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As a compensation consultant I’ve asked myself a lot, “Can compensation make a difference?” There are those that say “no.” In this presentation noted career analyst Dan Pink claims that incentives are just plain wrong–that they actually lead to poorer performance. http://www.knowhr.com/blog/2009/08/25/everything-you-think-about-pay-for-performance-could-be-wrong/
Others have made similar claims. However, these arguments miss the point. Incentives don’t need to strip away the intrinsic desire for employees to contribute to something meaningful. Incentives, done properly, don’t turn employees into mindless robots. Instead, they communicate something meaningful about how the shareholders value their employees. And, they create alignment. A well-designed incentive plan says, “if we do well, you do well; now focus on those things that help us do well.”
My experience is that, in these circumstances, responsible, mature adults figure out how to do the right thing. And, ultimately, they are rewarded for it–in ways that include financial incentives, and in ways that don’t.
What tends to be missed is that most incentive plans are too short-term. I believe that well-designed long-term incentive plans are better than short-term plans. They can be a little trickier to get right. But done well they create tight alignment with shareholders and they reinforce meaningful value creation. “I invest capital. You invest your labor and your creative effort. If we create value for customers, we create value for us. Our organization has a fair way to share the economic value created between shareholders and employees.” That’s the idea behind a good long-term rewards plan.
Do incentive plans work? If they reinforce (rather than force) the right behavior that leads to the desired results, you bet they do.
Incentive Plans or Pay for Performance really works or probably could fail – it depends on the category and level of employees you are dealing with. For instance, what I have observed personally within my locality is that the “MBA” generation does not have the “patience” to wait for 5+ years to grow or earn their choice income. For them it must happen now. Unfortunately, it is the group that employers will have to deal with because the sort of ‘patience” group are gradually fading out.
In short the MBA generation is demanding. Probably the first place of orientation should be the institutions “pouring” out MBAs who carve the mind set of leadership role expected of their products. Of course they are right but…. Now in terms of performance incentives for this group, both short and long term plans should be engaged, the former being a feeder to the latter so as not to loose track. Every incentive must be focused on the the bottom line or that which adds value to the bottom line. There are situations where specific achivement/performance is required, in such a situation specific short-term incentive must apply.
Another personal perspective to performance incentives in general is that it should be an “open mathematics” so that others who fail to achieve will not view the process as biased. The process must be transparent, consistent and fair in its application. This also requires very clear objectives, level of achievement expected and recognition to be awarded.
In summary, success of implementation is contextual; management is the best to know what is desired by its employees and thus what works. Its failure in my opinion denotes the inability of management to bring out the latent “potent” force of its employees to bear fruit.