Most business leaders would like to know the answer to that question. We have been told that incentives don’t improve employee performance, but what about engagement? And can you improve engagement without improving performance? Technically, they are different; but can you really have one without the other? So many questions. Let’s see if we can answer them, shall we?
In my experience, researchers, human resource professionals and company leaders in general complicate this issue. The direct answer to the title question is of course an incentive plan can improve engagement, but only if it is constructed properly and reflects a coherent and compelling compensation philosophy. I’ll explain what that means in just a minute, but let’s build a broader context for our discussion first.
The Role of Incentive Compensation
We are at a point in the evolution of business when leaders should no longer be thinking of incentives as devices they use to try and affect the behavior of their workforce. Such manipulative attempts are the reason research companies began to examine the impact of incentive plans on employee performance in the first place. Those findings led Daniel Pink to write the book Drive, in which he drew upon the data to conclude that you cannot motivate people through monetary rewards.
While employee engagement and motivation are not technically the same thing as performance, they are connected. It’s not common you will see people within a business performing at a high level but not engaged in their work, or vice versa. So, understanding the proper role of incentive plans in an attempt to nurture a high-engagement and high-performance culture is important.
The purpose of incentive compensation is to reward value creation, not to try and directly influence employee behavior. Organizations that have highly engaged employees treat their people as growth partners, and performance compensation is the means they use to codify the financial component of that partnership. It is a way to communicate how they want their employees to view their roles. They want them to assume stewardship for certain outcomes and they reinforce that mindset by tying rewards to the achievement of certain short and long-term performance standards. By having some compensation tied to the results their employees produce, either implicitly or explicitly this is what they are communicating to their people about their pay philosophy:
“This is the role we want you to perform for us.
“These are the outcomes we need you to fulfill in that role. This is how we define success.
“These are the resources you will have to help you achieve that level of success in your role.
“I am one of your growth partners and this is how I will help you succeed.
“Our philosophy is that you should participate in the value you help our company create. As a result, the more you contribute, the higher your earnings will be.
“These are the specific value-sharing plans in which you will participate.
“These are the performance standards you will need to achieve to maximize value in these plans.
“Here is a five-year earnings projection for you based on you and the company achieving our growth targets over that period. And here is what it looks like if we hit superior results.
“As you can see, this is not simply a $150,000 salaried position we are offering you. We are offering you the opportunity to earn $1.7 million over the next five years. And if both you and the company perform, it won’t end there.”
Now, the numbers may be different for your company, but can you see the role compensation is playing here in communicating a sense of partnership with the person you are trying to recruit, retain or develop into an engaged and high-performing employee?
This is the framework within which an evaluation of the impact of incentive pay on employee engagement should occur.
How Value-Sharing Should be Constructed to Improve Engagement
With that premise established, let’s talk about what an incentive plan should look like if it is going to improve and not dilute employee engagement. I’ve already hinted at how that is accomplished but let’s dive a little deeper.
In today’s business environment, company leaders should have one overarching value-sharing philosophy that articulates shareholder beliefs about how people should be paid for achieving the outcomes they’ve hired them to achieve. At VisionLink, we refer to this as a wealth multiplier philosophy. Its rationale is that earnings should not be capped because you don’t want your business growth capped. The premise is that one of the ways you turn employees into growth partners is by allowing them to participate in the wealth multiple they help drive—no matter how high it goes. Employees who buy into this kind of philosophy being to see themselves as true growth partners (because that is how they are being treated). Therefore, they are inclined to more fully engage.
The wealth multiplier concept is not a philosophy rooted in altruism. Instead, it is founded on straight forward performance and economic principles. If people are treated as growth partners in every respect—including in how they are paid—they will “play up” to that role. Similarly, if you treat them as “employees” who are just there to fill a position, they will “play down” to that role. Compensation needs to solidify the expectations you have of your employees and communicate a sense of fairness and economic opportunity about how they will be treated (financially) for fulfilling those expectations. In short, you can’t just tell someone you consider them a growth partner in your business. You must pay them like one.
One Philosophy, Two Performance Periods
Under the umbrella of a wealth multiplier pay philosophy, you need to have plans that reward two different performance periods. One should compensate your people for the value they create short-term—typically for 12 months or less. The other, of course, will reward sustained performance—results achieved over a period longer than 12 months. Although each of these periods are compensated for in a distinct way, the plans you create should be operating under one value-sharing philosophy.
So how should these two performance periods be rewarded, if employee engagement is the goal? What should be the metrics or results factors upon which rewards plans for each period are created?
Generally, if you want to improve employee engagement through value-sharing, you should simplify the criteria for maximizing earnings under each plan. But keeping it simple isn’t the primary goal. Creating the right focus is the goal.
As a result, short-term value-sharing should be tied to profits and long-term to business value increase. This promotes a balanced performance effort. In the short term, you want employees focused on activities that will drive higher profits or improved profitability. But you want them to do it in a way that ensures those profits are enduring. Otherwise, they become “bad” profits, because they carry with them a long-term cost (an exploited customer, a strained vendor relationship, etc.). You ensure against bad profits by tying long-term value-sharing to improved company value. That increase can only happen if profits are steadily improving.
All of this leads to greater employee engagement because it improves line of sight. Line of sight occurs when employees understand (and experience) the link between the following:
- The company vision. (Where the company is headed.)
- The company’s business model and strategy. (How leadership plans to achieve the vision.)
- Employee roles and expectations. (How employees—as growth partners—should impact the business model and strategy.)
- Financial rewards. (How employees will be rewarded for fulfilling the expectations associated with their roles.)
- Personal financial vision. (How those rewards facilitate the achievement of the employees’ personal financial goals.)
When line of sight is consistently achieved within an organization, employees are engaged and performance follows. This happens because a unified financial vision for growing the business has been established. When that takes hold, a culture of confidence emerges that is capable of achieving sustained success.
So, can an incentive plan improve employee engagement? It certainly can, if you follow the right principles.
Learn how to accelerate the organic growth of employee engagement in your business: How Employee Engagement Happens