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.