Blog #7 - The Do's and Don'ts of Implementing an Incentive Pay Plan

Incentive pay plans can be great motivators.  What could be better than the almighty dollar to get employees to work harder, faster, and safer?  There are many forms of monetary incentives:  sales commissions - a percentage of a successful sale; bonuses - supplemental pay;  profit sharing - employees share in the profits of the company; and stock options - employees can purchase company stock.  But how do you implement these incentives into an already existing pay structure?  And how do you do this successfully?

I found 2 articles that address these questions.  The first article, How NOT To Do Incentive Pay, discusses an experiment performed by Hewlett-Packard that went horribly wrong.  The experiment taught HP (and others) a valuable lesson - how not to implement an incentive pay plan.  Lesson #1 - Setting Goals.  Goals that are too easily attainable will increase costs and affect the bottom line.  Lesson #2 - Adjusting Goals.  Avoid this!  A moving target causes distrust in the system and poor attitudes among workers.  Lesson #3 - The Effects of Different Performance Levels.  Employees can become competitive and uncooperative toward their co-workers, which leads to decreased productivity.  The experiment was abandoned and the old pay structure was restored.  What could HP have done differently?

The second article, Incentive Compensation, gives advice on how to implement an incentive pay plan the right way.  When setting goals, make sure they are clear-cut, understood, and communicated to employees before the plan begins.  Also, tie individual goals to the company goals.  Focus on what behavior is desired, and make sure the incentive drives that behavior.  Next, the plan design should link goals to increased performance.  This is important for 2 reasons:  1. Increased performance leads to increased profits and 2. The increased profits will help cover the costs of the incentives. 

Companies and employees can benefit from a well designed incentive pay plan.  Don't let what happened to Hewlett-Packard happen to your company.  Pay attention to the do's . . . . and be aware of the don'ts.