Well designed and implemented variable reward or incentive plans, used in the right areas, can be an effective tool for communicating the organisation’s vision and strategy, helping to align organisational and individual employee interests by driving a focus on the key priorities at an organisational, team and individual level.

Badly designed incentive plans, however, or those used in the wrong areas, can have very negative consequences – the opposite of what was intended.

Read on for an overview of our approach to designing and managing effective short term incentive plans that drive individual and organisational performance or click here for more on how your plans might fit in as part of a broader executive remuneration strategy.

The prominent traditional way of thinking is that dangling the carrot (the incentive) will drive motivation to achieve desired outcomes.  This thinking is challenged by a growing body of contemporary research which is highlighting a much more complex range of factors impacting human motivation and which may require what we currently consider to be counter-intuitive strategies to positively influence.

We’ve summarised some of the typical types of and objectives of short term incentives below which may assist in determining what type of plan is most likely to suit your specific situation.

There are several design elements that should be worked through when developing incentive plans.  We’ve found that work-shopping each element with a small project team made up of key stakeholders is most effective during the initial development phase, ensuring a rounded and comprehensive view of what’s important and what will be most likely to have the desired impact.

What is it that we’re trying to achieve as a business, business unit or team?  This has to be drawn from a higher order strategic-level review of the function – perhaps it’s to improve the customer experience or to drive operational efficiency for example.

Simply saying that we want to increase sales won’t cut it – don’t we all!

Who will participate in the plan and, more importantly, why?  Research shows that in certain circumstances (such as where innovation or creative thought is required) typical incentive plans have the opposite impact of what’s intended.

What measures, metrics, checks and balances do we need to consider in the plan design?  What are the priorities and how do the potential measures work together?  What might be considered ‘core’ deliverables, non-negotiables and over-achievements?

We like to use three categories to capture potential inputs which can then be ranked and prioritised;

• Volume: measures of productivity and output.
• Value: typical financial measures such as sales results, revenue and profit.
• Quality: measures such as process compliance and customer satisfaction can fit here.

The practical side of operating the plan is often overlooked during the design phase and only considered when it comes time to implement.  Do we have the tools and systems in place to enable the reporting and number crunching we’ll need to do or to test the quality-related measures we want to build in?

A wise man once said, “Spend 20% of the time in development and 80% on implementing the plan”.  We can’t stress enough the importance of clear and consistent communication, ensuring everyone involved understands the rationale and objectives of what’s being put in place and offering plenty of time to digest the new arrangements before going live.

Think also of post-implementation reviews –  an extension of both the implementation AND design phases.  Depending on the scenario it can be prudent to review after 3, 6 and 12 months to consider whether the plan is in fact having the desired impact.  Qualitative input from the key stakeholder groups should be paired with meaningful quantitative analysis (noting that you’ll likely be looking for correlations to intended performance outcomes rather than expecting to prove a direct impact).

Whilst incentive plans may not be the magic bullet for organisations looking to increase productivity or drive performance improvements, we believe there is a genuine benefit to be seen from well-designed and positioned plans.

The best message we can offer is to ensure from the outset that the incentive plan is not seen as a proxy for effective leadership.

Too often, we’ve seen organisations attempt to over-engineer incentive plans expecting to ‘set and forget’ and have the plan cater for all manner of situations that may arise in practice.  The role of incentive plans should be to provide focus on what’s really important from an organisational point of view and to provide a mechanism for those involved to be rewarded.

It’s as simple, and as complicated, as that.