Incentive Pay Programs – Casual + Structured

Many employers utilize incentive pay programs to motivate their employees.  The design of these programs are to aid in employee retention, company loyalty, worker satisfaction, and ultimately, lower costs.  By having tenured employees and a reduction in turnover, businesses benefit from not having to train new employees and can minimize mistakes in the production process.

Casual rewards include a pat on the back, a sincere thank-you, a $50 bill, a dinner for two at a local restaurant, or a gift cards to stores and gas stations. Many programs also entitle workers to choose from a menu of several rewards.

While utilizing a casual incentive program, jealousy and perceived favoritism toward those who get rewarded can arise if there is no data to back up why an employee received a reward.  Avoid potential pitfalls by developing rules and goals. Reward employees who offer suggestions that improve the process and result in a savings or increased productivity that can be documented.  Create a feedback mechanism for all of the legitimate ideas submitted.  Without feedback, confusion for the employees and frustration in the program will continue. Make your rewards system clear.

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By utilizing a structured incentive program, employees will have a better understanding of exactly what they need to do to be rewarded.  The positive results for businesses include cost certainty and cost reduction.  Results to employees are higher wages and improved satisfaction.  However, there are also potential pitfalls in a structured program. Avoid these by developing a structured incentive program by taking these 7 steps:

1. Analyze the challenge and determine if incentives are appropriate – the targets and goals need to be clear and specific, and achievable for the employees.  Support functions need to enable employees to be successful.

2. Link pay with performance – measure the output of each employee or group versus the developed standards, and reward the employees for exceeding the targets.

3. Anticipate loopholes – identify any shortcuts the employees may utilize to increase their productivity.  Many businesses initially add quality steps downstream from the process that will catch any errors before full implementation of the program.  The best programs actually link quality objectives into the incentive pay to ensure a positive impact on both productivity and quality benchmarks.

4. Establish standards and determine pay – This process involves clarifying expected performance, considering work content variations, contemplating potential savings and gains, determining base wage versus incentive pay, anticipating effects of technological or capital investment changes, and converting standards into pay.

5. Protect workers from negative consequences – establishing an effective communication strategy to keep employees up to date on performance and establishing fair expectations are critical for positive morale

6. Improve communications – both on overall performance, as well as how they rank in the group.  There also has to be a mechanism to allow for suggestions and comments from the employees to improve the process.

7. Periodically review the program – record keeping and statistical analysis must be performed to understand the success of the program, ensuring that all are benefiting from the implementation of the model.

Structured incentives are most likely to succeed if they have accurately established standards, clearly linked superior performance with pay or a valued reward and carefully considered what type of performance the incentive stimulates.  

Effective incentives are designed so the more an employee earns, the more the employer benefits.