Incentive Programs for Motivating People

Money Not Peanuts

Subject: Gain Sharing Programs, Salary Bands, Pay for Performance, Incentives, Sales, Motivator

By Victor Antonio

Many experts who’ve probably never had any revenue incentives thrown their way argue that people cannot be motivated by money.  Every time I hear this I cringe in fear that someone actually believes that money is not a serious element in the motivational equation. 

The use of money as motivator has to be qualified before anyone can pass judgment on whether or not it is a motivator.  Because money, inappropriately applied to productive work, becomes a de-motivator for achieving excellence.  But when money is linked to performance, a positive reinforcing cycle kicks in.  Positive reinforcement serves to reproduce, if not amplify, the desired affect that one seeks.  Money must to be linked to performance if it is to be used as an incentive. 

Secondly, being penalized for performance is a bad way to motivate people to excel.  For example, a progressive tax system, which taxes people more the more they make is an example of negative reinforcement.  When someone takes from you the more you make, why work harder or smarter?  When more taxes are taken out, the person sees no value in increasing their performance so they either try to maintain a given level or it drops below the desired level only to be raised back to the minimum or maximum that needs to be maintained. 

When companies put together incentive programs that fail, they’ve usually failed because the wrong element of the individual was animated and motivated to work harder.  For example, many companies use workgroup programs as a way of incentive a group as opposed to an individual.  This is fine, but realize that the group is still as strong as its weakest link.  A group is penalized for one person’s inability to perform to expected levels.  This in turn dis-incentive the rest of the group to outperform their previous performance.  In many case the rest of the group conforms to an average level of performance with little or no hope of ever reaching the highest incentive levels.

A third issue with motivating people with incentives is a term called Line-of-sight.  When wireless companies are building towers for their transmitters, they need a line-of-sight to the other towers in case you roam or move over to some other location.  Line-of-sight is important with regard to incentives because if a person CAN see the cause-benefit or cost-benefit for himself, like a positive reinforcement cycle, they will repeat their behavior. 

Employees at a low level of a billion dollar company have a hard time seeing the line-of-sight.  In other words, they can’t see how their job, their small job that they do everyday, impacts the overall direction of the company.  So when the company reports earnings or losses, the employee still doesn’t or can’t interpret or translate what that means for him personally.  Distance between his work and the results are out of his line-of-sight.  Companies that can find ways to show employees how they do impact the bottom-line are far more likely to get better results motivating employees then those companies who just spew things like, “We need to be more cost effective, We need to streamline our process, We need to re-engineer our this, Or we have to restructure that to get more value, we need more vertical integration or we need more horizontal integration, we need to improve our scheduling, we need to identify bottlenecks and eliminate them and on and on.

Now, tell an employee that his work, if he could improve it 10% will bring 20% or X millions of dollar to the bottom line that will translate into X thousands of dollars for him or her and now you are talking their language.

Let’s talk salary bands versus commission versus gain-sharing programs.

Salary band ranges of salary for given pay grade levels.  Typically every year, an employee review is done and a percentage increase (typically 2%-5%) is given to an employee.  The problem with salary bands is that the employee comes to expect some type of increase.  When someone ‘expects’ to get something, the motivational factor of what he’s getting is lost.  Many managers give a standard 3%, unless you’ve done something heroic and even then you may only get 5%.  Employees know this and see year-end salary increase as an entitlement so the motivational impact is gone.  In this case I would agree that money doesn’t motivate becomes it has been democratized (i.e., everyone gets them so why should I bust my hind side?).

Employers than move to a more global incentive approach by instituting a Gain-sharing program where once a certain revenue number is achieved, anything above that is split between the company and the employees.  For example, Lets say a company with 100 people decides it will split revenues with the employees 50/50 after the company has a target revenue goal of $5 million. If the company finishes at $6 million the company must split, or share the gain, of $1 million ($6M - $5M) with its employees.  The company keeps $500K (50/50 split) and distributes the remaining $500K to its employees (i.e., $500K/100 employees = $5,000/employee).  This is great.  But, what if some employees feel that others in the company didn’t produce as much as they did?  What if the Pareto Principle is true (i.e., that 20% of the people do 80% of the work)?  And come next year, if the Gain-sharing revenue number is higher, the payout per employee will be lower.  A Gain-sharing program does not give employees line-of-sight and, from a performance perspective, they are not recognized as individuals and are clumped together with performers and non-performers alike.  This type of incentive is democratized much like a salary-band, with one glaring difference, it is not guaranteed.

Commission for individual performance is the both individualized and has clear line-of-sight aspect of motivating employees.  Sales people best exemplify commissioned based motivation.  Sales people in general are paid low or no base salary and must perform in order to earn commission.  They take the majority of the risk while the company only pays out for tangible and measurable results.  One of the gravest mistakes I’ve seen in commission-based incentive for salespeople is the ‘capping’ (i.e., setting limits or conditions) of those commission. For example, let say George will get 5% of everything he sells.  In George’s mind he just wants to sell as much as he can to earn as much as he can.  But what happens to George’s enthusiasm when the manager informs him that once he gets to a certain level, he will only be earning half or 2.5% of the commissions?  Right, his enthusiasm wanes.  And what does George do, he slow down once he knows he’s approaching his maximum and begin to take it easy.  In economics it is term the point of diminishing returns.  Whereby, beyond a certain point you are not getting as much value as you are putting in to justify you working so hard.  So George rushes to get to the maximum and when he nears it he begins to slow his sales process and pushes out the sales to the next year when the quota is reset to zero and he can begin to sell earning 5%, not the 2.5%.  At the end of the year, George can measure his revenue contribution to the company’s overall revenue.  In other words, he has a clear line-of-sight of how his performance has benefited the company.

Incentive Programs

Michael LeBoeuf wrote, when you “Pay for performance, you get performers; pay peanuts and you get monkeys.” Incentive programs determine the vitality and aggressiveness of your employees.