Designing Incentives and Rewards
Class Session 1
Why Do You Like Some Jobs and Tasks
But Hate Others?
In this Session:
Well examine the underlying concepts that
distinguish effective incentives from ineffective
ones.
Well look at how the goals and performances
of individuals, teams/units/departments, and
organizations might be more effectively linked.
What Do Incentives Incent
and Rewards Reward?
What Kinds of Incentives and Rewards
Do Organizations Use?
Incenting and Rewarding
Desired Performance
Design Issues for Performance-Based
Incentives and Rewards
To be effective, incentive and reward systems must:
Specify and measure performance.
Specify the level of aggregation for reward
distribution in the organizations hierarchy.
Specify the type of reward.
Gain employee acceptance.
Specify and Measure Performance
1. Employers should measure and reward what
is important:
Do not ignore performance aspects that are difficult
to measure (e.g., conflict resolution, relationship-
building).
2. Results and behaviors are important:
a. Examples of results:
Profits, productivity, attendance, quality, sales.
b. Examples of behavior:
Returns customer calls within 24 hours.
Checks orders for correct shipping and billing
information before shipping package.
3. Behaviors and results must be under workers
control.
Specify and Measure Performance, contd.
4. Decide whether the focus is on short-
term or long-term objectives.
It is a difficult balancing act to ensure that
long-term performance and goals are not
sacrificed for short-term results.
For example:
Focusing on the short-term stock price for a
company while neglecting crucial long-term
investments in research and development.
Downsizing to reduce short-term costs while
neglecting long-term skills and knowledge
development.
Specify the Level of Aggregation for Reward
Distribution in the Organizations Hierarchy
Decisions about who to reward and how rewards are
distributed are based on performance at various
levels:
> Individual employee.
> Work teams.
> Department, plant, strategic business unit.
> Organization as a whole.
Levels of Aggregation for Reward Distribution, contd.
Organization
Department
Team Individual
Specify the Type of Reward
To be effective, the reward:
Must be valued by employees (not necessarily
financial!).
Must be clearly linked to expected behaviors or
results.
For financial rewards, proportion of at-risk pay
generally increases as employees move up the
organization.
Cultures vary in the acceptability of at-risk pay.
Gain Employee Acceptance
1. The plan must be clearly communicated.
2. Employees must believe they are being treated
fairly.
3. The plan must be easily understood and
incentives easy to calculate.
4. Employees should have input into establishing
and administering the plan.
5. When possible, rewards should be given soon
after the desired performance is achieved.
Gain Employee Acceptance, contd.
Employees must have an avenue of appeal if they
believe they are treated unfairly.
Employees must believe they can trust the
organization to be confident that the effort-
performance-reward link will really materialize.
Legal Considerations
Discrimination:
> Must apply same decision rules to all employees
eligible for the reward or incentive.
> Employees protected by Title VII and Equal Pay Act.
Taxes and accounting rules:
> For example, those governing capital gains, deferred
compensation and stock plans.
Why Are Group Projects
So Unpopular With Students?
Deciding to Use Team-Based Incentives
Design Challenges for
Performance-Based Team Incentives
Aligning team performance measures with
individual performance measures.
Aligning team performance measures with
organizational performance measures.
Ensuring workload is equitably distributed.
Coordinating team incentives and incentives for
people not in teams.
Determining how incentives will be allocated
among core and noncore team members.
Advantages of Team Incentives
Peer pressure reduces counterproductive behavior
(e.g., reduces social loafing).
Group rewards, such as praise and camaraderie,
increase reward value.
High performers act as role models for marginal
performers.
Lessons Learned
Individuals vary in what motivates them, so
incentives and rewards must also be varied (one
size does not fit all).
Organizations frequently reward the very behaviors
and results they are trying to avoid.
Incentives and rewards must be aligned within and
among individuals, teams/units and the
organization as a whole to be most effective.
Designing Incentives and Rewards
Class Session 2
Design an Incentives and Rewards
Program for Atlas Corporation
Collections at Atlas Corporation
In groups of 3-4 students, review the case for
collections clerks at Atlas Corporation.
Answer the questions provided to guide you in your
decisions about how to incent collection clerks to
increase collections each month.
Share your results with the rest of the class.
Ask your instructor for clarification on any point for
which you are unsure.