Designing Incentives and Rewards

Class Session 1

Why Do You Like Some Jobs and Tasks But Hate Others?

In this Session:

– We’ll examine the underlying concepts that distinguish effective incentives from ineffective ones.

– We’ll look at how the goals and performances of individuals, teams/units/departments, and organizations might be more effectively linked.

What Do Incentives Incentand 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 organization’s 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, cont’d.

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 Organization’s 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, cont’d.

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, cont’d.

• 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.