Getting employee incentives right

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Business Matter

By Manish Shah

One of the key principles of economics is that humans respond to incentives. However getting workplace incentives right is difficult. There are several reasons according to Alfie Kohn the author of Punished by Rewards as to why incentive systems fail to achieve the desired result.

Control: People at the highest levels of an organization are instrumental in developing the incentive system. As the incentives are pushed down by the upper management, they carry negative connotations such as manipulation and patronization. Generally these systems are designed to move accountability away from the top level to the frontlines.

Strained Relationship: Re-wards are awarded to the best performing employees. Therefore they create animosity between those who get the awards and those who do not. The situation gets worse when due to the subjective nature of rewards good performers are deprived of the rewards.

Motives: The premise of incentive systems is that the employees could be doing a better job, but for some reason they are not. Therefore they need rewards as an extrinsic motivator. Research has shown that these extrinsic rewards reduce intrinsic motivation. Intrinsic motivation is the desire to perform a task just because it provides satisfaction.

Measurement: Most incentive systems fall short of defining good criteria for measuring performance. For example, an organization that sets goals to increase revenues without regard to bottom line will induce the employees to go after projects that are not profitable to company but will fatten their wallets.

So how do we realign the incentives to get the desired result? The answer is to offer monetary rewards selectively, according to Tyler Cowen, author of Discover Your Inner Economist. He suggests that we should offer monetary incentives when performance is directly impacted by extra effort. For example, a proofreader will be motivated to spot more errors if he is rewarded for doing so.

Another suggestion is to offer monetary incentives when the intrinsic motivation is weak. For example, a company that is trying to spur innovation can institute a reward system to motivate employees to come up with new ideas.

Manish Shah is the former president of Midwest Law Printing in Chicago. He also worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and a MS in Computer Science from Illinois Institute of Technology. He can be reached at manishshahus@yahoo.com.

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