Incentives to succeed

hrmonthly June 05
Employees Benefits
Pp52-57

By Glenn Martin

Designing successful incentive schemes is more complicated than many companies think, and it needs to begin from the employees up.

With business’s incessant emphasis on performance and employee effort, HR managers often look to incentive schemes to get the desired results. But such schemes can cost money without delivering outcomes or satisfaction.

One cautionary tale of incentives gone wrong comes from the downfall of One.Tel. In the final 12 months before the company went down with debts of $600 million, its two managing directors were paid bonuses totalling $14.2 million.

At the time, many other executives and HR managers did not think there was anything very untoward about the bonus payments. They were duly paid under the board’s incentive scheme, in recognition that the two executives had achieved the agreed goals.

One response is that it was disingenuous from the start, and all the participants knew or should have known that the scheme was, at the least, highly imprudent. But if for the moment we take the view that the scheme was entered into in good faith, its problem was its very success. The executives focused on the target, a given level of market capitalisation, and achieved it. The problem was, they sacrificed the company’s long-term financial sustainability to do so. The distress of One.Tel was already apparent at the time the bonuses were paid.

One of the lessons to be learned here is about the potential dangers of incentive schemes and the organisational processes that produce them. Performance-and-reward systems are frequently defended with the argument, what doesn’t get measured doesn’t get done. The One.Tel example tells us that what does get measured may get done at the expense of everything else.

Incentive schemes arise in response to many different situations. For example, an organisation may have high absenteeism. A survey by CCH Inc (USA) in 2004 concluded that unscheduled absenteeism was costing employers about US$645 per employee per year. One response would be to offer incentives to employees, perhaps by awarding points for perfect attendance that could be redeemed for merchandise.

Employee disengagement is another driver for incentive schemes. A recent Gallup Australia study found that 20 per cent of employees are “actively disengaged” at work, and only 18 per cent consider themselves to be “engaged”. The estimated cost to the economy was $31.5 billion a year, the study said. Employees who are actively disengaged are less productive, less loyal and less likely to provide excellent customer service.

Difficulty in reaching sales targets is another common rationale for incentives. Sales staff are more likely than other employees to participate in such schemes, involving both financial and non-financial rewards. A study by the US-based Incentive Federation in 2004 found that material incentives such as merchandise and travel were used by 82 per cent of organisations for sales staff and by 67 per cent for non-sales staff.  And impending skills shortages and the ageing workforce are forcing attention onto retention as a critical HR issue. Incentives are seen as one way of fostering retention.

Although the aims of incentive schemes are quite varied, they are broadly aimed at keeping employees, improving performance (individual and organisational), and fostering morale and satisfaction. Often, however, employees become dissatisfied with the incentive scheme itself. A recent US survey by Maritz Incentives (reported by CCH Inc) found that 55 per cent of employees were not happy with their organisation’s incentive program.

A number of common reasons have been identified for the failure of incentive schemes. A roundtable of US executives conducted by hr.com in 2004 detailed four types of reasons:

• Schemes did not pay off for employees—performance targets were not met and arguments ensued. Companies were saying “We need that level of economic performance so we can afford incentives,” but employees
were saying “The goals were unreasonable and unachievable” or even “Managers tried to ensure that they did not have to pay out on incentive schemes, but they still included the incentives in their claims about notional salaries.”

• Employees said they could not influence the outcomes—in seeking to balance increased remuneration against increased revenue, the company errs on the side of proving the incentives “add value to the business”, so the measures become too broad. For example, production employees object that achievement of the targets relies on actions by others (sales or marketing, for example) over which they have no control.

• Complexity—the attempt to target different groups of employees leads to a complex “portfolio” of measures and goals. Workers then select those that are easiest to achieve and neglect other measures that may be just as important to company performance.
• Boosting base pay instead—the company shifts away from at-risk incentives and pours its budget into across-the-board increases in base pay, which erodes the development of links between rewards and company performance.

A 2001 study in the US found that many schemes were established without any evidence of their appropriateness to the target group of employees or their work, and without investigation of the scheme’s prior success elsewhere. Incentives were often introduced with the view that they were “better than nothing”, and, once established, they became built into employees’ ordinary expectations, according to the study, Incentives, motivation and workplace performance, by H. Stolovitch, R. Clark and S. Condly (see www.hsa-lps.com/Performance_WS_2002.htm for summary).

Most complaints about incentives schemes related to implementation. Employees were dissatisfied with their scheme’s equity, and often they did not know what the incentives were for. Over half of incentive recipients said they were not exerting much more energy under the scheme than before. Where incentives were offered on a team basis, many recipients did not understand the connections between individual roles and benefits.

It’s not all bad news for incentives. Studies also find that employers and employees commonly support the schemes. In the Stolovitch study, analysing a large number of existing studies as well as surveys and interviews, the researchers still concluded that incentives made a difference to performance.

The overall evidence indicated that carefully designed incentive systems increased the value employees assigned to important work goals and significantly improved performance.

According to the study, schemes over longer periods were more effective than short-term schemes. Those with a one-week horizon resulted in a 20 per cent gain in performance, but over six months the gain was 44 per cent. Team-based incentives resulted in a higher increase (45 per cent) than individually based incentives (27 per cent).

Incentives improved both quality and quantity of performance, and monetary rewards were preferred to rewards-in-kind (gifts, travel). It was calculated that money delivered a 27 per cent increase in performance compared with 13 per cent for rewards-in-kind. Over half of the respondents said incentives had resulted in the achievement of company objectives, and only eight per cent said they would have achieved them anyway.

Moreover, the study concluded that incentives did not destroy personal, intrinsic interest in work. Rather, rewarding people for exceeding goals caused them to value work more, and increased their self-confidence and loyalty to the organisation.

It was noted that incentive schemes, especially involving financial rewards, were more common for sales people than for other occupations. Sales targets are easier to quantify than the key areas of performance in many other jobs. If a job has strongly qualitative aspects (nursing, teaching, customer service) it may be much more difficult to create appropriate measures of achievement.

Finding the right measures is one problem with designing effective incentive schemes. Sometimes a proxy for high achievement can be generated through customer feedback. Teachers can be rated by their students, or service staff can be rated through customer surveys—but these kinds of efforts often create as much aggravation as motivation.

In some jobs and work situations, there is insufficient measurable difference between the behaviour of a competent employee and an outstanding employee. In some situations, the organisational culture is a much stronger determinant of performance than the individual actions of employees. In some occupations, competitiveness between colleagues is deemed inappropriate, unnatural and destructive; cooperation and collaboration are preferred. And there are significant differences between individuals and groups in their sources of motivation—for example, between older and younger employees.

To devise an effective incentive scheme, these issues need to be addressed. Most important is to determine the goals that will lead to the desired improvement in overall company performance. If goals are not clearly defined and rooted in the realities of the company’s business, and an understanding of employees and their motivations, then the incentives will create more problems than they solve.
Glenn Martin, CAHRI, is a writer and editor in HR and training for CCH Australia. gmartin@cch.com.au

Case studies

Getting engaged
Employee engagement at Insurance Australia Group has increased “substantially”, boosted by a reward and recognition program which was introduced two years ago, says the group’s senior manager, remuneration and benefits, Alex Christie.

The Group has seen a link between the program and improved employee engagement, says Christie, “one of our key measures of success”.
The employee reward program is part of IAG’s strategy to attract, reward and retain quality employees.
IAG approached Accumulate to provide a tailor-made program after receiving feedback from staff through its annual employee survey. “One of the issues raised by our people was that sometimes there was not adequate recognition for their contributions and achievements,” says Christie.

Under the program, IAG’s employees are nominated to receive points for superior performance in four categories: helping others; leadership; sustainability and innovation; and achievement.
“Managers are charged with approving allocations of points which can be redeemed for a range of products and experiences such as leisure activities, sporting goods, homewares and electrical items.”
Employees receive certificates for each successful nomination. These certificates are presented at workplace forums such as team meetings.

IAG chose Accumulate because it could provide a program to meet the company’s needs. “We wanted a program that could be delivered to all employees across the country. Accumulate offered an online solution that could be accessed and used anywhere in Australia,” says Christie.
Being online, says Christie, also enables IAG to track and measure reward and recognition activity across the company.

Achieving rewards
A fit, healthy and happy workforce is a high-achieving one, says Vicki Cranfield, group general manager of people at the Chandler Macleod Group.
The company introduced an employee benefits program three years ago as part of a staff retention strategy and to help it become an employer of choice.

Benefits include discounted home loans, travel and shopping services along with preferred seating for theatre and concert tickets. Chandler Macleod also provides its employees with access to competitive credit cards, additional annual leave and tailored learning and development opportunities.

Cranfield is delighted with the program, which was designed by API Leisure & Lifestyle. Administration of the program is simple and API’s reporting is comprehensive and meaningful, she says. Cranfield also appreciates that the companies that partner with API to offer the benefits are reputable and offer national coverage.

In fact Chandler Macleod’s program has been so successful the company is considering extending it to contractors.
Employee benefit programs can be used to improve productivity and profitability within an organisation, says API’s business development manager, Kylie Green.

“In a market where skilled employees are in demand, factors such as employee engage-ment, morale, loyalty, recruitment and retention of quality employees are paramount,” she says.

See and feel
Alcon Laboratories (Australia) Pty Ltd introduced a corporate wellbeing program 18 months ago to help employees improve their health and manage their lives
“We try to create a supportive environment where employees feel comfortable seeking help to make necessary lifestyle changes,” says Lisa George, MAHRI, senior HR generalist at Alcon.

The program includes health and well-being, community and social activities.
Alcon provided flu vaccinations, hepatitis A and B vaccinations and healthy heart blood testing, massages and exercise programs. And it teamed with Blackmores to run a series of seminars covering topics such as dealing with stress, nutrition, exercise and quitting smoking to promote the physical wellbeing of employees.

Under the program, Alcon employees are encouraged to get involved with charities by participating in various fundraising activities.
Financial planning and superannuation advice is also made available as well as seminars on topics such as preparing a will or choosing a health fund.

“We see the program as an opportunity to improve productivity, increase staff morale, improve general health and fitness of employees and to have more fun in the workplace,” says George. “These are all areas that are hard to measure, but easy to see and feel.”

For more information about the Accumulate employee recognition rewards programs and software, sales & channel incentive programs or customer loyalty programs call 1300 733 725 or email info@accumulate.com.au