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September 08, 2006

Incentives: Fast Track to Performance Improvement?

By Shannon Lear Martin

The eternal question in any business with employees is how to increase performance effectively. Will monetary offers improve employees' output? In the United States alone, organizations spend almost $120 billion annually on work-related incentive programs.

In 2003, Harold Stolovitch organized a research team to cut through the confusion and derive clear conclusions about incentives. The study was supported by a grant from the Society of Incentive and Travel Executives Research Foundation and was sponsored by the International Society for Performance Improvement.

Some of the key findings:

  • When designed, implemented and monitored correctly, incentive programs (with awards in the form of money or tangible awards) increase performance by an average of 22 percent
  • Team incentives can increase performance by as much as 44 percent.
  • When an incentive is first introduced for completing a task, a 15 percent increase in performance occurs.
  • When asked to attain a specific goal, employees increased their performance by 27 percent when presented through an incentive program.
  • Incentive programs that run for a year or more produce an average 44 percent performance increase.
  • Programs that run for six months or less showed a 30 percent increase.
  • Incentive systems appear to work best when current performance is inadequate, the cause is motivational, and desired performance can be quantified (how much, how often and how many). Goals must be challenging, but achievable. All other work goals must be achieved at or above current levels.

David Wudyka, president of Westminster Associates, a human resources and compensation consulting firm, believes that rewards based on behavior can backfire if they are badly designed, misapplied, or poorly communicated. In these situations, neither the employee nor the co-workers can be completely sure what is being rewarded, and what will be rewarded in the future. “When goals and rewards are not specifically defined, aligned, and articulated, they fall flat. Most companies make the mistake of not rewarding people enough to make a difference.”

It’s important that HR managers only select incentives only when there is a motivation gap, and only for challenging goals. To reap the benefits of a well-designed incentive system, and see the measurable improvements in employee performance, include the recipients in the incentive selection, focus on consistency, implementation and communication, and monitor the system continuously.

Shannon Lear Martin is a performance consultant with TrainUtopia, where she helps clients measure and improve organizational performance in support of their business goals and objectives. She can be reached at smartin@trainutopia.com.

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Comments

John Elmer

Nice summary, but you need to extend your Performance Improvement research out a few months. When an incentive is offered, there is an increase in performance. The next time it is offered (or the next time there is any incentive offered) the amount of improvement is reduced - until the employees expect a reward for doing their jobs. I refer you to Alfie Kohn's book "Punished by Rewards" for discussion about many studies that show this practice in business, education, health care.

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