Defining Best Practice Incentive and Reward Strategies

1 Insight Newsletter NO 5: 2007. Defining best Practice Incentive and Reward Strategies By Jean-Claude Latter, CPT, MBA, Sales Director, Achievement Awards Group What is the formula for achieving Building a competitive advantage, improving profitability and increasing shareholder value can and sustaining peak performance in be achieved through Incentive Strategies which organisations? The question has been align communication, learning, measurement and baffling behavioural scientists, leaders feedback, and rewards, to organisational strategy and goals. and corporate managers for decades and has become something of a search The next question to ask, is what defines best Practice ?

2 How do we go about designing sustainable for the Holy Grail. best Practice Strategies , and in particular Incentive What has hindered the drive to achieve and sustain and Reward Strategies that have a meaningful peak performance in organisations is their inability impact on organisational goals? to effectively implement and manage plans, Back to performance management basics communicate objectives and results to individuals best Practice Strategies begin with the basic and ensure that there is line of sight' between principles of performance management. Consider effort and Reward . Plus, they have no mechanism the four building blocks of a well-structured to analyse the effectiveness of these plans across performance improvement strategy: the entire enterprise.

3 Communications Organisations are typically on a continuous drive to Learning achieve the following goals: Measurement and feedback Rewards and recognition Increase revenue Reduce costs best Practice Strategies spring from a return to the Improve workforce performance basic principles of a well-designed performance grou group t Insight Newsletter NO 5: 2007. management system; one that includes an Traditional pay, although professing to organisation's workforce as well as every individual Reward performance, is actually based on in the distribution channel. tenure, entitlement and internal equity. Rewards inspire performance, traditional Traditional Reward systems do not compensation doesn't communicate or support strategic How many times have I heard managers say, We business priorities pay them a wage to perform?

4 I don't need any additional Incentive or Reward Strategies for my A well-structured Reward system is a employees. They either perform or they're out . powerful force that motivates performance This attitude does little to inspire performance. excellence and sends out a strong message According to John Belcher, international expert on about what is important to the business. Yet, alternative compensation Strategies and author of traditional Reward systems fail to harness the book, How to Design & Implement a Results this power. They do not communicate Orientated Variable Pay System, traditional pay business priorities, nor do they reinforce the systems fail to support today's business Strategies behaviours that are important to business for several reasons: success.

5 Traditional Reward systems compensate Traditional Reward systems are but don't Reward inflexible and are not reflective of business results Merit increases for salaried employees have, in reality, very little to do with merit. Under traditional Reward systems, In most instances, these amount to across employees are paid a consistent salary the board salary adjustments for inflation irrespective of personal performance or or shifts in the labour market. business profitability. Compensation, therefore, becomes a fixed cost. In some The failings of merit pay are due partly cases this fixed cost is set at a very high to the inherent difficulties in objectively level, relative to competition or years of measuring performance and the reticence service and does not take into account the of many managers to honestly differentiate organisation's good and bad times.

6 Among the individuals who report to them. Fortunately, change has become an imperative, Hourly paid workers tend to be paid at the and progressive managers challenge entrenched same rate regardless of their contribution business systems and practices . to the success of the business. Where is the motivation for employees to take the Managers think in terms of processes rather initiative to improve work performance? than functions. (continued overleaf). Insight Newsletter NO 5: 2007. Organisational structures have been for this reason that outsourcing the design flattened and employees have been and implementation of Incentive Strategies empowered to make more decisions.

7 Is now becoming commonplace. Compensation Strategies are being revisited Defining best Practice to ensure that they support today's business The primary role of a best Practice Incentive strategy culture. is to engage, motivate, recognise and Reward As part of this shift in business systems and individuals and teams to achieve organisational practices , pay for performance' programs goals and objectives, which, as we have seen, is a have been embraced by many organisations. shortcoming of traditional pay systems. Unfortunately, unless these are properly designed If we recognise that Incentive Strategies are a part and implemented, they are no more effective than of the total performance management system, we traditional Reward systems.

8 Must be careful that we do not narrow our thinking Pay for performance systems also fail to that of improving the performance of our own In a recent article in the International Society workforces only, but include the workforce within for Performance Improvement's publication our channels of distribution. Performance Improvement (Vol. 45, January The question now remains as to how we get 2006), Mark A. Stiffler, CEO of the US-based individuals and teams within our own organisation, performance management company Synygy, cites and individuals and teams within our external a few key reasons why some well-intentioned, but channel of distribution, engaged in focusing on ill-managed pay for performance programs produce organisational priorities and motivated to achieve no better results than traditional Reward systems.

9 And / or exceed organisational goals. The Wall Street Journal reports that 83%. Participant-centricity of companies with some form of pay for So what is best Practice for engaging and motivating performance' programs hold the opinion desired behaviour? I define it as participant- that poor communication of corporate goals centricity'. In the same way that customer- and failure to engage management in the centricity is an attempt to listen to the voice of the performance management process are the customer and understand the customer experience, prime reasons these types of programs participant-centricity attempts to understand the fail.

10 Psychological processes that engage and motivate Only 31% of companies engaged in the Incentive program participants. same survey felt that individual goals were aligned with those of the organisation. Six basic questions Administrative constraints associated with In juggling the myriad priorities of the average the implementation of complex programs workday, we may not even be aware that we have limits the extent to which management can a running question and answer dialogue going on react quickly to changes in the market. It is in our heads. But we do. And so do our staff: (continued overleaf). Insight Newsletter NO 5: 2007.