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Wednesday, July 21, 2010

Formulating Performance-Based Incentive Scheme

I was talking about motivation in my recent training assignment and the issue of salary and cash incentives as motivational factors was brought up. This is what I said, if you want your employees to be motivated to stay, then salary matters. If you want people to be motivated to perform better, then you should look at how you reward high performance.

There are a number of ways to design your performance incentive scheme. I don't know all of them but I am sharing with you some of my experiences in implementing two of them.

When I was HR Director in a data processing company, I had the opportunity of implementing several incentive schemes. Too bad I left my data showing the impact of these incentive schemes but I remember a lot about them and I'd like to share them with you. The first one used performance bell curve as basis for rewarding. The top 10% performers received the highest fixed amount incentive. The next 10% got less, and the next 10%, even less. The plus point of using this incentive scheme is that the amount the company gives away for incentives is fixed and manageable. The minus point, it did not improve individual performance. My observation is this. By using this scheme, we succeeded in rewarding those who performed well. These are the same people who performed well whether they are given incentives or not. These are achievement oriented, competitive and naturally hard working individuals. Did the incentive scheme further improve their performance? The answer is no. One reason could be the amount we assigned to give at each level of performance. We paid a decent amount for the top 10% but the amount for the next levels are almost laughable... No, they are laughable. The amount did not entice those who, just like I do, found the amounts laughable.

After the terrible failure of the scheme to encourage higher performance, we devised a new incentive scheme that rewarded every unit of over production from daily target while working within time. The principle is to share cost savings and additional revenue produced because of over production. The share is divided among those involved in the production from the front-line workers to their supervisors. After implementation, we saw performance surge. We saw some of our top performers increase their already high performance go up to 300 % . We also saw some new stars rising. Some employees started to go home with incentives that are as high if not higher than their salaries. The best news is the company increased its production capacity without increasing manpower. If we will use the bell curve to determine performance after the implementation of the new scheme, I will bet that there will be small difference in who are occupying the top spot but the numbers will be different. If we overlay the new curve from before the implementation of the new scheme, we will see that overall performance improved.

Looking at Maslow's Hierarchy of Needs might explain this. In my opinion, most Filipino front line workers are still at basic physiological and safety needs stages. They are most likely to work hard to satisfy these needs that's why the performance-based cash rewards attract them. In my previous company, those who were not naturally hard working and not concerned about their finances did not care about the incentive scheme and did not show much improvement because of it. They are a minority compared to those who could think of several things to do with the extra income. My other observation is that many people do not like moving targets. People like their targets to be predictable and achievable. This is likely the reason why a lot of people responded to our second incentive scheme.

I hope you picked up something from this. Let me know if you wish to discuss your plans on rewarding high performance for your team.

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