Incentive program
Encyclopedia
An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees, and in sales to attract and retain customers. Scientific literature also refers to this concept as pay for performance
.
, an understanding of the goals, and the ability to measure progress. Often companies turn to incentive programs to counter failures in meeting targets, poor behaviors or performance, unengaged employees, poor morale or attitude, high turnover or loss of talent, or increases in expectations from management.
Many companies mistakenly assume that what works for one organization will work well for all organizations. Companies often attempt to create incentive programs without thinking in detail about how each program feature will best suit their targeted audience.
To facilitate the creation of a profitable
program, every feature must be tailored to the participants’ interests. A successful incentive program requires clearly defined rules, suitable rewards, efficient communication strategies, and measurable success metrics. By adapting each element of the program to fit the target audience, companies are better able to engage program participants and enhance the overall program effectiveness.
An incentive program represents a substantial investment to most organizations. Receiving a sufficient return on that investment requires the full participation of the program participants. Incentive programs are based upon the concept that effort increases as people perceive themselves progressing towards their goal. Therefore programs should offer participants a variety of products and services based on their unique interests and diverse needs. Successful programs need to carefully develop their reward methods to keep participants eager to approach a new goal once they have achieved a reward.
Objectives should be drawn up on the basis of the organization's strategic goals and should be straightforward and specific so that participants clearly understand the expectations. They should be challenging, yet achievable; if they are viewed as unattainable, the program will be destined for failure. Objectives may include motivating employees, recognizing performance, persuading customers to make a purchase, or even reinforcing a marketing message. Once the program goals have been determined, every aspect of the program must be measured against this goal in order to ensure the program's success in goal achievement. If successful, objectives should provide measurable results allowing the organization to track performance
and measure the overall success of the program.
However, at its core, an incentive program is designed to lift the performance outputs of a group of people engaged in some activity by increasing their motivation. With monetary rewards, this has often been shown to completely fail, give only small short-term gains, or even reduce performance.
W. Edwards Deming
, a leading Quality Management
scholar and consultant, taught and demonstrated that motivation efforts are a form of tampering because they try to make improvements to individual components of what is largely common cause variation. He argued that the overall performance of a unit was much more a function of the quality of materials, process design and management, quality specifications and machine performance – in other words, the "system." Deming went on to demonstrate that the result of an improvement strategy based on trying to lift the performance of each worker one-at-a-time would be no system improvement; rather, it would simply be increased variation in performance. He encouraged management to find ways to lift the performance of the whole system.
In addition, incentive schemes will very often create moral hazard
. By giving the incentive of hitting specific targets, the targets become the goal, rather than raising the performance of the organization as a whole. This causes reduction in overall performance, even while increasing the rate of hitting targets.
, reduce sales costs, increase profitability, develop new territory, and enhance margins. Sales incentive programs have the most direct relationship to outcomes.
A sales incentive plan (SIP) is a business tool used to motivate and compensate a sales professional (or sales agent) to meet goals or metrics
over a specific period of time, usually broken into a plan for a fiscal quarter or fiscal year. A SIP is very similar to a commission
plan; however, a SIP can incorporate sales metrics other than goods sold(or value of goods sold), which is traditionally how a commission plan is derived. Sales metrics used in a SIP are typically in the form of sales quotas (sometimes referred to as point of sale
or POS shipments), new business opportunities and/or management by objectives
s (MBOs) independent action of the sales professional and is usually used in conjunction with a base salary.
SIPs are used to incentives sales professionals where total dollars sold is not a precise measure of sales productivity. This is usually due to the complexity or length of the sales process or where a sale is completed not by an individual but by a team of people, each contributing unique skills to the sales process. SIPs are used to encourage and compensate each member of the sales team as he/she contributes to the team's ability to sell. It is not uncommon for the members of such teams to be located in different physical locations (often working in different countries) and for the product introduction to happen in one location and the purchase of such a product to occur in another location.
Research shows that pay for performance often gives only short term gains, frequently gives no gains at all, and may give reduced performance.
If it comes to environmental behavior, often labeling and recognition certificates are used. This may include stickers, T-shirts with banner logo etc..
Pay for performance
Pay for performance is an emerging movement in health insurance . Providers under this arrangement are rewarded for meeting pre-established targets for delivery of healthcare services...
.
Program design considerations
If programs are to be effective, all the factors that affect behavior must be recognized, including: motivation, skills, recognitionRecognition (sociology)
Recognition in sociology is public acknowledgement of person's status or merits .When some person is recognized, he or she is accorded some special status, such as a name, title, or classification...
, an understanding of the goals, and the ability to measure progress. Often companies turn to incentive programs to counter failures in meeting targets, poor behaviors or performance, unengaged employees, poor morale or attitude, high turnover or loss of talent, or increases in expectations from management.
Many companies mistakenly assume that what works for one organization will work well for all organizations. Companies often attempt to create incentive programs without thinking in detail about how each program feature will best suit their targeted audience.
To facilitate the creation of a profitable
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
program, every feature must be tailored to the participants’ interests. A successful incentive program requires clearly defined rules, suitable rewards, efficient communication strategies, and measurable success metrics. By adapting each element of the program to fit the target audience, companies are better able to engage program participants and enhance the overall program effectiveness.
An incentive program represents a substantial investment to most organizations. Receiving a sufficient return on that investment requires the full participation of the program participants. Incentive programs are based upon the concept that effort increases as people perceive themselves progressing towards their goal. Therefore programs should offer participants a variety of products and services based on their unique interests and diverse needs. Successful programs need to carefully develop their reward methods to keep participants eager to approach a new goal once they have achieved a reward.
Objectives should be drawn up on the basis of the organization's strategic goals and should be straightforward and specific so that participants clearly understand the expectations. They should be challenging, yet achievable; if they are viewed as unattainable, the program will be destined for failure. Objectives may include motivating employees, recognizing performance, persuading customers to make a purchase, or even reinforcing a marketing message. Once the program goals have been determined, every aspect of the program must be measured against this goal in order to ensure the program's success in goal achievement. If successful, objectives should provide measurable results allowing the organization to track performance
Performance
A performance, in performing arts, generally comprises an event in which a performer or group of performers behave in a particular way for another group of people, the audience. Choral music and ballet are examples. Usually the performers participate in rehearsals beforehand. Afterwards audience...
and measure the overall success of the program.
However, at its core, an incentive program is designed to lift the performance outputs of a group of people engaged in some activity by increasing their motivation. With monetary rewards, this has often been shown to completely fail, give only small short-term gains, or even reduce performance.
W. Edwards Deming
W. Edwards Deming
William Edwards Deming was an American statistician, professor, author, lecturer and consultant. He is perhaps best known for his work in Japan...
, a leading Quality Management
Quality management
The term Quality management has a specific meaning within many business sectors. This specific definition, which does not aim to assure 'good quality' by the more general definition , can be considered to have four main components: quality planning, quality control, quality assurance and quality...
scholar and consultant, taught and demonstrated that motivation efforts are a form of tampering because they try to make improvements to individual components of what is largely common cause variation. He argued that the overall performance of a unit was much more a function of the quality of materials, process design and management, quality specifications and machine performance – in other words, the "system." Deming went on to demonstrate that the result of an improvement strategy based on trying to lift the performance of each worker one-at-a-time would be no system improvement; rather, it would simply be increased variation in performance. He encouraged management to find ways to lift the performance of the whole system.
In addition, incentive schemes will very often create moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
. By giving the incentive of hitting specific targets, the targets become the goal, rather than raising the performance of the organization as a whole. This causes reduction in overall performance, even while increasing the rate of hitting targets.
Points program
Points-based incentive programs are a type of program where participants collect and redeem points for rewards. Depending on the program type and the organizational objectives, points can be awarded on a number of criteria including positive employee behavior, the demonstration of organizational values, repeat customer purchases, the sale of new products, increased overall sales, or even the use of proper safety precautions. In addition to point awarding, the levels at which points can be redeemed can be customized by the organization and set at virtually any level. Points programs are a way for organizations to motivate behavior over time while improving the organizations’ overall performance.Employee
Employee incentive programs are programs used to increase overall employee performance. Employee programs are often used to reduce turnover, boost morale and loyalty, improve employee wellness, increase retention, and drive daily employee performance.Consumer
Consumer incentive programs are programs targeting the customers and consumers of an organization. In a recent study conducted by Bain & Company’s research, researchers found that a simple 5% increase in a company’s customer retention rates will increase the average lifetime profits per customer. Consumer programs are becoming more widely used as more companies realize that existing customers cost less to reach, cost less to sell, are less vulnerable to attacks from the competition, and buy more over the long term.Dealer/channel
Dealer incentive programs are used to improve performance for dealer and channel resellers using sales incentive programs. It can motivate the staff which in turn only helps business. These programs help companies capture market share, launch new products, reduce cost of sales, increase product adoption, and ultimately drive sales.Sales
These programs are primarily used to drive salesSales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
, reduce sales costs, increase profitability, develop new territory, and enhance margins. Sales incentive programs have the most direct relationship to outcomes.
A sales incentive plan (SIP) is a business tool used to motivate and compensate a sales professional (or sales agent) to meet goals or metrics
Metric (mathematics)
In mathematics, a metric or distance function is a function which defines a distance between elements of a set. A set with a metric is called a metric space. A metric induces a topology on a set but not all topologies can be generated by a metric...
over a specific period of time, usually broken into a plan for a fiscal quarter or fiscal year. A SIP is very similar to a commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
plan; however, a SIP can incorporate sales metrics other than goods sold(or value of goods sold), which is traditionally how a commission plan is derived. Sales metrics used in a SIP are typically in the form of sales quotas (sometimes referred to as point of sale
Point of sale
Point of sale or checkout is the location where a transaction occurs...
or POS shipments), new business opportunities and/or management by objectives
Management by objectives
Management by Objectives is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization....
s (MBOs) independent action of the sales professional and is usually used in conjunction with a base salary.
SIPs are used to incentives sales professionals where total dollars sold is not a precise measure of sales productivity. This is usually due to the complexity or length of the sales process or where a sale is completed not by an individual but by a team of people, each contributing unique skills to the sales process. SIPs are used to encourage and compensate each member of the sales team as he/she contributes to the team's ability to sell. It is not uncommon for the members of such teams to be located in different physical locations (often working in different countries) and for the product introduction to happen in one location and the purchase of such a product to occur in another location.
Online programs
When first emerging in 1996, the use of online incentive programs was extremely rare. According to the Online Incentive Council (OIC, defunct), since its emergence, the number of online programs has almost doubled in size every year. At present, nearly every traditional incentive company offers an online component in programs including employee motivation and recognition, sales performance, channel programs, and consumer promotions. Companies that run their programs online experience efficient communication, reporting, and awards fulfillment. Online incentive programs pose an attractive alternative to traditional offline programs since online programs save money and time and allow organizations to have much greater control.Monetary rewards
Selecting the appropriate rewards is vital to any programs success. The goal in choosing rewards is to select items that will spark the participant’s interest or feelings, and support the program’s objectives. Effective rewards will both motivate short-term behavior and provide motivation over time. There are several types of rewards.Cash
While incentive program participants often state that they prefer cash to non-cash rewards, research has shown that cash is a poor motivator due to its lack of "trophy value." In a recent study conducted by the Center for Concept Development, three of five respondents agree that a cash payment is perceived to be part of an employee’s total compensation package and not as part of an incentive program. Additionally, cash is quickly forgotten as many participants tend to spend it on everyday items or use it to pay bills. Given that most people do not generally talk about cash awards, cash programs do little to generate the interest required to create an effective incentive program.Research shows that pay for performance often gives only short term gains, frequently gives no gains at all, and may give reduced performance.
Non-cash rewards
Merchandise and other non-cash rewards are more often perceived as separate from compensation. Accordingly, non-cash rewards tend to stand out as rewards for performance, which enhances their long-term effect. Branded merchandise and other non-cash rewards have high trophy value, bringing greater recognition to the recipient at the time of the award and possessing a long-term lasting effect that can result in increased engagement in the organizations goals.Gift cards/certificates
Gift cards/certificates are prepaid retail cards or certificates which are redeemed at a later time at checkout. In general, they are available in two types: (1) cards which carry a major credit card brand, commonly referred to as universal gift cards (UGC), and are redeemable at all merchants accepting the credit card brand; and (2) retailer-specific cards, issued by well-known merchants, redeemable only through the issuing retailer. In the 2005 Incentive Federation Study of Motivation and Incentive Applications, gift cards were ranked as the most frequently used type of corporate reward.Merchandise
Merchandise rewards can range anywhere from small branded key chains to high-end electronics. In a 2005 study conducted by the Center for Concept Development, 73% of respondents agreed that more stimulating, memorable incentive programs can be built around merchandise as opposed to cash rewards.Travel
Travel rewards can best be defined as a face-to-face event designed to motivate, either directly or indirectly. In a 2005 study conducted by the Center for Concept Development, 51% of respondents perceived that travel is remembered longer than other incentive rewards.Experiential
Experiential rewards provide program participants with an experience. This form of reward gives organizations the ability to offer their employees and customers interesting experiences as incentives. Examples might include a seaplane flight and lunch, a two hour horse ride on the beach, a day of sailing for two, a chance to meet a star athlete, or the use of a party planner for an occasion of the recipient’s choice. Experiential rewards allow participants to share their experiences with others and reinforce the reward and the behavior that led to the giving of the reward.Non-monetary rewards
Non-monetary incentives are used to reward participants for excellent behavior through opportunities. Non-monetary incentives may include flexible work hours, payroll or premium contributions, training, health savings or reimbursement accounts, or even paid sabbaticals.If it comes to environmental behavior, often labeling and recognition certificates are used. This may include stickers, T-shirts with banner logo etc..
See also
- IncentiveIncentiveIn economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
- MotivationMotivationMotivation is the driving force by which humans achieve their goals. Motivation is said to be intrinsic or extrinsic. The term is generally used for humans but it can also be used to describe the causes for animal behavior as well. This article refers to human motivation...
- Goal-setting theory
- Travel incentiveTravel incentiveTravel incentives are a reward subset of an incentive, recognition or a loyalty program, which is a business tool used to change behavior to improve profit, cash flow, employee engagement and customer engagement....
- Loyalty programLoyalty programLoyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behavior — behavior which is potentially beneficial to the firm....
- Loyalty marketingLoyalty marketingLoyalty marketing is an approach to marketing, based on strategic management, in which a company focuses on growing and retaining existing customers through incentives...
- Employee development
- Organization developmentOrganization developmentOrganization development is a new term which means a conceptual, organization-wide effort to increase an organization's effectiveness and viability...
- Organizational performanceOrganizational performanceOrganizational performance comprises the actual output or results of an organization as measured against its intended outputs .According to Richard et al...
- Management effectivenessManagement effectivenessIn the management, the ultimate measure of management's performance is the metric of management effectiveness which includes:* Conflict management, or how well management is able to utilize confrontation and collaboration skills; management's ability to be flexible and appeal to common interests.*...
- Share Incentive PlanShare Incentive PlanThe Share Incentive Plan was first introduced in the UK in 2000. SIP's are an HMRC approved, tax efficient all employee plan, which provides companies with the flexibility to tailor the plan to meet their business needs...