Incentive Programs in HR: Do They Really Boost Performance or Cause More Issues?

Incentivizing HR Policies: Does It Truly Work?

We design HR policies, benefits, and compensation to incentivize almost everything under the sun. Does this truly work?

I hear from HR across the continuum about escalations in compensation. Most of the issues I find are due to the incentives. Addressing one's need for livelihood is mostly answered by the salary. No matter what the perceptions about needs and wants may remain, the amount offered through Cost-To-Company is supposed to be a standard amount that can be paid in lieu of the services offered.

A stimulus to effect a sudden rise in performance standards backfires, especially when the incentive program is oversold and the parameters aren't transparent.

Countering Incentive Program Challenges

How are you countering this? Please do share the measures that you have taken to avoid the incentive program from backfiring.

NB: Please consider keeping your answers 'anonymous' if talking about your firm's compensation policy is against the privacy standards.

In principle, any compensation system/model backfires if it becomes the sole criterion. The very fact that the incentive system came into vogue is because the CTC system was found to be inadequate [or 'backfiring', depending on how one views the consequence].

As you are aware, the overall compensation format/model, irrespective of the sector/domain, is a combination of CTC, employee-friendly allowances, incentives, etc.

Does the 'Incentive Culture' Work Without Backfiring?

We already have a classic example right now in the banking sector. All of us are aware of the recent CobraPost sting operation that indicts most of the well-known banks for selling insurance products—which in itself isn’t as per norms—along with unrecorded cash transactions. As per the RBI findings, the primary cause of the excessive focus on bank employees getting involved in selling insurance products [when they should be focusing on the banking part of their jobs] was high incentives with respect to the insurance products & targets through incentives [meaning excessive focus on incentives].

The only measure that I can see working with incentives in place will be when the line is drawn reasonably & ethically—lower the limit-line, the business will get hit & higher the limit-line, the situation you described evolves. In a single word, I guess it will have to be "balancing".

Regards,
TS

Yearly Incentive Plan Considerations

Hope the question is about the yearly incentive plan only. "We" has too much inclusiveness in your question. If a C&B specialist designs a specific incentive program, he/she will include only those criteria which need to be incentivized and have special impetus. Determining compensable criteria in the case of incentives is a specific exercise. You need to determine each year's parameters based on each year's business goals, priorities, and special initiatives. In India, most of our incentive programs are very much generalized. The organization's focus on the design aspect of the program is very poor; many management teams do not understand the use of incentives. Poorly designed incentive programs always confuse employees and backfire.

Calculating incentives in the total cash structure is not a bad idea, but it should be communicated properly as target compensation. If it is a discretionary plan, then it needs to be written down in bold, not with a star and smaller font somewhere at the end of the plan documents. If you have disqualifying criteria, please write them properly. In the above banking/insurance sector example, if the sales process was unethical and the intention of the plan was to follow an ethical way, then it must be written as disqualifying criteria for incentive payout or payback if it is already paid (commission) to employees.

The intention of any incentive plan must be to pay employees. Design a plan that employees will believe in and get rewarded with the right effort. Do not design a plan where employees will never qualify for payment. Nobody will believe in such a plan.

Develop a specific communication channel for incentive-related queries, and C&B is appropriate to handle such queries. Do not dilute the employee's relevant questions with philosophical, ZALEBI-type answers.

Give high importance to the designing stage of the plan. Your half of the work is done, and it will never backfire. Another important point is to keep a scope of adjustment of targets in case the market collapses or turns around suddenly.

Many more things are coming to mind, but I believe I have answered your above questions.

Regards