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Incentives and Workplace Performance

Some HR professionals swear by incentives; others, at them. In the United States alone, organizations spend almost $120 billion annually on work-related incentive programs.

January 1, 2007
Related Topics: Performance Management
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Some HR professionals swear by incentives; others, at them. In the United States alone, organizations spend almost $120 billion annually on work-related incentive programs. Are they getting their money’s worth?

Purveyors of incentive systems are wildly enthusiastic about using such tangibles as gifts and travel. But some researchers claim that tangible incentives destroy personal interest in work. Others conclude that organizations should not offer incentives for performance that might normally be achieved without them. Some have found that they work in specific cases with dramatic results.

Meanwhile, there is a lack of systematically documented incentive workplace practices. Many organizations implement incentive systems without understanding the factors that increase the positive effects and eliminate negative consequences of what they adopt. So what is an HR decision-maker to do when senior managers ask for an incentive program?

Two years ago, I organized a research team to cut through the confusion and derive clear conclusions about incentives. The purpose was to help senior HR managers make more informed decisions. The study was supported by a grant from the Society of Incentive and Travel Executives (SITE) Research Foundation and was sponsored by the International Society for Performance Improvement (ISPI). It included a review of

 

more than 600 English-language studies on incentives, a meta-analysis of well-conducted lab and field research and an extensive survey of U.S. organizations that apply various incentive systems. Nearly 150 surveys were completed, and 90 structured interviews were conducted with incentive system designers and selectors, incentive recipients and supervisors of recipients. The findings of the research disproved two myths:

 

• Myth: Incentives destroy personal, intrinsic interest in work. To the contrary, rewarding people for exceeding targets causes them to value work more and even heightens self-confidence and employee loyalty.

• Myth: Incentives only lead the business to pay for results it would have gotten anyway. To the contrary, only 8 percent of the workers surveyed said they would have achieved the same results without incentives.

Here are some other key findings:

• Tangible incentives, such as money, gifts or travel, increase performance by an average of 22 percent.

• Of the four major types of incentive systems, quota-based systems that require a performance goal to be met or surpassed are the most effective. Incentive programs that last longer than six months have the strongest effect, with a 44 percent performance gain. When the effectiveness of incentive programs on quality versus quantity outputs was compared, there were no significant differences. Incentive systems affect quality and quantity equally and positively. Incentive systems have an impressive positive impact on goal achievement: 57 percent of survey respondents surpassed or met performance objectives, while 92 percent surpassed, met or partially met performance goals. As for effectiveness of the incentive type, monetary rewards seem to yield a greater gain, but the costs may be higher. One sad finding: Only 23 percent of respondents’ incentive programs included recipients’ participation in incentive selection—an important red-flag finding for HR managers.

• 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.

There are many myths, uncertainties and controversies about incentives and their effect on workplace performance. This meta-analysis and field practice study demonstrated convincingly that incentives work. They positively and strongly influence both the quantity and quality of workplace performance, the value workers attribute to goal achievement and the emotional commitment to reach objectives and increase performance. They also can enhance organizational loyalty.

However, HR executives should select incentives only when there is a motivation gap, and only for challenging goals. Targeted recipients should be involved in the selection of incentives. Equity and fairness should be ensured. To achieve incentive system success, focus on implementation and communication, and monitor the system continuously.

Recent Articles by Harold D. Stolovitch, Ph.D.

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