Managing Success: The value of rewards

November 9, 2004

Editor's Note: This column was prepared by the staff of Winning Workplaces, a not-for-profit organization that helps small and midsized businesses create better work environments.

Employee reward programs can be a great way to motivate staff. If set up correctly, they are a win/win proposition that brings out the best in employees by increasing productivity and the bottom line.

If designed poorly, however, they can result in unintended negative consequences that can be financially costly, harmful to employee morale, and detrimental to an organization's basic value structure. For these reasons, senior executives need to be vigilant in providing the right incentives for the right kinds of behavior.

A recent Towers Perrin survey called "Rewards & Performance Management Challenges: Linking People and Results" detailed reward program best practices of high-performing companies. A total of 1,294 firms in North America, Europe, Asia, and Latin America participated in the study. The firm defined high-performance companies as those with three-year total shareholder return or earnings growth that exceeded the median of their global industry groups.

The study found that high-performing companies segmented the work force by key company functions and high performers. They integrated their rewards programs into the company's overall system, understood the cost and value of each incentive, struck a balance between fixed and variable rewards, and effectively communicated how the reward system works to managers and front-line employees.

Incentive Programs Gone Bad

Conspicuously absent from the Towers Perrin study was what role values should play in designing a rewards program. Poorly designed incentive programs are, at best, ineffective and, at worst, demoralizing. However, when they are divorced from values, they can lead to malfeasance.

Recently managers at several organizations—including Family Dollar stores, Wal-Mart, Toys "R" Us, and Taco Bell—were caught for altering employees' timecards. Not surprising, all of the companies in question insisted that they do not condone this kind of conduct. That is probably true, but a considerable portion of their managers' compensation is tied to bonuses for cutting costs and boosting profit margins. Condoned or not, these companies provided their leadership with an incentive to do the wrong things.

Experience shows that rewards based on the bottom line can lead to negative consequences. For example, in his book The Soul of an Organization, customer support expert Richard S. Gallagher tells of a manufacturer that made its customer service representatives' bonuses dependent on keeping all calls under 13 minutes. As a result, employees rushed customers off the phone, and referral business dropped approximately 20 percent.

Perhaps the biggest mistake a manufacturer can make in designing performance incentives is to base them solely on individual productivity. Take piecework incentives, for example. As Gallagher points out, establishing a piecework rate is challenging. Set the rate too high, and you demoralize your employees. Set it too low, and production falters. Even if you set the perfect piecework rate, the program gives employees a natural disincentive to raise the bar and improve operations in the future.

Similarly, when a manufacturer bases incentives strictly on production, product defects and accidents increase as employees rush to meet deadlines. As Gallagher states, "Given a choice between doing a job right and doing a shoddy job with higher productivity, most will vote with their wallets and do the latter."

Programs That Work

It can be argued that the ideal reward program moves away from workplace metrics altogether and encourages values such as collaboration and teamwork.

A good example of such a program can be found at Interface Software, an Oak Brook, Ill.-based software developer. The company places a smaller emphasis on financial rewards, preferring to focus on a number of employee-run recognition initiatives.

According to Jodi Wasserman, the organization's "ambassador of fun," management-driven recognition can be counterproductive because it fosters competition and can divide the workplace, whereas peer-to-peer recognition encourages a spirit of camaraderie and teamwork. The program has proven to be a huge success. Not only are Interface Software's employees pulling together, but in doing so they better the company.

At DeCardy Diecasting, incentives focus on behaviors that impact productivity rather than on individual productivity. DeCardy runs a time-sensitive manufacturing operation, and regular attendance is integral to the company's success. The organization communicates this by putting a running total of absences in the employees' paychecks and covers attendance during performance reviews. Workers with perfect attendance are recognized.

By communicating to each employee how important he or she is to DeCardy's success and recognizing top performers, the company has managed to sustain a remarkable absenteeism and tardiness level of less than 1 percent. When the company does reward productivity, it does so companywide, thereby avoiding competition and fostering teamwork.

Incentive programs can be among the most powerful determinants of behavior. If done right, an incentive program gives employees a sense of individual accomplishment, and the company benefits from an enhanced bottom line.S

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