Advantages & Disadvantages of Individual Incentive Plans

Incentive plans are simple in concept: if your team performs better, you give them a reward. The plans are more complicated to put into practice. If they are badly designed or implemented, individual incentive pay plans may have the effect of discouraging performance and ambition.

Types of Incentives

Your company may have an incentive plan in place even if you don't call it that. Commissions for salespeople are an incentive: the more they sell, the more money they make. Increasing employees' pay when they do well is another individual incentive plan example.

Commissions and individual wage incentive plans are only some of the options, though. You can also offer bonuses for completing a project or use a formula for allocating profits among above-average employees. Some employers opt for group plans, such as rewarding an entire department for meeting quarterly goals.

Incentive Plan Design

The very design of individual incentive pay plans or other reward systems can be a disadvantage if you rush without thinking it out. The first step is to look at your business and your workplace culture and figure out what will work best.

  • The incentive benchmarks should be quantifiable. The classic standard is to make them SMART: specific, measurable, achievable, realistic and time-bound.

  • Are you confident that individual incentive pay improves performance, or will it make your employees resent each other?

  • Do you have an ethical office culture, or is your team likely to cross lines while trying to win?

  • Would group incentive plans build teamwork better than individual plans? Will high-performing individuals pressure group members who are dragging down overall performance?

  • Is offering an annual bonus or pay bump going to inspire workers? Do they need regular, more frequent awards even if they're smaller?

Don't be afraid to talk to employees about what sort of incentives they'd like. They know what would motivate them better than you do. After you implement the plan, survey them again and see how it's working for them in practice.

Purpose Of Individual Incentive Pay Plans

The purpose of incentive plans is to encourage employees to advance your company's goals. If your plan doesn't do that, it's a waste of money instead of an advantage. Before you launch your plan, think about the financial or productivity goals you want to attain and tailor the incentive to that.

This is something else with which employees can help. Talk to them in person or survey them and ask how they can contribute toward the company's goals. Depending on the individual and his job, his contribution may be more sales, fewer defective products or bringing new products to market quicker.

If you build your individual incentive pay programs around these ideas, everyone wins. You win when the business or the department meets its goals, and employees share in the success. It's important to explain how individual and company goals tie together so your team knows the goals are more than arbitrary.

Incentive Pros and Cons

Well-designed individual incentive pay plans have several positive effects:

  • Top performers get rewards and acknowledgment for their great work. That can push them to continue excelling.

  • Underachievers may push themselves harder for rewards. Watching what the winners do can teach them how to do the same.

  • If your workplace enjoys healthy competition, an incentive plan provides something for which to compete.

However, even good plans can go bad in practice:

  • Employees may become fixated on the money rather than the rewards of doing a good job.

  • Employees who consistently win rewards may soon take them for granted. At that point, it's no longer an incentive.

  • Egotists may decide that receiving awards makes them better than their co-workers, which can hurt team unity.

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com