Variable-remuneration plans, although increasingly widespread, do not always achieve their main objective, which is to motivate people. Typically these plans are useful for establishing and communicating business priorities,however, and they can link labor costs to results, which means that remuneration costs increase only in line with business profits, whether economic or otherwise.
However, Pablo Maella, a lecturer at the Instituto de Estudios Superiores de la Empresa at the University of Navarra in Spain, finds that these plans are not always effective, mainly because the relationship between variable remuneration and motivation is complex. Numerous factors, many of which cannot be controlled, influence the equation.
Obviously, the key to a good incentive plan is its optimal design and implementation. According to Maella, it must overcome certain challenges in order to be truly motivational.
First, it should set realistic goals. The nature of a given job, often based on vague occupations and dependent on elements that are beyond the individual’s control, makes it difficult to establish objective numerical indicators. Also, it is difficult to come up with goals that are ambitious enough to motivate employees but realistic enough not to discourage them.
The reward should be adapted to the effort required. The plan should, in other words, establish a clear and direct relationship between the increased effort and the reward. Often the problem is that the results do not depend solely on the efforts of employees, but instead are influenced by internal and external factors beyond their control.
Objectively evaluate performance. For the evaluation to be considered fair, goals need to be easily measurable, even though numerical indicators don’t always exist. If they do, they are contaminated by external variables, such as market circumstances or competitor behavior. The fact that evaluations are carried out by individuals often makes them subjective.
It’s important to generate the perception of fairness. Fairness is normally based on the idea that the one who contributes more, earns more. Again, though, subjectivity corrupts the process. After all, what exactly does it mean to contribute more? Who decides this, and why? How can we guarantee that the outcome is the result of efforts made rather than of chance? Unless there is a widespread perception that the remuneration scheme is fair and equitable, it is likely to lead to demotivation.
Prevent opportunistic behavior. The behavior that a variable-remuneration plan promotes often is unexpected because the plan is poorly designed or too easily manipulated. A typical case of opportunistic behavior would be that of employees who think only of selling at all costs to maximize their commissions, without taking into account other factors such as customer solvency or profitability.
Incentives also can have adverse effects, one being what Maella calls the “buffet effect,” whereby initial enthusiasm soon turns into weariness, causing the effect to vanish as time passes. Other negative consequences include the “incremental effect,” whereby an employee needs increasingly more bonuses to motivate the same level of effort, “limited efforts,” whereby individuals work only until they receive the reward and no more, and the “vicious circle,” which is generated by promoting work only when there are incentives.
Maella suggests eight easy, inexpensive ways to create a highly motivated work force.
1. Establish a fixed remuneration system that is externally competitive and internally equitable.
2. Select people who are qualified, responsible, self-motivated and dedicated to their work.
3. Fire employees who prove to be consistently inefficient.
4. Develop intrinsic motivation such as personal development, learning and achievement.
5. Facilitate transcendent motivation, indicating the usefulness of each position relative to the organization and society.
6. Design jobs with greater autonomy, to facilitate self-realization.
7. Establish clear priorities and address them regularly.
8. Set goals that depend primarily on a person’s effort. In other words, encourage behavior rather than simply results. Furthermore, it is important to establish incentives that the person will view as being worth the effort required to achieve them. Otherwise the entire plan will fail.
It is important to implement a plan that is simple and easy to apply. The plan needs to be somewhat provisional and flexible, to ensure that employees are aware that changes can be made, if necessary.
By : Economic Times