Variable remuneration schemes, although increasingly widespread, do not always achieve their main objective: to motivate people.
Typically, these schemes are useful for establishing and communicating business priorities. In addition, they can link labor costs to results, which means that remuneration costs only increase in line with business profits, whether economic or otherwise.
However, IESE’s Pablo Maella finds that these schemes are not always effective, mainly because the relationship between variable remuneration and motivation is complex. Numerous factors that cannot always be controlled influence the equation.
Why Do Incentive Schemes Fail?
Obviously, the key to a good incentive scheme is its optimal design and implementation. According to Maella, it must overcome certain challenges in order to be truly motivational.
Establish and set realistic goals. The nature of the job, often based on vague occupations and dependent on elements that are beyond a person’s control, makes it difficult to establish objective numerical indicators. Also, it is difficult to establish goals that are ambitious enough to motivate employees and realistic enough not to discourage them.
Adapt the reward to the effort required. The scheme must establish a clear and direct relationship between the increased effort and the reward. The problem is that, quite often, 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, it is advisable to make goals easily measurable, although sometimes numerical indicators don’t 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.
Generate the perception of fairness. Fairness is normally based on the idea that the one who contributes more, earns more. But again, 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 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 scheme promotes is often unexpected because it is poorly designed or can be manipulated. A typical case of opportunistic behavior would be that of employees who only think of selling at all costs to maximize their commissions, without taking into account other factors such as customer solvency or profitability conditions.
Limitations of Incentives
Incentives can also have adverse effects, one being what Maella calls the “buffet effect,” whereby initial enthusiasm soon turns into a certain weariness, which means that the effect tends to vanish over time.
Other negative consequences include: the “incremental effect,” which is when a person needs increasingly more bonuses; “limited efforts,” which is to work only until you receive the reward and no more; and the “vicious circle,” generated by promoting work only when there are incentives.
Designing a Motivational Scheme
Maella suggests some easy and inexpensive ways to create a highly motivated workforce.
Keys to Variable Remuneration
Set goals that depend primarily on a person’s effort. In other words, encourage behavior rather than just 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 scheme will fail.
It is important to implement a scheme that is simple and easy to apply. The scheme needs to be somewhat temporary and flexible, to ensure that employees are aware that changes can be made, if necessary.
Written by Maella, Pablo
Published by www.ieseinsight.com