Ultimate Guide to Incentive Design
Badly designed employee rewards can cause everything from frustration and high turnover to lost customers and surprise costs. They’re like a bucket of gasoline – handle with care or risk setting everything on fire! In this ultimate guide, we'll cover the basics of what incentives are and we'll show you how to design incentive plans that are fireproof.
Understanding Incentives
Targets (also referred to as goals or objectives) and rewards are so deeply embedded in a modern society that many of us don't even notice that they are core to almost every aspect of our lives. Ever seen a parent using a sticker chart in a desperate attempt to get the kids to cooperate with them?
So, it's an area that merits considerable attention and understanding. Let's lay the foundation by first understanding two key concepts: what is an incentive and what is an incentive plan?
Key concept: What is an incentive?
An incentive is something offered to encourage or motivate someone to do something. Incentives are concerned with behaviour and at their core, they give a benefit in exchange for a certain actions.
If the KPI provides the objective truth, and the goal provides the context, then an incentive is intended to provide the behavioural motivation.
Not quite sure what a KPI is? Here's a 60 second guide. Want to brush up on what a target is? Here's our KPI refresher.
An incentive can be either...
- Positive (e.g. I buy myself a new smart watch if I hit 80kg)
- Negative/punitive (e.g. I will put a padlock on the fridge if I hit 85 kg)
- Or some combination of the two.
Incentives can work on their own or be structured into a strategic rewards programme designed to shape long-term conduct, driving individuals towards accomplishing specific goals over time.
Key concept: What is an incentive plan?
In the context of business, an incentive plan (also sometimes referred to as an employee rewards programme) is a setup where employees get a perk for hitting certain goals at work. It’s a way to inspire people by offering bonuses, perks, or other benefits when they meet or surpass goals.
The idea is to encourage everyone to work towards the company’s big goals while also getting something extra for their efforts.
Understanding Reward Programme Design
Now that we know what incentives and motivation schemes are, it's time to get into incentive plan design and how we go about structuring them. Not all motivational schemes are created equal: there is plenty of evidence every time you open a news website that they often don't work very well at all.
Here are 8 performance incentive problems and some well-known publicly reported motivation scheme failures. When employee motivation schemes fail, it's often because organisations or managers have used a broken reward structure model.
A Broken Incentive Design Model
There is a simple model that most of us use for targets, incentives and behaviour:
- If we want someone to do something, we set them a goal and offer a benefit for attaining that goal or punish them for not attaining it.
This can written as…
[Target] + [Reward for hitting target] and/or [Penalty for missing target] drives [Desired behaviour] which delivers [Desired outcome]
...or more visually...
Everybody from parents of young children through to reforming governments invest a huge amount of time, effort, and energy based on the assumed truth of this model:
- If the goal is important, we offer a valuable benefit, often money.
- If we really want them to achieve the goal, we offer them a bigger benefit.
- If we want people to over-perform, we offer additional financial incentives.
Whether it’s banks offering bonuses to their staff or governments incentivising couples to have children, this approach seems to be hard-wired into most business models and even our personal lives.
Warning
This model presupposes that people are driven by extrinsic motivation only. This is not the case which means that this model does not work all the time, not even close. Here's exactly why the motivation model we all use is broken and here's how to motivate employees in the workplace beyond the paycheck.
Designing Effective Employee Rewards Programmes
Now that we've uncovered this broken motivational model, is all hope lost? Certainly not. There are many examples of well-designed motivation schemes that align incentives with strategic goals, delivering successful (sometimes even stunning) outcomes like:
- the eradication of smallpox;
- the repair of the ozone layer; and
- a 92% reduction in single-use plastic bag consumption in the space of 5 years.
Bernie has dedicated considerable time and effort to analysing plenty of publicly reported target and incentive failures. He then used what he learned from those case studies as well as his many years of solving problems for major companies like Airbus, UBS, and HSBC to create a solution to this problem.
Bernie created the ROKET-DS method. ROKET-DS stands for Results Orientated KPI Effective Target Design System. This system was created to help give people a step-by-step, repeatable process that, if followed correctly, will produce goals and rewards that have the best chance of delivering the desired outcome and avoid scandalous failures.
You can read all about 14 high-profile, scandalous incentive failure case studies as well as the entire ROKET-DS method and how to implement it in Bernie's popular book, GAMED: Why targets and incentives fail, and how to fix them.
How to Design Incentive Plans: ROKET-DS Method
The ROKET-DS method has a total of 15 steps. The first 10 steps can be used to generate efficient and impactful KPI goals. The last five steps of the method can then be used to design well thought out incentive benefits that will actually produce the desired final result while being beneficial to both the organisation and the individual.
If you're looking for the full guide to the first 10 steps for generating powerful KPI goals, you can find it in our Effective OKR Targets in 10 Steps guide. If you're only interested in employee motivation, keep reading.
ROKET-DS Method: Steps 10-14
There's a lot to take on board in the next five steps. Bernie brings these concepts to life by using case studies, stories and video lessons in his online course, GAMED.
Step 10: Draft incentive values and rules
In Step 10, we create the first draft of our incentives and the rules associated with them. This is a key step in understanding how to design incentive plans that align with both individual and organisational goals. To guide us with this task, we make thorough use of Bernie's eight research-based employee motivation structure guidelines.
As ‘the eight principles of incentive design’ doesn’t exactly roll off the tongue (and we never miss the opportunity for a cheesy pun), the eight guidelines will become the Motive8 Principles for the rest this post.
The Motive8 Principles
There’s been a substantial amount of academic work on incentives, in particular sales incentives. Although this research is very useful, it can be a little bit difficult to digest and apply. To make this simpler, we have boiled this research down to the Motiv8 Principles.
Principle 1: Portfolio management — don’t just focus on one group
Within any sales team there will always be Superstars, middle-ranking Foot Soldiers, and low-ranking Laggards.
Although it's tempting to focus on the Superstars, the majority of the selling is actually done by the large body of Foot Soldiers. Neglecting the Foot Soldiers and the Laggards is a mistake.
Treat the sales team as a portfolio of investments, treating each group as distinct entities and handling them in a customised way.
Principle 2: Tiered targets and prizes — don't just motivate your top performers
Introduce a tiered approach with aspirational prizes for the Superstars, Foot Soldiers and the Laggards.
A tiered scheme would look a bit like this:
- First tier: Set a level that most of the sales team can achieve or have achieved over the last two years.
- Second tier: Tougher but still achievable by about 20% of the team.
- Third tier: Only for the elite Superstars of the team.
The idea is to have something for everyone. Research shows that elite salespeople are driven to push themselves even harder by exclusive and impressive tier three objectives. The Foot Soldiers aim for tier two and the Laggards will be driven by the quite-achievable tier one benefits and they are satisfied when they hit them.
Principle 3: Multiple prizes — differentiate, don’t downgrade
Offer distinct types of prizes for the different levels of abilities. Avoid creating the impression that the second and third place winners won the consolation prize, a prize that was clearly a downgraded version of the first prize.
When you differentiate prizes properly, it allows the winners of the lesser prizes to rationalise that, in fact, they prefer their prize, increasing the chance that all parties can be happy with their prize.
Here's an example of a sufficiently differentiated prize structure:
- Tier one prize: A three-course meal for two
- Tier two prize: A supercar track day
- Tier three prize: A week long stay at a 5-star resort in Hawaii
Principle 4: Set the pace — frequent prizes inspire poor performers
The longer the gap between what we do and the benefit, the weaker the impact of that benefit becomes. The time period between bonuses can have a major impact on motivation.
Research found that switching from a quarterly bonus to an annual bonus had a significant negative impact on the bottom performers. The Laggards' performance dropped by about 10%, Foot Soldiers' performance by about 4%, and Superstars' by 2%.
Principle 5: Feeling the heat — social pressure keeps ‘em keen
An oversupply of high quality talent tends to have a stimulating effect on the whole existing workforce.
Analysis shows that salespeople in districts where there are 'spare players' perform about 5% better than in areas where there aren't any available surplus resource. This effect has its biggest impact on the Laggards.
Principle 6: Making the most of your Superstars — don’t cap commission
Don’t cap sales commission on profitable sales if you want to maximise revenue and profit. As long as salespeople are being paid a bonus that doesn't incur a loss on each sale, more sales should be a good thing for both parties.
Research showed that the difference between capped versus uncapped sales commissions could be about 9% on total revenue.
Principle 7: Reward overachievement — overachievement wins more, not less
Reward overachievement more, not less. Offering a higher rate of commission for sales above a threshold (for example, the sales goal) can drive sales overachievement.
A study showed that for an office supply company, paying an enhanced commission rate for sales above quota contributed an additional 17% to their sales Superstar figures.
Principle 8: Spread the love — create multiple winners, everyone wins
There should be at least as many prizes as there are Superstars, increasing the likelihood that a Foot Soldier or Laggard will win a prize. This keeps the pressure on the Superstars to perform.
Research has shown that having multiple prizes will boost performance more than having one epic, winner-takes-all prize.
Step 11: White hat test incentives
The purpose of this step is to understand how the incentives work when everyone behaves as intended and expected. We ask one simple question:
What should happen when people display the conduct we expect and encourage in the context of our drafted targets and incentives? In other words, how does our incentive plan work when things go right?
Step 12: Black hat test incentives
Black hat testing is all about spotting potential real-world, unintended actions and consequences resulting from our drafted incentives before we go live and discover those issues in the worst possible way.
In this case, we are focusing on the unintended behavioural impacts of the incentives, rather than the goals. To do this, we can use reverse brainstorming as well as the ROKET-DS™ Diagnostic Tool to tease out the many ways in which our new incentives could misfire.
Check out this detailed post on how to reverse brainstorm. You can download Bernie's ROKET-DS™ Diagnostic Tool for free from our 8 Performance Incentive Problems That Kill Results blog post. You can also use the GAMED: Design Checklist available within the GAMED online course.
Step 13: Fix problems and re-test rewards design
If we identify any issues with the structure of our incentives, this is the point where we work out how to fix or mitigate them. The fix will typically involve an incentive redesign, clarification of the rules, or extra rules for edge cases and specific situations.
We have five main options when fixing our incentives:
1. Adapt the design of the incentive
2. Replace the incentive with another
3. Change the incentive rules
4. Create incentive rule exceptions, exemptions, or special cases
5. Create extra rules
Once we've worked out a fix, we'll need to repeat Step 12 with the new mitigations included.
Step 14: Record and go live with incentives
Our final step is to implement our incentives using good quality launch messaging and communications, and to make sure the system runs smoothly and effectively in everyday use.
To make our incentives successful, we need a solid technical launch, good buy-in from the organisation, and robust systems and processes in place to manage things after launch.
The key things you need to remember are covered in the GAMED Implementation Checklists supplied in the GAMED online course. These checklists help us answer four key questions:
- How will we communicate the launch and deployment?
- How will the new goals and rewards be implemented?
- How will we manage and sustain our new incentives?
- How will we deal with problems and issues?
Get Started with our Free Incentive Design Canvas
All five of the incentive design steps are summarised on a single page in the ROKET-DS™ Incentive Design Canvas. This Canvas provides a space for you to work within each step. You can find this free download here.
If you'd like more help on how to implement the ROKET-DS method, you can:
- buy a copy of Bernie's book, GAMED: Why targets and incentives fail, and how to fix them, or
- take part in the GAMED online course, or
- learn about targets and incentives as well as all the other aspects of high-quality performance measurement in Bernie's 13-week hybrid KPI Black Belt programme.