Incentive Plan Design - Ultimate Guide
How to design performance incentives
We are going to cover...
- What an incentive is
- A robust five-step method for designing and testing your own incentives, including the eight principles of incentive and reward design
Key concept: What is an incentive?
If the KPI provides the objective truth, and the target provides the context then an incentive is intended to provide the behavioural motivation. An incentive can be either...
- Positive (I buy myself a new smart watch if I hit 80kg)
- Negative/punitive (I will put a padlock on the fridge if I hit 85 kg)
- or some combination of the two.
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 target and offer a reward for achieving that target or punish them for not achieving 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 target is important, we offer a valuable reward, often money.
- If we really want them to achieve the target, we offer them a bigger reward.
- 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.
Health warning: This model of extrinsic motivation does not work all the time, not even close. Be careful!
Design effective incentives using the ROKET-DS method
ROKET-DS stands for Results Orientated KPI Effective Target Design System. It is a system for designing effective targets and incentives. The first ten steps focus on 'target design', the last five steps are for 'incentive reward design'.
In this post we will be looking at steps 10-14, which are all about incentive design (head to the Target Design resource for more information on steps 0-9). Here is the order and name of the five steps of the incentive design process...
Incentive Design: ROKET-DS Steps 10-14
Here is a quick introduction to each of those five incentive plan design steps...
Step 10: Draft incentive values and rules
In Step 10 we create the first draft of our incentives and the rules associated with those incentives using the Motive8 Principles:
The Motive8 Principles
There’s been a substantial amount of academic work on incentives, in particular sales incentives. Although this research based is very useful, it can be a little bit difficult to digest and apply. To make is simpler, we have boiled this research down to eight fundamental principles of incentive design.
Principle 1: Portfolio management — don’t just focus on one group
Within any sales team there will always be Superstars, Foot Soldiers, and Laggards.
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.
Principle 3: Multiple prizes — differentiate, don’t downgrade
Offer distinct types of prizes. 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. This 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 reward.
Principle 4: Setting the pace — getting more from the poorest performers
The longer the gap between what we do and the reward, the weaker the impact of that reward becomes. The time period between bonuses can have a major impact on motivation.
Principle 5: Feeling the heat — social pressure keeps ‘em keen
An oversupply of high quality talent tends to have a motivating effect on the whole workforce.
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.
Principle 7: Reward overachievement more, not less
Offering an higher rate of commission, for sales above a threshold (for example the sales target) can drive sales overachievement.
Principle 8: Spread the love — 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, so keeping the pressure on the Superstars to perform.
What's with the cheesy name?
As ‘the eight principles of incentive design’ doesn’t exactly trip off the tongue (and we never miss the opportunity for a cheesy pun), the eight principles will become the Motive8 Principles for the rest this post.
That's a lot to take on board. This [totally fictitious] case study, from my online GAMED course, should bring each of these concepts to life using a story.
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 behaviours we expect and encourage in the context of targets and incentives?
Step 12: Black hat test incentives
Black hat testing is all about spotting potential real world, unintended behaviours and consequences resulting from our draft 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 targets. We use reverse brainstorming and 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
Step 13: Fix problems and re-test incentive designs
If we identify any issues with the design of our incentives, this is the point where we work out how to fix 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
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 in the Appendix. These checklists help us answer four key questions:
- How will we communicate the launch and deployment?
- How will the new targets and incentives be implemented?
- How will we manage and sustain our new incentives?
- How will we deal with problems and issues?
All five of the incentive design steps are summarised on a single page in the ROKET-DS™ Incentive Design Canvas [copy available in your free download pack, details in the first section of this book]