The traditional employment relationship is a relatively straightforward exchange between employee and employer whereby an employee provides labor in exchange for money and benefits—health insurance, paid leave, etc.
An employee’s incentive to do adequate work is the desire to keep his or her job; fail to meet expectations on an ongoing basis, and sooner or later, the employee risks getting fired.
Of course, there are limits to this simple model, which has led many employers to offer incentives designed to drive desirable employee behavior more effectively and precisely.
In this feature, we’ll discuss some of the limitations of traditional incentive models and look at some of the ways employers are designing their incentive structures to address those limitations.
The Limits of Pay-for-Time Incentives
In a simple pay-for-time-worked incentive model, employees are effectively incentivized to do just enough work with just enough diligence and quality not to get fired. After all, an employee who does just enough to get by is just as employed as one who regularly goes above and beyond. In this model, an employee’s hourly wage or salary doesn’t fluctuate based on how well he or she performs the job.
Of course, most companies don’t really have a pure pay-for-time-worked incentive model. While this is fairly close to the model used for many entry-level, temporary positions (think summer job in high school), even these roles come with certain incentives beyond the hourly wage.
Let’s consider some.
Prospect of Continued or Future Employment
As we alluded to above, the baseline, foundational incentive for any employee is not to get fired. Although it’s so obvious and basic that most people don’t automatically think of it as an incentive, it is. That’s because an employer might have to pay an employee for an hour on the job, even if the employee’s work was of poor quality or inefficient, but within the at-will employment model that dominates the United States, that employer doesn’t have to keep employing a poor performer.
At first glance, it might seem like this incentive is only good for ensuring a floor-to-employee performance—again, the idea that employees need to do just enough not to get fired. While that might seem like a low bar, it really depends on the job requirements. There are extremely competent and diligent—even brilliant—people who get fired all the time. The CEOs of major companies are often in constant fear of being replaced, as are politicians, coaches, and athletes in professional sports. Even companies may fear being “fired” by their customers or clients, who are always at risk of switching to a competitor.
Fear of termination can be a strong negative incentive, but it’s a very blunt instrument and one that doesn’t allow for long-term development.
The other side of the coin, however, is the positive incentive that rewards high performers with more work. This could include overtime opportunities with overtime wages or the extension of a temporary employment contract.
More work could also mean more responsibility in the form of a promotion.
Career Advancement
While the fear of losing one’s job is certainly a strong motivator, employees are also motivated by the prospect of career advancement. Countless employees do far more than just enough to get by, in part because they want to climb the corporate ladder. They see a high level of engagement and strong performance as a means to a promotion and/or raise.
Career advancement can also include all forms and offshoots of such advancement, including permanent pay raises, job-level increases, expanded team sizes or budgets, and all of the prestige that comes with it.
Bonuses
Bonuses are an extremely popular incentive. A bonus is typically paid annually or quarterly and is based on relatively short-term performance. For example, an employee’s bonus for calendar year 2022 should generally be independent of how well that employee performed in 2021. However, when considering a more permanent reward for good performance, such as a promotion or pay increase, consideration is typically given to an employee’s entire tenure.
Bonuses can therefore be great as targeted incentives. Employers can be clear about exactly what behavior and results they want to see incentivized. Perhaps the most familiar employee bonuses are those for sales personnel, who are often paid a percentage of the revenue or profit their efforts generate as a commission. This incentivizes sales staff to sell because their bonuses/commissions are tied directly to the number of sales they bring in.
Another example is bonuses paid to corporate executives. These are often mind-boggling and headline-grabbing amounts of money paid to executives as a reward for strong company performance.
A major challenge with bonuses is that they can lead to unexpected and undesirable employee behavior if they aren’t crafted carefully. For example, as salesperson with strong incentives to sell may cut corners, engage in dishonesty, or advocate for unfavorable contract terms if it means getting a deal signed and getting the corresponding commission. Executives may be tempted to fudge numbers or skimp on health, safety, and environmental protections.
Therefore, bonuses need to be balanced against other incentives to ensure they don’t create distorted behaviors and outcomes.
Performance Reviews
Performance reviews are sometimes seen as a kind of incentive, and they can be, but some caution is needed here. Performance reviews are a measurement tool and feedback opportunity for employee performance. Often, employees who have outstanding performance reviews will receive a bonus or even a promotion if their reviews are consistently strong.
But unless concrete rewards like bonuses, raises, or promotions come with strong performance reviews, those reviews are really just a pat on the back in writing. Furthermore, employees may start to feel underappreciated or undervalued if they continually receive high marks but don’t see a corresponding change in compensation, job level, or prestige.
While many employees don’t think of themselves as having a very complicated incentive structure, there are implicit and explicit incentives within any standard employment relationship. In addition to salary and bonus, simply being allowed to continue working and being paid is an incentive. There are many tools at employers’ and managers’ disposal, but the key is understanding them and putting together a well-thought-out incentive plan.
Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.