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Employee Incentives: How to Drive the Behavior You Want

Employee incentives drive behavior and performance. Learn how to motivate your employees effectively and design incentives that are aligned with company goals.

13 min read

Employee incentives are a system of rewards and compensation pay that motivate employees to reach specific goals. In sales organizations, this is often the sales compensation plan, made up of base pay and variable incentives in a sales commission structure. Sales incentives drive reps to their goal, which is often referred to as quota. But regardless of the team an employee sits on (sales or not), employee incentives are key to driving behavior and revenue in any organization.

Think about it this way: you pay every employee to fulfill their job responsibilities. Without that base pay, you wouldn't convince many people to come to work each day. Employee incentives work in this same way. They are meant to motivate employees to hit aggressive goals and go above and beyond their job description to help the company reach objectives.

Why Employee Incentives Work

Employee incentives, like sales compensation plans, work because they motivate employees and drive specific behaviors. In all reality, it comes down to psychology, specifically positive reinforcement—reinforcing a behavior with a positive reward (i.e., an employee incentive) increases the frequency of that behavior. 

Ultimately, employee incentives work because they do five distinct things. 

1. Employee Incentives Make People Feel Valued

It’s no secret that the war for talent is a competitive one—and more often than not, the companies that come out on top have mastered how to make their employees feel valued and appreciated. They are the true winners in this case because employees who feel more valued and satisfied at work are less likely to leave, allowing you to preserve top talent while shielding you from battling other companies for more.

According to Harvard Business Review, turnover can be one of the most expensive problems at a company; research on the costs of replacing an employee range from 20% of their salary to 150%, depending on how you calculate it. So, a 3% change can represent tens of millions of dollars, depending on the scale of the company.

This is where employee incentives make a difference—the tool you must possess if you want to be able to do everything in your power to keep those top performers on board, and ensure that they understand just how valued they are. If anything, just start small. Maybe that means choosing an employee of the month and giving them a gift certificate.

It can be that simple, and if you’ve never rewarded employees in such a matter, you’re almost guaranteed to see a change in working habits, morale, and results.

2. Employee Incentives Contribute to Building a Thriving Culture

Every company sets up their employee incentives differently, but one of the most important aspects of an incentive plan is recognition. At Xactly, we recognize individuals for their outstanding performance on a quarterly basis at company-wide all hands meetings, with an announcement of the specific employee achievement accompanied by a small gift card as their reward.

While this might be a small incentive from a monetary standpoint, it makes a big impact. Learn more about the power of recognition through our post of ideas for improving employee morale.

3. Employee Incentives Create Meaning

When tasked with finding out why employee performance was in decline, Harvard Business School professor Teresa Amabile and independent researcher Steven Kramer collected electronic diary entries from 238 employees in seven different companies for research.

Of all the factors that resulted in employee performance, the most important one was making progress in meaningful work. To create meaning and properly manage employee performance, dig deep and discover what it is that truly matters to employees. Once you’re certain you’ve found it, create incentive programs around it, and establish a connection between the employee’s work and the incentives you’re offering.

4. Employee Incentives Improve Workplace Morale

To effectively recognize employee performance in your own workforce, be sure to measure your people objectively, and provide them with regular feedback. Monitor performance data, and reward top performing reps by recognizing them in person, on a leaderboard, or as mentioned, in a company-wide email blast.

The last thing you want to do is recognize employees who aren’t deserving. In The Carrot Principle, authors Adrian Gostick and Chester Elton discuss a study they did of employee performance over a ten-year period. Their research showed that employee performance was highest when they received performance incentives like praise or accolades. These incentives inspired performance significantly better than even money.

5. Employee Incentives Provide Autonomy

Finding incentives that encourage individual employee performance is the key to creating meaningful incentive programs. The best thing you can do is set employee incentives that guide behavior, and monitor your programs for efficacy and engagement.

Edward L. Deci and Richard M. Ryan conducted several studies to evaluate how employee performance fared when employees felt controlled as opposed to self-directed. They found that the group that was allowed to act based on their own opinions persisted significantly longer in a puzzle-solving activity than did those who were told how to solve the puzzle, or were pressured to solve it in a specific manner.

Using Employee Incentives to Drive the Right Behaviors

Now that you better understand why employee incentives are so valuable, let’s take a look at a few methods for seamlessly incorporating them into your organization.

1. Align Incentives with Organizational Goals

Your incentives drive behaviors but they must motivate and encourage the right behaviors. This means your employee incentives must be aligned with company goals. An easy way to remember this is through the ABCs of incentive planning

  • A: Aligned with corporate objectives
  • B: Benchmarked against industry data
  • C: Constructed to drive the right behaviors

2. Tailor Employee Incentives to Job Roles

You know the difference it makes when you have a perfectly tailored pair of pants compared to when you buy off the rack; with the former, you feel like a million bucks. Those pants are made for you, and you only, doing wonders for your confidence. The tailor fully understood how to create the best wearing experience for you personally.

That’s the difference it makes when you tailor your incentives to fit your individual employees’ tastes, motivations, and interests rather than using one-size-fits-all incentives to recognize employee performance. If you want to reward employees in a meaningful way then the reward must inspire them on a personal level. This is where employers make major mistakes when it comes to using incentive compensation to recognize employee performance.

The first mistake is crafting incentives too similar for high and low performers. In such a scenario, that top performer is going to get frustrated and move on to a company where the employee incentives more closely reflect his or her hard work. Worse, you’ll have a low performer who thinks they’re knocking it out of the park for what is really sub-par performance.

The second major mistake is assuming that money is the greatest motivator of all. Sure, everyone likes a bonus check, and the cash bonus is an important part of recognizing employee performance, but it’s not the only way. A non-cash reward of equal or lesser value can do the trick, as long as it aligns to your employee’s interest, as mentioned before. Try courtside tickets for the basketball fanatic, or travel vouchers for your team member who always has wanderlust.

3. Utilize MBO Programs

MBO programs haven’t yet gained the popularity they deserve, mainly because many people haven’t been educated on best practices, and thus, don’t experience the maximum benefits of a Management By Objectives program when one is put into place.

One of the most important aspects of using MBO bonuses for all employees is to make both the process and goals simple and understandable. If you add in twenty targets, you’re setting up your employees for failure because it can’t possibly be clear which projects should take priority.

Alternatively, three to five projects or metrics will do the trick. This way you are able to track all of your employees’ progress and reward employees when they meet the goals you’ve set together.

The overall goal of employee incentives is to encourage your workforce’s investment in the job they’re doing, and inspiring them to do it better. Productivity and profits will both increase, leaving your business with nowhere to go but up.

Want to learn more employee incentive best practices and improve performance? Download the guide, "How to Build and Retain Employees to Drive Top Performance."