Q: How do you pick one incentive program over another? I've asked business associates what they do, and they're all over the map. One offers a cash incentive, another uses merchandise. Both say they work well. A third colleague says he doesn't offer any incentives and seems to do OK. Is there any objective data to tell which is the most effective?

A: It is good that you are concerned about the question of incentives and rewards. A recent article in the Harvard Business Review (March-April 2000), "Leadership That Gets Results," reported that of six leadership styles studied, the use of rewards was the single highest predictor of "organizational climate," which in turn had a direct correlation with financial results.

You are correct in your assessment of the variety of incentive plans in the workplace. Most of them are home-grown, and many business owners insist they produce positive effects. Of course, rough impressions like these are based on personal experiences, not scientific research.

Dr. Alyce Dickinson of Western Michigan University has probably done more research on the issue of incentive effectiveness than anyone. In a recent review of her work and that of others in this field ("Individual Monetary Incentives: A Review of Different Types of Arrangements Between Performance and Pay," Journal of Organizational Behavior Management, Vol. 21, #3, 2001), Bucklin and Dickinson indicated that most of the common variations in incentive plans make no difference in performance. These variations include percent of base pay available as an incentive, whether the percent increases, decreases or stays the same for increasing performance, total amount that can be earned, or the per piece incentive amount. One of her studies showed that performance did not differ significantly whether the amount to be earned as an incentive was 3 percent or 100 percent of total pay. As her work seems to indicate, any incentive plan, regardless of its structure, is better than none at all. They also found that plotting results on a graph each day facilitated performance under incentive plans.

To get the most out of any incentive plan, I would advise the following:

  1. Let the performers track their performance daily. The payout can be monthly, but feedback should be available daily.
  2. Separate incentive pay from regular pay. I would advise issuing separate checks and giving them out on different days.
  3. Consider non-cash incentives. These are not confused with ordinary pay and actually have advantages over cash. For further details, you may want to read about this in my book Performance Management: Improving Quality Productivity Through Positive Reinforcement, which is available at www.aubreydaniels.com.
  4. Individual incentives are more effective than group incentives. You may add an incentive for group accomplishments, but the plan should differentiate between individual contributions and accomplishments.
  5. Make sure that your day-to-day management is positive. No matter how much money you put into rewards, you'll waste both money and time if you use negative reinforcement as your management style. There's no substitute for daily contact with employees--asking how they're doing, asking if you can help with any problems and, most importantly, recognizing even small improvements.
  6. Systematically evaluate the effectiveness of your plan on performance, cost and employee satisfaction.

Aubrey C. Daniels, Ph.D., founder and CEO of management consulting firm Aubrey Daniels & Associates (ADA), is an internationally recognized author, speaker and expert on management and human performance issues. For more about ADA's seminars and consulting services or to order Aubrey's bookBringing Out the Best in People: How To Apply The Astonishing Power of Positive Reinforcement, visit www.aubreydaniels.com, or contact Laura Lee Glass at (800) 223-6191 or lglass@aubreydaniels.com.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.