Employee Ownership
Commission Model for Businesses: When Bonus Schemes Fall Short (And What to Do About It)
You know the story. Flat sales results, stalled projects, or project costs running over — but it seems like no matter the bonuses or incentives on the table, they aren’t moving the needle (or, the business in the right direction).
Many bonus and commission schemes fail to deliver the desired outcomes. Some may have minimal impact on behaviour change, or worse yet, encourage behaviour that goes against company values, leading to infighting, lying, cheating, and gaming the incentive program. Bonus programs often obey the Law of Unintended Consequences, including examples like bank sales staff signing up people to unnecessary accounts, or production efficiency targets that undermine quality and safety.
Incentives based solely on individualistic, extrinsic motivators can be downright dangerous. For a start, money alone is an expensive and dull motivator. Implementing effective employee incentive programs often means providing monetary and non-monetary rewards.
In this article, we’ll explore what works, what doesn’t, and how to tap into the intrinsic motivations of your people to achieve business goals through collaboration rather than competition.
Understanding What Powers Incentive Programs
Incentive programs are structured systems that organisations use to motivate and reward employees for achieving specific goals, improving performance, and demonstrating desired behaviours. These programs are designed to drive employee engagement, boost productivity, and enhance overall job satisfaction. By offering rewards for meeting or exceeding targets, incentive programs help to keep employees motivated and aligned with the company’s objectives.
However, many employee incentive programs get it wrong. Below are the top 9 common missteps when designing your bonus or commission-based program.
1. Poorly Structured Incentives
Misalignment with Business Goals: If the incentive plan isn’t aligned with the overall business goals, employees may focus on short-term gains rather than the long-term health and success of the company. This misalignment can lead to decisions that boost immediate results but harm the company’s future prospects. For example, a sales team might push products that are easy to sell but have lower profit margins, neglecting more profitable items that require more effort to sell.
Overemphasis on Quantitative Metrics: Focusing solely on numbers (like sales targets) can lead to neglect of qualitative aspects such as customer service and teamwork. Employees might prioritise hitting the measured target over providing excellent service or collaborating effectively with their colleagues. For instance, a customer service representative might rush through calls to reach their quota for calls per day, but go off-script and leave important customer issues unresolved.
2. Lack of Clarity and Understandability
Complex Calculations: If the scheme is too complex, employees may not connect how their actions directly impact their rewards, reducing motivation. Clear and straightforward employee incentive plans are essential to ensure that employees can easily see the connection between their performance and their rewards. For example, a bonus scheme that involves multiple tiers and percentages based on various performance metrics can confuse employees, making it difficult for them to see which area of effort best translates into rewards.
Unclear Objectives: Goals and targets must be clearly defined and communicated. Ambiguity can lead to confusion and decreased effort. Employees need to know exactly what is expected of them and how they can achieve their targets to stay motivated and focused. For example, if a sales target is vaguely defined as “increase sales,” employees might not know whether to focus on new customer acquisition, upselling to existing customers, or both.
3. Unrealistic or Unattainable Goals
Demotivating Targets: Goals that are perceived as unachievable can demotivate employees and negatively impact employee performance. Targets must be challenging yet realistic to inspire effort. If employees sense that the goals are impossible to reach, they may become discouraged and disengaged. For example, setting a sales target that requires doubling the previous year’s sales in a declining market or without additional resources could just send those numbers in the opposite direction.
No Consideration for External Factors: External market conditions can sometimes significantly impact an employee’s ability to meet targets. Failure to account for these can result in unfair assessments. There will be factors beyond the employee’s control – such as an economic downturn or a barrage of bad press for the industry — so consider these when setting targets to ensure that the incentive scheme is both fair and motivating.
4. Insufficient Value in Rewarding Employees
If rewards offered are not perceived as valuable or meaningful, employees may not be motivated to strive for them. For example, offering a small gift card as a bonus for achieving a significant target might not be enough to motivate employees to put in the extra effort required.
Rewarding employees with valuable and meaningful incentives is crucial for motivation. We must find out what employees value and design rewards that are meaningful and motivating. This could include additional time off, professional development opportunities, a change in title/responsibility, or even the free use of parking bays near work. For instance, a company could offer additional vacation hours, or a fully paid training course relevant to the employee’s career growth.
5. Short-Term Focus Affecting Employee Retention
Employee retention is crucial for maintaining a stable workforce and minimising costs associated with frequent hiring and training. Incentive schemes that focus solely on short-term results can lead to a lack of long-term planning and sustainability. For example, a sales team might offer heavy discounts to meet quarterly targets, which can boost short-term sales but harm the company’s profitability and brand reputation in the long run.
To combat short-termism we must design incentive schemes that balance immediate and long-term goals, encouraging behaviours that contribute to the company’s sustained success. For instance, a company could implement a bonus structure that rewards both immediate sales achievements and long-term customer retention, ensuring that employees are motivated to secure lasting relationships with clients.
6. Negative Impact on Employee Morale and Culture
A poorly designed incentive program can create a competitive and cutthroat environment, leading to a toxic workplace culture, whereas well-designed programs can boost employee engagement and camaraderie. If employees are pitted against each other to achieve individual targets, it can lead to backstabbing, hoarding of information, and a lack of collaboration. In short, it’s a productivity and morale killer.
To foster a positive workplace culture, it’s important to design employee incentive plans that encourage collaboration and teamwork, such as team-based bonuses or recognition programs that reward collective achievements. For example, a company could implement team-based bonuses where the entire working team is rewarded for collective achievements, promoting a sense of unity and cooperation.
7. Ignoring Non-Monetary Motivators
While financial incentives are important, they are not the only motivators for employees; employee satisfaction is significantly influenced by recognition, career development opportunities, and a positive work environment. Recognition, career development opportunities, and a positive work environment are also crucial for employee motivation and satisfaction.
Delivering public recognition for delivering meaningful work, taking the initiative to identify business opportunities, or showing professional growth can mean more than a monetary bonus.
Incorporating non-monetary motivators into employee incentive programs, such as recognition programs, career development initiatives, and efforts to create a positive work environment, can help ensure a well-rounded approach to employee motivation. For instance, a company could establish a public intranet feed where employees are publicly acknowledged for their contributions, or provide mentorship programs to support career development.
8. Inconsistency and Lack of Transparency
Employee incentive programs work best when they are applied consistently and transparently. Inconsistency and lack of transparency can lead to distrust and dissatisfaction among employees. When some employees receive bonuses while others with similar performance do not, without a clear explanation, it can create feelings of unfairness and resentment.
To build trust and ensure fairness, it’s important to apply the incentive program consistently and transparently, clearly communicating the criteria for rewards and providing regular feedback on performance. Start by establishing clear criteria for rewards, and making them public to all employees. Don’t wait for the final results; provide regular feedback on performance to ensure that the incentive scheme stays front-of-mind and is applied uniformly.
Characteristics of Successful Incentive Programs
Effective incentive programs share certain characteristics that set them apart from less successful initiatives. These characteristics ensure that the programs are not only motivating but also fair and aligned with the organisation’s goals.
1. Clear Objectives
Successful incentive programs have well-defined goals that are aligned with the organisation’s overall objectives. This clarity helps participants understand what is expected of them and how their efforts contribute to the bigger picture.
2. Fairness and Transparency
Fairness is crucial in any incentive program. Participants need to feel that the criteria for earning rewards are transparent and achievable. This builds trust and encourages consistent participation.
3. Relevance and Appeal
The incentives offered must be relevant and appealing to the participants. Understanding what motivates your team is key to designing rewards that will drive the desired behaviours.
4. Measurable Outcomes
Effective programs have clear metrics for success. This allows for the tracking of progress and the ability to make adjustments as needed to ensure the program remains effective.
5. Regular Feedback and Communication
Keeping participants informed about their progress and providing regular feedback helps maintain motivation. Open communication channels also allow for the addressing of any concerns or questions that may arise.
6. Flexibility
The best incentive programs are adaptable to changing circumstances. Don’t move the goalposts midway through, but remain flexible in adjusting the program to remain relevant and effective over time.
Examples of Effective Incentives
1. Monetary Rewards
Bonuses, commissions, and profit-sharing plans are classic examples of monetary incentives. These rewards are straightforward and can be very motivating, especially when tied directly to performance metrics.
2. Recognition Programs
Public recognition, such as Project or Team of the Month awards or shout-outs to individuals during team meetings, can be highly effective. Public recognition taps into the human desire for appreciation and acknowledgment within the tribe.
3. Professional Development Opportunities
Offering opportunities for growth, such as training programs, workshops, or conferences, can be a powerful incentive. These rewards not only benefit the individual but also enhance the overall skillset of the team.
4. Non-Monetary Perks
Flexible working hours, premium parking bays, additional vacation days, or the option to work from home are examples of non-monetary perks that can be highly valued by employees. These incentives can improve work-life balance and overall job satisfaction.
5. Team-Based Rewards
Incentives that reward team performance can foster collaboration and a sense of camaraderie. Examples include team outings, group bonuses, or shared team-building activities.
6. Health and Wellness Programs
Incentives that promote health and wellness, such as gym memberships, wellness challenges, or health screenings, can be very appealing. These programs show that the organisation cares about the well-being of its employees.
Best Practices to Boost Employee Engagement in Effective Schemes
- Alignment with Business Objectives and Values: Ensure the employee incentive programs align with and support overall business goals.
- Simplicity and Clarity: Make the scheme simple to understand and transparent.
- Realistic and Flexible Goals: Set achievable targets and be flexible to adjust for external factors.
- Balance with Non-Financial Rewards: Combine monetary rewards with non-monetary incentives.
- Foster a Positive Culture: Encourage a culture of teamwork and ethical behaviour.
In summary, to be effective, bonus and commission schemes must be well-structured, clear, achievable, and aligned with both the employee’s and the company’s long-term interests. It’s also crucial to understand that financial incentives are just one aspect of motivation and should be part of a broader employee engagement strategy.
One type of incentive scheme that covers all of the above is an Employee Share Ownership Plan, tied to a Peak Performance Trust. The Peak Performance Trust releases or rewards employees with additional shares in the business based on clearly defined KPIs. The shares are usually redeemed at exit, which can be beneficial to an employee in their tax obligations — as opposed to a direct financial benefit. Read more about unlocking employee potential through an ESOP, or book an appointment with your Succession Plus Accredited Advisor.
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