Wednesday 14 September 2016

Do Employee Incentives Really Work?

Posted by at 10:13 AM in

Many owners use various incentives for employees as a supplemental reward to serve as a motivation tool for a particular action, behavior or outcome. Mostly owners use incentives to solicit better performance results from key employees. It’s common for sales staff to receive financial incentives in the form of commissions. The more they sell the more they make.

They have an incentive to work hard to increase sales, and increase their salary through commissions. What has been reserved mainly for the sales force is oftentimes applied to other employees to solicit certain behavior related to personal performance. Technicians may be incentivized to work efficiently to maintain higher per job profits. Estimators sometime receive an incentive based on the total dollar of estimate charges written over a period of time. The more they write and the higher the charges the more commission the estimator earns.

Most commonly it is the construction manager or project manager who is incentivized with a commission incentive based on the percentage of gross profit per job. The higher the per job profit the greater the per job incentive. What each of these approaches has in common is the owner wants to achieve a level of performance they feel might not be given without the incentive. Owners want top performance and the greatest possible per job profit, and they are concerned these benchmarks might not be reached without additional employee incentive to reach them.

Other than for the sales force, incentives typically follow poor performance. An owner isn’t getting the results they want either in personal performance or reaching profit benchmarks, so an incentive is put in place to coax the under-performer into doing better and working harder. The problem with incentives is that they rarely work, and instead oftentimes produce unintended negative results. Incentives typically don’t work because rarely does a worker actually raise the bar of their personal performance in order to reach the standard required by the incentive. Workers often view the incentive as simply another portion of their salary package, and begin to expect the incentive regardless of performance.

If failure to reach the required benchmark is inevitable employees learn how to game the system in order to reach the mark anyway. I know of instances where other company employees actually help the incentivized employee falsify information in order to “help Johnny make his money.” Some employees see it as their duty to “help each other out.” Without close supervision and a reliable verification process that confirms performance outcomes owners may unintentionally create a culture of deceit and deception with employees working together to insure incentivized employees hit their goals to get paid.

While job costing is a critically important accounting system for confirming per job gross profit margins there are two additional systems that must each work together hand-in-hand to insure the owner isn’t getting deceived by incomplete or false information. When construction gross profit margins continue to come in at 40% or more, and yet net profit for the company is single digit, something is out of whack and it may well be the incentive program.

Another problem with incentives is that owners pay a lot of money trying to “buy” better behavior – it is just plain costly! I encourage owners to stop using incentives to encourage workers to do what they are already being paid to do. Each employee should get a fair wage and should be expected to meet certain performance objectives for their job. Providing incentives to try and attain an acceptable level of performance is to go down a rabbit hole from which you may never emerge.

Owners should reconsider incentive programs designed to gain a level of performance that should be expected of employees without additional coaxing. If additional training is needed to improve skills – provide it; if correction is needed to change poor habits – redirect them; if coaching and encouragement spur an employee to higher performance – give it. If this does not solve the performance problem – replace the under-performing worker. Don’t waste your money and effort on trying to coax or buy better performance from those you employee – it doesn’t work, and it is very costly. Reference: 3 Month Coaching Plan – The Cash Flow Accelerator – Blow the Lid of Your Cash Flow Chaos