“Show me the incentive, and I will show you the outcome.” Charlie Munger
Let’s start by examining the difference between a bonus and an incentive. A bonus is typically paid after the fact and does not require specific criteria to determine the amount to be paid. An incentive, on the other hand, is typically paid for the achievement of specific pre-determined performance criteria, with the amount paid being linked directly to performance against the incentive metrics. The terms bonus and incentives are used interchangeably in most organisations e.g., an organisations short-term incentive plan (STIP) may well be known as the “annual bonus.”. In this blog, I am speaking about incentives, i.e., real variable pay that is contingent on organisation/employee performance.
So why all the heat and noise in some organisations about incentives? There are many reasons, all of which have varying degrees of validity. Let’s examine the key ones.
Having dealt with the issues associated with incentives, I will finish by outlining key requisites for effective variable pay (incentives) in organisations including:
In conclusion, while incentives are no panacea to the performance management challenges organisations face, they can be a useful tool in an organisations total rewards proposition to ensure optimal organisational performance. The degree of success organisations will achieve using incentives will be determined by how effectively the incentives are designed, communicated, managed, and administered.