You might have read our last article, “A Bonus is a Gift; an Incentive is an Investment,” and you might argue a bonus is not a gift. It is also a good investment of money. However an incentive is a much better investment.
Incentives motivate employees directly leading to action. Employees know in advance what they need to do and what they will earn when they do it. With a bonus, it is unclear what will produce a payout and how much you will get. The clarity and transparency of incentives stimulates employee action whereas the unpredictability and ambiguity of bonuses does not influence employee action.
The incentive goal-setting process is one of the year’s most critical business processes. At the beginning of the year, employees and their managers set incentive plan measures and goals. Additionally, employees regularly receive feedback so they know where they stand on their incentive goals at any given time. Bonuses are an afterthought, recalled at the end of the year whereas incentives are in the forefront of employees’ minds throughout the year.
An incentive plan is the document that gets everyone on the same page. Incentives inspire teamwork. Incentive plans align the best interest of the company with the best interest of the employee and focus the employee on achieving critical business results. Giving employees the same measures and goals also fosters teamwork. Bonuses fuel self-interest. Employees think of how they, as individuals, can look as good as possible in order to maximize payouts.
An incentive is an investment; a bonus is a gift. The philosophy behind incentives is to pay for results you would not necessarily have achieved without the incentive. Bonuses essentially throw money away because they pay for results that were already achieved. Incentive plans give the company a return on its compensation investment because the relationship between the value of the results achieved is many times the amount paid to achieve it.
An incentive plan is a useful investment that motivates and rewards employee results and a bonus is an unpredictable gift with little influence on employee action. Incentive plans maximize the return on your dollar. So rather than paying for results that were already achieved, allocate your bonus funds for incentive payouts. You will focus your employees on a payout they feel they can control. When employees know they can influence the outcome, they work hard to achieve it.
It’s about that time to start thinking about incentive plans for next year. Check out Incentive Plan Builder to help you use incentives as an effective tool!