Does your incentive pay actually incentivize employees?
Posted December 5, 2017
By Ed Zalewski, PHR, editor, J. J. Keller & Associates
Many employers offer incentive pay, but it may not help drive the intended behavior. Incentive pay should motivate employees to higher productivity, or perhaps persuade employees to volunteer for less desirable jobs or shifts.
Many incentives can be offered, but commissions and shift differentials are among the most common. The first should incentivize productivity, and the second should persuade employees to volunteer for less desirable hours or shifts. Each is intended to motivate a specific behavior.
Commissions reward the most successful employees with higher compensation, but the commission rate must also be balanced with base pay to attract the preferred type of applicants. Suppose an applicant receives the following job offers from two different employers:
- DEF Company offers a $40,000 salary with potential commissions up to $5,000.
- GHI Company offers a $30,000 salary with potential commissions up to $30,000.
Which offer is better? The answer depends on what the company intends to incentivize. If DEF Company needs to attract more candidates, it may believe that a higher base salary will help with recruiting. GHI Company may have employees who do not meet their sales goals and may hope to incentivize greater effort by increasing the total potential compensation.
The incentive also impacts the type of employee that the company will attract. Typically, an offer with higher potential earnings will attract self-motivated individuals, while an offer with higher base pay may attract employees who want to be paid for their time rather than their effort.
Shift differentials are typically intended to encourage employees to volunteer for second or third shifts. Determining the effectiveness of this incentive involves examining whether employees request transfers from first to second shift, or vice versa.
If employees consistently request the first shift, then the differential is not creating the desired incentive. Some employees will prefer the day shift no matter how much extra pay is offered (such as those with kids in school), but others should see the extra pay as a worthwhile trade-off for working unusual hours.
If employees do not remain on (or request a transfer to) second shift, you may want to reevaluate the differential. Perhaps it could be increased until it incentivizes the desired transfer requests, or perhaps it could be eliminated because employees are simply assigned to particular shifts based on seniority or need.
Some employers may view a differential as a reward for working odd hours rather than an incentive, in which case the amount is irrelevant. But if the intent is to encourage employees to work second shift, the differential should be substantial enough to attract volunteers.
You have many options for incentive-based pay, including bonuses for efficiency, safety, attendance, or even profit sharing. The structure and amount chosen should be based on the behavior or outcome that you want to encourage.
To drive a change in behavior, incentive pay must create a direct connection between the desired behavior and the reward, and must be substantial enough for employees to seek the reward. If the extra pay is not incentivizing the desired outcome, you may be paying for something that you aren’t getting – or getting something you didn’t want.
About the author:
Ed Zalewski is a certified Professional in Human Resources and an editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit www.jjkeller.com/hr and www.jjkellerlibrary.com.