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3 lessons about incentive pay

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Victor Lipman is a management trainer and author. His online course on Udemy is The Manager’s Mindset and his book is The Type B Manager. He has more than 20 years of Fortune 500 management experience. He contributes regularly to Forbes and Psychology Today, and his work has appeared in Harvard Business Review.

I was fortunate to work for many years for a company that was a big believer in incentive pay. Overall it was great, and I too am a big believer in it. But like any powerful management tool, incentive pay can have pitfalls as well as benefits for organizations that are just getting into it.

Accordingly, here are three lessons I learned over time about incentive pay:

1. Include employees (if at all financially possible) from all levels of your organization.

You want an incentive that motivates, not one that inadvertently demotivates. You want this powerful incentive to unite, not divide.

Naturally, the program can be structured in a way that rewards employees at different levels differently (few people would advocate compensating a CEO like an entry-level worker). But the last thing you want is to have sizable portions of your employee population feeling disenfranchised because of it. The program should never become a source of resentment. If well structured, it should be a terrific motivator.

2. Don’t rush into anything—spend all the time you need structuring the incentive pay program.

For the reasons noted above, and then some, take all the time you need building a program, thoughtfully deciding exactly what financial measures to use in determining payouts.

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Incentive pay programs should be evolving, not static—and they may well change over time depending on the business environment. A perfect metric one year may become inappropriate the next. It’s an oversimplified example, but consider the period after the Great Recession that began in 2008: An organization that had focused on sales revenue might adjust their focus to concentrate more on profitability or business retention in a vastly changed environment.

3. Communicate robustly and transparently about your program.

Employees should know exactly what they’re getting and why. There’s no point keeping employees in the dark. An informed employee population is a tremendous corporate asset. To this last point, I have a true—and I believe informative—story.

When I first started in management in the corporate world shortly after the earth cooled and dinosaurs became extinct, I worked with a Human Resources VP who was wary of telling employees anything related to the company financials underlying their incentive plan. “That stuff is dynamite!” he said forcefully (I still remember his excited use of the word “dynamite”). “You just can’t tell employees that stuff!”

A manager sits at his desk

Same organization years later, I was a VP and once again involved in discussions about communicating on the company’s incentive pay plan. We now had new senior management that favored more open communication. So what happened? We communicated candidly about the plan. And rather than the organization exploding, employees loved the change. They were being treated like adults. They gobbled up the financial data and digested it.

The result wasn’t insurrection but intelligence. For example, one of our key payout metrics was “expense savings.” What resulted was an unprecedented explosion of thoughtful, innovative cost-saving ideas bubbling up from the shop floor. Employees wanted to do all they could to help the company save costs and maximize their payouts.

When you roll out your incentive pay program remember these tips. Your employees will be glad you did.

Victor is a management author and speaker.

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