Six Key Principles for Designing an Effective Employee Incentive Scheme


Employee Incentives Fail Their Objectives

Current research indicates that more than half of human resources executives see their organization's performance management system as failing its objectives.1 An effective performance management system is meant to elevate organizational results through encouraging superior employee performance. Regrettably, many organizations' management systems achieve the opposite. Much of the reason for this poor result is inferior design of the system.

An essential core of any good performance management system is its system of incentives and rewards. There are many considerations that go into developing a useful employee incentive scheme that is right for your organization. If your organization is currently without a performance management system and does not have a coherent system of rewards and remuneration, now may be the time to develop one. Whether you design and implement a scheme from scratch or you modify your current system, the behaviors and results that you expect of your employees will need to be well integrated into a coherent and consistent performance management and rewards scheme.

Designing and implementing such a scheme is a significant endeavor for any organization. If you are contemplating such a project, there are many excellent resources available. Whether you are implementing a comprehensive system or just adding an incentive or two, for any such incentives to be truly effective in encouraging the required employee behaviors, there are, I think, six important principles for which you will need to take heed. These principles are generally regarded by human motivation experts to be conditions that must be met for an incentive to change behavior positively. Let me introduce you to these six essential elements of an effective incentive scheme.

  1. The employee must be aware of the incentive and how the reward is achieved

    If the employee is unaware of the incentive, they cannot use the knowledge of it in their deliberations about how to behave. Even where the motivation for the behavior is largely unconscious (for example, resulting from a supervisor's praise), if the incentive is not presented to the person's mind, it cannot influence it.

    Ensure that the new incentive is well communicated to all relevant employees more than once and in a number of forms. For positive feedback, such as supervisor praise, the feedback needs to be specific so that the employee knows what it is about their behavior that is being commended. So, for example, instead of saying, "That was a great report you wrote." say, "The way you formatted your report looked very professional."

  2. The employee must perceive the reward to be of value

    If the reward is perceived to be of no or little relevance to the employee2, they will not be motivated to do what it takes to receive it. One size does not fit all. Every employee is different, and what appeals to one employee may not appeal to the next.

    To avoid wasting time and resources, ask your employees what they consider to be relevant rewards to them. You could conduct a paper-based or online survey, or run a focus group session. Motivations are complex, with most of our actions resulting from an interplay of internal and external motivators. Ask employees to nominate and rate a number of motivators for significance to them. Allow some flexibility in your rewards if you are to get the most coverage.

  3. The employee must perceive the value to outweigh the effort in achieving it

    Even if the reward is considered to be of value, if the value is insufficient in comparison with the effort required to achieve it, the employee will not change their behavior. In fact, the "reward" can even act as a demotivator. In one case, an employee who received a $50 dinner voucher as a reward for winning the company millions of dollars in business from a product innovation they developed felt insulted. Subsequent to that, his productivity fell sharply.

    Employees also calculate the value of the reward compared with rewards received by others. If an employee perceives that the rewards received by workers in another department are worth twice as much as those offered to them, even though the reward may be worth the effort, the perceived inequity leads to a drop in motivation.

  4. The employee must perceive the reward to be a direct result of their behavior

    Where the reward is given, the employee must perceive the giving of the reward to be caused by their behavior. Where this "line of sight" between the behavior and the reward is missing, the employee sees no incentive to act as expected, as the reward is bestowed regardless of how they act.

    This is often the case with bonuses given to front-line employees for such disconnected business results as increased shareholder return and market capitalization. The accounts clerk trained to process more forms per hour is neither more nor less motivated upon receiving such a bonus.

  5. The giving of the reward must be timely

    The employee will need to receive the reward as close in time to the result or behavior being rewarded as possible. It the time gap is too long, the association between the result or behavior and the reward will be weakened in the mind of the employee. Do not leave all of the rewards till the end of year employee performance appraisal. Where results are achieved or expected behaviors demonstrated, there are many non-monetary rewards that can be applied immediately or almost immediately.

  6. The application of the reward is consistent

    If the employee expects the reward and it does not eventuate, the behavior will be weakened or extinguished. If employees are promised an end of year bonus and in some years the bonus is not delivered, in spite of achieving target, employees will, by and large, give up on the reward. On the other hand, if employees do not expect a reward, it does not need to be given every time the behavior is demonstrated. Supervisor praise, for example, does not need to be given each time. It needs to be given with sufficient frequency, though, for the behavior to become ingrained.


Applying these six key principles to the design of your organization's incentive scheme is a crucial starting point for driving superior performance in your business. In your system design or system improvement phase, get your senior managers on board. You will need their visible and active support3 from start to finish, and beyond, if your incentive system is going to be a success.

Regularly monitor your incentives scheme for effectiveness. Use a collection of soft and hard measures to gauge both employee and manager attitudes and impact on business results. Work for the continuous improvement of your incentives scheme. In the world of business, nothing stands still for long.

End Notes

  1. Allan, L. P. "Performance Management Survey Votes Down Employee Appraisals"
  2. Allan, L. P. "How Psychology Can Help You Be a Better Manager"
  3. Allan, L. P. "Top Leadership Perspectives on Performance Management"

The above is a condensed adaptation from Leslie Allan's book, From Training to Enhanced Workplace Performance.

Copyright © Leslie Allan

About the Author
Leslie Allan

Leslie Allan is Managing Director of Business Performance Pty Ltd; a management consulting firm specializing in people and process capability. He has been assisting organizations for over 20 years, contributing in various roles as project manager, consultant and trainer for organizations large and small. Mr. Allan is a prolific writer on business issues, with many journal and web articles to his credit. He is also the author of five books on employee capability, training and change management. Mr. Allan currently serves as Divisional Council Member for the Australian Institute of Training and Development and is a member of the Australian Institute of Management, the Graduate Management Association of Australia and the American Society for Quality. Leslie may be contacted by email at

Leslie Recommends
From Training to Enhanced Workplace Performance

Find out more about building employee capability and motivating for success. Check out Leslie's practical resource kit packed with ideas, tools and templates for implementing effective learning and driving superior employee performance. Visit the From Training to Enhanced Workplace Performance information portal to find out how to download the free Introductory Chapter and start using Leslie's comprehensive training guide and toolkit today.

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