What are the pros and cons of individual incentive plan?

By Fraser Sherman Updated July 02, 2020

When employees go above and beyond, it seems logical to reward them. Let your staff know that you appreciate exceptional performance or valuable ideas, and they'll work twice as hard to succeed, right? Sometimes. However, there are drawbacks to incentive plans that can alienate the people under you. Design your program carefully to avoid them.

The obvious advantage of incentives is that they give employees a reason to do their best. Some employees don't need an extra push to be outstanding. Others may have the talent but no drive to use it. If they know applying themselves generates serious rewards, underachievers can turn into star performers.

Employees who do their best and still don't qualify for incentives may become resentful of the star performers. Some workers find the rewards a disincentive. When they see they can't compete, they give up, and their performance suffers.

If you substitute an incentive scheme for part of their pay, the action can alienate your staff. From the perspective of workers who don't qualify for the bonuses, you've imposed a pay cut. This can cause people to undermine their co-workers' efforts, rather than focusing on their own goals.

People like to feel they're in control of their careers. Giving employees the opportunity to earn more if they achieve more can give them that feeling. Job satisfaction increases, which encourages them to stay with the company.

According to Gretchen Rubin, author of the Happiness Project, people are happiest when they feel in control of their lives. This is good news for the business, as happy employees tend to work harder and are more productive.

Individual and group incentive plans are easier to apply to some departments than others. If you're in manufacturing, you can tie the incentives to the amount of product made or to minimizing errors. You can reward salespeople for the amount of sales revenue they bring in.

With other workers, it's hard to come up with a metric that works. A newspaper can reward salespeople for above-average advertising income, but how should they incentivize reporters? Number of stories? Length of stories? The relationship between writing and revenue is hard to assess.

Some individual incentive pay plans offer awards to anyone who meets the benchmarks. Others are competitive, limited to a small number of top performers. That competitive aspect gives employees even more of a reason to outperform the rest of their department. However, it can create greater resentment than a regular incentive program can.

A competitive program has to be designed carefully, with clear standards for reaching the winner's circle. If employees think it's unfair or that you're rewarding your favorites rather than the best performers, they may start looking for jobs elsewhere.

Employees who want to earn incentives may do so in ways that hurt the company as a whole. If factory output is the benchmark, workers on the shop floor may prioritize speed and let quality slide. If sales volume is what counts, salespeople may offer customers discounts or deals that eat into your profit margins.

Busch, whose remarks came at a recent BLR-sponsored webinar, is owner of HR Compensation Consultants, LLC. Here are her suggestions about team and individual incentives.

What Are Team-Driven Incentives?

Team-driven incentive are intended to foster a collaborative environment in which team members are focused on helping one another. They are:

Based on a team’s performance.
Place the focus on how a team comes together to drive the business.
Types of plans:

Gain-sharing plans
Profit-sharing plans
Earnings-at-risk plans

Types of Team-Driven Rewards

Team incentive carve-out—A broadening of individual performance measures to include team performance.
Team multiplier—Multiplies the individual’s incentive earning by a factor based on team performance.
Team pool—Typically used in sales; allocates the incentive to team members based on each person’s role in the sales process.
Unique team measures—Specifically created for a unique team; generally are customer-focused measures.

Individual Performance Measurements

Quantity of work output
Quality of work output
Monthly sales
Work safety records
Work attendance

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Advantages and Disadvantages of Individual Incentives

Advantages

Relate pay to performance of individual.
Help retain best performers.
Provide equitable distribution of compensation.
Suitable for individualistic culture.

Disadvantages

Factors not rewarded may be overlooked.
Factors not in the employee’s control might impact outcomes.
Establishing performance standards is time-consuming.
Unrealistic standards can hamper motivation.
Can lead to mistrust between workers and management.

Advantages and Disadvantages of Team Incentives

Advantages

Improve organizational performance.
Based on organizational measures.
Periodically measured.

Disadvantages

Line of sight may be lessened.
May not be accepted by high-level individual performers.
Increases to compensation at risk—lack of stability

Is there a time and place for both types?

Yes, based on the organization’s compensation philosophy.
Individual incentives are focused on achieving work-related performance standards.
Team incentives reward collective performance.

Examples of when team-driven goals may be the way to go instead of individual rewards:

Team-Driven

Use to build a sense of ownership.
Use to recognize increases in performance measurements that move the business forward.
Use to promote teamwork and collaborative efforts.

Individual

Use when the contribution to the business was performed independently.
Use to recognize that individual contributions are part of the organizational culture.
Use if individual competitiveness is desired.

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