ten steps to designing an effective incentive program

Ten Steps to Designing an Effective Incentive Program

Bruce Bolger

© 2004 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/ert.20003

It seems obvious that having motivatedemployees, channel partners (retailers or

other distributors), and vendors can providea competitive edge, yet surprisingly few orga-nizations put a strategic emphasis on motiva-tion. Those business leaders who do focus onmotivation tend to do so out of faith, becausethe vast business, media, and academic com-munity has paid comparatively little attentionto the issues specifically related to motivatingcustomers to buy, channel partners to pro-duce, and all sales, service, and operationsemployees to work with maximum commit-ment toward achieving organizational goals.

The lack of business focus on motivation isdemonstrated by the fact that few organiza-tions have any one person responsible formotivating customers, employees, channelpartners, and vendors. Is it the CEO, or headof human resources, sales, or marketing? Isthat function written into anyone’s jobdescription? Is anyone measured by how wellhe or she motivates? The fact is that numer-ous people in an organization face the issue ofmotivation, often using their own approacheswith little linkage to other organizationalefforts. The HR department may have oneapproach for management and rank-and-fileworkers, while the sales department handlessales and channel-partner motivation, andmarketing tackles customer motivation. “TheInteraction Between Marketing & HumanResources and Employee Measurement &

Incentives,” a study conducted at the end of2003 by the Forum for People PerformanceManagement at Northwestern University,found that a large gulf existed between themotivational efforts of HR on the one side andsales and marketing on the other.

Based on the department from which theplan emanates, the need, or the audience,organizations use many different types ofstrategies to motivate people. These caninclude benefits, workplace environment,training, meetings, newsletters, compensa-tion, recognition, and, in many cases, incen-tive programs. Maximizing overall motivationclearly involves a careful integration of thesemany factors.

Motivation clearly has an impact on per-formance, but it alone cannot guarantee suc-cess. A group of employees in a hamburgerchain may love their work and provide greatservice, but motivation cannot replace thebusiness lost if a nearby factory shuts down.What sets incentive programs apart fromother motivation strategies is the ability tolink the campaign to measurable, desirableactions or outcomes, such as increased effortby salespeople or increased customer loyaltydue to better customer service. The specificobjective of an incentive program is to drivemeasurable performance improvement.

Another element unique to the issue ofmotivation is the potential benefit of betterintegrating external motivation of consumers

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Employment Relations Today

and internal motivation of employees, as wellas specific tactics, such as meetings, printcommunications, and promotions. This inte-gration, which focuses activities on the tar-geted audiences and desired behaviors andnot the interests of tactical managers defend-ing their budgets, requires a level of align-ment that may not be present at many largecompanies today. Very few organizations havein place a management structure that clearly

bridges internal and external audiences andthe internal departments that serve them.

The process of motivating people toimprove performance can involve a variety oftactics, but all have in common the goal toproduce a measurable action or outcome inthe target audience. So the focus starts on theaudience, by asking who do we want to moti-vate, and then proceeds to what are we ask-ing them to do, how will we help them suc-ceed, and how will we measure success andreward people in order to reenergize them forthe new challenges beyond?

WHAT IS AN INCENTIVE PROGRAM?

The lack of focus on motivation has created afuzzy world of nomenclature related to incen-tive programs and other recognition and con-sumer promotion programs. Definitions andterms vary depending on the industry, audi-ence, and individual businesspeople; theseterms include sales contents, recognition,rewards, tangible rewards, premiums, and dealerloaders. Incentive programs comprise internalor external marketing campaigns designed to

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promote specific actions on the part of a spe-cific audience to produce measurable outcomesthrough the integrated use of motivationalstrategies, including awards, communication,involvement, feedback, and recognition.

Actions promoted by incentive programscan include:

• Make more sales calls. • Put up displays.• Buy more of a product.• Attend an event.

Outcomes can include:

• Increased sales, • Expanded productivity, • Improved quality, or • Improved cycle times (how long it takes to

get something done).

When referring to incentive programs,businesspeople and media often use the termincentives, as if the strategy focuses primarilyon giving something to someone for doingsomething. This may be the case, but unlessthe campaign addresses the other issuesrelated to increasing motivation, the programlikely will fail. Business planners tradition-ally have often placed too much emphasis onincentives and not enough on the other ele-ments that can affect performance.

WHAT MOTIVATES

Because the issue of motivation stretchesacross an organization’s entire audience, theanswer depends on the audience: sales force,operations employees, administration orresearch, channel partners, or consumers. Tosimplify the answer, we’ll break this intointernal and external audiences.

Business planners traditionally have often placed too muchemphasis on incentives and not enough on the other ele-ments that can affect performance.

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Internal Audiences

Despite the lack of research and attentionpaid to the relationship between motivationand business performance, over the yearsnumerous researchers have looked at differ-ent aspects of the issue. A study conductedin 2003 by the International Society of Per-formance Improvement, entitled “Incen-tives, Motivation, and Workplace Perfor-mance,” provides an excellent summary ofwhat is known on the subject. Commis-

sioned by the SITE Foundation, a not-for-profit research foundation focused on incen-tive research, the study was undertaken toprovide a comprehensive review of pastacademic research as well as provide asnapshot of current business practices viaboth a broad-based and in-depth survey ofU.S. organizations. The study of currentorganizations found several elements criticalto achieving performance improvementthrough motivation.

❏ Emotion. The study found that the work-place mood has a fundamental impact onperformance. How employees feel abouttheir jobs, work environment, and com-pany directly affects their level of serviceand productivity. Further support for thishypothesis comes from a 2002 survey ofU.S. workers, entitled “2002 Motivationfor Excellence,” which found that 85 per-cent of employees see a link betweentheir level of motivation and the qualityand quantity of their work. When prop-erly designed, incentive programs have a

Ten Steps to Designing an Effective Incentive Program 27

positive, measurable impact on the emo-tional state of participants.

❏ Communication. The data support the exis-tence of a direct link between perfor-mance and the degree to which partici-pants understand the desired goals andsteps they can take to help get there.Incentive programs should foster a greaterunderstanding of organizational goals andhow each participant’s actions can con-tribute to overall success.

❏ Buy-in. The study found that perfor-mance thrives when employees feelengaged in the goal. Incentive-programproponents specifically use the campaigndevelopment process to foster engage-ment by involving employees in thedesign process.

❏ Feasibility. The study found that programsrewarding individuals based on their ownachievement, rather than rewarding a pre-determined number in so-called tourna-ment or closed-ended programs, providemuch better results.

❏ Work utility. The research confirms theintuitive link between work satisfactionand sense of purpose. Incentive programsshould instill a feeling of importance,because everyone’s job counts when itcomes to improving performance.

❏ Employee capability. People quickly becomediscouraged if they want something butlack the skills to get it; motivation goeshand-in-hand with a participant’s sense ofability. So every incentive program shouldinclude training that complements theactions requested by the program.

Analysis and feedback provide the methodfor utilizing the invaluable information thatcomes from directing people toward specificgoals. What happens, or does not happen,

Incentive programs should instill a feeling of importance,because everyone’s job counts when it comes to improvingperformance.


provides a road map for better results in thefuture, no matter what the outcome.

External Motivation

Recently, much more research has been con-ducted regarding the understanding of cus-tomer behavior. Although much debate con-tinues on many granular issues, a solid basisof evidence suggests the following key factorscan come into play, depending on the audi-ence and individuals. Curiously, many ofthese external marketing elements relate tointernal audiences.

❏ Availability. Do consumers even know theproduct or service exists, and is it easy tofind it? Availability could be a function ofwillingness of channel partners to carry aproduct, which in turn could be deter-mined by how they are treated by sales orother employees.

❏ Function. Does the product or service fill abig enough need and do what it says itwill do? Function can be a product ofinnovation that comes from a committedemployee base looking for new ways toplease the customer.

❏ Value. Is the price paid comparable tosimilar products in the market? Valuecan also be viewed in terms of produc-tivity and the efficiency of internalemployees.

❏ Emotion. Many people respond to whatthey perceive to be fun, exciting, and hip,and want to feel valued and recognized.Marketing strategies that address emotion

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often require the involvement of employ-ees or channel partners.

❏ Convenience. Is the product relatively easyto buy and use with a minimum of prob-lems? Convenience can suffer greatlywhen internal employees have little inter-est in customer satisfaction or understand-ing of what they can do to foster it.

❏ Identification. Can customers or prospectsemotionally identify with the “brand,” anddo they feel comfortable interacting withthe company’s people or image? Manyorganizations spend millions to build abrand through advertising, only to have itthwarted by employees who interact withcustomers but whose attitudes can’talways be covered up by a uniform, dress-code standards, and one-week intensivetraining programs.

❏ Communication. Do customers and exter-nal channel partners understand your lat-est products, services, and value proposi-tions? Communication is a two-way street,with marketers advertising and marketingto external customers, who in turn com-municate to the internal employees theyencounter on a day-to-day basis. Whatcustomers say to employees may be oneof the most overlooked areas of businessintelligence in helping organizations betterunderstand what they can do to please.

❏ Integrity. If there is a problem, how doesthe company handle it? Many marketingdepartments overlook the extent to whichthe internal audience—employees, sales-people, and channel partners—can influ-ence these outcomes.

When properly constructed, consumerincentive programs get a better response ifthey address both external and internalaudiences.

What customers say to employees may be one of the mostoverlooked areas of business intelligence in helping organi-zations better understand what they can do to please.

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THE LINKAGE TO PERFORMANCE

Companies do many things to motivateemployees, but incentive programs aredesigned to drive specific actions that lead toincreased performance.

In addition, incentive programs are amongthe very few business strategies whose costvaries according to the outcome. Whetheryour organization uses benefits, meetings,newsletters, advertising, promotions, recogni-tion, training, or many other related strate-gies, your cost will likely be the same no mat-ter what the outcome. With properlydesigned incentive programs, your cost willhave a direct correlation to results, meaningthat, under ideal circumstances, you paymore if your program succeeds, and muchless if it doesn’t.

The design steps below will show how todirect motivational energy toward theachievement of specific, measurable goals.Also, performance measures are describedthat your organization can use to determinethe specific value derived from an incentiveprogram.

STEPS TO DESIGNING A PROGRAM

The following overview covers the basic ele-ments of incentive program design, no matterwhat the audience.

1. Design a Strategic Plan

The overall strategy of an incentive programis to perform a specific action to obtain a spe-cific result. Your incentive program shouldaddress specific objectives with a specificstrategy and tactics so that you have measur-able results. The strategic plan should readlike a business plan, outlining all of the ele-


ments covered below, along with the itemsthat produce a return on investment.

2. Identify the Audience

Before you can do anything to set up anincentive program, you need to pinpoint theaudience(s) that can drive the desired perfor-mance. Often, including more target groupscan have a greater impact than you mightthink. For instance, customer service peoplemight have a direct bearing on the efforts ofyour salespeople to increase sales. Retail per-sonnel at a retail outlet might have a directimpact on whether or not customers see thepoint-of-sale displays that outlet agreed to putup. Employees in the shipping departmentmight play just as much a role in helping youmeet customer production deadlines as thosein the assembly operation. No matter whatdepartment you’re in, you can benefit bylooking at all of the people who can affectyour goals.

When identifying your audience, don’t for-get to take into account the anecdotal butuseful 20-60-20 rule: 20 percent of your bestperformers will probably continue to performno matter what you do, because they alreadyperform under the current circumstances.Another 60 percent can go either way. Thefinal 20 percent probably won’t budge nomatter what you do.

3. Conduct Appropriate Fact Finding

This process lies at the root of identifyingwhat actions will yield the desired results.

Your incentive program should address specific objectiveswith a specific strategy and tactics so that you have mea-surable results.


You need to find out how motivation candrive the behaviors your objectives requireand what obstacles potentially stand in theway. This step often includes employeeinvolvement programs or focus groups withconsumers to determine what your targetedaudience can do (or not do) to help you

achieve your goal. This step helps you makesure your program addresses whatever hid-den factors might stop people from doingthe things you need them to do. The outputof this process provides the basis for devel-oping your program structure by confirmingthe specific actions required by the specificaudience that can lead to the specificresults.

4. Create the Program Structure

Think of this step as the blueprint for yourstrategy. It spells out precisely what peoplehave to do to reach their goal—how theorganization will assist them, how peoplewill be rewarded and recognized, and howyou will measure the return on investment.There are essentially two types of incentiveprogram structures underlying almost anytype of program:

❏ Open-ended programs enable anyone towin based on his or her own actions and,therefore, give participants the greatestpotential control over their success. Theresearch confirms that these programsgenerally have greater motivational valuebecause they offer accessibility to thebroadest possible audience.

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❏ Closed-ended programs have a predeter-mined number of winners. They have thebenefit of letting you offer a larger, moreimpressive award with a fixed, predictablebudget, but research clearly shows thatthey often discourage a large portion ofparticipants who quickly count them-selves out of the running.

Many companies use closed-ended pro-grams in conjunction with open-ended pro-grams as a means of fostering loyalty amongtop performers by making them feel valuedand appreciated.

5. Integrate Communications

Many programs overlook the value of inte-grating communications with incentive pro-gram design. The incentives used in conjunc-tion with the program help draw attention tocompany communications, and companycommunications help direct people towardthe behaviors and training tools that can helpthem succeed. Communication can take theform of imprinted promotional productsdelivered with training; announcements;standings reports showing how well partnersor teams are performing; meetings, includinglocal, regional, national, or international;newsletters (print or e-mail); personal letters;brochures; and more.

6. Select Rewards

Award selection depends largely on yourobjectives. If the goal is to compensateemployees for work they accomplish yearafter year, cash is clearly the currency ofchoice. But if the goal is to recognize peoplefor special behavior that may not berewarded in subsequent years and to foster

Many programs overlook the value of integrating communi-cations with incentive program design.

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communications, alignment, etc., then it maypay to use noncash awards that won’tbecome confused as compensation and,therefore, expected year after year.

So, the question becomes, How do noncashawards compare with cash rewards when thegoals include rewarding exceptional behavior,enhancing communications, and better align-ing employee actions with external marketingpromises? In a survey of incentive-awardusers released in September 2003, the major-ity of users surveyed believe that merchandiseand travel awards get remembered longer andare more promotable than cash and that cashawards have the least residual value. Thesefindings support the use of noncash awardswhen the goal involves getting attention andderiving derivative value in terms of focusand commitment levels. If memorability hasno place in your recognition strategy, cashmay be a better solution.

Both common sense and research supportthe theory that presentation is as importantas the award itself, because people respondbest to genuine appreciation for their efforts.

7. Develop a Budget

Several rules of thumb help guide incentiveplanners to more measurable, cost-effectiveprograms. First, set up your program so thatyour fixed costs consist primarily of strategicplanning, communications, training, and track-ing and administration and that your rewardsand recognition are based on incremental per-formance generated by participants, customers,channel partners, or employees. Return-on-investment measures below can help youdetermine how much to pay out in awards, butcompanies generally budget top awards toequal about 3 percent to 5 percent of a recipi-ent’s annual earnings to get attention. Under


this scenario, only about 20 percent of the pro-gram’s budget has a fixed cost; the rest variesbased on performance improvement.

Open-ended programs can be more diffi-cult to budget, because how much you spenddepends on how much individuals or groupsperform, which no one can accurately pre-dict. On the other hand, your budget onlygoes up if your results go up; and if your pro-gram is structured correctly, you won’t paynearly as much for your program if results

fall short. Most other marketing options havea fixed cost no matter what the outcome.Closed-ended programs are easy to budget,because you set the predetermined numberof winners, but that also may mean you’llpay full freight for your program even if youdon’t achieve your objectives.

8. Develop Measures

In the early 1990s, the American Productivityand Quality Center created the Master Mea-surement Model for the SITE Foundation inorder to guide planners toward the develop-ment of measurable programs. The model hasthe following elements.

1. Determine the processes to be measuredin a numeric way. Measures could includeunit sales, dollar sales, repeat customers,defect percentage, customer satisfactionscores, cycle times, etc.

2. Decide on two to three related processesor outcomes to be measured, and makesure that you measure related issues, suchas sales, sales presentations conducted,

Both common sense and research support the theory thatpresentation is as important as the award itself, becausepeople respond best to genuine appreciation for their efforts.


repeat business or number of repairs perday, timeliness of repair report submis-sion, or number of suggestions made torepair the update manual.

3. Create a basis for comparison. What is therate of unit sales, dollar sales, repeat cus-tomers, defects, customer satisfaction, orcycle times to which your program’s per-formance will be compared?

4. Translate the numerical goal into a unit ofmeasure that can easily be tallied againsta previous, comparable period.

5. Weight that measure based on how impor-tant it is to the overall program objective. Asales incentive campaign might weight thegoals as follows: 50 percent for sales; 25percent for sales presentations; and 25 per-cent for repeat customers. (See Exhibit 1.)

9. Track Results

Tracking and administration of incentive-program design ironically can create some ofthe biggest challenges and opportunities.The challenges relate to the practical issuesof collecting and sharing data. Fortunately,

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the Internet, intranets, and enterprise soft-ware or customer relationship applicationshave made this task much easier, andadministration is now further supported viathe proliferation of online incentive technol-ogy. Some of the available online incentivetechnology has easily customizable functionsenabling you to set up the type of measure-ment and award allocation features outlinedabove under step 8.

The most important elements of trackingand administration include:

❏ Implementing the program business planaccording to the time line;

❏ Having an up-to-date database of eachparticipant;

❏ Setting up a simple system for collectingand reporting data;

❏ Sending out all standing and other reportson schedule;

❏ Making sure all awards get distributed onschedule;

❏ Running tracking reports to determineaward redemptions and costs;

❏ Calculating results and return on invest-ment as indicated above; and

Performance Feedback ReportBase Data New Data New Base Weight Result

Measure A 12.11 12.52 103.44 .50 51.7

(This indicates an improvement in performance of 3.4 percent, translating into a unit measure of 51.7.)

Benefit Report for Field Service RepsBase Data New Data Improvement $ per Unit Benefit

Measure A 14.32 15.17 .85 $50K/1 $42.5K

(By multiplying the unit improvement by the estimated benefit per unit, you arrive at an estimate of the benefits derivedfrom your program.)Source: The Master Measurement Model of Employee Performance, created for the SITE Foundation by the American Productivityand Quality Center.

Exhibit 1. Performance Feedback Report and Benefit Report for Field Service Reps

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❏ Feeding back market or other knowledgeobtained from the program.

One of the key benefits of an incentive pro-gram is the ability to collect valuable data notonly about results, but also about the processesnecessary for success. Often, an incentive pro-gram helps collect useful data you might notordinarily get unless people (especially channelpartners) have an incentive to do so.

10. Analyze Results and Solicit Feedback

Your program might have both quantitativeand qualitative measures of success. Quanti-tative measures are reflected in the actualresults; qualitative measures might comefrom some other indices, such as results fromemployee or customer surveys, customer oremployee turnover rates, revenue or otherproductivity measures per employee, etc.These qualitative results can representbyproducts with an additional value to theorganization over that achieved through theactual results.

During the analysis and feedback phase,you want to look at your program resultsagainst your business plan and attempt to iso-late any outside factors that could haveaffected performance, either accounted for or


unaccounted for in your plan. Review actualresults and whatever qualitative informationyou gleaned so that you can prepare a recom-mendations report for any future programs.

This process can include a per-participantreview to see whether any patterns haveemerged about group or individual perfor-mance that could provide ideas for improve-ment in the future.

If you have used both results and processmeasures, you have powerful tools to deter-mine the precise impact of your incentive pro-gram. If the results went up, but the processesbeing measured went down in quantity orquality, then you can assume that the resultshad little to do with the program. If, on theother hand, the processes showed improve-ment but results went down, you can concludethat some outside circumstance other thanmotivation or work effectiveness contributed tothe outcome. Also, if you can continue to trackdata following the end of the formal program,you can continue to monitor what happens toresults and process measures to see what hap-pens without the incentive program.

Many companies that use incentive pro-grams do so in the belief that there’s almostalways a value to promoting important behav-iors and that the use of rewards helps sustaincommitment to positive behaviors over time.

Bruce Bolger is a founder of the Forum for People Performance Management and Measure-ment in the Department of Integrated Marketing Communications at the Medill School atNorthwestern University. He is also managing director of the Incentive Performance Center,a not-for-profit organization dedicated to improving the effectiveness of incentive programs,and president of Selling Communications Inc. (Irvington, New York), a target marketing,media, and technology company. He is also author of Principles of Incentive ProgramDesign (Association of Incentive Marketing, 2004), from which this article has been adapted.

ten steps to designing an effective incentive program

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