Why Employee Incentive Plans Fail (& How to Make them Work)

Posted on 7 July 2022 by IRIS FMP

Categories: Global Hiring

Deploying and implementing effective employee benefits, compensation schemes, or incentives is no easy feat. Challenges are varied, but often range from exciting initial employee interest for incentive plans, to the actual outcomes in terms employee engagement and retention. These plans may even aspire to see improvements in performance, efficiency, and productivity by the end of the year.

But delivering value from an employee incentive plan should remain the key priority, and this can help define a successful compensation scheme from one that feels troubled. Whilst most incentive plans do work in some form, benchmarking your benefits to be truly effective can help your employees thrive in the workplace.

If your incentives struggle to make a real difference in the workplace, then there are ways you can capture excitement from the benefits you offer. We’ve rounded up the top reasons incentive plans struggle to find success in your business, and ways that you can make them work for the better.

Why Should You Use an Incentive Plan?

Incentive plans have attractive benefits for employers and staff alike, which is why these kinds of schemes are commonly adopted across the world. Whether the goal is to motivate better outcomes for employee engagement, or an employer wants to reduce short term costs by offering alternative benefits, there is plenty of value in a compensation scheme.

  • For employers: To see optimal take up from your participants, or if you’re benchmarking success against different employee-related outcomes, then designing and documenting your plans properly will matter greatly. Audits and revisions are an expectation, but making meaningful next steps towards a better, more fulfilling plan is no easy task.

It’s common to see workforces building and delivering employee incentives schemes to attract, retain and motivate employees. But employers may be driven by immediate, short term cost concerns, or a greater ambition or pressure to deliver more from a business’ performance.

You can start by familiarising yourself with the most frequent mistakes that hinder incentive plans, but after that, businesses should look to their employees and business goals to inspire which incentives are on offer.

  • For employees: with a staff-centric design, incentive plans are commonly aligned with goals for talent acquisition or retention. Incentives can attract and excite new hires or renew interest from your key staff. There are long-term rewards for a business willing to invest in exciting incentive programmes. Those who don’t benchmark their benefits against competitive firms, and focus solely on salary expectations instead, may find that participants won’t so easily get involved.

8 Reasons Why Employee Incentive Plans Fail

Incentive plan failures cannot be ringfenced to one common problem or error that employees make when designing incentives or compensation schemes for employees. Neither is an incentive plan destined to fail if it struggles to rise above any of these eight outlined problems. Instead, we’ve identified the most common areas that can undermine how effectively an incentive scheme can be delivered in a workplace.

Importantly, incentive plans should be designed with agility and flexibility in mind, allowing employers to adjust, revise, and revisit benefits to align with the business’ goals and what’s best for your employees.

Failure of an incentive plan can often be attributed to one of the following common areas:

1.   Communication Isn’t Clear Enough

Communication is critical in most aspects of human resources, not withholding its role in the design and delivery of incentive plans. When communication lacks clarity, then incentive programs can fall short of their potential, and may even struggle to get initial interest from your employee.

Communication not only has the role of clarifying the benefits on offer, but strong contact between human resources and employees can enable transparency. Benefits included in an incentive programme should be communicated and the process as a whole should be demystified – including information on how incentives benefit employees and when they can expect to see the reward. Your HR team should take precautions to communicate why incentives are valuable for the business and employees, how they work, who is eligible and then they will pay-out. It’s worth clarifying the impact of incentives on other aspects of an employment contract, such as salary arrangements.

Always frontline communication and afford space in the process for employees to clarify and feedback on the benefits on offer. The value of communication, here, is how it opens the process into a conversation and collaboration, rather than a siloed project that benefits no-one.

The value of communication

2.   Benchmarking is Absent from Your Compensation Planning

New hires and existing employees will maintain some awareness of what the job market offers, likely from their network of professional contracts from sites like LinkedIn. It’s also not uncommon for the mainstream press to report on developments in employment best practice and trends, including those countries beyond America. For example, the recent news of a four-day workweek has caused a conversation in many regions, including Scotland where it was recently adopted. With a constant access to the wider market, and a continued spotlight on employment, your incentives need to consider moves in the job market.

Benchmarking needs to consider the context of job markets and the wider competition. In particular, new hires will want perks that are attractive, and these expectations are often set when an employee looks to see what’s currently advertised. Employers should similarly benchmark their incentives to at least match this competitive market, if not go beyond it and offer valuable and relevant benefits.

3.   Measurability Matters

Whatever incentives are included, you should focus on the measurability of outcomes. If you’re offering more generous annual leave allowances for the end goal of greater retention rates, then you need to accurately measure the ROI of your incentives over time. Measurability means setting up realistic outcomes that can be monitored and audited by your human resource department. Assign measurable outcomes against incentives and ensure these are regularly reviewed. Without this information, a business will struggle to understand the effectiveness of its incentives.

What the experts say

“Whilst measurability matters, keep KPIs (Key Performance Indicators) to a minimum and don’t overcomplicate how an incentive programme is measured. Refine your goals and introduce indictors that can be used to evaluate whether your incentives are working. But limit how many indicators you use to evaluate goals, or you could be creating more admin, or even overcomplicating the process.”

Measurability Matters

4.   Best Practice Doesn’t Drive What’s on Offer

Like all areas of employment, there is best practice guidance regarding the kinds of benefits that should be on offer. Falling behind best practice can result in fines or penalties if employment regulations are found to have been breached, and your firm will suffer reputational harm in the long term. 

Employers are advised to start from the legal minimum for any benefits that are governed by local laws and can then capitalise on any incentives that can add value to the everyday lives of their employees.

Best practice is way of defining a benefit that meets the market’s expectations. Compliance is a mandatory check for any incentive program, but employers should look to go beyond this. Those who take risks and set trends are, typically, the businesses with the most favourable reputations amongst employees for places to work.

5.   Priorities (and Goals) Are Misguided

One of the hardest stages of an incentive plan is aligning priorities or goals that can be effective measures for its success. If measurability matters, having clear objectives is the roadmap that businesses can use to drive, scale and sustain the impact of compensation on their employees. You’ll need the right goals, but you should also prioritise how you approach them and what information is the most relevant and valuable for your business.

As incentives are not universal across industries and companies, if you haven’t defined your solution or goals, you’ll likely suffer with an undefined incentive scheme. In some scenarios, companies opt to have multiple incentives for different objectives or parts of a business. These time or deadline sensitive objectives will look differently from what your company aspires for in the long term. For example, a company can have incentives that are unlocked when an employee hits a target or earns it after length of service.

What the experts say…

Don’t forget to establish clear objectives at different levels for your business, including benefits that employees can unlock, as well as wider goals for the business to collaboratively work toward. When goals feel misguided, a scheme will fail to get the right engagement from participants, and outcomes will fall short of their goals. This might mean that you’ve offered a benefit that isn’t relevant to your employees, or it doesn’t add the immediate value you initially thought.

6.   Irrelevant or Underwhelming Benefits

One of the key reasons an incentive plan fails or struggles to get interest from employees is because the benefits on offer lack relevance. In short, this means that employees may feel incentives are lacking or uninspiring.

To overcome this potential shortfall, plan incentives with employees in mind and collaborate with them to understand what benefits would enrich their everyday lives. For some, a gym membership may be useful for wellbeing, whereas others would benefit from a greater annual leave allowance.

Offer incentives that address what employees actually want and need, and you’ll start to notice better outcomes from your compensation plan. Not only should your benefits match what’s on offer from the competition, but they should consider what’s best for an employee.

7.   Ineffective Employee Performance Evaluation

For many benefits, there’s often a prerequisite for an employee to meet targets or unlock an incentive after achieving a certain length of service. Where incentives start to feel more personal, your compensation plan will only be as effective as how you review and evaluate employee performance. Typically, this is an annual meeting that happens between an employee and their line manager, but this can be flexible. Often milestones are celebrated, or progress is checked at regular intervals. This allows employees to monitor the pulse of their individual goals.

Businesses bothered by ineffective employee performance reviews won’t have the right tools for goal setting and evaluation. This will harm both employee progress and how well a business meets its broader objectives.

Ineffective Employee Performance Evaluation

8.   Rewards Become Entitlements

It’s not uncommon for rewards to become entitlements if an employee misperceives the reward as a regular condition of their employment. Businesses see the greatest success rates when incentives are rewarded after targets, in celebration of the right behaviours, or after submitting a strong performance after a quarter or year. Making incentives unlockable and earned when targets are satisfied will transform incentives into occasional rewards rather an expectation. The danger with employees expecting reward is how this changes the tone of a benefit into something that resembles an entitlement. The consequence could be that benefits start to reward the wrong behaviours or that rewards are no longer celebrated or enjoyed meaningfully.

What the experts say…

Letting an incentive plan feel like an entitlement will do very little to motivate employee engagement and retention, because the expectation for reward devalues what it sets out to celebrate. When an incentive gains the reputation of an entitlement, it will undermine the entire plan, not just certain benefits on offer. That’s because this embodies a change in attitude from your employees. Rewards structured around goals are more likely to excite employees in the long term.

Things to Consider in Effective Incentive Planning

If a failing incentive struggles to excite employees, consider revising what’s on offer, how it’s delivered and whether it’s even worth structuring incentives into a plan. Businesses who are successful with their incentive plans aren’t bound by the conventions of setting compensation, but rather are creative and personal with how they approach benefits.

When you’re setting up incentives, focus on the employee’s potential gain from introducing incentives into the workforce.

What do your employees value? Which benefits would create the most impact for them? And what could help them strive better in (and outside of) the workplace?

Lastly, remember what employees prioritise from their work:  

  • Type of work
  • Workplace setting
  • Work fulfilment

Financial incentives are not always motivational for every employee, especially where salaries are properly benchmarked and competitive. That’s why an incentive plan should be thought of as a platform for adding reward in exchange for those who embody the right behaviour and strong performance.

How IRIS FMP Can Help

As much of your incentive planning and compensation scheme will be coordinated by a HR department, it makes sense to invest in the right people. Without this critical input, your employees could struggle to feel properly incentivised.

If you need help setting up a competitive incentive plan or want HR expertise to intervene on a failing incentive plan, get in touch with specialist at IRIS FMP today.