Core concept incentives must be based on

CORE CONCEPT
Incentives must be based on accomplishing
the right results, not on dutifully performing
assigned tasks.
CORE CONCEPT
The first and most important rule in designing an
effective reward structure is to make measures of
good business performance and good strategy
execution the dominating basis for evaluating
individual and group efforts and for awarding
incentive payments.

Chapter 11 • Managing Internal Operations: Actions That Promote Good Strategy Execution
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Additional Guidelines for Designing Effective Incentive Compensation Systems
It is not enough
to link incentives to the right kinds of results—performance outcomes that signal both the company’s strategy and
its execution are on track. For a company’s reward system to truly motivate organization members, inspire their
best efforts, and sustain high levels of productivity, it is equally important to observe the following guidelines in
designing and administering the reward system:
n Make the performance payoff a major, not minor, piece of the total compensation package. Payoffs
must be at least 10 or more percent of base salary to have much impact. Incentives that amount to
20 percent or more of total compensation are big attention-getters, likely to really drive individual or
team efforts. Incentives amounting to less than five percent of total compensation have a comparatively
weak motivational impact. Moreover, the payoff for high-performing individuals and teams must be
meaningfully greater than the payoff for average performers, and the payoff for average performers
meaningfully bigger than for below-average performers.
n Have incentives that extend to all managers and all workers, not just top management. It is a gross
miscalculation to expect that lower-level managers and employees will work their hardest to hit
performance targets just so a few senior executives qualify for lucrative rewards.
n Administer the reward system with scrupulous objectivity and fairness. If performance standards
are set unrealistically high or if individual/group performance evaluations are not accurate and well
documented, dissatisfaction with the system will overcome all or most of the positive benefits.
n Make sure the performance targets each individual or team is expected to achieve involve outcomes the
individual or team can personally affect. The role of incentives is to enhance individual commitment and
channel behavior in beneficial directions. This role is not well served when the performance measures
by which company personnel are judged are outside their arena of influence.