An incentive is anything, tangible or otherwise that motivates or encourages improved
performance or output. It’s normally in monetary value i.e. payments or paid holidays that
generally stimulate greater production or output or even investments. Incentive structures are
critical to the success of any company.
In his statement working too well (1993) Baker means that the incentives provided to employees
may actually achieve the wrong results. These side effects of incentive plans are not the aim of
the incentive schemes which normally target productivity, growth and profitability. Baker (1993)
also states that incentives still play a key role in the successes of organization and that they
should not be abandoned if there are no alternatives.
Their major objective is to provide real value for money paid and contribute positively towards
the organization’s success. (Russell , 2006) It’s obvious without incentives most profits of many
organizations will take a drastic turn to the worst and it will require more than incentives to turn
the organization back to profitability. (Hill and Jones, 2008)
The organization should develop and design incentive plans that rewards effectively team
productivity to avoid unproductive behavior such as employees working too well (Baker III,
1993) and instead focus on inducing employee cooperation. The establishment of employee
stock ownership schemes to encourage accountability and profit sharing plans to induce hard
work and honesty provides enough grounds for employees to support the management as they
also feel they are co-owners and their input may also affect the profitability of the organization.
Application of the basic concepts of Economic Value Added (EVA) principles may prove
effective in motivating the employees to improve the quality of service. EVA champions three
basic incentives: to improve and increase productivity, to grow the profitability and finally to
withdraw the resources from areas or sections that are uneconomical and direct them economical
activities. Application of EVA principles will generally increase productivity and provide
accountability for the incentives granted.
Incentives and compensation policies are directly linked to the company’s performance. If the
company improves or increases its sales or income then it’s considered successful. While
measurements, motivation techniques and the management systems are meant to improve the
performance of a company, the real goal of EVA is to change the perspective of the employees
and instill accountability and reliability. (Abate, Grant & Stewart, 2004). This principle is
important for the employees to be directly responsible for his performance not just because of the
incentives but also to understand the basic concepts of the incentives schemes.
Finally to conclude, incentives are critical components to strategic management operations and
they are mostly tied to performance contracts. Eliminating the use of incentives to motivate
employees may be disastrous if there are no alternative schemes in place to counter the removals.
The best alternative is to introduce measures that provide accountability to the incentive schemes
like the EVA principles. The employees should also be made aware of their expectations and
targets. A well designed and effective incentive plans will automatically attract and maintain
hard working and honest employees. These incentives should also be reasonably tied to some
expectations that employees should be reasonably accountable to.
Hill, C., Jones, G. (2008) Strategic Management. Houghton Mifflin Company: New York.
Russell , R. (2006). “Incentives Matter” . Library of Economics and Liberty .
Abate, J. A., Grant, J. L., & Stewart, G. B., III. (2004). The EVA style of investing:
Emphasizing the fundamentals of wealth creation. Journal of Portfolio Management
Baker III, P.B. (1993) Rethinking Rewards, Harvard Business Review, November 1993