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03.02.2010
09:00

In Focus: Incentives

Incentives such as salaries, rewards, and recognition have become a very interesting topic that has been heard in the news many times over the last couple of years. I had the pleasure of attending a very interesting presentation by a former European manager of Enron. He was able to share some of his insights into the reasons of Enron’s decline as well some thoughts to consider when thinking about incentive systems.

The first idea that I want to address is the idea that “incentives work”. I believe that this is a very interesting and true statement. An incentive definitely has the ability to bring about defined results for an organization. When a company incentivizes goals and targets, employees should be striving to achieve the targets to attain the incentive. At the onset this sounds like a wonderful arrangement, but this seemly simple concept must be explored with much more depth.

The saying, “Be careful what you wish for, you just might get it,” illustrates the problem of poorly designed incentive systems. While reaching a target or goal could represent value for a company, the value for the company must be properly evaluated, as “everything that shines is not gold”. Accurately determining value-added is probably one of the most difficult challenges when designing incentive systems. For example, an incentive system that is linked to the quick development of a product will not guarantee the quality of a product. If quick development is incentivized, then quick development is the result that will be attained, not necessarily a quality development.

 An effective incentive system in my opinion should fulfill three criteria. The first criterion is the incentive itself should be effective in order to bring about desired results. The second criterion is, the desired results are properly valued and generate sustainable value. The third criterion is the incentives should include systems to ensure long-term value. This can be done by using claw-backs, retraction of incentive payments, when long-term value is not created.

Chris

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