How to Design an Incentive Plan that Boosts Performance 22-44%

This year, the Incentive Research Foundation (IRF) released a study on the effectiveness of reward, recognition and incentive programs. This study was inspired by findings in the early 2000’s asserting that

The presence of reward programs resulted in an average 22 percent gain in performance (as compared to organizations offering no reward program). For programs in place longer than six months, average performance gains leapt to 44 percent for individually-based rewards, and to 48 percent for team-based rewards— Condly, Clark, & Stolovitch, 2003

Sounds like great news, right? Hold up. Newer studies in 2012 and 2017 added these caveats:

Firms with effective incentive programs enjoyed 31 percent lower voluntary turnover than firms with ineffective programs

When used appropriately, rewards, including cash, can lead employees to feel more intrinsically motivated at work, which results in more effort

The key message in the IRF’s study is that reward programs and incentive plans work only if they’re well-designed. If this leaves you wondering how to design an incentive program that boosts performance 22-44%, you’re on the right track! We parsed the IRF study and narrowed its’ information down to three actionable strategies that will help you design an effective reward or incentive plan:

1. Reinforce the meaning and purpose of efforts you’re rewarding.

   When you’re deciding how to design an incentive plan, consider if participants will wonder, “What was the point of receiving this reward, again?” Rewards should be a reflection of your appreciation for the effort, loyalty or other desired behavior required to earn the reward. Imagine you arrive at work one morning to find a gift card to your favorite outdoor store sitting on your desk. Now imagine arriving to find that same gift card wrapped in a box that also contains a note reading, “Thank you for all the hard work on your latest project. You were vital to the project’s success. Now go buy some camping gear and take a trip—you earned it!”

   They may be the same gift card, but they’re two very different rewards, right? Sentiment, delivery and meaning matter a great deal in how successful your incentive program is. As the IRF study says, citing behavioral economist Dan Ariely,

   Mere acknowledgement of a person’s work ‘is a kind of human magic – a small human connection, a gift from one person to another that translates into a much larger, more meaningful out-come.’

2. Use non-cash rewards in your incentive plan.

   Don’t focus on how to design an incentive plan that yields only cash rewards. Study after study gathered by the IRF validates the fact that non-cash rewards have a greater impact on behavior than equivalent cash rewards. This is partly because cash is spent too quickly to have a lasting and memorable impact, partly because cash loses its “luster” after the first few times receiving it as a reward and lastly, because people tend to spend cash rewards on obligations, not fun stuff.

   University of Waterloo Professor Adam Presslee points out that people may prefer tangible non-cash rewards because they know they’ll spend a cash reward on something pedestrian… Supporting this claim, a 2016 IRF experiment suggests they may choose cash because they have a pressing need or, as other research has concluded, they feel guilty or selfish in taking a luxurious or hedonic tangible reward

3. Measure the success of your incentive plan.

   When you’re deciding how to design an incentive plan, it’s absolutely necessary to first pick out clearly-defined, measurable goals. What are the signs that your incentive plan is working? What does a 22-44% boost in performance actually look like, in your organization, team or department? An incentive plan’s key performance indicators (KPIs) will vary from one unique team or organization to another, but here are a few ideas from the IRF study of common factors you could measure, along with the percentage of firms who track that factor:

   • financial productivity (73%)
   • revenue from increased product sales (70%)
   • new customers (49-75%)
   • increased market share (50%)
   • employee retention (49%)
   • salesperson retention (20%)

Put all these strategies together, and you’ve got a research-backed framework showing you how to design an incentive plan that boosts performance up to 44% or more!