Why Incentive Plans Don’t Work (all the time)

Throughout my career of designing and managing compensation programs, I’ve seen the good, the bad, and the ugly of incentive plans. Incentive plans, despite their widespread use in organizations, often fail to deliver the desired results and can even be counterproductive. There are several key reasons why these plans tend to be ineffective:

Temporary Compliance, Not Lasting Change

Incentive plans may secure short-term compliance, but they fail to produce enduring changes in attitudes and behaviors. Once the rewards are removed, employees typically revert to their previous patterns of behavior. This temporary nature of incentive-driven motivation undermines the long-term goals of most organizations.

Undermining Intrinsic Motivation

Perhaps most critically, extrinsic rewards can diminish intrinsic motivation. When people are offered incentives for tasks, they might otherwise find inherently interesting or meaningful, their focus shifts to the external reward rather than the work itself. This can lead to decreased creativity, reduced risk-taking, and a narrower focus on only those activities directly tied to rewards. People managers should ask questions that uncover their team’s intrinsic motivations. Not every player can be coached the same. A great people manager will use these insights to align individual performance with the collective internal motivations of the team.

Ignoring Root Causes

By relying on incentives, managers may neglect to address the underlying issues affecting performance. Instead of investigating and resolving problems related to inadequate training, poor processes, or systemic obstacles, the focus shifts to manipulating behavior through rewards. This approach fails to create sustainable improvements in organizational effectiveness.

Encouraging Short-Term Thinking

Incentive plans can lead employees to prioritize short-term gains over long-term value creation. This myopic focus may result in unethical behavior, manipulation of performance metrics, or neglect of important but less immediately rewarded activities.

A Better Approach

Rather than relying on extrinsic motivators, organizations would be better served by fostering intrinsic motivation. This involves creating meaningful work, providing autonomy, supporting skill development, and cultivating a sense of purpose. By focusing on these elements, companies can build a more engaged, creative, and high-performing workforce without the negative side effects associated with traditional incentive plans.

In conclusion, while the intent behind incentive plans is often positive, their implementation frequently leads to unintended consequences that undermine organizational goals. A more holistic approach to motivation and performance management is needed to create lasting, positive change in the workplace.