1. Designing Incentives and Rewards
Assign the following reading before the first class session:
Kerr, S. (1975). On the Folly of Rewarding A While Hoping for B. Academy of Management Journal, 18, 4,
Class Session 1

2. Why Do You Like Some Jobs and Tasks But Hate Others?
Ask the class to take a minute to list what motivates them. Ask them to take out a piece of paper and draw a line down the middle. On one side, ask them to list one or two jobs, tasks, classes, or activities they really like; on the other side, list ones they dislike. Then ask them to list words or phrases that describe why they like (or dislike) those activities. After a minute, ask students to share first the things they dislike and the associated words, and then share the things they like and their associated words. Write some of them on a chalk board or flip chart. Discuss as a larger group the differences they noted. It should become evident that people like to do things that are fun; that they are comfortable with or good at; and for which they get some admiration, satisfaction of accomplishment or other reward of some sort. People don’t like to do things they aren’t good at, for which there is no clear rationale, or that seem like a waste of time. They also don’t like to do things if they think no one else wants to do them or they see no intrinsic value for themselves. Remind the class of the Herzberg concepts of hygiene factor (or satisfier) vs. motivator in designing incentives and rewards.
Frederick Herzberg, in his classic theory of motivation (1959), discovered that the things that caused dissatisfaction were provided extrinsically (in other words, they were not part of the job but were provided by management or the work environment). These included money, relationships with bosses and peers, company policies and working conditions. However, the things that caused people to be satisfied or motivated were intrinsic to the job itself (in other words, were provided by the actual job). These included achievement, recognition, responsibility, advancement, and growth opportunities. The bottom line, according to Herzberg, is that satisfaction and dissatisfaction are not opposites. Rather, making sure that relationships with bosses/peers, salaries, policies, and working conditions are all positive will keep people from becoming dissatisfied (hygiene factors or satisfiers), but they won’t motivate employees to higher performance. Only the intrinsic factors of a job (motivators) can do that.
Other salient points about motivation:
Employees expect that if they expend the necessary effort to meet the employer’s expectations for performance, they will receive a reward that means something to them (expectancy theory).
Employees expect that the reward they do receive will be commensurate with their knowledge, skills and abilities and further, that the reward will approximate the rewards given to other employees with similar knowledge, skills, and abilities. Most employees expect that the difference between their rewards and others’ rewards should be due to performance differences (equity theory).

3. In this Session:
We’ll examine the underlying concepts that distinguish effective incentives from ineffective ones.
We’ll look at how the goals and performances of individuals, teams/units/departments, and organizations might be more effectively linked.
Effective rewards acknowledge what the organization wants to reward. Ineffective rewards do not reward what is hoped for by the organization and, in fact, reward the very things the organization doesn’t want. Kerr’s article, The Folly of Rewarding A While Hoping for B, is a good launching point for discussion of this (next slide).

4. What Do Incentives Incent and Rewards Reward?
Ask the class if anyone has ever worked with a budget in their job or school responsibilities; usually, at least one person has. Ask what happens at the end of the fiscal or budget year if they have been a good and responsible steward of the money and have some left. The response, often, is that they will hurry up and spend what is left, because they know that if they have any remaining, the budget will be reduced the next year.
This can lead into a discussion of On the Folly of Rewarding A While Hoping for B. The point of this article and the in-class discussion is to show that organizations often reward the very behaviors or results they don’t want (e.g., they want more responsible spending--but when employees don’t spend their entire budget, it is reduced in the future. So, employees learn to spend all they have available, leading to “hoping for less spending, but getting more spending”). The manager’s job is to clarify the expectations for performance so employees see the link between desired performance and rewards. You might ask students for other examples of ways organizations say they want one thing but actually reward something completely opposite.

5. What Kinds of Incentives and Rewards Do Organizations Use?
Ask students to make a list of the kinds of incentives and rewards organizations use. Write these on the board, separating them into two categories: financial and non-financial. The list often includes bonuses; merit pay; extra time off (additional vacation days, comp time); T-shirts/hats; gift cards or coupons redeemable for food, etc.; a job promotion; preference in shift work; sending employees to training; and travel opportunities. (Students rarely list the intrinsic rewards, such as growth opportunities or additional responsibility.)
Now, go back to your list from the first slide about why people like or don’t like their jobs. Note whether financial reasons are predominant on the list of likes. It is more than likely that money won’t be on that list at all and, even if it does appear, there are reasons other than money why people are motivated to do the job tasks they like. On the other hand, it is likely that “They don’t pay me enough” is on the list of the dislikes.
The goal here is to have students realize that organizations often design incentives and rewards that management believes motivate employees and teams, without asking those involved what they want. In other words, incentives and rewards work only if they are valued and desired by employees and, because employees differ in what they value and desire, one size doesn’t fit all. This highlights the importance of “valence” in rewards (as discussed in the expectancy theory model).

6. Incenting and Rewarding Desired Performance
Lead into the next discussion by asking: “What criteria do you think makes a good incentive or reward to bring about effective performance?” Remind students that you are looking for criteria, not actual rewards.
Students will likely suggest several criteria. The key is to clearly identify what the organization really wants from employees and then design incentives and rewards that meet those criteria. Some criteria students may offer:
Clearly linked to performance.
Valued by employees.
Financially feasible for the organization.
Large enough for employees to want to achieve it.
Equitably administered by managers.
Most criteria should clearly address what is required to achieve the reward and the equitable administration of the reward. To be a valued incentive, the criteria should also address growth needs, advancement potential, increased responsibility, and appropriate recognition.
This can lead to a discussion about how organizations link rewards to performance. The processes to establish performance competencies and standards through job analysis, designing performance evaluation tools, and performance feedback processes are key to making the performance-reward link clear, equitable and achievable.

7. Design Issues for Performance-Based Incentives and Rewards
To be effective, incentive and reward systems must:
Specify and measure performance.
Specify the level of aggregation for reward distribution in the organization’s hierarchy.
Specify the type of reward.
Gain employee acceptance.
Each bullet point is discussed in detail on the following slides.

8. Specify and Measure Performance
Employers should measure and reward what is important:
Do not ignore performance aspects that are difficult to measure (e.g., conflict resolution, relationship-building).
Results and behaviors are important:
Examples of results:
Profits, productivity, attendance, quality, sales.
Examples of behavior:
Returns customer calls within 24 hours.
Checks orders for correct shipping and billing information before shipping package.
Behaviors and results must be under workers’ control.
1. Employers should measure and reward what is important for the organization to achieve its goals. One of the biggest mistakes managers make is to focus on too many behaviors or results employees must accomplish to receive a reward. This results in frenetic work behaviors. It is best to choose one or two major behaviors and/or results that really make a difference in organizational or unit goal achievement. Don’t overlook performance aspects that are difficult to measure, such as relationships or conflict management. For example, including interpersonal interactions with subordinates on a manager’s performance appraisal can focus the manager on building good relationships with direct reports and handling conflict before it escalates.
2. Both results and behaviors are important. Not everything in a person’s job can be results-based; how a person behaves can be just as important. For example, we often reward salespersons for outcomes like the amount or number of sales. If the salesperson promises an unrealistic product feature or assures the customer of an impossible delivery date, rewarding only the sale itself would reinforce the salesperson’s undesirable behavior.
3. Behaviors and results must be under workers’ control. It isn’t fair to offer an incentive or reward which is based on an outcome that the employee does not control. However, obviously, everyone has control over their own behavior; so even if the result may not be under the employee’s control, an employer can offer an incentive or reward for the employee’s behavior(s). Just make sure that it is clear what is being rewarded or incented.

9. Specify and Measure Performance, cont’d.
Decide whether the focus is on short-term or long-term objectives.
It is a difficult balancing act to ensure that long-term performance and goals are not sacrificed for short-term results.
For example:
Focusing on the short-term stock price for a company while neglecting crucial long-term investments in research and development.
Downsizing to reduce short-term costs while neglecting long-term skills and knowledge development.
4. Sometimes managers are more concerned with short-term outcomes (e.g., quarterly profits) to the detriment of long-term ones (e.g., customer loyalty). Make sure that rewards and incentives are clearly tied to business outcomes you consider most important for organizational health. This isn’t to say that short-term results aren’t appropriate to incent and reward; just don’t lose sight of long-term goals and what is required to achieve them. For example, you could ask the class to discuss the difference in desired behaviors of a salesperson to achieve short-term quarterly profits (e.g., call on as many prospects as possible) versus long-term customer loyalty (e.g., provide after-sales service). In other words, for this example, how a salesperson spends their time is the balancing act.

10. Specify the Level of Aggregation for Reward Distribution in the Organization’s Hierarchy
Decisions about who to reward and how rewards are distributed are based on performance at various levels:
Individual employee.
Work teams.
Department, plant, strategic business unit.
Organization as a whole.
By the “level of aggregation” we mean how an organization distributes rewards among different levels in the organization. For example, an individual employee may be an excellent performer, but is part of a team that has a number of marginal performers (students will be able to relate this to group projects required in classes). Additionally, the team could be in a department that may not achieve its goals for the year, despite the fact that the organization overall is profitable that year. The next slide shows how incentives and rewards can work to align the organization’s behaviors and outcomes more effectively.
Rewards can be based on behaviors or results of individuals, work teams, units (department), or based on some aspect of the organization’s performance. One design issue is how to distribute rewards among these levels.
Ask the class to discuss issues of aggregation (or distribution of rewards) at different hierarchical levels. For example, have them think of a group project in which they were involved. What reward issues were present in terms of how the instructor assigned grades to individuals and the group itself? Usually, there are a number of people who felt that some in their group should not have gotten the same grade as they did. Have them think about how that distribution might have been handled differently. What benefits to each level and what problems might arise with their revised plan of distribution? Would it ever make sense to give a “class” grade? Why or why not?

11. Levels of Aggregation for Reward Distribution, cont’d.
Organization
Team
Department
Individual
This slide highlights the idea that all parts of the organization should be aligned for incentives and rewards to actually improve performance. Use the example below to point out that The Car Depot is missing the mark by not making the best use of its pool of incentive money. NOTE TO INSTRUCTOR: There are many ways to use this example…be creative!
Joe works in the parts department of The Car Depot, an auto aftermarket retailer. His primary job is to locate for customers various replacement parts for do-it-yourself car repair (e.g., carburetors, brake shoes, fan belts).
Recently, top management set a goal for the year to increase by 10 percent their sales of car detail and trim products (waxes and polishes, glass cleaners, decals and stripes, customized license plate holders, etc.). In an effort to incent their sales associates to sell more of these products, management provided money to be divided among the sales associates in the trim department who increase their sales on car detail and trim products.
What are some pros and cons in The Car Depot’s proposed incentive plan?
Pros: Rewards an organizational outcome; the incentive is directly tied to increased sales; is a realistic and attainable goal.
Cons: It doesn’t reward other contributors who aren’t selling (like Joe); it is rewarding only annual sales and not profit.
How might The Car Depot better use its incentive money to achieve the 10 percent goal of market share increase?
Follow the model on the slide.
Use part of the money to reward all contributors as profit sharing; individual goal achievement in specific area (sales, parts); and department goal achievement.
What role, if any, might Joe have in achieving this goal?
Link Joe’s individual reward to increased sales of replacement parts, for example.

12. Specify the Type of Reward
To be effective, the reward:
Must be valued by employees (not necessarily financial!).
Must be clearly linked to expected behaviors or results.
For financial rewards, proportion of at-risk pay generally increases as employees move up the organization.
Cultures vary in the acceptability of at-risk pay.
One of the biggest mistakes HR managers make is designing incentives and rewards without asking people what they want and find valuable. For example, many employees value time off far more than they value a financial reward.
Offering incentives and rewards to employees works only if they clearly understand what they have to do to receive them. If an incentive is offered to manufacturing employees for no reportable accidents, management must make it clear what constitutes a reportable accident; how to prevent accidents from happening; and the time frame for the incentive period.
Explain what is meant by “pay at risk.” Executives typically have more of their pay at risk than lower-level employees because they have more riding on the outcomes of their behaviors and results. However, there are exceptions (e.g., salespersons). The bottom line is that the more a reward depends on an employee’s performance, the more likely the employee will be motivated to perform.
Cultural differences exist in acceptability of at-risk pay. For example, Eastern cultures typically are more risk-averse than Western cultures. Additionally, cultures that value more collective versus individually centered work and cultures that value more collaboration versus competition tend to respond less favorably to having their pay at risk. The organization’s culture, as well as the ethnic culture, will also value different incentive systems. A “work hard, play hard” culture like those found in sales is more likely to accept at-risk pay than, for example, a process culture (like manufacturing) that revels in the standardization and systemization of work (Deal and Kennedy, 1987).

13. Gain Employee Acceptance
The plan must be clearly communicated.
Employees must believe they are being treated fairly.
The plan must be easily understood and incentives easy to calculate.
Employees should have input into establishing and administering the plan.
When possible, rewards should be given soon after the desired performance is achieved.

14. Gain Employee Acceptance, cont’d.
Employees must have an avenue of appeal if they believe they are treated unfairly.
Employees must believe they can trust the organization to be confident that the effort-performance-reward link will really materialize.
One of the most important aspects in gaining employees’ acceptance of rewards is the idea of justice. There are two kinds of justice for which employees hold the organization responsible:
Procedural justice: The process involved in specifying the reward, assessing employees’ performances and assigning the reward to employees.
Distributive Justice: The outcome (i.e., reward) that is given to employees.
These types of justice really get at the heart of the equity theory; that is, the fairness of the process employed and the fairness of the reward given. Only with fairness can trust be achieved between the employer and employees, resulting in achievement of the goals and objectives desired.

15. Legal Considerations Discrimination: Taxes and accounting rules:
Must apply same decision rules to all employees eligible for the reward or incentive.
Employees protected by Title VII and Equal Pay Act.
Taxes and accounting rules:
For example, those governing capital gains, deferred compensation and stock plans.
Like any employment decision, employers must make sure that incentives and rewards are equitably administered. If a group of employees are eligible to receive a reward, the criteria must be applied equitably across all employees in that group. Note that the criteria must be applied equitably, not equally. This does not mean that all employees should receive the same reward; the process, however, must be applied fairly and the outcomes distributed fairly, based on the set of performance standards set and achieved.
In addition, depending on employers’ choices of the types of incentives and rewards they offer, there may be some unanticipated or unplanned tax consequences for employees. For example, with incentive stock options, tax is deferred as long-term capital gains (15 percent) when the stock is actually sold by the employee. For employees with non-qualified stock options, the spread (i.e., the difference between the price at which the employee bought the stock and the current market value) is viewed as income and is treated as compensation, which is taxed at a rate higher than 15 percent. If the instructor is knowledgeable in this area, they could offer other tax and accounting issues that employers and employees might consider as they decide the mix of rewards.

16. Why Are Group Projects So Unpopular With Students?
Be prepared for an onslaught of responses to this question! Almost every student has experienced inequity in group projects and will have much to say on the matter. The point of this question is to lead into a discussion about how it is difficult to design group or team incentives that are equitable for individuals and team members. Part of the problem is task interdependence.
It may be helpful to discuss the issue of task interdependence as a prerequisite for effective team-based incentives and rewards. For example, class groups are generally asked to produce one report or one assignment. Most students do not see that any of the tasks in creating the outcome are necessarily interdependent. This is evident, since most groups assign different parts to individual students. The problem comes when all the parts are brought together to form the whole. In other words, class projects are interdependent; but this fact is usually not made clear to the students from the start.
The next slide highlights some of the challenges faced by managers trying to design performance-based incentives and rewards for teams or employee groups.
Deciding to Use Team-Based Incentives

17. Design Challenges for Performance-Based Team Incentives
Aligning team performance measures with individual performance measures.
Aligning team performance measures with organizational performance measures.
Ensuring workload is equitably distributed.
Coordinating team incentives and incentives for people not in teams.
Determining how incentives will be allocated among core and noncore team members.
These challenges are common to all employers who want to reward group-level performance separately from individual performance.

18. Advantages of Team Incentives
Peer pressure reduces counterproductive behavior (e.g., reduces “social loafing”).
Group rewards, such as praise and camaraderie, increase reward value.
High performers act as role models for marginal performers.
It is worth mentioning here that there are pros and cons to rewarding groups over individuals, as well as individuals over groups. For example, “social loafing” is one aspect of ineffective team performance in which one or more members rely on the contributions of others. However, it should be pointed out that incentives and rewards, working in concert at all levels, are preferred in achieving overall organizational performance goals.
Social loafing occurs when tasks are perceived to be difficult and unrewarding for an individual [see an excellent explanation of this by Jackson, J. M. & Harkins, S. G. (1985). Equity in effort: An explanation of the social loafing effect. Journal of Personality and Social Psychology, 49, ]. The pressure from others in the group may reduce the feeling of difficulty, but won’t reduce the feeling that any one person is underappreciated.
The importance of evaluating both the individuals in the group and the group as a whole cannot be understated. These rewards don’t have to be monetary, but the encouragement of a group goal with its respective reward will help individuals see the importance of the task and the value of the reward.
Modeling the behaviors you wish from each individual is important; high performers act as the models to be emulated by others.

19. Lessons Learned…
Individuals vary in what motivates them, so incentives and rewards must also be varied (one size does not fit all).
Organizations frequently reward the very behaviors and results they are trying to avoid.
Incentives and rewards must be aligned within and among individuals, teams/units and the organization as a whole to be most effective.

20. Designing Incentives and Rewards
It may be worthwhile to assign the following reading prior to the second class session or before attempting the Atlas Corporation exercise:
Designing Incentive Compensation Programs to Support Value-Based Management, chapter 9 in Paying for Performance: A Guide to Compensation Management, 2nd Edition ( , April 2002).
Class Session 2

21. Design an Incentives and Rewards Program for Atlas Corporation

22. Collections at Atlas Corporation
In groups of 3-4 students, review the case for collections clerks at Atlas Corporation.
Answer the questions provided to guide you in your decisions about how to incent collection clerks to increase collections each month.
Share your results with the rest of the class.
Ask your instructor for clarification on any point for which you are unsure.
This case, Improving Collections at Atlas Corporation, is designed to help students think through the process of designing an incentive program to address a real business problem—collections from past-due accounts. If your students are upper-level HR or graduate HR students, you can assign this as an individual, graded assignment in which the student actually designs a workable incentive and reward program. However, incentive program design is a complex task that would likely take longer than the allotted class time. If students are not that advanced, it is probably most appropriately done as an in-class assignment in groups of 3-4 students, for which they answer the following questions and report back to the class:
What do you think is a realistic goal for Atlas to set to reduce outstanding amounts each month? This can be stated in dollars or as a percentage of the total amount currently due.
Should this be an individual incentive, a team incentive, or a combination of both? How would you design it?
When should the incentive/reward be given--monthly, quarterly, annually?
How should it be given--publicly or privately?
What should the reward(s) or incentive(s) be? Who will determine what they are and how they will be distributed?