Joe Regenstein, CPA, FPAC

Why are Incentive Plans Necessary?

Incentive Plans

The short answer is your business has objectives to meet and one of them most certainly generating revenue.  Revenue comes from selling products and services and this often requires human intervention to accomplish.  If revenue doesn’t regularly exceed expenses you won’t have a business for too long without buckets of capital.  Even non-profits need continuous revenues to sustain their mission.  A well designed incentive plan has a dual purpose, rewards those who help achieve the business objectives and to drive certain behaviors.  However, simply slapping an incentive plan in place doesn’t guarantee success. And it certainly won’t turn the salesforce into selling machines since rewards temporarily change what we do:

Incentives, a version of what psychologists call extrinsic motivators, do not alter the attitudes that underlie our behaviors. They do not create an enduring commitment to any value or action.

Kohn, A. Why Incentive Plans Cannot Work. Harvard Business Review, September-October 1993

When the rewards run out or become unachievable we tend to revert back to our old attitudes and behaviors. We need to focus on the balance of motivational rewards which comes in two forms: 

Intrinsic motivational orientations are characterized by preference for activities that are relatively complex, challenging, and entertaining. Extrinsic motivational orientations are characterized by preference for activities that are relatively simple, predictable, and easily completed. 

Pittman, T. S., Emery, J., & Boggiano, A. K. (1982). Intrinsic and extrinsic motivational orientations: Reward-induced changes in preference for complexity. Journal of Personality and Social Psychology, 42(5), 789.

Intrinsic motivation could be defined as doing an activity because you find it fulfilling.  If the activity you need completed to meet business objectives largely falls into this bucket an incentive plan may not be necessary.  The standard compensation plan or base pay (salary or hourly rate) covers these activities.  When the necessary activities requires extrinsic motivation an incentive plan becomes an option.  However, extrinsic motivation only goes so far and works better with certain activities.  When faced with this type of motivation researchers found people would try to minimize the challenge:

It isn’t that human beings are naturally lazy or that it is unwise to give employees a voice in determining the standards to be used.  Rather, people tend to lower their sights when they are encouraged to think about what they are going to get for their efforts.

Kohn, A. Why Incentive Plans Cannot Work. Harvard Business Review, September-October 1993

Therefore, as the task becomes more challenging and less predictable, the effectiveness of the incentive plan will diminish.  In addition, incentives can backfire when the reward is no longer attainable according to a 2008 study regarding procrastination when opportunities are missed:

Bonuses are likely to have two opposing effects: they should motivate more participants to complete the task in time to obtain the bonus, but they will also lead those who do not receive the bonus to engage in subsequent task avoidance. 

Pittman, T. S., Tykocinski, O. E., Sandman‐Keinan, R., & Matthews, P. A. (2008). When bonuses backfire: An inaction inertia analysis of procrastination induced by a missed opportunity. Journal of Behavioral Decision Making, 21(2), 139-150.

Why you may ask? Because the opposite of reward is punishment even if that isn’t the Businesses’ intention.  When you expected to receive a commission or bonus and don’t the impact is the same. 

Our challenge is to design a plan that will help the business achieve its objectives while not being coercive, containing the cost of sales and selling with integrity. We need to identify a limited number if activities lend themselves to extrinsic rewards. There are only so many levers management can pull to drive the salesforce.  Too many performance measures will result in the salesforce ignoring the most difficult and focusing the most lucrative measures. The same goes for products and services, if everything is a priority then nothing gets prioritized.

It is vain to do with more what can be done with less.

William of Occam (c. 1288–1348), “ Occam’s Razor” 

All this needs to be done while identifying where a customer’s needs and the business offerings intersect. For the remaining activities intrinsic value needs to be created or the task needs to be made simple enough the energy expended to complete it is immaterial. To accomplish this the pay mix needs to have sufficient base pay. Otherwise why would an employee help a customer in a non-compensated activity if it just takes away opportunities to earn. In addition to the pay mix, utilizing recognition as a driver may help as long as it is not expected or seen as an attempt to buy behavior. The business may also consider including those in the salesforce that excel in projects or panels. This should increase their leadership skills, subject knowledge and elevate their personal capital. These fulfilling options could never be replaced with monetary rewards.

Although out of the realm of plan design the salesforce needs to have products and services customer need, want and desire. The most generous incentives can’t overcome inferior products and services over the long term.  The salesforce will turnover often in this high pressure and low personal fulfillment environment. 

The beatings will continue until morale improves.


A vicious cycle will ensue where incentives and/or pressure keep increasing to keep the revenues flowing.  If this is the case then resources need to be applied to design and creation of the underlying product or service.

If it is determined an incentive plan is desirable then careful consideration needs to go into the design. The Business needs to be vigilant in maintaining a balance between the two types of motivation to maintain an effective salesforce. To know it is unreasonable to address every business objective or solve all problems. Lastly, the plan needs to be maintained as if it was an asset that would lose value if neglected.

#Bonus #Compensation #Incentive Plans #Incentives #Motivations