In a post-pandemic business world of hybrid work and quiet quitting, companies must rethink how they motivate employees.
Good incentive plans and reward structures require a careful analysis of a company’s objectives, culture, and pressure points, says Brian Hall, the Albert H. Gordon Professor of Business Administration at Harvard Business School. In May, Hall convened what he hopes will be a yearly conference of scholars now working in the burgeoning field of incentive design, which draws lessons from both microeconomics and behavioral science and is being watched closely by corporations looking to boost morale.
“People are quitting, and companies are noticing that it’s harder to get people to join the company and hold on to them, so they’re going back to the drawing board.”
Hall is working on a how-to guide about HR systems for managers that he has tentatively named “Cents and Noncents.” It will be a practical examination of the way money—and nonmonetary rewards—trickle down to create that special magic that makes employees believe in the mission and work harder to further its success.
Getting these incentive systems right has new urgency against an uncertain economy, a tight labor market, and a workforce whose trust has been shaken by the pandemic. “People are quitting, and companies are noticing that it’s harder to get people to join the company and hold on to them, so they’re going back to the drawing board,” Hall says.
An incentive is an inducement to do something you wouldn’t otherwise do, and good incentive systems create a market of sorts inside companies with a series of pressure points, Hall says. Whether it’s raising your hand for extra work, prioritizing innovative projects, or staying with a company for a long time, behaviors are driven by the forces at play in these internal markets, Hall argues.
“If you try to put water into a hose, it’s going to squirt out somewhere. No matter what decision you make, there will be something that needs to be controlled,” Hall says. “Every kink creates opportunity for mischief that needs to be looked into.”
Hall offers four research-backed strategies leaders should put into place now to create incentive programs that work, and three important pitfalls to avoid.
Do: Offer equity ‘with juice’
For senior-level employees, a way to riches has always been an equity share. But Hall says many of these models offer false promises.
Many companies have offered stock options to upper level employees. But “options are fragile in a way most people don’t understand,” Hall says, “and over half of the time they fall underwater” if the market as a whole loses value.
Hall suggests taking the route of Silicon Valley companies that add “a little juice” to restricted stock programs by rewarding outperformance only over direct competitors, regardless of broader market shifts. He says these outperformance shares, where more or fewer shares vest as companies outperform or underperform their competitors, work better because the payout incentives are tied to leading only your company’s sector.
“It’s paying for real performance, which is the thing the shareholders want,” Hall says.
Do: Remember that cash isn’t always king
Non-monetary rewards can be just as motivational as money, and sometimes more so if managed correctly, says Hall. They’re often much less expensive for the company, too, he adds.
“Most people just think, ‘What do employees want? They want money,’” Hall says. “I’m not sure why they don’t get more creative with non-monetary incentives.”
He recounted a story of how private equity firm Forstmann, Little & Company motivated board members of Gulfstream to sign up new clients: with model airplanes. The wealthy and influential members of the private plane company’s board reveled in the bragging rights conveyed by each individual model plane they earned that could be lined up in front of their seat at board meetings.
“This stuff doesn’t cost a lot but requires people to get into a room and talk about how to meaningfully recognize performance and commitment, so even the process of creating non-monetary rewards is good for the company.”
Hall says the best non-monetary awards need to feel meaningful to the culture, like employee of the month plaques or sales awards. Companies should think about who they want to attract and design non-monetary awards around that goal. For instance, companies with a training culture could offer access to ongoing learning—and should expect that the applicants who will flock to them are those that value on-the-job growth opportunities.
“Money costs money, and this stuff doesn’t cost a lot but requires people to get into a room and talk about how to meaningfully recognize performance and commitment, so even the process of creating non-monetary rewards is good for the company,” Hall says.
Do: Consider your story
It’s important to frame any incentive plan in a way that’s motivating. The goal is to deepen the connection employees feel with their company in a way that’s positive and inspirational. If an incentive feels too heavy-handed to employees, it can come across as crass, pushy, or unethical.
“The story matters a lot,” Hall says. “Even when you get the financial incentives right, it’s rarely the case that you want to emphasize to employees that this is primarily about making them wealthy. That’s rarely inspirational. It’s about succeeding and meeting the goals of the mission.”
Putting in an incentive plan is an opportunity to frame what is needed from employees to achieve the company’s mission. Everyone is nervous when incentive plans are introduced, which is a challenge. But the flip side is that you have their attention.
Hall points to the New York Yankees contract negotiations with former manager Joe Torre. The Yankees offered Torre a $5 million contract in 2007, with a $3 million bonus for reaching the World Series—but Torre rejected the offer, saying at the time that he didn’t think motivation was necessary and took the incentive plan as an insult.
If a positive story isn’t wrapped around the incentive plan, Hall says, “You lose over time, because people feel like they’re being bribed.”
Do: Try to measure the unmeasurable
“Not everything that counts can be counted, and not everything that can be counted, counts,” says Hall, paraphrasing Albert Einstein.
It’s hard to do, but Hall advises building into any incentive plan values like teamwork or culture or customer relations that are difficult to measure. This can be accomplished by making subjective measurements part of rewards programs and performance reviews. That might mean a reward for an employee whose values stood out, even if they didn’t necessarily flow directly to a bottom line measurement.
“Most great companies will have elements of subjective measurement that go into a bonus plan that reinforce values,” says Hall. “The finance department doesn’t have all the measurements that matter.”
Don’t squeeze your workers
If you squeeze your workers so that they are rewarded (in money and benefits and culture) barely above the amount necessary to attract them, then the job isn’t very sticky, Hall says. And they won’t want to invest in a career at your company.
“You have to have some combination of non-monetary benefits and pay where it’s an attractive value proposition,” says Hall. “So your employees say, ‘I want to get good here.’ You have to share the value with the value creators, or they are not going to invest.”
Don’t create unfair systems
Be as transparent as possible about the process for determining pay and earning rewards. Nothing is more demotivating than feeling like someone in a similar position is being treated better, Hall says.
“When people feel that the pay is unfair, they are more likely to do nasty things,” Hall says. “They will behave unethically, they will try to sabotage others, and, at a minimum, they will be less engaged and less productive.”
True equality is hard to come by. But being as open as possible about how and why pay is determined will help build trust with your workforce, Hall advises. The key is that the process is transparent and understood, even if everyone’s individual pay isn’t transparent.
Don’t replace all your people with robots
In the age of AI and robotics, it’s tempting to slash costs by subbing in machines or machine learning for jobs or parts of jobs. But don’t do it, says Hall. Those might be the very parts of the job that your workers find most enjoyable, and loving their work is an important motivational factor for many workers.
“The way that AI will change jobs is really a motivation issue,” Hall says. “Don’t just try to cut costs, think about how the use of the tech affects motivation. Are you taking away the part of the job that people really enjoy?”
“Harvard Business School is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA program, management-related doctoral programs, and executive education programs.”
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