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Compensation Cafe: The Contradiction of Annual Incentives

By Derek Irvine

Recognize This! – Incentives are only effective when they match the timeframes of employees’ motivation to perform.

In light of a recent Willis Towers Watson report on the ineffectiveness of annual incentives, I wanted to take a closer look at how and why they motivate employee behavior. For me, it was important to start at the very foundation and really look into what we mean when we talk about annual incentives.

Click over to the Compensation Café to read the full post and why I think that annual incentives may actually be a contradiction in terms, which helps explain the ineffectiveness. As I go into more detail in that post:

Operational realities aside, there is even a more basic contradiction in terms underlying this notion of an “annual incentive.” First, incentives can be broadly defined through the following equation: “something that motivates an individual to perform an action.” We also know that for incentives to be effective, the time horizons of the “something” must match the timeframes of the action itself and the motivational drive to perform that action.
In the case of annual incentives, our new definition could be interpreted as: “something [given annually] that [annually] motivates an individual to perform an [annual] action.” Perhaps these types of pay for performance schemes might be perfectly suited for long-term projects or even jobs where there is stability in both the work and performance levels over time (especially over the course of an entire year!).

But what about everything else that we do at work that plays out over much shorter time-frames? This observation got me thinking and here are just some of the questions that initially came to mind:

So what do annual incentives mean at this point, especially from the perspective of the employee? What exactly is being incentivized, is it aggregate performance or a few examples of exemplary performance over the prior year? How much information is lost in connecting annual incentives to daily or monthly behavior? Most importantly, what is the motivational impact of the answers to these questions?

Read the full post and let me know what you think.