· Features

Incentives have been used to encourage rather than drive performance. Is this changing?

They may not want to admit it, but the recession gave bosses an excellent opportunity to dispense with a long list of incentives (fruit in the office, away days, gifts, Christmas parties, vouchers etc.), all in the name of cost-cutting, keeping the business going and preserving jobs.

As one survey in 2009 found, a quarter of company directors said they would cut all their benefits/incentives spend altogether if they could start their reward scheme afresh. While there was plenty of debate at the time as to whether this was a short-sighted reaction that would harm engagement (not even free tea and coffee survived the cull - uSwitchforbusiness.com found just 57% of workers can now brew up without stumping up for it themselves), the slashing went unabated. Non (directly) financial incentives, including flexible working, more annual leave and remote working, found new popularity.

Things could be about to change though. According to figures just released by the voucher industry (see p52), spend on incentives is rising once more. Historically, incentives have differed from rewards - they are mostly given to encourage rather than reward actual performance. They don't depend on output. But, in this post-recession era, in which delivering a return on investment is still front of mind, should incentives start to be offered linked to some sort of productivity/performance measure? Should there, in other words, be a clear ROI - or Return on Incentives?

Some people think there should. Provider P&MM, which saw the market fall significantly over the past two years, says enquiries this year have risen threefold. But Adrian Duncan, its motivation business development director, notes it's been more on what he calls a "speculate to accumulate strategy". He says: "Incentives drive sales. Incentives are becoming seen more as something for rewarding discretionary effort, which affects a company's bottom line."

Duncan believes the way incentives are structured has begun to change, that there has been a general move away from the 'keeping people sweet' types of incentives to a more controlled structure designed to minimise risk and control budgets. Examples include increased incentives for making second sales and team multipliers, in which the value of the reward increases significantly when team or departmental budgets are met. (Carphone Warehouse introduced this earlier this year). Duncan suggests recognition incentives are fast being replaced by sales incentives, where the latter is intrinsically linked to the business performance. The reason? They are self-funding: the organisation 'gets something back' as the incentive generates a return on investment.

Clare Martin is group HR director at broadband and phone company Daisy, the 18th fastest-growing company in Deloitte's recent Fast50 list. Under her stewardship, the company has a history of running expensive incentives - including a three-day whale-watching excursion to Spain, in 2007, a five-day skiing trip in 2008 and 2009 and a three-day break in Magaluf. All, however, were linked to the top performers in the company. She says: "It is vitally important that our incentives relate to performance and take into account business challenges. Sales teams are easy to incentivise as they are self-funding and the impact on revenue can easily be seen."

Opinion, however, seems split on whether wanting a specific return for goodwill incentive gestures creates the wrong sort of culture. "Recognition incentives traditionally encompass the entire business as opposed to just the sales function," says Colin Hodgson, director at provider Edenred, who believes cancelling a general incentives plan at a time when organisations need to motivate all employees "contradicts all incentive theory". He adds: "Employee satisfaction should be for all. It has a direct correlation with customer satisfaction which, in turn, impacts on the bottom line. Singling out sales staff goes against this." Daisy's Martin admits this is an issue but unfortunately the current climate is against her: "It is less easy to get financial sign-off for non-sales teams whose impact on revenue is not as easily visible," she says.

Sheila Sheldon, director of European operations at international employee rewards and recognition specialist Michael C Fina, says bosses ought to be looking at creating brand advocates rather than incentives that fail to go beyond the short-term target of closing a single sale: "Ideas for this could include rewarding loyalty as staff members reach milestones in their length of service; rewarding staff that have gone beyond the call of duty, either in customer service or helping out their colleagues; rewarding staff that demonstrate they are putting their training into action effectively; rewarding staff that make suggestions on how to improve internal policies, systems or functions as well as recognising staff birthdays, weddings, the arrival of new babies and new starters," says Sheldon. On this, Martin says she has made some ground: "We have worked to introduce a transparent programme that involves non-financial incentives as well," she says. "For example, our employee of the month programme is linked to the company vision and values."

The problem is that this is emphatically not an argument for throwing huge amounts of money into an incentive programme. Research has found that spending more than 3% of base pay on incentives does not produce additional benefits. Most companies spend 1.5%-2% of base pay or about two hours of salary cost per month and achieve excellent results.

It's also worth noting cash incentives are not always as appreciated as is often presumed. A US survey of more than 1,000 employees by Wirthlin Worldwide asked staff how they spent their last cash incentive. Among respondents, 29% said the money went on bills, and 18% could not remember how they spent it. Only 14% treated themselves to something special like a holiday. This supports the notion that it may be advisable to ring-fence the 'incentive' by giving a voucher instead, or by making it something tangible, otherwise potentially people may not perceive it as a special or a treat.

But what of the public sector, where every spending decision is subjected to microscopic inspection? Gillian Hibberd, strategic director, resources and business transformation at Buckinghamshire County Council, and immediate past president of PPMA, believes there is definitely a move away from any incentives that might be perceived as gimmicky. "At Bucks we're moving to a system purely based on performance and contribution," says Hibberd. "It won't happen overnight, but there is a real need to change the culture of the public sector to be more performance-based."

Undoubtedly, carefully constructed incentive programmes have a role to play in cultural and behavioural change.

Nuclear waste management and fuel manufacturing com-pany Sellafield, which has more than 10,000 employees and 2,500 contractors across three sites, revamped its behavioural safety programme in April 2010. The aim was to reward staff for sharing information relating to safety observations which, in turn, would be used to actively influence and reinforce safety strategies.

"Under the new scheme, called Peer to Peer Observation, employees are encouraged to make observations of other colleagues, noting both positive and at-risk behaviour," says Joe McCluskey, head of human performance at Sellafield. "They are asked to record the activity, why it is being performed in that particular way, and what could be done to make it safer." Employees have the option of recording their observations onto Sellafield's own intranet software programme or writing it into a booklet, which is dropped into designated post boxes. The individual recording the observation is rewarded with points paid into their new VIP 'bank' account, which can be saved or spent on over 3,000 items from Love2reward. For every 10 points awarded, Sellafield donates an additional 50% of their value to a charity pot. Participation levels have "far exceeded" expectations, says McCluskey, and the whole programme is now more effective with higher levels of visibility, commitment, investment and personnel involvement.

Research for a Grass Roots white paper on incentives last year found that 64% of respondents agreed that incentives drive a positive return on investment within their organisation. That's certainly good news for them - others clearly still have some way to go.

Long-term, money-based programmes work best

Back in 2002/3, Harold D Stolovitch, Richard E Clark and Steven J Condly estimated that US$117 billion was spent annually on a global basis on cash/non-cash incentives. Having put a figure on the size of the market, they then went on to try to establish whether this was money well spent by employers.

Over the years, an argument that has gained some traction is that incentives can destroy personal, intrinsic interest in work. To the contrary, the researchers concluded that rewarding people for exceeding targets causes them to value work more and even heightens self-confidence and employee loyalty.

A second concern for businesses is that shelling out on incentives equates to nothing more than paying extra for results they would have achieved anyway. However, the research found that a mere 8% of workers surveyed said they would have achieved the same results without receiving incentives.

Breaking down performance improvements based on different programme types, the research ascertained the following: individual-based incentives led to a 27% performance gain, while team-based incentives delivered a 45% performance gain; the longer the programme, the better the results - with a duration of one week or less delivering a 20% gain, up to six months achieving 30% and over six months bringing about 44%; while monetary incentives (27% increase in overall performance) were apparently twice as effective as gift/travel incentives (13%).

All in all, the evidence appears to be that long-term programmes, suited to re-loadable incentive cards, and those that are monetary-based, work best at boosting performance.

Incentive money well spent?

Have you heard about City law firm Clifford Chance's £90 knickers allowance for staff who work late? The truth is a little more mundane - the firm is prepared to shell out for some basics if associates end up working overnight on a client deal and cannot get home before going into meetings.

But while the £90 lingerie story is largely pants, there's a sweet truth about Cotswold District Council's decision to spend £50 on chocolate bars that were left on the desks of staff who shut down their computers properly and switched off their monitors. The authority has about 300 computers and switching them off at night will save an estimated £3,000 a year, as well as being in line with council objectives to cut carbon emissions.

It seems a little bit of lateral thinking about rewards can work a treat.

Voucher surge

According to Gift Card and Voucher Association figures, the second quarter of 2010 saw the sharpest ever growth in voucher sales. Compared with Q2 of 2009, business-to-business sales were up by an extremely healthy 20% to £216 million. This follows on from a rather more modest year-on-year rise of 4% in the first quarter.

Business-to-business voucher sales in the retailer category, which had declined in the previous period, bounced back with growth of 15%. Business-to-business sales in the leisure category rose even more strongly at 26% - impressive in the context of the wider leisure market, up at just 2.5%.

Gift cards continue to be the most popular way for consumers and businesses to buy vouchers. Sales of Closed Loop, Open Loop and Restricted Loop types of cards all rose. Open Loop is now worth £25 million, with sales coming exclusively from the corporate sector, while Restricted Loop is worth £5 million.

Clearly, businesses are investing more on vouchers as rewards/incentives.

Spending more than 3% of base pay on incentives does not produce additional benefits