How Employee Incentives Work

Employee Incentive Plans

In the early 1980s, Microsoft began hiring hundreds of new employees to feed its growing software empire. For years, the start-up company had fewer than a dozen employees. But now, with a slate of new products on the horizon, it needed to fill its ranks with new programmers. The hours would be long and the pay would be low, applicants were told, but as Microsoft employees, they would be assured a generous package of stock options. Hundreds of new employees took them up on the deal, and over the next 10 years, they quickly saw their initial stock offerings blossom into multi-million dollar fortunes. By 2000, it was estimated more than 10,000 employees had become "Microsoft millionaires" as a result of the stock policy [source: Bick].

Many former Microsoft millionaires still say that it felt like they won the lottery. In fact, they were simply reaping the benefit of one of history's most lucrative employee incentive plans. From their first day of work, Microsoft employees knew that their compensation would be directly tied to the success of the company. The harder they worked, the faster the company grew -- and the faster the company grew, the more valuable their stock became.

Of course, not all companies are subject to that kind of meteoric growth. That's why many choose to implement wage incentive plans. Under these plans, every employee is paid the same base rate, but exceptional employees are given a bit extra come payday -- a "bonus."

To be effective, experts recommend that bonuses be equal to at least 10 to 30 per cent of annual income. If an employee makes $50,000 a year, for instance, he or she should be rewarded with nothing less than $5,000 [source: Lowenberg]. Top employees need to be shown that they're a cut above the rest, and if their wage is topped up with anything less than 10 per cent, it could be seen as nothing more than a token gesture.

Wherever possible, bonuses should be awarded based on measurable performance indicators, such as "number of sales closed" or "number of employees served." Many companies will also combine incentive programs with increased training. That way, not only do employees know how to improve their performance -- they're also the given the skills to do so.

Even if employers can't swing the high costs associated with a wage-based incentive plan, management experts agree that any incentive program is better than none at all [source: Daniels]. A gift certificate, an extra day off -- even a phone call. In the end, an incentive plan is all about recognition. As long as employees feel that their hard work is getting recognized, they'll be prompted to keep going.

Turn the page to find out why flight attendants can make rock-bottom wages and still love their jobs.