One formal definition of compensation, one of many definitions:

“Something that motivates, rouses, or encourages; A bonus or reward, often monetary”

I’ve seen incentives work well for a vendor or single specific closed-end dedicated staff project such as creating a new product. If getting the product out 60 days earlier will earn the company an additional $100,000, then it makes good sense to provide early-finish incentives that total less than the value created. (The incentive can motivate the team to work harder, i.e. put more hours per week on the project. It also rewards them for being innovative in finding more productive ways to get the job done.) 

I’ve observed other incentives that have less impact:

An annual Christmas/holiday bonus becomes an entitlement and no longer affects motivation positively. (It becomes a negative motivator the first time the company has a poor year and can’t provide the bonus every employee has already mentally spent on holiday gifts.)

A financial incentive for technical people misreads their motivations. Technical people are motivated by the challenge. (They consider compensation as earned for past performance. They will take the money but it isn’t likely to change their behavior. They think it is only “fair” that they get it. Being fair doesn’t provide positive motivation.) They have “video game” motivation, i.e. they are motivated by the opportunity to be challenged again.

Most people don’t value long-term incentives such ESOPs, profit sharing, or phantom stock until they are actually vested in the plan and can see a definable, tangible cash value. Their participation is viewed as fairness. There is limited positive influence on behavior unless it is clear how their specific behavior can affect their share of the pie.

The employees of companies I’ve come in contact with want their company to succeed. They want to do a good job.

Step one to creating compensation programs that motivate employees is to document the results you want to motivate them to achieve. Strategic planning is the process that establishes and documents the results that employees need to be focused on.

Step two is to make sure that the company is organized consistent with the results you want to motivate, and organized consistent with your strategic plan.

Step three is to make sure you have the right people in the right seats.

Step four is to then make sure that employees are being motivated to produce the desired results. While compensation plans can affect motivation, the greatest success comes from having positions filled with people whose personal goals are aligned with the company’s, who are passionate about their jobs, and who are highly competent.

You can tweak motivation around specific projects for most people. The lion’s share, maybe 80%, will be generated by having the right people, in the right seats, with complete understanding of what they need to do to be successful.

The best way to do this is through a well structured strategic planning process, including effective implementation.