Next to owning a piece of the company, incentive-based pay is the highest form of ownership. Leaders understand that if everyone shares in the fruit of their labors, they will take ownership of the entire process and of the company itself.
Why Not Invite Everyone to Be a Capitalist?
You cannot preach ownership to people at the task, job, process, and result levels, without tying incentives to those results. What you are saying is, "You work harder, but I'm keeping the fruit of your increased labor for myself." Founders and CEOs are incentivized to grow their companies and reap both the monetary rewards and the satisfaction of having added value to the world around them with a great product or service. Smart businesses are now giving everyone the same motivation.
Traditional Bonus Plans Don't Work
Many arguments have been made in the last couple decades against things like profit-sharing and bonuses, but most of them assume a worn-out approach that is easy to discredit; top-down plans focused on individual performance, and with little regard for the intrinsic motivators that make us tick.
In the 1990s, HP instituted a disastrous incentive-based pay program that was dismantled three years later. It was doomed because it was top-down, focused on individual performance (not team), and was changed as soon as people starting to hit it.
A number of years ago, Harvard Business Review ran an article on Why Incentive Plans Cannot Work but it made the same assumptions as the HP plan and assumed that incentives were all about the individual's pocket book.
In both cases, and in the case of almost every incentive plan in place today, the focus is solely on extrinsic rewards (making money), without any attachment to intrinsic rewards (making meaning).
The Key – Extrinsic Meets Intrinsic
Incentive plans only work in companies with great culture, where the primary focus is on Making Meaning, and ensuring everyone is growing, learning, and contributing by doing things that they find personally satisfying. In most companies, incentive plans are put in place because the intrinsic value of work and of each person's contribution is not the top priority. In that case, incentives are an attempt to buy off the abused. The leadership is unmotivated to change the way they value people, so they hope money will do the trick.
If great value is placed first on Making Meaning, then incentives are a powerful way to build on those intrinsic rewards. To work, we think they should be on three levels:
1) Personal--I want to know that I am recognized for being as good as I am.
2) Team--I should be heavily incentivized to make others successful, not just myself.
3) Company--If I'm not working hard to make the company better, I'm not contributing the way I should.
Rewards Include Time, Experiences, and Recognition
All three of these should be in the form of either more time off after hitting goals, or more money, rewards, recognition, and experiences for exceeding them. And they should be distributed as close to the good performance as possible. That is partly why profit-sharing by itself doesn't work--it just functions as part of an annual salary--nobody knows exactly why they got it.
Incentives Have Worked For Thousands of Years
How do we know incentive-based pay coupled with intrinsic rewards is the right thing for everyone? Because it is the same thing that drives every business owner, founder and CEO--capitalism. If you told a leader to double the size of their business next year and they would only get a 2.8% pay raise, none of the great companies we know today would exist. We're all driven to solve problems and make meaning (intrinsic rewards) and to be compensated appropriately (extrinsic time and money rewards).
Let Them Design the Plan
Get people involved in building their own incentive plan (time and/or money/rewards/experiences). Make sure it rewards them by being great team members and Stakeholders in your company. And don't move the goal-posts once the deal is made. You wouldn't put up with that as a capitalist, and either will they.
More and more companies are learning to reward both intrinsically and extrinsically. If you focus first on Making Meaning, incentive-based pay will attract the best and the brightest, and they will stay. If you focus on old-fashioned bonuses and profit-sharing, people will just sense you're trying to buy them off for treating them like extensions of machines. It's both/and.
Turn everybody into a capitalist. You'll both make more money, and your Stakeholders will want to build a great company, not for you, but with you.