Managing incentives in the workplace: Paying for performance or disaster?

From Enron earlier in the decade to the crash of capital markets in 2009, we all have witnessed everyone from main street to the board of directors at your favorite love-to-hate fortune 1000 company asking:

How can we give incentives without jeopardizing the long term health of our company?

Living in a country based on capitalism, many do not want to put a cap on compensation. After all, this is the place where people from around the world come to in great hopes that if you study and work hard you can have anything you want. On the other hand, no one wants to see a CEO run away with a $30 Million dollar package after running a company into the ground or even your top account executive promising everything under the sun to their clients so they can make their own bonus.

Assigning short term goals with large rewards takes away the long term thinking and planning a business needs today to not just be profitable but to simply survive. One of the best incentive programs I recall was at the shop floor level where, assuming the business was there to do so, higher production rates and higher levels of quality meant that all of the hourly workers would receive hefty incentive checks.

Everyone wanted to work together towards a common goal, to earn a great incentive check. With that in mind I always look at professional sports teams and what we can learn from them. Ask yourself, would we as spectators and fans be better off if a team had a payroll of $100 Million dollars regardless if they win or lose versus a payroll of $45 Million dollars where if they win the championship this year they as a team would get $125 Million dollars – and if they won a second title in the next 5 years it would be for over $150 Million?

Often the desire to win is not enough to drive someone. How many times have you watched a professional sports player making $10 Million dollars a year walk out and give 40% of their effort, I mean what does it matter, they get their $10 Million win or lose right?

With that in mind, the leaders of American corporations of all sizes need to figure out an incentive program that works for them. For those leading corporations they will demand and deserve high paying salaries. The question remains, aside from the salaries, how can you tie bonuses and incentives to the long term health of a company?

We would love to hear any and all ideas on the topic so feel free to comment with your idea or plan.