How to Use Financial Incentives for Managers to Maximize Employee Productivity

How to Use Financial Incentives for Managers

This article was updated on June 15, 2018.

You depend on your managers to maximize employee productivity and prevent turnover. Because these are such important goals for talent management, it might seem like a good idea to give your managers financial incentives to meet their objectives. However, you need to be careful how you set this up as the wrong incentive program could create more problems than it solves.

What Financial Incentives Can Do

Results matter for your organization. It seems unfair to give all your managers the same compensation when they have different results. At the same time, you want to reward your top performers while giving the rest of your management team motivation to improve for their future.

Tying part of a manager's compensation to their performance can seem like a perfect solution. Whether you give bonuses, recognition or enhanced benefits, these incentives give your managers a clear reward when they improve productivity and retain talent. This can serve to be the extra push they need to reach your organization's HCM goals.

Using Incentives Well

If you want to use financial incentives for your managers, they should be based on factors that managers have the most control over. Employee productivity could have more to do with the actual employees than a manager's efforts, while turnover can sometimes depend on events outside of work like an employee relocating for personal reasons. Instead, you could offer rewards if employees give their managers good reviews for workplace satisfaction. That's something a manager has more ability to influence.

If you want to give managers incentives for talent retention, have HR conduct proper exit interviews when employees leave so you can see what your managers could have prevented and what was out of their control.

Finally, make sure that the incentives align with your long-term goals. If managers receive a large bonus for hitting their quarterly sales target, they may be reluctant to take on and mentor new employees because this could get in the way of their bonus objectives. Instead, you could base the manager's bonus on whether their team members improve their performance compared to the year before.

Paying for Incentives

The cost of your incentive program can vary widely depending on the type of rewards you decide to offer. Some low cost incentives include a one-time cash prize, gift cards, trophies, and/or a rewards dinner as part of an employee recognition program. An effective employee recognition program costs about 1 to 2 percent of payroll, according to the SHRM/Globoforce 2015 Employee Recognition Report.

If you want to make your incentives more generous, like offering annual bonuses or salary increases, then the cost of the program can be significant, comparable to what you are paying in salaries. You'll need to decide whether to reduce your regular compensation to make up for the cost of the incentives or whether to keep things the same, so you have an extra expense from the incentives.

Impacting Employee Engagement

Perhaps more important than financial incentives is creating a supportive environment for your managers to engage with employees. While organizations say they're committed to talent management, it often takes a backseat to managers hitting their production targets. As a result, managers may see employee development and support as a secondary goal compared to their day-to-day tasks. Then, the problem only comes up when long-term productivity takes a hit.

If you want to improve employee productivity, emphasize that talent management is a critical component of your manager's responsibilities. It should be written in their job responsibilities and they should have clear tasks to accomplish in regular intervals, like holding performance reviews and strategy sessions with employees at least once a month or quarter. You could also make this part of a manager's annual goals and base their bonus structure on whether employees improve their annual performance based on this mentoring.

Incentives can play a big role in motivating your managers, but they also can't be expected to solve every problem. By combining good incentives with a supportive environment, you can effectively encourage solid employee management, improve productivity and promote talent retention.