"Linking Goals to Monetary Incentives"

Edwin Locke

Academy of Management Executive

November 2004, pp. 130-133

The author of this article discusses four different methods of combining goal setting with incentives, and identifies the pros and cons of each of the four methods:

• "Stretch" Goals with Bonuses for Success—This method assigns people difficult (or "stretch") goals. Individuals receive a substantial bonus if the stretch goal is met, and they receive no bonus if the goal is not met.
  • Pros
    • Employees have strong incentives to attain the goals.
    • There is no ambiguity about exactly what must be accomplished to receive the bonus.
  • Cons
    • There is considerable incentive to take risky "short-cuts" to try to get the bonus.
    • There is considerable incentive to think short-term and sub-optimize long-term results in order to receive the bonus.
    • There is considerable incentive to cheat in order to receive the bonus.
    • It can be very demoralizing for hard-working employees who barely miss achieving the goal and get no bonus at all.
• Multiple Goal Levels with Multiple Bonus Levels—This method uses the approach that higher levels of bonus are received as higher levels of goals are attained.
  • Pros
    • Competent employees receive some level of bonus for their achievements.
    • There is less temptation to take risky short cuts or to cheat.
  • Cons
    • Employees may be less motivated to try for the highest level of performance.
    • There is no external motivation to exceed the top goal.
• A Linear System—In this method, the amount of bonus received is in proportion to the exact degree of performance achieved. Even small increments in performance improvement get some sort of reward.
  • Pros
    • There is no "loss" to the employee of just missing a goal level.
    • There is even less temptation to take risky short cuts or cheat than in the multiple goals method.
    • There is no upper limit on the bonus.
  • Cons
    • Some people would not be motivated to "stretch".
    • Some companies would have trouble compensating everyone for their achievements.
    • A meaningful linear system may be hard to design for some jobs, making certain employee perceive the system as unfair.
• Motivate by Goals but Pay for Performance—In this method, employees are given specific and challenging goals, but the level of bonus for the actual results is not set in advance. The actual bonus takes into consideration the full context of the situation in which the employee performed.
  • Pros
    • The flexibility of the method takes into consideration unanticipated events that may affect performance.
    • The comprehensiveness of the method looks at all relevant factors.
  • Cons
    • The boss must be knowledgeable about the full context in which the employee is performing.
    • The boss must be objective to minimize favoritism or bias.

The author concludes by providing a four-step plan to set up effective bonus systems. In Step 1, determine exactly what you want people to do or accomplish. In Step 2, set clear and challenging goals for desired outcomes. In Step 3, determine which goals will need to be integrated with other parts of the organization. In Step 4, pick the appropriate type of bonus, with full awareness of the pros and cons.

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