POWERFUL ROLE OF FINANCIAL INCENTIVE IN TRANSFORMATION

The success of enterprise transformation requires a true commitment to understand the organizational needs, leadership, and workforce. Performance metrics and financial incentives are crucial elements of the enterprise transformation strategy. Performance metrics measure success across critical functional areas, while financial incentives drive workforce engagement in the transformation initiatives.

Why are financial incentives significant for transformation?

The employees are crucial in achieving the transformation goals, and without their involvement, success will be elusive. Financial incentives are essential to motivate employees to overcome psychological barriers to adopt change and become part of the drive to improve business and financial performance through transformation. Financial incentives ensure higher employee engagement. 

According to McKinsey's research, companies that implemented financial incentives tied to transformation outcomes achieved a five hundred percent increase in total shareholder returns compared to companies without similar programs.

How to implement financial incentives in transformation?

Financial incentives are helpful to drive focus and efforts on issues that are an organization's priority. Some critical elements for the success of transformation-incentive programs are

Determining performance threshold

The first step is reaching an agreement on the threshold for awarding the financial incentives. This is tricky, especially in a transformation program constituted by multiple initiatives. The definition of performance criteria should not be too broad that employees cannot relate to. The performance threshold should be a judicious mix of organization and unit-level performance criteria. 

Use the incentives program to encourage broader participation.

Transformation incentive plans should not be limited to the top senior executives leading the initiatives. The incentive plan should be democratised to include employees in the middle and lower rung of the organization for greater participation and involvement in the implementation of the transformation agenda. A transformational initiative will be truly successful when all the participants are rewarded rather than just leaders. 

Transparent and clear incentive programs 

The program should have clarity about metrics used to reward individual contributions for equal participation in the transformation initiatives. There should be transparency without any ambiguous terms and conditions.

Organizational culture should influence the program.

No one size fits all approach can be adopted for designing transformation-incentive programs. Organizations with a long history and culture can use financial and non-financial incentives to drive the transformation. A relatively young organization might need more significant financial incentives for higher workforce engagement. 

What is the impact of financial incentives on transformations?

Drive performance

The most visible benefit of a transformation-incentive plan is improved business performance, translating into higher revenue and profitability on a sustained basis.

In 2017, J Crew began a transformation initiative to improve the company's business performance and adopted the Transformation Incentive Plan (TIP) to reward employees for their contribution to the initiative. TIP is an addition to Annual Incentive Plan (AIP) and is funded from a percentage of the value realized from the transformation initiative.

Retention of high performers

The transformation incentive program can become a tool for employee retention. It enables organizations to provide a renewed sense of purpose to their high performers and retain them. 

In a Nutshell

The objective of transformation initiatives is to improve business performance, for which workforce engagement is essential. Companies that use financial incentives have higher employee involvement, improving the chances of their transformation's success translating into higher financial gains. Besides, transformation incentive plans serve as a talent retention tool for organizations. 

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