Of the many components that make up a successful small business, is one of the most important. As a small business owner, you are acutely aware of the value of doing more with less. Not only does this mean stretching budgets, but it also means getting the most out of every employee. If you are lucky, you have a dedicated staff willing to go the extra mile because they are as invested in the success of your small business as you are.

That ideal state is easier to achieve when your small business is really small. But once you start to grow, it’s time to start thinking strategically about ways to maintain high productivity. Instituting a recognition program that rewards desired behavior might seem like the way to go. And it can indeed be effective, often with a relatively small monetary investment. However, recent research shows that poorly implemented awards programs can actually hurt your business by decreasing overall productivity, demotivating your best employees, and creating only moderate, temporary improvement in the laggards.

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A recent Forbes magazine post, How to Demotivate Your Best Employees, summarized a Harvard Business School study that examined an incentive program that rewarded perfect attendance (download the complete study here). The study examined a program at a factory that entered employees in a monthly drawing for a gift card if they had no tardies (being more than five minutes late) and no unexcused absences during the month. An additional drawing was held at the end of six months for perfect attendance during that period. The program was implemented to improve overall productivity, since the assembly line nature of the factory operations meant that lateness or absence by one employee slowed down the entire operation. The operational cost of the program was thought to be minimal, and thus warranted even if productivity gains were slight.

Surprisingly, the authors found that though the program did moderately reduce tardiness, it also caused an increase in absences and an overall decline in productivity. This cost the company approximately $1500 per month. The increased absences were attributed to people “gaming” the system by taking a day off instead of coming in late and thereby maintaining eligibility for the award. The productivity decline was largely due to demotivation of the top-performing employees, as measured prior to the awards program. These top performers — who previously went above and beyond by coming in early (thus working for “free” for a time) and performing at productivity levels above the top-tier pay grade — pulled back just enough to impact overall company productivity but not their own compensation.

The authors posit that the negative impact was a result of top performers being annoyed that incentives were being provided for expected behavior and that those who received the awards were just playing into the program. The authors also suggest that programs rewarding future behavior, as opposed to those recognizing past behavior, are the least effective in fostering long-term organizational change.

So, how can you create an effective incentive program for your small business? Focus on recognizing those people who go the extra mile and use them as examples to motivate the rest of the team. For specific ideas, and examples of what others are doing, read the Bersin research report, The State of Employee Recognition in 2012.

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Lisa Hephner

Lisa Hephner

My name is Lisa, and I’m the Vice President of Knowledge, responsible for the management of corporate, product, competitor, marketplace, legal, and regulatory knowledge, and creation and dissemination of knowledge tools using these assets to PaySimple prospects, customers, employees, and partners.

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