Employee Incentivization: Getting it so wrong is so easy
By James W. Kim
Incentives make society go ‘round. Then why are so many employee incentivization schemes so dumb?
It is a question that has puzzled me throughout my career spanning multiple countries, industries, and company sizes. From my time at LG Life Sciences in Seoul, through my various roles in Singapore, Warsaw, and Beijing, I have seen the same mistakes made over and over again — with remarkable consistency across cultures and geographies.
The Fundamental Disconnect
The root of the problem is surprisingly simple: most employee incentivization schemes are designed by HR departments that have little understanding of the business objectives they’re supposed to support, and approved by executives who delegate the details without ensuring alignment.
The result? You get sales teams incentivized on revenue when the company needs profitability. R&D teams measured on number of projects initiated when the company needs projects completed. Operations teams rewarded for cost reduction when the company needs quality improvement.
This is not a theoretical problem. I have personally witnessed a pharmaceutical company’s sales team push low-margin products aggressively because their commission structure rewarded top-line revenue, while the company was desperately trying to improve margins. The sales team hit their targets. The company nearly went bankrupt.
The Compensation Trap
The most common mistake in employee incentivization is equating incentives with compensation. While money is certainly important — nobody works for free — the research consistently shows that beyond a certain threshold, additional monetary compensation produces diminishing returns in terms of motivation and performance.
Netflix understood this early. Their famous HR policy memo — which became a Silicon Valley legend — articulated a simple principle: pay people top of market, then focus on creating an environment where great work is possible. Remove the uncertainty about compensation, and people can focus on what actually matters.
Amazon took a different but equally instructive approach with their obsessive focus on customer outcomes. When your incentive structure is aligned with genuine customer value creation, the behaviors you want tend to follow naturally.
The Gig Economy Problem
The rise of the gig economy has further complicated the picture. An increasing number of talented professionals prefer the flexibility of contract work over traditional employment. This isn’t laziness — it’s a rational response to the realization that traditional employment packages often represent poor value for highly skilled workers.
When a senior consultant can earn their annual salary equivalent in 6-7 months of independent work, the remaining months become a gift to their employer — a gift that most employers neither recognize nor appreciate. The traditional package of benefits, job security, and career progression rings increasingly hollow in an era of mass layoffs, eroding benefits, and flattened organizational structures.
The Declining Working Population
Compounding this challenge is the demographic reality facing most developed economies: working populations are shrinking. Japan, South Korea, Germany, and increasingly China are grappling with aging populations and declining birth rates. This means that the competition for talent is only going to intensify.
In this environment, cookie-cutter incentivization schemes are not just ineffective — they’re actively counterproductive. When you have more jobs than qualified workers, the power dynamic shifts decisively toward employees. Companies that fail to offer genuinely compelling incentive packages will simply lose their best people.
Getting It Right
So what does good incentivization look like? Here are some principles:
1. Align incentives with actual business objectives. This sounds obvious, but requires genuine dialogue between HR, finance, and operational leadership. Incentive structures should be reviewed quarterly, not annually.
2. Individualize where possible. Different people are motivated by different things. Some want money. Some want autonomy. Some want learning opportunities. Some want flexible hours. A one-size-fits-all approach wastes resources and fails to motivate.
3. Make the connection between effort and reward transparent. The worst incentive schemes are those where the connection between what an employee does and what they receive is opaque or lagging. If someone has to wait 18 months and decode a complex formula to understand their bonus, the incentive effect is essentially zero.
4. Don’t punish risk-taking. Innovation requires experimentation, and experimentation means failure. If your incentive structure penalizes failure, you will get a workforce that never tries anything new. This is how large companies become stagnant.
5. Recognize that retention is not the same as engagement. Many incentive schemes focus on retention — keeping bodies in seats — rather than engagement. Golden handcuffs keep people around, but they don’t make those people productive or innovative. In fact, they often breed resentment.
The companies that get this right will have an enormous competitive advantage in the coming decades. The companies that don’t will find themselves perpetually understaffed, with a revolving door of mediocre talent, wondering why their competitors keep pulling ahead.
Getting employee incentivization right is not easy. But getting it wrong is remarkably easy — and the consequences are far more severe than most executives realize.