Turning any ship around is never easy, but giving employees the right motivation can be a key part in the process. When Greg Brenneman was named President and COO of Continental Airlines a decade ago, the company was facing its third bankruptcy and ranked at or near the bottom in customer satisfaction. Brenneman’s management team introduced a new incentive program.

The team focused on tracking and improving company performance, set targets for workers, and provided meaningful incentives for meeting them. Employees were promised a $65 bonus for every month Continental ranked in the top five for on-time arrivals and departures, and $100 if it came in first. Within months, the airline was transformed into one of the industry’s best on-time performers. And while Continental has faced new challenges in the ensuing years, it still ranks fourth overall for on-time performance over the 20-plus years covered by the Bureau of Transportation Statistics’ database.

Continental Airlines’ scenario notwithstanding, according to Pricewaterhouse Coopers, three out of four organizational change programs fail. A critical element in change-management programs—and perhaps a key reason so many fall short—is conflict around the understanding of what the new business will be and how to reward the people building it, says Sarah Kaplan, assistant professor of management at the University of Pennsylvania’s Wharton School. She and Rebecca Henderson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, have focused on incentives as a causal agent in the development of these conflicts.

“Changing an organization’s incentive system is not a straightforward activity, because it’s not always clear just what’s going to replace the existing system,” Kaplan says.

What Makes an Incentive Plan Work?
According to a U.K. study on rewarding performance in government networks prepared by a team of top private-sector specialists, an incentive plan can only operate successfully within a system of performance management with five specific characteristics:

• Management must have the skills, experience, and delegated authority to implement the plan.
• The overall compensation structure must be flexible and motivational.
• Management information systems must measure performance quickly and accurately.
• The plan must permit the benefits of achievement to be shared with employees.
• Performance targets must reinforce the psychological motivation of employees and be clearly communicated.

The longer a company has been in business and using an established incentive system, the greater employee resistance to changing that system is likely to be, Kaplan says. “Devising a new incentive plan is only part of the challenge. Employers first have to break the set of promises embodied in the old plan,” she says.

The challenges are even more complex for what Kaplan and Henderson describe as “ambidextrous organizations,” in which one part of the organization continues to operate as it has in the past, while another attempts to function in a more entrepreneurial manner.

In creating a new incentive program model, organizations need to focus on two things, the researchers say. First, employee performance is the result of both cognitive processes and incentives. Employees do certain things because they are taught or come to believe that is the proper way to do them (cognitive) and because they believe it is in their best interest and/or will trigger a reward (incentive).

Second, barriers to the acceptance of change within an organization also are both cognitive and incentive-related. People resist change because they don’t believe it will work and/or because they think they won’t be rewarded for changing.

According to Kaplan, the key to creating a successful new incentive program is acknowledging the interrelatedness of incentives and cognitive frames, and relying on managers to reshape the links that exist between them.