In the last 25 years, the number of companies that offer bonuses, commissions and the like has gone up 50%. Many of them, however, are making the same mistakes – ones that can be avoided.

Sure, pay for performance sounds great in principle, and it’s a concept that’s catching on, but maybe for the wrong reasons.

Consider an example from a Harvard Business School book, What Were They Thinking? Unconventional Wisdom About Management.

An auto dealership, hoping to increase sales, offers increased commissions to its showroom staff. The perfect approach to capitalism, right? Maybe not, since sales dropped right after the commissions were increased.

The reason: Staffers who normally spent time cultivating customers were walking away from the people who said they were “just looking for now.” Research showed that a lot of those people ended up buying a car eventually – at other dealerships with lower commissions.

Now, no one who believes in capitalism is advocating doing away with financial incentives. When used properly, they work and create a culture of celebrating success. But here’s what to watch out for:

Using incentives to change behavior. Offering a slacker (to put it bluntly) a chance to make more money probably isn’t going to change the slacker. You have a better chance of effecting change by using good management.

Stressing numbers over quality. That might work in the short term, but it’s deadly to growth and building a gleaming brand.

Encouraging shortcuts and bad habits. Some people will take the hotdog-making method to figure out how to hit numbers. That is, as with hotdogs, you don’t want to know what went into it. Until you realize those people are using bad ethics or bad practices, and then you have a real problem on your hands, one that money won’t fix.

Tags: , bonuses, commissions, Incentives, sales