Developing an

incentive scheme for

a project
inShare

ARTICLE Team Building , Skill Development December 1983

Project Management Quarterly
By Globerson, Shlomo
How to cite this article:
Globerson, S. (1983). Developing an incentive scheme for a project. Project Management
Quarterly, 14(4), 34–41.

Tel Aviv University

Introduction
Motivational needs of individuals who work in project environments may differ
from those of individuals working in different organizational environments;
however, both managers and employees who are involved with research and
development feel that incentive schemes should be developed for them as
well (See references [3] [9] [18]). Renwick and Lawler [20] found that lack of
proper pay was ranked as a chief cause for dissatisfaction at work. This
finding emphasizes that payment level is a significant factor affecting the
amount and quality of employees’ efforts. The desire to earn more money may
come from economic needs or from the individual equating monetary reward
with the organization's recognition of his ability.
It is also well-known that employees can increase their productivity
significantly if they receive a fair share of the added output. This was verified
by a survey administered by Fein [5], who reported the average level of
productivity jumped from 86.4 percent to 123.5 percent; that is, an increase of
42.9 percent was witnessed when an incentive scheme was installed. This
indicates that although incentive schemes are not the only means of
improving performance, they obviously can have a significant impact. It is
important, however, to point out that most of the organizations that
participated in Fein's survey were probably production departments in
manufacturing and service organizations, as compared to high technology,
research and development, and project oriented organizations.
Very few cases of using an incentive scheme in a project environment have
been published, the one reported by Parkinson [19] being an exception.
The next section reviews the major stages in developing a wage incentive
scheme; a definition of each stage is followed by a general discussion of
implementation problems, ending with an implementation analysis in a project
environment.

Stages in Developing an Incentive Scheme

Development of any incentive scheme requires the following stages:
1. Generating a relevant list of PCs (PCs = Performance Criteria, PC =
Performance Criterion)
2. Choosing the preferred set
3. Measuring present performance
4. Assigning standards to the chosen criteria
5. Formulating the incentive equation
The following raises and discusses methodological issues in the
implementation of the stages, as well as possible ways to overcome some of
the methodological difficulties.
1. Generating a Relevant List
Since we are concerned with evaluating the performance of an organization,
many PCs may be considered relevant. Examples of such criteria are cost per
item, percent of defects, and turnover rate. Theoretically, one may argue that
a long list of possible PCs may be generated for an organization, but for
practical purposes we may find it difficult to generate a list of more than a few
dozen relevant criteria.
An important issue in developing output oriented PCs is the generation of a
PCs hierarchical system. First, this entails designing PCs for each elementary
unit according to the Work Breakdown Structure (WBS) of the project. PCs
are next generated at the upper levels by integrating some of these lower
level units. However, as Martin [16] points out, it is important to make sure
that there is only one set of a PCs systems which are interrelated one to the
other without unnecessary duplication.
Since projects are generally one-time operations, they do not lend themselves
as readily to the development of a PCs system. Woodward [23] identifies two
complementary approaches which may be used for performance evaluation in
this context; one is concerned with output and the other with the process.
The output oriented approach is based on measurement, using quantifiable
inputs, outputs, and their derivatives. Typically, PCs belonging to this category
relate to time, cost, and the quality of the project. Each PC is evaluated
through comparison of the actual value to a designated standard, e.g., actual
completion time (or cost) to the planned time, and the project's actual
technological properties to its planned specifications. The importance of
following the above PCs can be demonstrated by Baker and Fisher [1] who
note that project expenditures that double the original budget are a common
event or Goff [11], who supports this claim and stresses that many
government projects reach expenditures of three times the original budget.
The process oriented approach stresses the importance and influence of the
process throughout the project life cycle, and its successful completion. The
work process refers to the activities and equipment required to convert input
into outputs, taking into consideration the required resources, and the order
and methods of performing the activities.
The characteristics of the process oriented approach depend to a large extent
on behavioral dimemsions. Hence, performance assessment may be
concentrated on an employee's evaluation procedure as it relates to attributes
such as attitude, ability to communicate, accuracy, and creativity. Kerzner [14]
presents different forms with possible attributes applicable to employees
working in a project environment.
To sum up this section, we may conclude that output and process oriented
PCs are both needed for a proper evaluation of the project.
2. Choosing the Preferred Set
Since a long list of PCs can be generated, questions arise as to how many
PCs to include in the scheme, and how to choose the PCs to be included.
There is no magic number of PCs that a scheme should contain; however,
since each PC creates some workload, it is common practice to avoid
introducing too many. For example, Galinka, Globerson and Oron [7] found,
among organizations using incentive schemes, a maximum of seven PCs
being used, with three the most frequent number cited.
Although any selection process is based on the assumption that management
has implicit knowledge of the best PCs to be selected, it is still beneficial to
call management's attention to several selection guidelines. The following
guidelines are based on the author's experience and on previous studies [2]
[4] [13], and are relevant to project environments:
• PCs must be derived from the company's objectives.
• PCs make possible the comparison to organizations that are in the same
business.
• The purposes of the PCs must be clear.
• Data collection and calculation methods of the PCs must be clearly defined.
• Ratio PCs are preferred to absolute ones.
• PCs should be under the control of the evaluated organizational unit.
• PCs should be selected through discussion with the people involved.
• Objective PCs are preferred to subjective ones.
• Selected PCs must include productivity PCs (ratio of output to input), quality
(nature of output), and process oriented PCs.
Although objective PCs are preferred to subjective ones, there is no choice
but to use subjective PCs if the process oriented approach is desired. Results
of the case study presented later in this article confirm that employees prefer
to have a subjective PCs system to no PCs system at all. More relevant
subjective PCs may be related to the activities which have to be performed
throughout the project life cycle; Roberts and Fusfeld [21] identify six typical
innovation project stages, each of which needs different behavioral attributes
in order to be completed successfully. The six stages are: 1) pre-project; 2)
project possibilities; 3) project initiation; 4) project execution; 5) project
outcome evaluation; and 6) project transfer. These six stages need
direct inputs from the following five critical behavioral functions: (1) idea
generating; (2) entrepreneuring; (3) project leading and coordinating; (4)
gatekeeping (information gathering and channeling); and (5) coaching less
experienced personnel. These functions represent the various roles that must
be carried out for the successful completion of innovation projects. It is
important to recognize the functions among the different project stages, and to
identify some relevant measures for each of them.
3. Measuring Present Performance
Present performance of each of the chosen PCs must be measured before
standards, or satisfactory levels of performance, can be established. There
are two reasons for this. First, if a PC proves to be difficult to measure either
an alternative means of measuring must be employed or a more easily
measured PC must be used. Second, a knowledge of the present level of
performance for each of the chosen PCs must be identified, since this
information has to support the decision concerning the desired standard for
each criterion.
Although a proper performance measurement system is a very important
managerial tool for effective project management, an organization must avoid
performance measurement systems which are too detailed. Gerloff [8], who
analyzed 108 projects, concluded that too tight and detailed project control
may not be effective, and may actually lead to undesired changes in the
project's objective.
Since process related PCs involve human attributes, there is a need to
develop proper employee evalution routines and forms. Kerzner [14] points
out that a major difficulty in evaluating employees working in a project
environment is due to the fact that they usually have several bosses,
depending on the number of projects in which they are involved. An employee
evaluation usually involves a discussion between the supervisor and the
subordinate, together with a written summary which is referred to by the
name, “the evaluation form.” Examples of various types of project oriented
evaluation forms are presented by Kerzner [14].
4. Assigning Standards to the Chosen Criteria
Standards are used to indicate the satisfactory level of performance, above
which an incentive is paid. An appropriate standard has to be higher than the
present average performance, but still be attainable if it is to encourage
continuous improvement. Also, there must be simple and logical techniques
by which standards can be revised.
Possible techniques for assigning standards to PCs include:
• Work measurement techniques: methods such as time study, predetermined
time standards, and work sampling (See Mundel [17]). These techniques are
used for determining standards for only one PC, mainly efficiency as
expressed by the ratio of assigned time to actual time.
• Analysis of past organizational performance: data for each PC may show
deviations of the value of the PC, and also trends that can be depicted by a
learning curve. Based on this analysis a relevant standard may be assigned.
• Management by objectives approach: assignment of standards or objectives
is based on different considerations such as needs, abilities, and availability of
resources. The specified objectives are usually a result of a group analysis
and discussion.
• Data comparison: between organizations with similar characteristics such as
type of business, technology, or environment (e.g., insurance companies,
textile factories). An organization may assign standards based on its own
standing as compared to other organizations.
• Economic considerations: profit may be obtained if expenses do not exceed
a certain level. This level (or levels), if the operation is broken down according
to needed resources (manpower, energy, material, etc.), may be considered a
standard or standards.
• Legal considerations: the law may state required performance levels for
specific PCs. In this case, the standards have to meet those stated by law.
Since subjective estimates are probably very common in project standard
setting, it is important to investigate the discrepancy between the standards as
they were set by the people involved, and the actual performance level. A
survey conducted by Baker and Fisher [1] shows that among 450 project
budget planners, the main reasons for mistaken estimates of project cost are
insufficient data, vague definition of project objectives, and lack of
experienced personnel.
Another issue which may complicate the standard setting in a project
environment is the frequent revisions which may occur in design or
scheduling, and result in different time and cost structures. Standards have to
be revised accordingly, and it becomes difficult to evaluate the performance to
date on the basis of the previously valid standards. As standards for the
output oriented PCs tended to be dynamic, and therefore harder to deal with,
they should be supported by process oriented PCs which use behavioral
attributes. The standards for the behavioral attributes may be based either on
the average of all the employees, or on the previous performance of the
evaluated employee.
5. Formulating the Incentive Equation
The incentive, which is the value added to the base salary, is a function of the
value of all the PCs and their assigned standards. A very important part of
incentive scheme design is the formulation of the equation used to calculate
the incentive. Some examples of equations can be found in Globerson [10]
and Fein [6].
The following is a simple example of an incentive scheme based on two PCs:

where percent of incentive or the value added to the base salary

INC:

Eff: the efficiency, which is the ratio of assigned time to actual time multiplied by 100

R: the response time factor expressed as a function of the project length. A possible function is
described in Figure 1

Figure 1
Response Time Factor R as a Function of Project Length (months)

To generate the response time factor function, management has to answer

the following questions:
• What is the critical project length (PL1) above which the incentive achieved
by the efficiency factor has to be reduced? For example, let us assume that
Eff = 120. The bonus, based only on efficiency, is 120 – 100 = 20%. If
management decided that PL1 = 1.0, and the actual project length was longer
than 1.0 month, the bonus paid would be less than 20%.
• Is management willing to pay more for faster completion than PL,? In this
example, management decided not to pay an additional bonus for completing
the project before PL1.
• What is the critical project length (PL2) after which a bonus will not be paid
despite high efficiency? In this example, if PL2 = 6.0 months and the actual
length is 7.5, nothing would be paid even though a 20% bonus would be
indicated based on efficiency alone.
• What reduction function should be used between the point PL, at which there
is no penalty, and PL2 at which there is maximum penalty (no bonus paid)?
This function may be a linear or nonlinear function.
The example described above is relevant to output oriented PCs. The next
section describes a case study of a process oriented incentive scheme based
on the results of employees’ evaluation. A complete description of the study
may be found in Shapira and Globerson [22],

The Case Study

This section describes an existing individual incentive scheme, which is used
by a project oriented research and development organization which develops
electromechanical products. The organization employs about 500 persons,
including scientists, engineers, technicians, and administrative staff. The
incentive scheme is based on the results of employees’ evaluation with regard
to chosen behavioral attributes. The scheme includes two subschemes, one
for employees and one for managers, with a common part. Only the
employees’ subscheme is reported in this section. A form (See Figure 2) is
used for documenting the evaluation results.
Group 1 of PC. There are five general weighted performance criteria (weight
is given in brackets):
1. Discipline at work (15)
2. Professional knowledge relevant to the last period's projects (30)
3. Human relations (15)
4. Production and quality of performance (20)
5. Dedication at work and responsibility (20)
A relative weight is assigned to each criterion so that the total weight equals
100. The weights of the criteria were assigned by a management committee,
and the results were approved by the employees. Assignment of weights to
the criteria was based on relative importance and the potential impact that
they may have on the success of performing the job under evaluation.
Each criterion consists of 4 subcriteria (As can be seen in Figure 2). A 7-point
scale for each sub-criterion is used for evaluation, where 4 is the lowest grade
and 10 is the highest. The meaning of each grade is defined in Figure 2. The
grade is assigned by the manager of the evaluated person.
The following equation is used for calculating the Group 1 efficiency factor for
each employee k:

where

i: criterion number

j: subcriterion number

PC(k, i, j): grade of employee k on subcriterion j within crtierion i

W(i): relative weight of criterion i (Wi= 100)

Since each criterion may obtain a maximum grade of 40 points (4 subcriteria

with a maximum of 10 points each), the value of the denominator is 40. Thus,
GlEFF(k) will be within the range

For example, the numerical value of the efficiency factor of equation (2), when
one uses the values circled in Figure 2, is:
(Note that the values circled represent the performance of a specific
employee.)

Figure 2
Evaluation Form
Group 1 of Performance Criteria (for employees and managers)
Employee's Incentive Scheme. The following are the steps in calculating the
employee's incentive:
a. Calculate GlEFF(k) for employee k by using equation (2).
b. Evaluate the employee's work load and assign a load factor (LF); See
Figure 2.
c. Calculate the efficiency of employee k, EFF(k), by using the following
equation:

Continuing the previous numerical example, in which G1EFF = 72.875, if the

employee load factor is LF = 1.1, then

d. Calculate the bonus, BONUS (k), for employee k by using the following
formula:

where

M: number of employees in that department

CAKE: the amount of money assigned for bonuses in that department

In order to find the employee's bonus, the EFF(i) for all the employees in that
department has to be calculated, and the amount of the “CAKE” to be divided
among all the employees has to be determined. For example, if CAKE =
$15,000 and there are 6 employees in the department with EFF(i) as follows,

EFF(l) = 115 EFF(2) = 120 EFF(3) = 80

EFF (4) = 60 EFF(5) = 95 EFF(6) = 110

then the bonus for employee 3 is:

After using the incentive scheme for two years, the company decided to
evaluate the impact on its employees and managers. The following
conclusions were derived from questionnaires that the participants were
requested to complete.
1. Participants believe that the scheme increases the manager's power
significantly.
2. Although a majority of both employees and managers are in favor of
continuing the scheme, the managers’ view is more favorable than the
employees’. A possible explanation is that the incentive scheme benefits
managers more than employees; managers and employees both get bonuses,
but managers also have power since they decide on the reward level.
3. The evaluation form is considered to be a reliable source of information and
it reflects actual achievements.
To conclude the case study it may be stated that it is possible to develop an
incentive scheme even for research and development projects which may be
considered more complicated then other types of projects, such as
construction projects. The case study also points out that in spite of all the
problems raised by the use of a subjective evaluation system, people prefer to
work with an incentive scheme which is seriously presented and implemented,
rather than work without such a scheme. Provided there is any kind of periodic
evaluation procedure in the organization, an incentive scheme can be tied to
it. Connecting the incentive scheme to the evaluation procedure assures,
among other things, that the evaluation will be taken seriously by both
employees and managers with all the consequences attached to it, such as
specific feedback to the employee concerning potential areas for
improvement.
Finally, a serious drawback is the difficulty that the company faces if it wants
to evaluate the impact of introducing the scheme. It is difficult to compare the
“before” and “after,” because the complete nature of the work changes
continuously.

Conclusions
Wage incentive schemes can be applied to organizations dealing with
nonrepetitive activities such as projects, but it remains difficult to evaluate the
impact of such a scheme on performance. This is especially true if the PCs
are derived only from the process oriented approach. Further research is
needed in the area of investigating the relationship between behavioral
patterns of employees involved in a project environment, and the level of
performance expressed in input-output terms. Questions such as, “Is there a
significant correlation between ‘positive’ changes in behavioral attributes and
successful completion of the project?” have to be answered before managers
can be convinced that the efforts are justified. In spite of the lack of evidence
regarding the amount of improvement that a company can look forward to
after introducing an incentive scheme, it is obvious that such a scheme
increases the motivation of the employee to use a greater part of his potential
for the company's needs. Consequently, a company may find that the benefits
reaped by introducing a wage incentive scheme far outweigh any increases
incurred in salary costs.