Incentive plans, by definition, are supposed to affect people's behavior on the job, day in and day out.

If people know their job performance is linked to an incentive like a quarterly bonus, they'll likely develop new ways to produce better results. They'll naturally innovate to become more efficient--finding ways to finish work faster or improve quality without sacrificing cost. They'll seek new approaches to better serve customers. In short, engaged employees live in a world of cause and effect. They understand how their actions contribute to the success of the entire venture.

• Define the right group for the plan. In smaller companies, the right group is usually the whole staff. In larger ones, it could be a branch or a functional unit, but be sure it includes everyone, support staff as well as front-line workers. Remember that business is a team sport.
• Draft up a plan. A handy rule of thumb is to distribute one-third of the incremental gains to employees in the form of a bonus while retaining two-thirds for the company.
• Spell out the details. How much do we get and when do we get it?