• 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?

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 i...