Why incentives fail and how to fix them

Incentives are supposed to inspire performance, but in reality, many companies find the opposite. 

Without careful planning, incentives can drive short-termism, unhealthy competition, and behaviours that run counter to strategy.

The uncomfortable truth? A badly thought-out incentive plan can undermine culture, productivity, and progress.

In this article, we’ll cover the red flags that show your incentive plan isn’t working as planned, and share some practical steps to realign incentives without losing trust

Signs your incentive plan is broken

Most leaders don’t spot incentive problems until the damage shows up in performance reviews or exit interviews. 

This is too late, so it’s vital to look out for some common warning signs:

• Gaming the system. Employees manipulate metrics to maximise rewards, such as hitting sales targets with unsustainable discounts.
• Short-termism. People focus on the next bonus cycle instead of building long-term value. Think rushed end-of-quarter deals that harm customer experience.
• Silo thinking. Teams prioritise their own KPIs over collaboration, even when the business needs cross-functional effort.
• Culture clashes. Overly individualised incentives can kill teamwork, while blanket rewards can demotivate high performers.

If behaviour looks busy but undermines long-term goals, your incentives are working against you.

The missing link between strategy and rewards

A healthy incentive system follows a simple pattern, wherein strategy drives desired behaviour, which is then reinforced through rewards. 

Where it often breaks down:

• Incentives reward outputs (e.g. number of calls made) instead of outcomes (e.g. customer retention).
• Employees change behaviour to chase the reward, even if it undermines strategy.
• Reward mismatch. If incentives feel unfair or inconsistent, trust is undermined.

McKinsey found that only 52% of executives think their incentive programmes align with company goals, and just 32% believe they drive the right behaviours .

If strategy and rewards aren’t connected, you’ll fuel the wrong behaviours.

Incentives must be part of your operating system

Too many leaders bolt on incentives as a quick fix to hit targets, but incentives should be an add-on. 

Instead, incentives should become a core part of how your company defines success.

When incentives aren’t integrated, contradictions emerge. The CEO says long-term growth is the priority, but sales staff are rewarded for short-term volume. 

Values posters praise collaboration, but bonuses go only to individuals.

By contrast, integrated incentives create a reinforcing loop in which strategy informs incentives, incentives drive behaviours, and behaviours deliver strategy.

Treat incentives as part of your operating system, not as a side project.

Examples of effective incentive redesign

If incentives aren’t working as intended, then it’s time to make a few changes. 

Many companies have torn up their old incentive playbooks and rebuilt them around outcomes that matter. 

Their results prove that when incentives are redesigned with strategy in mind, culture and performance both improve.

Here are some examples: 

• HubSpot ditched traditional sales commissions, instead paying salaries plus bonuses tied to customer retention and satisfaction. The result was lower churn and a focus on quality over volume.
• Atlassian shifted from individual metrics to team-based rewards for engineering, reducing siloed competition and boosting collaboration.
• Microsoft replaced stack ranking (rewarding only the top tier) with a growth and collaboration framework, shifting emphasis from competition to collective success.
• Southwest Airlines uses profit-sharing to link rewards directly to company-wide success, creating alignment between staff and financial performance.

Why employee share schemes work where others fail

Most traditional incentives focus on the next quarter. Share schemes, by contrast, create alignment for the long haul.

Here’s why they’re powerful:

• Shared ownership. Employees think and act like owners when they have skin in the game. This builds accountability beyond the next payday.
• Strategic alignment. Rewards grow in value only if the company succeeds. Unlike bonuses tied to narrow KPIs, share schemes are directly linked to long-term performance.
• Retention and loyalty. Vesting schedules encourage employees to stay, reducing churn and saving on recruitment costs. Research shows that equity incentives are a key factor in retention, especially in startups. 
• Cultural signal. Offering share schemes build a culture of shared purpose, which helps to reinforce trust and collaboration.

Employee share schemes align incentives with strategy better than almost any other tool, making them a cornerstone of modern incentive design.

Final thoughts

Incentives shape behaviour whether you intend them to or not. Poorly designed plans breed short-termism and dysfunction. Well-designed ones act as a force multiplier for culture and strategy.

The most effective incentives aren’t quick fixes. They’re long-term levers. And employee share schemes are one of the best tools for aligning growth, motivation, and loyalty.

If you’re rethinking how to use incentives to power your business, Vestd can help. We specialise in employee share schemes that align founders, leaders, and teams for the long run. Book a call to find out more here.