More on the design of rewards....

Rewards encourage people to care about the metrics. Rewards need not be limited to money; they include all the things people find rewarding, such as recognition and appreciation, career-growth opportunities, discretion and influence, and even something as simple as a preferred parking place.

(Note: While leaders should be creative about non-monetary rewards, training opportunities should not be viewed as rewards. Doing so implies that the default is no investment in people unless warranted by exceptional performance. This creates a "Catch 22": poor performers who wish to improve through training but cannot.)

The subsystem of rewards also includes the adverse impacts of poor performance, i.e., fair but firm performance management. If poor performers are tolerated, everybody else will feel demotivated, as if their own performance doesn't matter.

Rewards should focus on individual or small-group performance (based on profession-specific metrics), not on team performance. In a well-aligned organization, there should be no need for team-oriented rewards, since doing what's best for your own entrepreneurship automatically means doing what's best for your customers and building healthy partnerships with your suppliers.

In fact, it's dangerous to reward people for team performance if other feedback loops are telling people not to serve the team. This only masks a more fundamental lack of organizational alignment. If teamwork is a problem, the better approach is to fix these conflicting signals rather than treat the symptoms with team-oriented metrics and rewards.

Clearly, rewards must be tied directly to the metrics which are within people's direct control. And to have maximum impact, rewards should be delivered as quickly as possible after the desirable behaviors occur.