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.)

"Rewards" also includes negative rewards, the adverse consequences of poor performance -- 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 job-specific metrics), not on cross-boundary team performance. In a well-aligned organization, there should be no need for team-oriented rewards, since doing what's best for yourself 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 cross-boundary team performance if other signals are causing 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.

Rewards must be tied directly to the metrics which are within people's direct control. Anything else creates a helpless victim who doesn't care about the metric because he/she can't affect it; who doesn't learn from rewards and punishments since they seem arbitrary and unrelated to his/her behaviors; and who lives in a climate of fear where random punishments can occur.

And to have maximum impact, rewards should be delivered as quickly as possible after the behaviors occur.

It's far better for a reward system to be comprehensive than to be precise. Rewards based on anything less than a comprehensive system of metrics will induce suboptimization -- winning at the chosen metrics while neglecting other critical goals.

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