Agla, wonderful post!
I've heard it said and repeat it often - "Incent the behavior you want."
My uttering that is usually followed by "I haven't figured out how to do that yet. Have you?"
It sounds like your employer is in the enviable position of having an employee who takes ownership in what he's doing - and that is a rare commodity, no matter what industry, or what level we're talking about. For a person like that, as long as wage/salary is at the level that person expects, they have no need for any other carrots to pull them forward. Doing a good job is the reward. Helping build a better company is the reward. My wife is like that.
However, I know that many skilled employees do not have that internal drive to do well for the sake of doing well. In those cases I think incentives are needed, but man, they are tricky, slippery, quadruple-edged swords. You mentioned what can happen when incentive plans are deployed.
I'll share a quick, true story about a mining company in Michigan's Upper Peninsula. I don't recall the name of the mining company, but I can verify the truth of the story - my grandfather was a miner in the Copper Country at the company in question, many, many years ago.
This mining company wanted to increase ore production out of their mines, and so they thought they'd try an incentive plan. The incentive was simple and effective: For every X cars or ore you produce over a certain amount in a given period, each man gets $Y.
The plan began to work beautifully - the men, now focused on the same goal as the rest of the company, had figured out that drilling shallower holes and putting a smaller charge in the hole would result in less destruction and more ore. Production went up 5%. Then 10%. Then 20%. The mining company was making a killing, and everyone was happy.
But the mgt of the company was starting to look at the bonus dollars going out and thought "Hey, those miners are making too much money now. We need to change the incentives so that they don't take home quite as much. They're making as much as some of us!!"
So mgt took a look at production times, materials used, equipment and the rest, and saw that very little dynamite was being used, and that a given amount of dynamite was producing a good deal of ore. So they decided to change the incentive to be based on dynamite usage. Now, for every X sticks of dynamite used, each man gets $Y.
I probably don't need to tell you what happened, but I will anyway. Now every hole was drilled as deep as it could be drilled, and dynamite was packed full into every hole, blasting everything in sight to smithereens. Ore, now broken into pieces small enough you'd have to pan for them, was much more difficult to recover, so ore production dropped like a stone.
Not surprisingly, the miners were enjoying their highest levels of incentive yet. The incentive plans were soon eliminated. Morale soared.
Down the road 10-20 years, enough corporate bungles saw the company go bankrupt.
This was a simple example, but all kinds of derivations of that can happen when incentives are used - I've been working on a plan myself off and on for about 2 years, and hope to deploy it, as soon as I feel it is 'dynamite proof'.
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