State policy makers and regulators need to consider the costs and potential problems when the shareholders of energy utilities are allowed to earn financial rewards as incentives for achieving energy efficiency goals. The basic premise of a shareholder incentive mechanism is that regulated utilities will only excel at delivering energy efficiency measures if they have a financial incentive to do so, because reducing energy use is not otherwise in their best interest. There are two types of incentives in California's energy efficiency programs: those given to customers to encourage adoption of energy efficient measures and those given to utility shareholders when the energy efficiency program meets a percentage of the state's targets for energy saving goals. In 2007, the California Public Utilities Commission (CPUC) adopted a new incentive mechanism known as the Risk Reward Incentive Mechanism (RRIM), which will increase the cost of California's $2 billion energy efficiency program by up to $450 million. These financial incentives are in addition to full program cost recovery. This paper provides background relative to the current mechanism, describes its impact to date, discusses how it is evolving, and highlights specific attributes of California's mechanism that could be improved by other states who are considering similar financial incentive programs. Alternatives to California's "shared savings" incentive mechanism are also provided.