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What are employee incentives?
Incentives are rewards and techniques that are used to motivate employees to encourage certain behaviours that are beneficial to the businesses.
Importantly, incentives are forward-looking and are expected to be received once set targets are achieved or the desired action is performed. ¹
The key incentive types are identified as financial incentives and non-financial incentives.
Financial incentives are the monetary rewards usually offered by businesses to employees once they achieve the set targets or goals.
These incentives include:
Piece rate system,
Commissions,
Salary schemes,
Performance-related pay,
Profit-sharing.
Non-financial incentives are aimed at improving employees’ performance by offering them non-monetary motivational methods.
These incentives can come in the form of giving employees more power, praise and making their work more interesting.
The key non-financial incentives include:
Job enlargement (Job rotation, job enrichment)
Empowering employees
Working in teams
Financial incentives
Financial incentives are monetary compensations that are given to employees when they achieve or exceed the company’s targets. Financial incentives are usually given to employees who contribute to increasing the company’s profit.
Financial incentives include:
Piece rate system
The piece-rate system is used to motivate workers by paying them per quantity (units) produced.
The concept is as follows: the more the workers produce, the more pay they are going to receive.
| Advantages | Disadvantages |
| An overall increase in production as employees will be motivated by this system to maximise their efficiency, as the more they produce the more payment they will receive. | Employees may be more concerned about quantity rather than quality. This may result in goods being produced at a lower quality which can result in a loss of customers. |
| Less supervision is needed as employees will be concentrated on production efficiency. | According to Herzberg's motivation theory, this method does not necessarily increase the employee’s motivation towards work. As it only changes employees’ performance temporary. |
| Output may only increase during seasons when employees need more money, such as at Christmas, rather than constantly throughout the year. | |
| Employees may not wish to go on the job training or development programs as that will prevent them from increasing production which will result in a loss of income. |
Commission
This incentive is typically given in addition to or instead of a salary to sales employees depending on the value of sales produced. Commission comes in two rates:
Flat rate – paid to employees at the fixed percentage rate according to the sold product’s or service’s value.
Ramped – The rate of commissions increases once certain sales levels are reached.
The commission incentive is put in place to motivate employees to sell more of the company’s products or services.
| Advantages | Disadvantages |
| Allows efficient sales employees to earn a large amount of money. | Can lead to aggressive sales techniques as employees will be motivated to sell as many units as possible. This can result in a loss of customers. |
| Motivates employees to make more sales of company’s goods as the more they sell the more they earn. | The high earnings attained by sales employees may be demotivating for other employees in the organisation who have not received any commission. |
| This method can assist businesses in critical economic situations. As businesses can use commission instead of base pay, which allows them to employ a large number of sales employees inexpensively. | In situations where a commission is paid instead of a salary, employees will not receive a regular income, which causes them to be financially vulnerable. |
Salary schemes
These are usually paid in monthly instalments based on the annual salary rate. The pay rate is set according to a time-based system which includes hourly or weekly wage and annual salary.
| Advantages | Disadvantages |
Salary schemes are easy for employees to understand and workers usually receive a proportion of salary every month. | Salary schemes do not motivate employees to perform above average as they will not receive extra payment in regard to these schemes. |
There are fewer disagreements related to salary payment. | Salary schemes are based on employees’ inputs rather than outputs. Regardless of the amount of effort or work they put in they will receive a base salary rate. |
Referring to Maslow’s hierarchy of needs theory, the salary gives workers stability and gives them motivation. | |
Inexpensive and convenient for companies to implement and allow to make accurate predictions regarding labour costs. |
Performance-related pay (PRP)
Performance-related pay (PRP) is usually used by companies in situations where employees’ performance cannot be measured using a pay per piece system or commission. Employees that perform beyond the set objectives will receive PRP incentives. These are usually paid in terms of bonuses or raising the salary.
| Advantages | Disadvantages |
Improved individual performance, as employees, will be motivated to perform better to receive financial rewards. | Can disturb teamwork as employees may be only focused on achieving individual targets. |
The goals can be linked to cooperative objectives which will make all employees work towards a common organisational goal. | It may be hard to measure performance in regards to achieved output as PRP is generally used in occupations where performance output is hard to measure. |
Reduced supervision is needed as staff will be focused on achieving their goals. This will reduce the company’s costs. | Can create conflict if employees believe that the system is unfair and some workers get more achievable targets. |
Increased staff retention due to the sense of achievement of objective completion. | Depending on the PRP, if the payment is too small it may not motivate employees. |
PRP is usually paid separate from salary and is not guaranteed. Employees will see it as additional pay based on their efforts and will increase their motivation. |
Profit-sharing
This incentive occurs when a company pays a part of the company’s profits to employees in addition to the employees’ salaries. This incentive motivates employees to work harder to make more profit for the company, as the more profit the company makes the more financial benefits employees will receive.
| Advantages | Disadvantages |
| Can encourage more team spirit as everyone shares the business's profit achievements. | The majority of tasks may only earn little profits for the company which will not increase employees’ motivation significantly. |
| Employees may be encouraged to look out for profit-making activities for the business. | Profit-sharing may encourage unfairness as employees who did not contribute to making a lot of the company’s profits will be sharing the same profit gains. |
| Large profit shares can motivate staff to perform more efficiently and effectively in their roles. | Large payouts may negatively impact a company's profits and stakeholders’ dividends. |
| This incentive can reduce employees’ resistance to change as the main focus will be the ways that an organisation can maximise its profits. |
What are non-financial incentives?
Non-financial incentives are also aimed to motivate employees to work harder and achieve the company’s targets. These are motivators that come in a non-monetary form.
Job enlargement, job rotation and job enrichment
Job enlargement means that more duties and tasks are added to the job role. This technique is put in place to increase employees’ engagement in their current roles, become multiskilled and avoid boredom. Job enlargement includes job rotation and job enrichment.
Job rotation - This is the process in which a job is expanded horizontally (also called horizontal extension). During job rotation employees are shifted from one duty to another. This technique aims to make employees multiskilled and have the ability to perform various roles and duties in the company.
Job enrichment – This is the process in which a job is expanded vertically (also known as vertical extension). This technique allows employees to have more authority and accountability in the organisation. The job enrichment technique is aimed for employees to feel more important and fulfilled.
Empowering employees
Empowering employees means giving them power and freedom to make decisions in their day to day work. To empower employees, managers need to trust their employees' skills and abilities, therefore, reducing supervision and avoiding micromanagement. Managers also need to create an environment where employees can contribute and get involved in various tasks and projects as they wish.
Working in teams
Working in teams means that different production systems are organised into various employee groups that are working towards achieving a common goal. Teamwork requires employees to be multi-skilled and have the ability to perform various tasks. This allows absences to be easily covered by co-workers. By accompanying this technique with job enrichment and enlargement employee motivation and teamwork can be improved. This motivation technique can be contrasted with the division of labour in which employees are performing small individual tasks.
What are employee incentive schemes?
Employee incentive schemes are additions to employees base pay and are aimed to motivate employees to contribute to achieving the company’s goals. There are two types of incentive schemes: short term and long term schemes.
Short term incentive schemes are aimed to motivate employees to achieve specific targets with a project or task. These incentive schemes are given to employees within the year.
Recognition schemes are put in place by employers or managers to recognise employees’ work by giving them monetary or non-monetary rewards.
Long term incentive schemes can be two to five-year incentive schemes. These are usually put in place to increase employee loyalty. Examples may include retirement plans or share options.
Professional development schemes are there to motivate employees to stay in the company for the long term.
These schemes will allow employees to develop in their careers and seek to be promoted internally.
Both short and long term schemes can involve financial and non-financial incentives.
Evaluating Incentives
The evaluation of incentives is a process that assesses different techniques and methods that businesses use to assist them in choosing the best-fitted incentive package for their employees.
The packages can be evaluated when looking at different aspects of the business. These aspects include:
Organisational design
The way an organisation is designed impacts the incentive choices in the organisation. The organisational design elements that impact the incentive choices are:
Organisational structure - For example, in a flat organisation using job enrichment to give more authority to employees may be effective. While in a tall organisation good communication between different hierarchical levels may be more motivational.
Employees’ accountability - Having an organisational structure in which employees are accountable for different tasks makes it easier to allocate their rewards compared to organisations where employees have low accountability.
Delegation and empowerment - If a company exercises delegation, it gives power to employees to make decisions. This aligns with the non-financial motivational methods of employee empowerment.
Other influences on choices of rewards
Nature of job and employees - In case the job requires minimum skills, training and runs on a temporary basis, employees will be mostly motivated by monetary incentives. In contrast, for jobs that require skill and creativity, the main motivators will be non-financial incentives that give them direction and opportunities to grow accompanied with some financial incentives.
Business objectives - Employees will be given incentives depending on the nature of business objectives, therefore they should be clearly communicated to employees.
Effective communication - Receiving feedback is a great motivator itself for employees to increase their performance.
Timescale - Incentive choices depend on long-term and short-term organisational needs.
Organisational culture - Organisations select incentives based on culture. For example, non-financial incentives, such as job enlargement, may not work in a hierarchical culture in which work duties are clearly defined.
Size of organisation - The larger the organisation the harder it is to motivate staff, due to formal relationships between various hierarchical levels. Therefore, organising them into teams accompanied by financial and non-financial incentives can work as a motivator.
Economy - Incentive choices depend on the economical situations and companies' budgets. Companies that are focused on survival in difficult economic times may use job insecurity as a motivator to increase productivity.
It is important to choose the right incentive package that will fit the nature of business and will increase employees’ motivation, positively affect their job satisfaction, maximise their productivity and overall lead to better organisational performance.
What are the differences between incentives and benefits?
Both incentives and benefits are crucial to implementing for employees to be motivated to work harder and stay loyal to the company. Although both incentives and benefits are implemented to motivate employees, they have a few differences between them.
Differences between incentives and benefits | |
Incentives | Benefits |
Incentives are not offered to employees at the start of their employment, instead, they are communicated to employees with the set targets. The achievement of the set target will mean that employees will receive rewards. | Benefits are usually implemented on job advertisements and are offered to all employees as soon as they join the company. |
The business may offer both financial and non-financial incentives. Such as:
| Benefits are non-monetary compensations. Such as:
|
Incentives are put in place to motivate employees to work harder, exceed the company's set targets and stay loyal to the organization. | Benefits are put in place to attract talented employees to join the company, as well as to lower staff turnover and keep employees satisfied with the company. |
Overall, we should keep in mind that there are two sorts of incentives: financial which are often provided to employees that contribute towards raising the company's profits and non-financial incentives that are aimed to increase employees motivation towards work. Crucially, incentives work best if they are selected considering not only employees preferences, yet also organisational culture as well as its's goals and objectives.
Incentives for Employees - Key takeaways
- Incentives are the rewards and techniques that are used to motivate employees, to perform or encourage certain behaviours that are beneficial to the business.
- There are two main kinds of incentives, which are: Financial and Non-financial.
- There are five main types of financial incentives. That includes 1) Piece rate system 2) Commissions 3) Salary schemes 4) Performance-related pay 5) Profit-sharing
- There are three main types of non-financial incentives. That includes 1) Job enlargement (Job rotation, job enrichment) 2) Empowering employees 3) Working in teams
- There are two types of employee incentive schemes. This includes 1) Short-term 2) Long-term.
- Evaluation of incentives is the process in which business evaluates different aspects to assist them in choosing the best-fitted incentive package for their employees and business.
- The key differences between incentives and benefits are that incentives are communicated to employees on the job when specific targets are set. While the benefits are mentioned in the job advertisements, employees will receive them as soon as they start their job.
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Frequently Asked Questions about Incentives for Employees
What is the difference between a bribe and an incentive?
A bribe aims to trick or manipulate the employees while an incentive is provided to reinforce desired behaviours.
Different types of long term incentive plans
The long-term incentive plans can be two to five-year incentive schemes aimed at increasing employee loyalty. Two common types of long-term incentive plans are retirement plans and share options.
Difference between bonus and incentive
An incentive is anything that spurs the employees on to work harder at their current job roles or do more of what is asked whereas a bonus is usually monetary reward for achieving a target.
What are examples of incentives?
Some examples of incentives are:
- Share options
- Professional development
- Gifts
- Tuition covers
- Health and wellness
- Bonuses
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