Introduction to Incentives
Incentives can be said as a strategy of the company to encourage the employees to work better. With the attraction of the incentives, the employees achieve the organizational goal in the process. The incentives can be in monetary form or non-monetary form. They are nothing but a push to the employees to make them work harder with efficiency.
In this context itself we will delve further on the topic of ‘Incentive’. It includes the true meaning, types of incentives and its usefulness to the employees in our discussion.
Incentive Meaning
An incentive is such a factor that motivates or has a driving force upon someone to do something or behave in a certain way of fulfilling the task. In a company, human decision is affected by two major types of incentives – Intrinsic and Extrinsic Incentives.
Intrinsic incentives motivate a person to do something based on their own self-interest or own desires, this is void of any outside pressure. While, extrinsic incentives are the ones which are motivated by rewards like the increase in payment for achieving a certain result or avoiding the disciplinary actions punishments for not doing any wrong. Or not being criticised is another extrinsic motivation.
Some examples of extrinsic incentives are appreciation letters, monetary bonuses, or even withholding a pay for less work done. While the intrinsic motivation is learning a new language to be able to speak in the foreign countries.
In Personnel Economics, incentives are the most studied area where the HRM team evaluates and analyses the investment scheme done by the firm to its employees.
Financial Incentives
A financial incentive deals with money, which is given by the company, or organization to encourage certain behaviors or actions of the employees. This financial incentive or monetary benefit, motivates certain positive behaviors or actions. A financial incentive may also be a monetary benefit that a company offers its customers or employees.
The term ‘incentive’ may mean also to encourage members to cooperate or to provide information. In a financial incentive, money is offered to encourage actions or behaviors that would not be possible without these incentives. The law dictionary states the exact definition of the term: “A benefit given to customers or companies to get them to do something they normally wouldn’t. It is money offered to get them to try something new. The event might not have happened without the incentive.”
Financial Incentive Programs are also held that encourages great productivity among the employees. Financial Incentives can be in the form of – Stock Options, Profit Sharing, Raises, Bonuses and Commissions
Monetary Incentives
Monetary Incentives are used by employers to motivate employees towards meeting their targets. As Money is the symbol of power, status and respect, monetary incentives play a big role in satisfying the social–security of the employees and physiological needs of a person. But monetary incentives seize to be an incentive when the psychological and security needs are satisfied.
This is to be understood by the business owners that monetary incentives are only the mere motivators that encourage the employees to meet their goals but this does not guarantee quality out-come nor it guarantees loyalty and dedication of work by the employees.
Some Monetary Incentives Are As Follows:
Piece Rates
Pay Rise
Bonuses
Sharing profit
Contests
Incentives for Employees
For an employee incentive is an object, item of value, that is pleasured by him. This incentive is achieved by acting in predetermined actions. Incentive motivates the employees to work and achieve the goals, they follow the direction of the employer for achieving the target and this is pushed by the incentives only. There are four kinds of incentives available for the employees are –
Compensation – Incentives such as raises or bonuses. These are basically the monetary incentives.
Recognition – Popularity at work gained due to appreciation of quality work will feed the ego of an employee.
Rewards – Such as gifts, monetary awards, or items such as gift certificates.
Appreciation – Social parties of work place, family events paid by the company, ice cream socials and sponsored sports team
Incentive Motivation
Being motivated is totally a human behavior, this will depend from employees to employees. This is basically the human behavior that responds to various kinds of motivation. Incentive is a way to keep the employees motivated and through which they can achieve the target of the company.
Interestingly, there is a whole theory about the Incentive Motivation which is known as – Incentive Motivation Theory.
The theory of Incentive Motivation tells that people get motivated with the driving force of the incentives that they receive by working hard in order to achieve their target. Incentive Motivation makes the people believe that if they work in a determined way, they will gain reward while if they work in an opposite way, they will attract punishments.
Thus, Incentives can be both negative and positive as well. It all depends upon the policy of the HR team of the company.
FAQs on Incentives: Meaning and Importance in Business
1. What is an incentive in the context of business studies?
In business studies, an incentive is any reward, financial or non-financial, offered to an employee to stimulate higher performance and motivate them to achieve specific organisational goals. It is a tool used in management to encourage behaviour that goes beyond standard job expectations and contributes directly to the company's success.
2. Why are incentives considered important for a business?
Incentives are crucial for a business because they serve multiple important functions:
Increased Productivity: They directly motivate employees to work harder and more efficiently to earn a reward.
Goal Alignment: They help align employee objectives with the broader goals of the organisation.
Improved Morale: Recognising and rewarding hard work boosts employee morale and job satisfaction.
Attraction and Retention of Talent: A strong incentive program can make a company more attractive to potential hires and help retain top performers.
3. What are the main types of incentives an organisation can offer?
Organisations can offer two primary categories of incentives. The first is based on the nature of the reward: Monetary (Financial) Incentives, which have a direct cash value, and Non-Monetary (Non-Financial) Incentives, which focus on psychological and social needs. The second category is based on the approach: Positive Incentives (rewards for desired actions) and Negative Incentives (penalties for failing to meet targets).
4. What is the difference between monetary and non-monetary incentives?
The key difference lies in the form of the reward. Monetary incentives are financial rewards that can be measured in terms of money, such as bonuses, profit-sharing, commissions, and pay raises. They are designed to satisfy basic physiological and security needs. In contrast, non-monetary incentives are non-cash rewards that satisfy higher-level psychological needs, such as status, recognition, and career growth. Examples include job enrichment, employee recognition programs, and providing more autonomy.
5. Can you provide some examples of non-monetary incentives?
Yes, common examples of effective non-monetary incentives include:
Status and Recognition: Awarding titles like 'Employee of the Month' or providing a better office space.
Career Advancement Opportunity: Offering training and development programs or clear paths for promotion.
Job Enrichment: Giving employees more challenging, creative, and responsible tasks.
Job Security: Providing a stable work environment, which can be a powerful motivator.
Employee Participation: Involving employees in decision-making processes.
6. How do incentives differ from a basic salary or wages?
A basic salary or wage is a fixed compensation an employee receives for fulfilling the fundamental duties of their job role. It is a predictable payment for their time and availability. An incentive, on the other hand, is a variable reward linked directly to performance that exceeds those basic duties. It is not guaranteed and must be earned by achieving specific, pre-defined targets. In essence, salary is payment for the job, while an incentive is a reward for exceptional results within that job.
7. Are negative incentives, like the fear of demotion, as effective as positive incentives?
While both positive and negative incentives aim to influence behaviour, their effectiveness and long-term impact differ significantly. Negative incentives, such as warnings or the threat of punishment, can produce short-term compliance out of fear. However, they often lead to a stressful work environment, low morale, and high employee turnover. Positive incentives, like bonuses and recognition, foster a supportive and motivating atmosphere. They encourage loyalty, creativity, and a genuine desire to contribute, making them far more effective for sustained, long-term performance and organisational health.
8. How does a well-designed incentive system contribute to achieving organisational goals?
A well-designed incentive system acts as a strategic bridge between individual effort and company-wide success. It contributes by clarifying key priorities, as the rewards highlight what the organisation values most. It directs employee focus and effort towards specific, measurable targets that are critical for the business. This creates a results-oriented culture where employees understand how their personal performance directly impacts the organisation's larger objectives, leading to better alignment and faster achievement of goals.
9. Can offering the wrong type of incentive actually harm employee motivation and company performance?
Yes, absolutely. A poorly designed incentive plan can be counterproductive. For instance, if a purely individual sales commission is offered in a role that requires teamwork, it can destroy collaboration. Similarly, rewarding only easily measurable tasks can cause employees to neglect other crucial responsibilities like customer service or quality control. If incentives are perceived as unfair or unattainable, they can lead to demotivation and resentment. Therefore, the design must be carefully aligned with the desired behaviours and company culture to avoid unintended negative consequences.
10. From a management perspective, how does one decide which type of incentive is most appropriate for different employees?
From a management perspective, choosing the right incentive requires a strategic approach based on several factors. The decision depends on the employee's role and responsibilities (e.g., sales teams often respond well to commissions, while R&D teams may prefer autonomy and recognition). It also depends on the employee's individual needs and career stage; a junior employee might be motivated by financial rewards, while a senior employee may value status and influence more (as explained in Maslow's Need Hierarchy Theory). Finally, the specific organisational goal being targeted determines whether a short-term financial bonus or a long-term career development opportunity is more suitable.
