Incentives – Definition, Types, Role, Examples and Advantages

What are Incentives?

Incentives refer to any material tangible or intangible that can pull in the attention of the employees and motivate them to work more enthusiastically in a constructive manner. An incentive’s sole purpose is to enhance the employee’s overall performance that eventually leads to the entire organization’s performance.

The power of incentives is immense, as they are the powerful hidden forces that can let human beings feel appreciated, plus can also convince them to shape their behavior to a certain amount as per the expectations of the incentive provider.

Delving deep into the world of incentives is actually understanding human beings because incentives are the factors that driven human behavior. Companies and organizations that do not realize the power of incentives sometimes make severe errors. So, without any further ado,

There are two popular ways of incentivizing employees. These are indirect and direct compensation. These incentives can be in the form of organizational incentives, individual incentives, or group incentives.

Incentive Definitions

Milton L. Rock, the author of The Compensation Handbook defines incentive as “Variable rewards granted according to variations in the achievement of specific results”

Another definition that K. N. Subramaniam suggests is “Giving incentives is a system of payment emphasizing the point of motivation, that is, the imparting of incentives to workers for higher production and productivity”

One of the common examples of such incentives that change the behavior of the employees is Employee Stock Options Plan (ESOP).

Stock options plan is the benefits scheme for employees under which the company encourages its employees to acquire ownership of the company in the form of shares.

Such shares are given to the employees at a rate considerably lesser than the prevailing market rate. The future value of the ESOP motivates the behavior of employees to be more dedicated and result-driven.

Types of Incentives

Incentives are broadly classified under three major heads that are as follows:

1. Monetary and non-monetary incentives

These include designation as a permanent employee, seniority, promotion, and merit recognition. It also includes payment for holidays, medical benefits, city allowance, house rent allowances, provident funds, and conveyance. Offering something monetary or non-monetary that can motivate employees to work harder will come into this type.

2. Financial incentives

These consist of group incentive plans and profit-sharing plans to motivate the behavior of the employees. This is in the form of extra monetary benefits on top of the basic compensation that the employees receive for their efforts. This is again something that acts as a reward and motivates employees to work with more dedication.

3. Non-financial incentives

Whenever an employee overachieves or consistently performs at a high level for a long time, they are usually rewarded with recognition or prizes for their challenging endeavor. This can be in the form of the Employee of the month Award. This type of reward is considered effective in the psychological empowerment of the employees to continue their work with the same dedication.

Examples of Economic Incentive Structures

The most common example of an incentive system is payroll.

An excellent fat paycheck motivates the employee to show up every day on work in time and perform their tasks admirably.

The five common examples being:

1. Subsidies

These are specific government incentive programs that give a business a set amount of money. This helps the business to grow under any circumstances.

For instance, Agricultural subsidies are pretty standard for all governments to provide farmers. There are different subsidies involved wherein government give health care, oil, housing, ethanol, environmental and export.

2. Tax Rebates

There are tax rebates on offer by the government of most of the economies. The most notable tac rebates are in areas where environmental welfare is concerned.

We all know the degradation of the environment poses a significant threat to the existence of humanity. This is why the government comes up with tax rebates like purchase EVs to incentivize people to use EVs.

3. Negative Incentives

They are also popularly known as disincentives; it means punishing people financially for doing specific jobs incorrectly. They encourage certain activities by making them compulsory.

They can be in the form of penalties that the employee might have to pay if he breaks a particular set of rules and regulations.

4. Tax Incentives

These are popularly known as “Tax Benefit”. The government provides these to motivate the public to spend their money on specific items. The tax benefits over the years have proved to be an excellent source of economic development. A tax incentive on the payment made towards the mortgage can influence people to make timely payments. This, alongside empowering the employees, helps the organizations as they can provide more employment opportunities.

5. Financial Incentives

All the monetary incentives received by the corporation, employer, organization, and consumer. These are all part of the financial incentives scheme of the organization. For instance, an employer might get a part in the commission or stock option plan. For a customer, it is discounted, buy one get one free offer.

Advantages of Incentive Plans

 

There are significant merits or advantages involved with providing incentives to the employees:

1. Improving Employee Dedication

Incentives have a proven track record of reducing employee turnover or attrition rate, depleting absenteeism, and decreasing unproductive time. These incentives can make sure that the employees give their full efforts in any task they perform.

It has been certified by the National Commission of Labour that wage incentives are the most cost-effective methods of increasing the productivity of the employees.

2. Developing better personal connections

A well-worked incentive reward can build a great personal bond with the customers. Bump up discount offers or buy three get one free are very popular among customers. It can motivate casual customers of the business to become regular customers.

The standard of living of the employees goes up after receiving incentives. They can use the extra incentive in improving their personal lives that will directly increase their productivity.

3. Positive Work Environment

There is a sense of positivity around the employees whenever they receive incentives for their hard work. This positivity can directly translate into an increase in the productivity of the employees. Incentives help the employees to be concentrated and dedicated to the task at hand. As a result, these decrease supervision costs.

This helps in improving the workflow within the organization. The smooth functioning of the workflow of the organization is significant. This makes sure that the targets and goals of the organization are met within the deadlines.

Extrinsic vs Intrinsic incentives

There are two major types of incentives are Intrinsic and Extrinsic incentives. Both have significant dissimilarities. These dissimilarities are as follows:

• Extrinsic incentives are materialistic, whereas Intrinsic incentives are not materialistic.
• Extrinsic incentives can be rewarding the employee with a financial incentive like money for completing a task. The intrinsic incentive is borne from within without any external stimulation from the outside.
• Extrinsic incentives can also be in the form of punishment if an employee fails to meet a deadline. The intrinsic incentive is more about self-satisfaction and self-fulfillment in his job role.
• All the economic incentives are Extrinsic incentives, whereas non-economic incentives are Intrinsic incentives.

Conclusion!

Employees become more creative in their work, and they give their all during their working hours. All these behavioural changes can be noticed during the implementation of an incentive plan.

Incentives are a tried and tested way of increasing employee productivity and efficiency. – And that is why they have become a must for all the organization.

Incentives programs give a much-needed boost to the sales growth and profit of the organization.