Types of Incentives

Some of the financial motivations are overtime wages, higher basic wages, incentive bonus, merit increments, suggestion rewards, various allowances, promotion and fringe benefits.

Some of the non-financial incentives are good human relations, self-respect, recognition, status, sense of belonging, appreciation, higher responsibility, greater authority, job satisfaction, improved working conditions and greater leisure. All these motivate workers to raise their productivity.

Some of the types of incentives can be studied under the following head:- A. Financial Incentives and B. Non-Financial Incentives. These are further sub-categorised as under-

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A: Some of the types of financial incentives are:- 1. Pay and Allowances 2. Productivity Linked Wage Incentives 3. Bonus 4. Profit Sharing 5. Co-Partnership/Stock Options 6. Retirement Benefits 7. Fringe Benefits 8. Compensation Based on Performance 9. Compensation Based on Competency 10. Rewards 11 . Group Bonus.

B: Some of the types of non-financial incentives are:- 1. Status 2. Organisational Climate 3. Career Advancement Opportunity 4. Job Enrichment 5. Employees’ Recognition Programmes 6. Job Security 7. Employee Participation 8. Employee Empowerment 9. Consultation 10. Teamwork 11. Quality Circles 12. Job Rotation and 13. Flexitime.

Types of Incentives: Financial, Non-Financial, Individual, Group and Organisation-Wide Incentives

Types of Incentives – 2 Main Types: Financial Incentives and Non-Financial Incentives

Financial and non-financial incentives means to satisfy employees’ needs and motives

Let us discuss in detail the various types of financial and non-financial incentives:

Type # 1. Financial Incentives:

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Financial incentives are the incentives which are offered to employees for their efficient contribution either in direct monetary form or in a form which can be valued in monetary terms. Such incentives satisfy the physiological, safety/security and social needs. The organisation may provide financial incentive for individual or group performance.

The various types of financial incentives offered by an organisation are:

i. Pay and Allowances:

The basic financial incentive offered to employees is the salary. Each organisation follows a specific salary structure, which may include basic pay, dearness allowance and other allowances like conveyance, rent etc. In some organisations salaries increase every year due to fixed increments policy. However, the efficiency and performance of an employee may be rewarded in the form of increase in salary or allowances, which may in addition to regular increments.

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ii. Productivity Linked Wage Incentives:

This type of incentive was suggested by Taylor as a technique of scientific management. Under this system, wages are linked with workers’ productivity. Different rate of wage rate is fixed for different levels of productivity. Higher the productivity, higher would be wage rate. The main aim of this type of incentive is to increase productivity at individual and group level.

iii. Bonus:

It is an incentive offered over and above the regular wages/salaries paid to employees. Organisations may pay bonus to its employees as a share profits earned or achieving the target production. It is given to recognize the contribution of the workforce towards achieving organisational goals. Most companies announce bonus during special occasions like festivals, company’s anniversary etc.

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iv. Profit Sharing:

It is a type of incentive where company decides that if it earns profit over and above a fixed percentage, then the excess profit earned will be shared among employees. It motivates employees to improve their performance and contribute towards increase in profits. This type of incentive fulfills belongingness needs of employees. They feel as part of the organisation.

v. Co-Partnership/Stock Options:

In this type of incentive scheme, employees are offered company shares either as free of cost or at a price less than the market price. Stock options give employees the feeling of ownership and motivate them to contribute for the growth of the organisation. This type of incentive is usually implemented at managerial level.

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vi. Retirement Benefits:

Most organisations as part of salary package give benefits like provident fund, pension, gratuity etc., which gives financial security to employees either after retirement or when they quit their job. Such incentives arise during the course of service but are payable either at retirement or when employee leaves the organisation.

vii. Fringe Benefits:

Fringe benefits are the allowances an Organisation provides to its employees. These incentives could be in the form of car allowance, education allowance, book allowance, medical allowance, house rent allowance, leave travel allowance etc. These allowances are over and above the salary offered to an employee.

Type # 2. Non-Financial Incentives:

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An employee will be motivated to perform to his/her potential if the organisation is able to satisfy his/her emotional, growth and development or esteem needs along with physiological, security or social needs. Therefore, it is important that an organisation provides non-financial incentives in the form of job security, promotions, recognition, appreciation etc. to satisfy the psychological or emotional needs.

Some employees feel satisfied with monetary gains but there may be some employees who give more importance to position or responsibility they hold, their status in the organisation, their involvement in decision making etc.

The incentives used to satisfy such needs are non-financial incentives, which may not be measured in terms of money.

Some of the non-financial incentives are:

i. Status:

An employee’s position in the organisation, the level of authority and responsibility he/she holds, his/her recognition in the organisation are few of the factors which indicate the status of an employee holding specific positions. Of course, jobs with higher authority and responsibility command higher financial incentives but status or position satisfies the psychological, social and esteem needs of an employee.

ii. Organisational Climate:

Organisational climate refers to the work culture, the values and the characteristics of an organisation. The organisational climate influences the behaviour of employees in the organisation. The employee-oriented policies like appreciation or recognition of employees’ contribution, individual autonomy, risk taking etc. develops positive attitude amongst employees and motivates them to perform better.

iii. Career Advancement Opportunity:

In order to satisfy the self-actualisation needs of employees, management provides opportunities of promotions to higher positions as an incentive for better performance. A sound promotion policy and appropriate skill development programmes encourage employees to enhance knowledge, strengthen existing skills and develop new skills. Promotion is one of the strongest stimulators which induce employees to perform their best.

iv. Job Enrichment:

Challenging job profiles, variety of work content and need for higher knowledge and skills is a source of motivation for many employees. Similar jobs make many employees complacent therefore management must ensure that jobs are enriched and interesting. Job enrichment gives employees a meaningful work experience and provides opportunities for personal growth.

v. Employees’ Recognition Programmes:

Recognition of effort by superiors encourages employees to improve performance. It is one of the most important non-financial incentives, which helps to satisfy the esteem and security needs of an employee. To motivate employees to perform better or prepare them for higher positions, managers must appreciate and recognize the contribution of employees as and when appropriate. For effective motivation it is important that positive attitudes must be recognized in public but negative attitudes must be corrected in private.

Few methods followed by organisations to appreciate employee contribution may include review meets to recognize employees’ contribution, give letters, certificates or mementos for outstanding performance, display the extra-ordinary achievements on company notice boards or in company newsletter.

vi. Job Security:

To satisfy the security needs of an employee, business enterprises must provide some kind of certainty and stability about job and future income. The company policy to retain its staff and give regular fixed increments develops confidence, brings stability and loyalty amongst employees and motivates them to work with greater zeal. However, company must set targets and have regular reviews to ensure that job security does not set in complacency among employees.

vii. Employee Participation:

It is a means to encourage employees to be part of decision making especially for issues directly related to them. Since employees are responsible for effective implementation of decisions, their involvement in decision-making give them sense of responsibility and ownership.

To encourage employee participation organisations may set up committees where employees have appropriate representation. Few examples of such committees may be Joint management committee, staff welfare committee, work committees.

viii. Employee Empowerment:

Empowerment means providing more authority and independence to employees to take decisions and perform jobs. Empowerment develops confidence and sense of responsibility amongst employees, provides them opportunity to use their skills and talents to contribute positively to achieve organisational goals.

Types of Incentives – Direct and Indirect Compensation

Incentives can be classified into:

(i) Direct compensation, and

(ii) Indirect compensation.

(i) Direct compensation includes the basic salary or wage that the individual is entitled to for his job, overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options, etc.

(ii) Indirect compensation includes protection programmes (insurance plans, pensions), pay for time not worked, services and perquisites. But these are maintenance factors rather than reward components. Since they are made available to all employees, irrespective of performance, they will tend to retain people in the organisation but not stimulate them to greater effort and higher performance.

Sometimes, the rewards are also termed as ‘Intrinsic’ rewards and ‘Extrinsic’ rewards. The former are those that an individual receives for himself. They are largely a result of the job that the worker does. The techniques of job enrichment, shorter work weeks, flexible work hours, project structures, and job rotation can offer intrinsic rewards through providing interesting and challenging jobs, and allowing the worker greater freedom.

On the other hand, the latter rewards refer to direct compensation, indirect compensation, and non-financial rewards.

Controversy prevails over the issue of ‘money’ only motivates the individual. The supporters of the view say that money is potentially an effective motivation. For example-

“Money may potentially be an effective motivator, regardless of the level one has attained and the organisation or the amount of money he is earning.”

“Money does appear to have a good deal of symbolic value, and it does mean different people having differing biographies or backgrounds of training and experience.”

“For some people, money can be instrumental in satisfying esteemed and recognition need as well basic physical needs. Motivating people with financial rewards is not a picker’s game. A company must be willing and able to give certain employees very large raises and/or bonuses if pay is to motivate performance. If a company cannot afford to do this, or is not willing to do so, it should probably forget about using pay to motivate performance.”

“Pay in one form or another is certainly one of the main-springs of motivation in our society. The most evangelical human religionist insists it is important while protesting that other things are too (and are perhaps in his view) nobler.

It would be unnecessary to belabour the point if it were not for a tendency for money drives to slip out of focus in a miasma of other values and other practices. As it is, it must be repeated: Pay is the most important single motivator used in our organised society.

Contrary to these observations, Allen Port observes- “Money incentives alone do not bring the desired motivation. Employees in an industry are not ‘economic men’ so much as they are ‘ego men.’ What they want, above all else, is credit for work done, interesting tasks, appreciation, approval and congenial relations with their employers and fellow-workers. These satisfactions they want even more than high wages or job security.”

“Workers will normally respond to monetary incentives only to a certain point. Beyond that point money becomes ineffective as an inciter of action. This is for two reasons- (i) Money is not foreseen as having the ability to satisfy an urgent need, (ii) The worker may respond to money as a motivator if he believes the benefits will be greater than the expenses incurred by him. If the benefits perceived are less than the personal cost he will not respond to money as an incentive any further. In effect, a break-even point is reached in which additional money earnings become marginal or even undesirable because of the efforts and conditions demanded to earn the added income.”

“Using money as a motivator may decrease intrinsic motivation. To use money and other extrinsic reward as effective motivators, they must be made contingent upon performance.”

It may be summed up that a more reasonable interpretation would be that intrinsic motivation is increased by money if two conditions are met:

(i) The monetary reward closely follows performance so as to be reinforcing, and

(ii) The monetary reward is perceived by the employee to be a function of his work behaviour.

Further, it may be fair to conclude that pay holds motivational properties. However, the issue is considerably more complex than merely stating that “money motivates.”

Types of Incentives – Individual Incentives, Group Incentives and Organisation-Wide Incentives

Incentives may broadly be classified into monetary or non-monetary. Monetary incentives have an important contribution to make within the total motivation pattern. They provide extra-financial motivation, by rewarding the worker over and above his regular remuneration tor performing more than the targeted work. Some of the financial motivations are overtime wages, higher basic wages, incentive bonus, merit increments, suggestion rewards, various allowances, promotion and fringe benefits.

Monetary incentives imply external motivation, non-monetary incentives involve internal motivation. Both are important. It is a judicious mix-up of the two that tends to cement incentives with motivation.

Rewards or incentives may also be classified into direct compensation, and indirect compensation.

Direct compensation includes the basic salary or wage that the individual is entitled to for his job overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options, and so on.

Indirect compensation includes protection programmes (insurance plans, pensions), pay for time not worked, services and perquisites. Rut these are maintenance factors rather than reward components. Since they are made available to all employees, irrespective of performance, they will tend to retain people in the organisation but not stimulate them to greater effort and higher performance.

Sometimes, the rewards are also termed as intrinsic rewards and extrinsic rewards. The former are those that an individual receives for himself. They are largely a result of the job that the worker does.

The techniques of job enrichment, shorter work weeks, flexible work hours, project structures, and job rotation can offer intrinsic rewards through providing interesting and challenging jobs, and allowing the worker greater freedom. On the other hand, the latter rewards refer to direct compensation, indirect compensation, and non-financial rewards.

Incentives have also been classified into individual, group and organisation-wide:

1. Individual Incentives:

One of the major proponents of individual incentives was Frederick Taylor. There are certain characteristics of individual incentives. First, they are not applicable to many jobs, such as those with no physical output measure of performance or those where individual contributions are difficult to assess. Second, individual incentives can cause a wide range of administrative problems.

These include- (a) the cost of time study to set and keep current production standards for multiple jobs, (b) the cost of tracking output in these multiple jobs and calculating payments, and (c) the difficulty in setting production standards that are accepted as appropriate by both management and workers. Individual incentives are most likely to work when there is trust in management and where production standards do not undergo regular change.

In an individual incentive plan, the rewards of incentives are based solely on individual performance. It is the extra compensation paid to an individual over a specified amount for his production effort. Such a system is feasible only where an individual can increase the quantity and quality of his output by his own individual efforts and where his output can be measured.

The payment is normally on a monthly basis, though in a few cases it may be quarterly or other convenient periods. The standards of performance have been set by a qualified industrial engineering analyst, using technically sound work measurement procedures. The rewards under this plan are almost always immediate, that is, paid daily or weekly.

The advantages of individual wage incentive plans are relatively obvious and straight forward. First and foremost, the individual incentive plan rewards the individual for his or her production. The more the worker produces, the more the worker earns. Second, the individual incentives appeal to the basic need for money found in most people.

Almost everyone will work harder, up to a point, when there is a justifiable reason to believe that increased productivity will bring about a personal gain. Although individual wage incentives have advantages, there are also limitations. Individual wage incentives work best with jobs that are primarily operator-controlled.

They may also lead to labour problems. Incentives, because they reward production levels, can lead to quality problems. Safeguards must be taken to ensure that quality is not sacrificed for quantity. It is the output of the group rather than that of each individual member of the group that can be measured most conveniently or accurately.

2. Group Incentives:

Profit sharing is better known, older and more widely practiced than gain sharing. Profit sharing is associated with participative management theories. Profit sharing is a group-based organisation plan. The logic behind profit sharing seems to be twofold.

First, it is seen as a way to encourage employees to think more like owners or atleast be concerned with the success of the organisation as a whole. Individual oriented plans often place little emphasis on these broader goals. Second, it permits labour costs to vary with the organisation’s ability to pay.

Some companies have effectively used their profit sharing plans as vehicles for educating employees about the financial performance of the business. The most important advantage of profit sharing is that it makes labour costs of an organisation variable and adjust them to the organisation’s ability to pay.

Most Japanese firms have used this approach to adjusting labour costs for decades. Group or area incentive schemes provide for the payment of a bonus either equally or proportionately to individuals within a group or area. The bonus is related to the output achieved over an agreed standard or to the time saved on the job – the difference between allowed time and actual time.

Such schemes may be most appropriate where – (a) people have to work together and teamwork has to be encouraged; and (b) high levels of production depend a great deal on the co-operation existing among a team of workers as compared with the individual efforts of team members.

Group bonuses are calculated on the basis of the output of the team and are divided among the members either equally or in specified proportions, with more being given to skilled employees than to those who are unskilled. Group incentives are usually applied to small teams and the rewards are based on the performance of the entire group. The bonuses are often much larger than individual wage incentives.

Group incentive plans since they evaluate overall performance, are applicable to a wide variety of tasks. Sometimes, however, they are applied to all workers of a department or even of a whole undertaking.

One of the disadvantages of group incentive plan is that there is a possibility of ignoring the individual performance as the rewards are based on group performance. In large groups it is often inevitable that there will be slackers who can disrupt the functioning of the whole group.

3. Organisation-Wide Incentives:

The organisation-wide incentive system involves co-operation and collective effort of the employees and management in order to accomplish broader organisational objectives, such as – (i) to reduce labour, material and supply costs; (ii) to decrease turnover and absenteeism; (iii) to strengthen employee loyalty to the company; and (iv) to promote harmonious labour management relations.

One of the aspects of the organisation-wide incentive scheme is profit-sharing under which an employee receives a share of the profit fixed in advance under an agreement freely entered into.

Some of the advantages of such a scheme are:

(i) It inculcates in employees’ a sense of economic discipline as regards wage costs and productivity;

(ii) It engenders improved communication and increased sense of participation;

(iii) It is relatively simple and its cost of administration is low; and

(iv) It is non-inflationary, if properly devised.

Types of Incentives – 2 Types of Rewards or Incentives Provided by Personnel Manager to Adequately Satisfy the Employees

The personnel manager has to formulate rewards or incentives, which adequately satisfy the employees.

These incentives can be of two types:

1. Financial incentives, and

2. Non-financial incentives.

Type # 1. Financial Incentives:

Financial incentives include the following:

i. Compensation based on Performance:

Where the performance exceeds the given standards, the employee is paid better in terms of piece rate, sharing profits, or bonus. This is different from the traditional compensation plan, which does not reflect the additional incentive for better performance.

In case of compensation programmes based on performance, the incentives the individual employee receives from time to time reflect some performance measures such as – individual productivity, team or group productivity, or overall organisation profit for a given period. As there is a strong relationship between the effort and the rewards, employees tend to perform better if incentives are better designed.

ii. Compensation Based on Competency:

Under this method, the pay and rewards are designed based on the competency of the employees. Competency is judged based on one’s leadership skills, troubleshooting strategies. Pay levels may vary in tune with the degree of competency. In other words, an employee’s rewards are determined by one’s capability to contribute to the organisational goals and objectives.

iii. Stock Options:

Employees are given shares in the company in which they work. The potential growth in the market price of the share is the incentive to keep working in the company. There could be a restriction that the employees cannot sell the shares for a given period. This practice is perceived to develop, among the employees, a sense of loyalty to their organisations.

iv. Rewards:

Rewards are individual incentives intended to reward individual performance. These include merit pay, time saving bonus, and commission.

v. Group Bonus:

Where the employee’s tasks are interdependent and thus require cooperation, group incentives such as group bonus make a lot of difference.

Type # 2. Non-Financial Incentives:

Non-financial incentives refer to the incentives related to the job.

These include:

i. Consultation:

Today, most of the successful companies are those which invite participation from their employees on strategic issues such as – working environment, introduction of changes, and so on. When the management consults the employees for their opinions, the employees feel motivated. This enhances their morale also.

The consultation may take any of the following forms – inviting the employees for workshops, joint committee consisting of representatives of employers and employees, suggestion schemes, and others. The employees are encouraged to suggest on issues relating to productivity or cost-saving. Those who offer practical suggestions are recognised and the best suggestions are even rewarded.

ii. Teamwork:

Here, the workforce is organised into small groups or teams who work together. A line manager may have one or more such groups and brief them regularly. There is a spirit of competition among the groups. Each group tries to outperform the other. In the process, the employees feel highly motivated and thereby develop a sense of belonging and loyalty to the organisation. Such an environment in the organisation is likely to enhance the overall performance level.

iii. Quality Circles:

Quality circle is a body of employees who meet from time to time under the guidance of a supervisor to discuss ways and means to improve the quality of the products and services of the organisation.

iv. Job Security:

When the employee is assured of the security of his job, he feels safer and this provides him adequate incentive to perform better.

v. Job Enrichment:

Here, the employees are given greater scope in deciding how the tasks should be performed. In other words, they are allowed to assume increased responsibility for planning and self-evaluation.

vi. Job Rotation:

Doing the same job for years together may create boredom for the employee. To overcome this problem, the employee is given a different job, may be in the same department or a different one, after a particular period of time. This enables the employees to diversify their activities and develop multiple skills.

vii. Flexitime:

Flexitime is a method of organising the working hours for the employees in such a way so as to provide greater flexibility in choosing their own working hours. It enables the employees to choose working hours of their choice within agreed parameters and provided they are present during a ‘core’ time (usually between 1000 hrs – 2100 hrs).

With the growing Internet and PC culture, the place of work is getting shifted from offices to personal computers. Most of the knowledge based organisations insist on results, not on the physical presence of the employees during office hours.