The term “incentivize” refers to the act of providing a person or persons with added motivation to carry out an action or activity. It can be done through financial or non-financial means.
Company performance bonuses are a great example of employee incentives, as bonuses encourage the employees to work hard and diligently to earn that added compensation. Incentives are widely studied in the field of behavioral economics.
An incentive creates motivation and provides a constructive influence on a person to enhance overall performance. All the initiatives taken by an organization and its management to boost the efficiency of its employees are considered incentives.
The term “incentivize” refers to the act of providing a person or persons with added motivation to carry out an action or activity. Incentives can be financial or non-financial.
Incentives that are in monetary form or can be assigned a monetary value are considered financial incentives.
Non-financial incentives are centered around satisfying the emotional, psychological, and social needs of employees.
How Employers Incentivize Their Employees
Incentives in monetary form or that can be assigned a monetary value are considered financial incentives. Such types of incentives are common and can be given to groups of people or an individual to provide a means of monetary security and satisfaction.
Examples of financial incentives can be seen below:
Bonuses: Bonuses are typically monetary packages offered to employees as a form of reward or compensation for notable performance at work. Certain bonuses are given when a company performed well during a financial year.
Retirement benefits: Retirement benefits provide long-term security for employees, serving as a motivation for them to work well and commit to a company for a longer period. Generally, retirement benefits can include leave encashment, pension, retirement policies, gratuity, etc.
Commission: For certain companies and businesses, employees are given a commission on top of their salaries and wages. It not only encourages them to work hard but also to strive and surpass performance targets. The commission is usually given in proportion to performance. The practice is common in sales roles and real estate.
Fringe benefits: Fringe benefits may vary between organizations, but they typically include medical benefits, car and housing allowances, or educational and recreational amenities and provisions. The benefits are given in addition to the employee’s salary and wage.
Profit-sharing: To retain and encourage staff members, several corporations develop and participate in profit-sharing schemes. It means that the staff members are given a portion of the earnings of an organization.
Salaries (including allowances): A common and basic financial incentive is the salary that employees receive from their employer. Depending on the organization, additional allowances, such as housing and car allowance, travel allowance, and other allowances, are given to the employees in addition to their basic salary. Salaries can also be increased yearly to account for inflationary movements or as a performance reward for an employee.
Productivity wages: Productivity wages are given to employees in proportion to their ability to produce a good or service. In manufacturing companies, factory line workers can receive additional wages for every item produced on top of the expected production level per employee.
Other financial incentives can include stock options, which allow employees to purchase ordinary shares in the company at a lower price per share. The benefit is normally offered to employees in management positions.
In addition to monetary needs, employees have other needs that keep them satisfied. Each person has social, emotional, and psychological needs. Organizations and employers are becoming more aware of such needs because they have a notable impact on employee motivation, satisfaction, and productivity. Non-financial incentives are centered around satisfying these needs.
Examples of non-financial incentives include – but are not limited to – job security, career advancement possibilities and opportunities, job enrichment, employee participation, employee status, organizational values, traditions and climates, job enrichment, employee empowerment, and employee recognition and rewarding.
Another common incentive is a customer incentive. It is a benefit given to a customer to encourage their support in the business. A common example is when a store offers 3 items for the price of 2 or the popular “buy one, get one free” incentive. Other forms of customer incentives include lucky draws and raffles.
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or are looking for a career change, the CFI website has a multitude of free resources to help you jumpstart your Career in Finance. If you seek to improve your technical skills check out some of our most popular courses. Below are some additional resources for you to further explore: