Types of Incentives: What is It and Importance of Incentives in Workplace

As a business owner or manager, you know that keeping your employees motivated and engaged is essential for
achieving success. One way to do this is through incentives, which are rewards given to employees for reaching
certain goals or milestones. These incentives can take many forms, from monetary bonuses to non-financial perks
like extra time off or recognition in front of their peers.

If you’re looking to implement an incentive program in your organization, it’s important to understand the
various options available to you. That’s why we’ve put together this article, which will cover the different
types of incentives in HRM you can offer your team and provide tips on how to structure an effective program.

What is an Incentive in Salary?

Incentive in salary is a term that often comes up when discussing compensation packages. It refers to any
additional payments or bonuses that an employee receives based on their performance, achievements, or meeting
certain goals. In other words, it’s a way for employers to motivate and reward their employees for going above
and beyond what’s expected of them.

Different types of incentives plan can be offered as part of a salary package. Some companies offer
commission-based incentives where employees receive a percentage of the sales or revenue they generate. Others
may offer performance-based incentives where employees are evaluated based on specific metrics such as meeting
deadlines, completing projects on time, or achieving certain targets.

The benefit of offering remuneration is
twofold: it motivates employees to work harder and it also helps retain top-performing staff members.

Why are Incentives Important?

Boosting employee morale and driving engagement is crucial for any organization to succeed. One way to achieve
this is through employee incentive programs, which have become increasingly popular worldwide. In fact, the
incentives industry is now valued at over $100 billion, with a significant portion of that coming from non-cash
incentives, totaling $46 billion.

The reason why incentive programs work is because they tap into human behaviour. Studies have shown that
organizations using employee incentive programs have a 79% success rate in achieving their goals when a reward
is offered. This highlights the importance of moving beyond just traditional annual years of service awards and
making employee incentive programs a part of everyday culture.

Companies that offer tangible sales incentives also see an annual revenue increase that is three times higher
compared to those that don’t offer such incentives. Additionally, professionals who are satisfied with their
benefits are more than twice as likely to be satisfied with their work, making incentive programs a win-win
situation for both employers and employees.

What are the Different Types of Incentives?

Incentives are rewards given to employees, either in monetary or non-monetary form, for achieving higher levels
of productivity or efficiency. There are two primary types of incentives:

Monetary or Financial Incentives

Financial incentives are rewards that are given in the form of money or can be quantified in monetary terms.
These incentives can be offered on an individual or group basis and are designed to fulfil the monetary and
future security needs of employees. The most frequently used forms of financial incentives include:

1. Pay and Allowances

Providing regular salary increments and allowances can serve as effective motivators for employees. In some
organizations, these increases and allowances are directly tied to an employee’s performance, creating an
incentive for them to perform at their best in order to receive the reward. This approach encourages employees
to work harder and strive for better results, ultimately benefiting both the employee and the organization as a
whole.

2. Profits Sharing

To motivate and incentivize employees to work more efficiently and productively, many organizations offer a share
in the company’s profits. Profit-sharing schemes typically involve the company setting a percentage of profits,
and any surplus profits above that percentage are distributed among the employees as a form of reward and
encouragement.

By offering a share in the profits, employees are motivated to work harder and more effectively, to increase the
overall profitability of the company. This, in turn, benefits both the employees and the organization, as it
encourages a culture of productivity and success. Ultimately, profit-sharing schemes can help to boost employee
morale and increase job satisfaction, leading to a more engaged and motivated workforce.

3. Bonus

A bonus is an additional sum of money that is given on top of an employee’s regular salary or wages, usually
as a reward for good performance or to mark a particular occasion. Many companies choose to offer bonuses during
holidays or special occasions such as Diwali, Christmas, or New Year’s as a way of showing appreciation for
their employees and boosting morale. These bonuses can help to motivate employees to work harder and perform
better and can be an effective way of incentivizing them to achieve their goals and meet targets.

4. Retirement Benefits

Certain companies provide retirement perks, like a pension plan, provident fund, gratuity, and other benefits, to
incentivize their employees. These rewards are particularly beneficial for workers who value security and safety
in their employment and serve as a motivation to remain with the company for the long term.

5. Commission

There are certain businesses that provide a commission to their employees in addition to their regular salary, if
they achieve predetermined targets over a specific timeframe. This type of incentive serves as a motivation for
employees to expand the company’s client base and increase their sales performance.

6. Productivity Linked with Wage Incentives

This refers to a compensation plan where workers are paid higher wages based on their productivity levels. This
means that efficient workers who produce more output are rewarded with higher wages compared to those who are
less productive. In order to earn higher wages, workers are incentivized to perform efficiently and increase
their productivity.

Non-Monetary/Non-Financial Incentives

Non-financial incentives refer to rewards or motivators that aim to satisfy an employee’s needs and cannot be
measured in monetary terms. It is important to note that certain non-financial incentives may also have
financial benefits. The most commonly used non-monetary incentives include:

1. Status

Status is a term that encompasses an individual’s position in terms of rank, authority, responsibility,
recognition, and prestige within their job. Managers can motivate employees who have esteem and
self-actualization needs by offering them a higher status or rank within the organization. By providing
employees with a higher status, they are more likely to feel valued, recognized, and fulfilled, which in turn,
can lead to a greater sense of motivation towards their work.

2. Organizational Climate

Organizational climate refers to the overall atmosphere or environment within an organization that is
characterized by the relationship between superiors and subordinates. It encompasses the various characteristics
and attributes that describe the organization and can have a direct influence on the behaviour of its members.

When a manager adopts a positive approach, it can lead to a better organizational climate, while a negative
approach can have a detrimental effect. Employees are generally more motivated and engaged in a healthy
organizational climate compared to an unhealthy one. Therefore, creating a positive and supportive
organizational climate is important for promoting employee motivation and productivity.

3. Career Advancement Opportunity

Managers should offer promotional opportunities to employees as a way of motivating them. When employees have the
opportunity to be promoted to a higher position within the organization, they are often motivated to improve
their skills and work more efficiently in the hope of being promoted. Promotions can be a powerful motivator
that encourages employees to perform at their best level in order to achieve their career goals. By offering
promotional opportunities, managers can encourage employees to develop their skills and work towards improving
their performance, which can benefit both the employee and the organization as a whole.

4. Employee Recognition

Organizations adopt employee recognition programs in order to boost employee morale, attract and retain key
employees, increase productivity, and improve competitiveness. These programs are initiatives taken by employers
to reward employees for their achievements, new behaviours, and milestones reached during their tenure with the
company.

For instance, recognizing the best performer of the month and publicly announcing and displaying their name on
notice boards is an example of an employee recognition program. These programs can help to promote a positive
and supportive work culture where employees feel valued and appreciated for their contributions to the
organization.

5. Job Enrichment

Job enrichment is a process that involves designing jobs to include a diverse and challenging set of tasks,
requiring higher levels of knowledge and skill, more autonomy and responsibility, and greater growth
opportunities. It is believed that this approach may lead to an increase in employee pay. Additionally, when a
job is inherently interesting, it can serve as an excellent source of motivation.

By providing employees with enriched jobs, managers can instil a sense of accomplishment and achievement as
employees take on new and challenging responsibilities. This can lead to increased engagement and job
satisfaction, which in turn can improve overall performance and productivity. Moreover, job enrichment can
provide employees with opportunities for personal and professional growth, which can lead to higher levels of
job satisfaction and greater employee retention.

6. Job Security

Providing job security to employees can offer them a sense of stability and security, which in turn can lead to
increased enthusiasm and motivation at work. However, it is important to note that this incentive can have its
downsides, such as employees becoming complacent and taking their jobs for granted.

Despite this, job security remains an important work incentive, particularly in light of the increasing rate of
unemployment in many countries. By providing employees with a sense of stability and reducing their concerns
about the future, managers can foster a more positive work environment and increase employee engagement and
productivity.

Final Thoughts

To ensure long-term better performance from employees, organizations should implement a combination of both
financial and non-financial incentives plans. This approach not only empowers employees to serve their company
to the best of their abilities but also enhances their career prospects for the future.

FAQs

1. Is incentive taxable?

No matter the name, bonuses or performance incentives are fully taxable. Typically, a performance bonus is tied
to an individual’s appraisal ratings or their performance over a specific period, in accordance with company
policy.

2. How to calculate incentive?

The bonus amount will be determined as follows:

• If an employee’s salary is equal to or less than Rs. 7,000, the bonus will be calculated based on the actual
  salary amount. The calculation will be done by multiplying the salary by 8.33% and dividing the result by
  100. The formula for this calculation is: Bonus = Salary x 8.33 / 100.
• If an employee’s salary is more than Rs. 7,000, the bonus will be calculated based on a maximum amount of
  Rs. 7,000. The calculation will be done by multiplying Rs. 7,000 by 8.33% and dividing the result by 100.
  The formula for this calculation is: Bonus = 7,000 x 8.33 / 100.

3. Is a company required to pay incentive pay?

In the private sector, there is no standard or consistent law regarding the incentives that employers offer. In
India, employment laws permit employers to create their own incentive plans and determine the criteria and
targets that employees must meet to qualify for those incentives. This means that each employer has the
flexibility to design their own incentive structure based on their business needs and priorities.