An incentive provides additional compensation for those employees who perform well. It attempts to tie additional compensation as directly as possible to employee productivity.

Further incentives are monetary benefits paid to workmen in recognition of their outstanding performance. They are defined as “variable reward granted according to variations in the achievement of specific results”.

Incentive systems should be tied as much as possible to performance. If an incentive is actually to spur increased performance and effort, employees must see a direct relationship between their efforts and then- rewards.

Incentives can be short-term and/or long-term, which can be tied up with the performance of an individual employee or a group/unit’s productivity.

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Performance through incentives may be defined as cost saving, quantity produced, standards met or quality improved, revenue generated, return on investment or increased profit.

Learn about:- 1. Meaning of Incentives 2. Importance of Incentives 3. Variables 4. Guidelines 5. Types 6. Classification of Incentive Plans 7. Incentive Systems.


Incentives: Meaning, Importance, Variables, Guidelines, Types, Classification of Incentive Plans and Incentive Systems

Incentive – Meaning

The main purpose of incentive is to tie employees’ rewards closely to their achievements. This tie is done by providing more compensation for better performance. Individual will generally strive for additional rewards by higher production and their performance depends upon higher efforts. Some people may prefer some extra time off rather than more money.

An incentive provides additional compensation for those employees who perform well. It attempts to tie additional compensation as directly as possible to employee productivity.

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Further incentives are monetary benefits paid to workmen in recognition of their outstanding performance. They are defined as “variable reward granted according to variations in the achievement of specific results”.

The international labour office refers to incentives as payment by results. But it is appropriate to call them Incentive systems of payment’. ‘Emphasizing the motivation i.e., the imparting of incentives to workers for higher production and productivity’.


Incentives – Importance

The importance of incentives are given below:

1. The primary advantage of incentive is the inducement and motivation of workers for higher efficiency and greater output,

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2. Fixed remuneration removes fear of insecurity in the minds of employ­ees (as incentive as a part of total remuneration)

3. Earnings of employees would be enhance due to incentive.

4. Reduction in the total as well as unit cost of production through incentives (because of higher productivity)

5. Production capacity is also likely to increase.

6. Incentive payments reduce supervision, better utilization of equipment, reduce scrap, reduce loss time, and reduce absenteeism and turnover.


Incentives – 3 Main Variables: The Individuals and Work Situation

The effective use of incentives depends on two variables:

1. The individual,

2. Work situation, and

1. The Individual:

Different people value things differently. Enlightened managers realise that all people do not attach the same value to monetary incentives, bonuses, prizes or tips. Employees view these things differently because of age, marital status, economic need and future objectives.

2. The Work Situation:

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This is made up of four important elements:

(a) Technology – The operation of a machine or work system which can establish a range of incentives;

(b) Satisfying job assignments – A worker’s job may incorporate a number of activities that he finds satisfying. Incentives may take the form of earned time-off, greater flexibility in hours worked, extended vacation time, and other privileges that an individual values;

(c) Feedback – A worker needs to be able to see the connection between his work and rewards. These responses provide important reinforcement; and

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(d) Equity – A worker considers fairness or reasonableness as part of the exchange for his work.


Incentives – Incentive Program Guidelines

1. Tie to Performance:

Incentive systems should be tied as much as possible to performance. If an incentive is actually to spur increased performance and effort, employees must see a direct relationship between their efforts and then- rewards. Further, both workers and managers must see the rewards as equitable and desirable. If a group incentive system is to be used, it clearly should reflect employees’ effort as a group of individuals.

2. Recognize Individual Difference:

Incentive plans should provide for individual differences. Recognition of the complex view of personnel management means that a variety of incentive systems may have to be developed to appeal to various organisational groups and individuals. Not everybody will want the same type of incentive rewards.

3. Recognize Organisational Factors:

The incentive system chosen should be consistent with the climate and constraints of an organization. For example, it is inconsistent to devise an incentive plan requiring a high degree of employee participation for an organization that adheres to traditional procedures and rulers. The incentive plan also should be compatible with organizational resources and be developed in close consultation with the firm’s financial officers to determine how much incentive compensation an organization can afford.

4. Continue to Monitor:

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An incentive system should consistently reflect current technological and organizational conditions. Offering an incentive for clothing sales clerks to sell outdated merchandise would be more appropriate than offering incentives to sell only current fashion items that are already in high demand. Incentive systems should be reviewed continually to determine whether they are operating as designed.


Incentives – Top 3 Types of Incentives (With Different Incentives for Employees and Agents)

Organisations perform use a combination of incentive system. This incentive plans can be setup as individual, group or organisational in nature. Performance can be measured un-productivity, cost effective, and superiors rating.

Type # 1. Individual Incentives:

Individual incentive systems may have to be tailored to individual desires for instant salary plus commission basis, only commission or worker wants additional time up instead of additional take home pay.

An individual incentive system may also be used as a means of measuring individual capabilities and initiatives.

Type # 2. Peace Rate Systems:

The most basic individual incentive system is the Peace Rate System. Under the State Peace Work system wages are determined by multiplying the number of units produce by the Peace Rate for 1 unit.

Type # 3. Differential Peace Rate:

The differential Peace Rate System pays employees at one peace rate, if they produce less than a standard output and at a higher peace rate if they produce more than the standard, developed by Frederick Taylor in the late 1800s. The system is to design to stimulate employees to achieve or exceed established standard of production.

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Peace Rate System is difficult to use, because of determination standards.

Incentives for Employees:

The following are the different incentives for employees which the company can use:

a. Financial Incentives:

The various financial incentives are:

(i) Pay and allowances

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(ii) Productivity linked wage incentive

(iii) Bonus

(iv) Co-partnership/stock option

(v) Retirement benefits

(vi) Perquisites

b. Non-Financial Incentives:

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The various non-financial incentives are:

(i) Employee recognition programmes

(ii) Employee empowerment

(iii) Job security

(iv) Status

(v) Employee participation

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(vi) Organisational climate

Incentives for Agents:

The following are the different incentives for agents which the company can use:

a. Financial Incentives:

The various financial incentives are:

(i) Commission

(ii) Profit sharing

b. Non-Financial Incentives:

The various non-financial incentives are:

(i) Recognition programmes like certificate of merit etc.

(ii) Organisational climate

(iii) Job enrichment

(iv) Career advancement opportunity

Benefits derived by the company from the above steps are:

(a) Loyalty and dedication of agents.

(b) Increased business due to enhanced motivational level.


Incentives – Classification of Incentive Plans

Incentives can be short-term and/or long-term, which can be tied up with the performance of an individual employee or a group/unit’s productivity. Performance through incentives may be defined as cost saving, quantity produced, standards met or quality improved, revenue generated, return on investment or increased profit. This means that there are endless possibilities.

1. Long-Term Incentives:

Long-term incentives are focused on an employee’s efforts on multi-layered results, such as innovations, strategic suggestions to increase the return on investments and increasing the market share or multi-layered contributions to develop the organization’s competitiveness. These could be indirect financial support to tax payee employees, social security plans, pension plans, stock ownership, etc.

2. Short-Term Incentives:

They are in addition to the basic pay provided within the current operating year which could be supplemented to pay cheques or a separate amount on a monthly, half yearly or yearly basis. This added income relates to the employee’s achievement or special performance to benefit the organization, such as 100% attendance, overtime, reduction in cost, suggestion for improvement, long-term association with the organization, etc.

These could be classified as:

(a) Individual Bonus:

Punctuality, specialized contribution affecting quality or productivity, increasing productivity and reducing cost with modified suggestions are generally covered here, which encourages an individual to earn more, and the organization is benefited by the increased productivity and profit.

(b) Length of Service Award:

In a competitive environment, the retention of knowledgeable workers or knowledge bank has become essential and the recognition of long service may also make an employee feel proud. The organization may also feel pride in the retention of the competent employee.

They, therefore, offers service awards such as 10 years service awards, 20 years service awards, 25 years service awards, etc. annually and give recognition to the employee in annual functions. These incentives could be in cash or kind.

(c) Referral Award:

Sometimes when the labour market is tight and the management prefers to have loyal and reliable employees, by seeking referrals from old employees, they would like to pay a cash award to that employee as it has helped the organization to have a reliable and loyal employee through him/her.

(d) Suggestion Award:

This is the most common and simple incentive plan to motivate the employees to use their creativity and earn recognition.

(e) Intellectual Contribution Award:

This is more applicable to the executive class which can be motivated to contribute intellectually in suggesting or implementing creative strategies, and to improve the performance or excellence in performing a job. The awards can be calculated based on the total financial improvement achieved by the company and the share can be worked out according to the proportion of the individual contribution.

(f) Special Achievement Award:

This is also very common to boost up the morale of the executives to get recognition in achieving something special by taking initiatives and putting in more efforts.

(g) Special Behavioural Award:

In discharging duties, behaviour plays an important role. Behavioural theory also indicates that an employee’s performance is dependent on wage/salary acceptance and satisfaction of worth. To encourage the employees to change their behaviour as desired, this incentive has been found advantageous.

However, the management, depending upon the size, type, financial strength and business nature, may have different values or types of these awards.

(h) Productivity Bonus:

It is a very common incentive in any organization as pay for performance. It is the main motto. There are various productivity bonus awards applicable in all the organizations.


Incentives – Incentive Systems

A group of or organization incentive systems provides rewards to all employees in a work unit, department, division or organization. These incentives are designed to promote cooperation and coordinated effort within the group or organisation.

1. Group Incentives:

A group incentive system may be useful in overcoming some of the problems associated with individual incentives. However it may not lead to higher productivity than individual incentive system because individual effort is not as directly tied to rewards. One critical factor in the group incentive system is the size of the group. If it becomes too large employees may feel their individual effort will have little or no effect on the total performance of the group and the resulting reward.

Small Group Plans may encourage team work in groups. Groups may restrict output, resist revision of standards and seek to gain at the expense of groups.

2. Organisational Incentives:

An organisation wise incentive system compensate all employees in the organize based upon how well the organisation as a whole, does during the year.

The basic concept behind organisation wide incentive plans is that overall efficiency depends on organisation as a whole.

Common Organisational Incentive System includes Scanlon plans and various profit sharing plans.

Scanlon plans a unique type of organisation wise incentive plan. Since its development in 1927 the Scanlon plan has been implemented in many companies. The basic concept underlying the plan is that efficiency depends on team work and plant wide cooperation.

The plan has two main features:

i. A system of departmental committees and a plant screening committee to evaluate all cost saving suggestion.

ii. A direct incentive to all employees to improve efficiency.