Incentives

In the field of human resources and compensation, incentives are specific rewards that are offered contingent on the achievement of some predetermined level of performance, or the performance of some specific type of behavior viewed as desirable by the organization. It could be argued that the earliest systems of exchange between organizations and individuals were primarily incentive based (i.e., piece rate systems in which individuals were paid a fixed rate for producing a set number of units). However, with the introduction of scientific management around the beginning of the 1900s, organizations moved to paying a fixed base wage or fixed annual salary. For most jobs, with the exception of sales and some lower-level jobs, monetary incentives played a secondary role as a type of additional method of motivating desired performance beyond that offered by performance appraisal and merit raises.

For organizations today, incentives serve as a way of attempting to influence future behavior toward some behavioral or production goal. Thus, they serve as a supplement to base pay or annual salary. However, unlike the base pay a person receives, incentives can be lost as well as gained. That is, if individuals do not meet the desired level of performance, or fail to perform the desired behaviors, then they do not receive the promised reward. So, incentives differ from the pay one receives from one’s job, in that incentives are directed at future behavior, whereas pay can be viewed as an exchange for past behavior. A second difference is that incentives can be lost if the behavior or performance does not occur, whereas one’s base pay is guaranteed regardless of one’s performance, given one works the required number of hours.

There are three general types of incentives commonly used by organizations. The first is monetary incentives. The second is nonmonetary, tangible incentives such as trips, gifts, or stock options. The third is praise or positive verbal reinforcement. Each type of incentive will be discussed briefly, primarily from the perspective of its practical application in modern organizations. This will be followed by a brief discussion of major theoretical approaches to the explanation of the effects of incentives on performance.

Monetary Incentives

A major incentive is money or pay. Most individuals receive some type of base pay in exchange for their labor. In addition to base pay, organizations may offer various types of incentive pay. This incentive pay is often referred to as pay-for-performance, or variable-based pay.

Incentive pay is presented as a potential reward that is dependent on behavior, productivity, or the attainment of some identifiable goal. If the behavior occurs or the goal is achieved, then pay is allocated at the individual, group, or organizational level.

When pay is used as an individual incentive, behavior may be measured using objective criteria or subjective performance ratings. Behavior may also be measured, and incentives rewarded, at the team or organizational level. Such group incentive plans are often aimed at improvement in specific areas of concern to the organization, such as cost, quality, production, absenteeism, or safety. Popular schemes for allocating organizational incentives include profit sharing, gainsharing, and goal sharing.

Skill- and competency-based pay can also be considered to be types of monetary incentive systems. Skill-based pay provides rewards in the form of pay for the completion of training that results in the acquisition of various skills; competency-based plans provide rewards for the acquisition and demonstration of various behavioral competencies.

Nonmonetary Incentives

Used in its broadest sense, nonmonetary incentives refer to pleasurable aspects of the job, benefits, and various perks. Normally, however, the pleasurable aspects of jobs and benefits are not at risk, but are fixed regardless of performance. Thus, the term non-monetary incentives is used here to refer to perks such as small gifts, trips, or awards that might be offered in exchange for the attainment of specific performance goals. For example, salespeople might be offered a cruise for meeting goals for calling on potential new clients, or teachers might receive a dinner for perfect attendance.

Such nonmonetary incentives may be a particularly effective and low-cost method of motivating behavior that is not directly tied to individual production, such as absenteeism or organizational citizenship. Of course, in designing such plans, compensation professionals must carefully consider legal issues such as the tax consequences or, in the case of absenteeism, the implications of the Family Medical Leave Act.

Stock options might also be considered to be a type of nonmonetary incentive, although they clearly have monetary value. Stock options not only serve as a reward but also impart a sense of organizational ownership.

Praise as an Incentive

A special type of nonmonetary reward is praise, recognition, positive reinforcement, or affirmation. Praise is an ideal reward because it is easy to deliver in close temporal proximity to the target behavior and tends to result in positive emotional states for the recipient. It is also very inexpensive, yet very effective. In addition, as compared with financial rewards, praise can be argued to be more likely to result in increased intrinsic motivation. The effective use of praise by a supervisor can also lead to more positive perceptions of supervisor leadership and communication.

Psychological Theories

The concept of reward is often associated with behaviorism, and behavioral theorists have contributed a great deal to our understanding of the role of incentives in molding behavior in organizations. This has included research on reinforcement schedules, the use of praise as a reinforcer, shaping, modeling, and the use of behavior modification principles in attendance and safety interventions.

The major challenge to behaviorist theories as an explanation for the performance improvements occurring as a result of incentives is offered by goal-setting theories. According to these theories, it is the establishment and acceptance of hard but difficult goals that leads to improved performance, rather than the reward itself. Cybernetic and control-theory perspectives have expanded on the goal-setting and behavioral positions by exploring the informational and feedback role played by rewards.

Evaluation of Incentives

It is very difficult to offer any overall evaluation of the use of incentives in organizations, in that the term incentives encompasses such a wide spectrum of reward options. There is a long history in psychology of research demonstrating the efficacy of both monetary and nonmonetary rewards, including praise, on behavior at the individual level. Clearly, incentives can change future behavior both through the desire for rewards and through the impact of incentives on goal setting and goal acceptance.

Incentives have also been shown to be effective in changing performance at the group or organizational level, particularly in areas such as safety and absenteeism. However, in using incentive plans for dealing with absenteeism, companies in the United States must now deal with the constraints imposed by the Family Medical Leave Act.

Monetary incentives for production or performance do appear to have an impact on retention rates. Under a monetary incentive plan, where pay is at risk, turnover tends to be lower among high-performing employees and higher among low-performing employees.

From an organizational utility perspective, the introduction of any type of incentive plan should have a positive impact on productivity and performance. However, and perhaps unfortunately, the ultimate impact of an incentive system will depend on the ability of the organization to fairly observe and measure the target behaviors.

References:

  1. Bartol, K. M., & Locke, E. A. (2000). Incentives and motivation. In S. L. Rynes & B. Gerhart (Eds.), Compensations in organizations (pp. 104-147). San Francisco: Jossey-Bass.
  2. Belcher, J. G., Jr. (1996). How to design and implement a results-oriented variable pay system. New York: American Management Association.
  3. Markham, S. E., Scott, K. D., & McKee, G. H. 2002. Recognizing good attendance :A longitudinal, quasi-experimental field study. Personnel Psychology, 55, 639-660.
  4. Milkovich, G. T., & Newman, J. M. (2005). Compensation (8th ed.). Homewood, IL: BPI/Irwin.
  5. Sturman, M. C., Trevor, C. O., Boudreau, J. W., & Gerhart, B. (2003). Is it worth it to win the talent war? Evaluating the utility of performance-based pay. Personnel Psychology, 56, 997-1035.

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