The term incentive means an inducement that motivates or stimulates one to action in a desired direction. Therefore, any wage system that induces a worker to produce more is called “incentive wage system.”

Incentive wage is a monetary inducement offered to employees to show the performance beyond the standard fixed. Incentive is one of the important factors for inducing and motivating the workers for higher efficiency and greater output.

Incentives attract a workers attention and stimulate him to work. Beside wages and salaries, employees are paid incentives depending on their performance and paid as regularly as wages and salaries. An incentive is to motivate individual or group performance.

“Incentive is a plan or programme to motivate individuals for good performance. An incentive is most frequently built on monetary reward (incentive pay or a monetary bonus), but may also include a variety of non-monetary rewards or prizes for work of an acceptable quality produced over and above a specified quantity or standard”. – Burak and Smith (1982)


Learn about:- 1. Introduction and Meaning of Incentives 2. Definitions of Incentives 3. Features and Characteristics 4. Variables 5. Classification 6. Types of Plans 7. Policies 8. Programme 9. Advantages and Disadvantages 10. How to Make Incentive Schemes More Effective?

Incentive: Meaning, Definitions, Features, Classification, Types, Plans, Policies, Programmes and Advantages


  1. Introduction and Meaning of Incentives
  2. Definitions of Incentives
  3. Features and Characteristics of Incentives
  4. Variables of Incentives
  5. Classification of Incentives
  6. Types of Incentive Plans
  7. Policies for Employee Incentives
  8. Incentive Programme
  9. Advantages and Disadvantages of Incentives
  10. How to Make Incentive Schemes More Effective?

Incentive – Introduction and Meaning

The core aspect of the human resource management is that employees primarily exchange their services and competencies for remuneration with the organisations where they are employed. Similarly, Organisations bear all kinds of costs of human resource management including payment of remuneration to employees for the employee performances. So both the employer and employees in general prefer to link performance to remuneration/salaries.

But, all aspects of remuneration can’t be linked to performance as employee needs certain portion of the remuneration to meet his/ her basic needs irrespective of the contribution. As such, basic salary and allowances are determined based on employee’s basic needs and the remaining salary can be determined based on the employee’s performance. This portion of the remuneration is called variable salary. Variable salary is also called incentive payments, which is based on employee performance/contribution to the organisation.


Incentives are monetary benefits paid to workmen to recognize their outstanding performances. Incen­tives are defined as ‘variable rewards granted according to variations in the achievement of specific results.’ The international labour office refers to incentives as ‘payment by result’. However, it is also appropriate to call them ‘incentive systems of payment emphasizing the need of motivation, which is, giving incentives to workers for higher production and productivity’.

Unlike wages and salaries, which are relatively fixed, incentives generally vary from individual to individual, and period to period for the same individual. Now you need to be acquainted with the role of incentives. The term ‘incentive’ has been used both in the restricted sense of participation and in the widest sense of financial motivation. It is used to signify inducements offered to employees to put forth their best in order to maximize production results.

Incentive is one of the important factors for inducing and motivating the workers for higher efficiency and greater output. Incentives attract a workers attention and stimulate him to work. Beside wages and salaries, employees are paid incentives depending on their performance and paid as regularly as wages and salaries. An incentive is to motivate individual or group performance.

It includes both monetary and a variety of non-monetary rewards or prizes. It is paid to workmen in recognition of their outstanding performance. Wages and salaries are relatively fixed but incentives vary from individual to individual and from period to period for the same individual. Incentives can be defined as, “variable rewards granted according to variations in the achievement of specific results.”


Though money is the real motivator to incite a man for work because it satisfies various needs physiological and others and is essential to maintain himself and his dependent. Usually middle class, ordinary people gives more importance to money. Incentive induces the worker which enhances the morale and motivates him to produce higher and better at minimum cost. Incentives as stimulus are mainly psychological which maintain and strengthen the desire to achieve improved performance.

Incentive – Definitions by Ratnam, Srivastava, Florence, Scott, Burak, Smith, Ditcher, National Commission on Labour and International Labour Office

The term incentive means an inducement that motivates or stimulates one to action in a desired direction. Therefore, any wage system that induces a worker to produce more is called “incentive wage system.” Incentive wage is a monetary inducement offered to employees to show the performance beyond the standard fixed.

According to National Commission on labour “wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration, for improvement in the present or targeted result.”

In the words of Venkata Ratnam and Srivastava, “a wage incentive scheme is a method of payment for work of an acceptable quality produced over and above a specified quantity or standard.”


The International labour Office refers to incentives as – “payment by result.”

Thus, it is a system of payment in which amount payable to a worker is linked with the output or product produced. The incentive payable may be financial or non-financial. Both play an important role in the compensation management.

The term incentives payments or wage incentives has been used both in the restricted sense of participation and in the widest sense of financial motivation. It has been defined differently by different authors. We give below a few of these definitions.

“It is a term which refers to objectives in the external situation, whose function is to increase or maintain some already initiated activities, either in duration or in intensity.” According to Hummel and Nickerson incentive payment refers to “all plans that provide extra pay for extra performance in addition to regular wages for a job.”


Florence observes- “It refers to increased willingness as distinguished from capacity. Incentives do not create but only aim to increase the national momentum towards productivity.”

In the words of Scott, “it is any formal and announced programme under which the income of an individual, a small group, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity output.”

“Incentive is a plan or programme to motivate individuals for good performance. An incentive is most frequently built on monetary reward (incentive pay or a monetary bonus), but may also include a variety of non-monetary rewards or prizes for work of an acceptable quality produced over and above a specified quantity or standard”. – Burak and Smith (1982)

The International Labour Office refers to incentives as “Payment by results.” According to George R. Terry, Incentives means that which incites or has a tendency to incite action.


Dr. Earnest Ditcher defines, “Incentives is a stimulus or a reason for producing action. Almost all of the human motivations can serve an incentive-anxiety, worries, fear, hope, prestige, money, security and so on-are all actual or potential incentives in our daily life.”

Incentive – Salient Features and Characteristics of Sound Incentive Plan

The following are the salient features of incentives:

i. Incentives are based on standards fixed for job performance.

ii. They are to be linked to work performance.


iii. They should not vary from person to person and from time to time.

iv. They should motivate employees for better performance.

v. They should be measurable in monetary terms.

Characteristics of a Sound Incentive Plan:

Since the underlying objective of an incentive wage plan is to encourage workers to perform with zeal and earn good wages, a sound incentive wage plan would have the characteristics as under-

1) The incentive plan should be simple and easily understandable by the employee.


2) It should be acceptable to all the interested parties.

3) The reward under the plan should be adequate and immediately paid.

4) The norm or standard upon which the plan is to be based should be fixed after careful work measurement devices, such as time and motion studies, work sampling, standard data etc.

5) The plan should be fair and just both to the employer and employees.

6) It should not cost unwarranted burden on the employer nor should it deprive the worker of his due reward for an increase in output.

7) Guaranteed basic or time rate should be established by job evaluation. This will give the workers a feeling of security about their earnings.


8) There should be no unwarranted rate cutting, otherwise the plan would fail and create resentment among workers.

9) The incentive scheme should be definite and should not be changed frequently.

10) To avoid development of grievances among certain workers, the plan should be applicable to all jobs for which incentive plan can be profitably adopted.

Incentive – 3 Important Variables: Individual, Work Situation and Incentive Plan

The effective use of incentives depends on three variables the individual, work situation, and incentive plan.

(i) The Individual and the Incentives:

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

However, even though employee reaction to incentives vary greatly, incentives must have some redeeming merits. For example, there might be a number of monetary and non­monetary incentive programmes to motivate employees. Money, gift certificates, praises, or merit pay are of the continuous parade of promotions.

(ii) The Work Situation:


This is made up of four important elements:

(a) Technology, machine or work system, if speed of equipment operation can be varied, it can establish range of the incentive,

(b) Satisfying job assignments, a workers’ 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,

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

Incentives, in general, are important motivators. Their effectiveness depends upon three factors- drives, preference value, and satisfying value of the goal objects. Misra says, “Beyond subsistence level, becoming needs (self-actualisation needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival). Below the subsistence level, however, the reverse holds true.”


He makes the following generalisations:

(i) Incentives, whether they are monetary or non-monetary, tend to increase the level of motivation in a person.

(ii) Financial incentives relate more effectively with basic motivation or deficiency needs.

(iii) Non-financial incentives are linked more closely with higher motivation, or becoming needs.

(iv) The higher the position of a person in an organisation’s hierarchy, the greater is his vulnerability to non-financial incentives.

“While budgetary restrictions and temporary improvements in performance place a limit on the potency of money as a motivator, non-financial incentives involve only human ingenuity as investment and also insure a relatively stable acceleration in output. Monetary incentive 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.”

Incentive  Classified into 2 Groups: Financial Incentives and Non-Financial Incentives

Incentives are classified into two groups:


1) Financial or Monetary incentives

2) Non-financial or Non-monetary incentives

1) Financial Incentives:

These incentives are payments for improved productivity, attendance and general improvements in employee performance. This type of incentives may be direct or indirect in nature. Indirect financial incentives scheme, the payments are based on employees own performance or contribution to the job such as production incentive schemes, attendance bonus, profit sharing etc.

In case of indirect financial incentives the payments are not directly related to employees contribution but schemes are like subsidized means such as leave encashment, gratuity scheme, leave, travel concession etc., money provide a sense of security in workers. Financial incentives are more important than non-financial incentives. These incentives may be given to individuals or to groups.

2) Non-Financial Incentives:

Non-financial incentives include all other influences, planned or unplanned which stimulate exertion. Merely cash incentives cannot help in solving the problems of industrial production. In order to induce enthusiasm in a worker, for greater and better work, non- monetary incentives have a distinct and significant role. These incentives are based on sociological and psychological principles of higher behaviour.

The following are the non-financial incentives:

i. Welfare and security measures

ii. Social and sports activities

iii. Educational opportunities

iv. Suggestion schemes- participation in management

v. Meritorious service awards

vi. Sound performance appraisal

vii. Promotion policy

viii. Better working conditions

ix. Creation of healthy organisational planning and development

x. Knowledge of results

xi. Growth opportunities in the organisation

xii. Recognition

xiii. Job security

xiv. Delegation -of authority and responsibility

xv. Training facilities

Like financial incentives, non-financial incentives may be positive or negative. And it may also be given individually or to group.  

Incentive – Top 2 Types of Incentive Plans: Individual Incentive Plans and Group Incentive Plans

A large number of wage incentive plans are used in organizations.

They may be classified into two broad categories as follows:

1. Individual incentive plans.

2. Group and collective incentive plans.

Type # 1. Individual Incentive Plans:

Under individual incentive plans, a worker’s earnings are directly related to his/her performance. These plans may be based on time or output. Under time-based plans, a standard time is determined and incentive wage is paid to those employees who complete their jobs in less than the stipulated stan­dard time. Under output-based plans, a standard output level is determined and incentive wage is paid to those employees who surpass the standard output level.

Some major individual plans are explained here:

(A) Taylor’s Differential Piece Rate Plan:

This plan was developed by F.W. Taylor (USA), the Father of Scientific Management, in 1880. Under Taylors plan, the standard output is established through time and motion studies, and workers are required to produce at 100 per cent level of efficiency as specified by the established standard time.

Two piece rates are specified for each job. A lower piece rate is applicable for performance below the standard level, and a higher piece rate is appli­cable for performance above the standard level.


(i) It makes a distinction between more efficient and less efficient workers and provides suf­ficient incentive to efficient workers to put forth their best performance.

(ii) It encourages work efficiency as there is no provision for a minimum guaranteed wage payment to workers.

(iii) Use of time and motion studies helps in standardizing work methods.


(i) The low rate is a sort of punishment to less efficient workers.

(ii) It does not provide for a guaranteed minimum wage and is, therefore, vehemently opposed by workers who cannot produce with exceptional pace.

(iii) The existence of low piece rate does not act as effective incentive force, but provides a sort of negative incentive to workers. In general, workers consider the low rate below task as harsh and unacceptable.

(iv) This plan fails to attract workers who are accustomed to receiving time wages or piece rate wages backed by guaranteed wages.

(B) Merrick’s Differential Piece Rate Plan:

M. Dwight V. Merrick proposed another plan by suggest­ing a modification in the Taylor’s plan. Instead of two, Merrick’s plan proposed three piece rates and made the lowest piece rate equal to the ordinary piece rate which became the ‘basic piece rate’.


(i) Merrick’s plan is a good incentive system for potentially high producers. It seems reason­able to pay the production bonus at 110 per cent of the basic piece rate to the workers when they reach 83 per cent task because many workers should be able to reach 83 per cent task with a little extra effort and when they do so they will be encouraged to reach the 100 per cent task.

(ii) By introducing the basic piece rate for low output, Merrick has removed the punitive wage rate proposed by the Taylor’s plan.

(iii) Merrick’s plan is less harsh to beginners or learners.


(i) It does not guarantee a minimum wage to workers, which is an essential ingredient of any incentive plan.

(ii) Merrick’s plan does not distinguish between those workers who produce less than 83 per cent of the standard output. All workers producing from 1 per cent to 82.9 per cent of the stan­dard output are clubbed together and classified as sub-standard and paid at the same rate.

(C) Gantt Task Bonus Plan:

Gantt Task Bonus Plan was developed by Henry L. Gantt, a close associ­ate of F.W. Taylor, in 1901. He modified Taylors plan and substituted Taylors punitive wage rate by a guaranteed basic wage. The guaranteed basic wage is always a time-rate wage.

A worker who fails to complete the task within the standard time receives wages for actual time spent at the specified rate. Workers who achieve the standard output within stipulated time get extra bonus— varying between 20 per cent and 50 per cent, but usually 20 per cent. This bonus is a percentage of the guaranteed time wages. For outputs above the standard, high piece rates are paid and are known as ‘output earnings’.

(D) Halsey Premium Bonus Plan:

This plan was developed by F. A. Halsey and was first introduced in the Weir Engineering Works of Glasgow, UK, in 1900. Under this plan, the standard time is fixed for the completion of a job. The standard time is fixed on the basis of past performance record or time study.

On the basis of this, wage rate per hour is determined. For each worker, the ‘guaran­teed base rate’ is assured. If a worker takes the standard time or more for the completion of a job, he/she is paid at the time rate.

In other words, time wages are guaranteed even if the output of a worker is below standard. Where the work is done in less than the standard time, the worker is paid for the actual time worked plus a bonus on the time saved. The bonus of the saved time paid to the worker is usually 50 per cent and the remaining 50 per cent is received by the supervisor.


(i) The plan is simple to understand and workers can easily calculate their earnings.

(ii) Every worker is guaranteed a minimum hourly wage which not only creates a sense of security but also brings a positive incentive for the workers.

(iii) The wages of time saved are divided equally between the employer and the worker. Since division of profits of saved time benefits both the parties, it makes for the permanence of the bonus rate.

(iv) Workers do not reject the Halsey plan particularly on the question of the earnings it fetches them because workers who save time can utilize the time saved in doing other jobs and earn more.

(v) Since the employer gets a share of benefit of saved time, the adverse effect of fixing a high wage rate is mitigated to a large extent.


(i) There may be difficulties in setting standard time for various jobs. This may cause dis­agreement over the question of some jobs being easier or lighter than others.

(ii) If the guaranteed wage rate is unreasonably high, the plan may not be economically work­able. On the other hand, if the wage rate is low, the incentive value may be low.

(iii) Careful supervision is necessary to ensure that the workers, in their eagerness to work fast, do not waste materials unduly or damage machines and tools carelessly. Those workers who are over enthused to exceed the target may not take due care of the quality standards.

(iv) The plan does not provide full benefit of work efficiency to the worker. This may provide little incentive to work hard if the bonus is exclusively the result of the worker s own efforts and ability.

(E) Rowan Premium Bonus Plan:

James Rowan of the UK brought out this plan in 1898. Under this plan, a minimum time wage is guaranteed to every worker. Standard time and rate per hour are also fixed for each job. If the time taken to complete the job is equal to or exceeds the standard time, the worker is paid for the time taken at the rate per hour.

If the time taken is less than the standard time, a worker gets extra bonus, in addition to the time wages. The bonus takes the form of a percentage of the workers time rate. This percentage is equal to the proportion of the saved time to the standard time.


(i) There is a guarantee of minimum wage to all workers which provides them with a sense of security about daily earnings.

(ii) Both the workers and the employer share the benefit of time saved.

(iii) Efficient workers get maximum bonus when they save 50 per cent of the standard time. After that, the rate of bonus diminishes. This provides a check against over-speeding and deterioration in work quality.


(i) Under this plan, a worker can hope to earn maximum bonus only when the time saved is half of the standard hours. On account of this limitation, workers cannot hope to increase their earnings substantially.

(ii) The labour cost is generally high in Rowan Plan. In practice, the difference between the task time and the actual time is not much and it is seldom, if ever, equal to half task time. More bonus paid to the worker means more labour cost.

(iii) Above all, the complications involved in calculating the bonus generally put workers in suspicion regarding the management’s intentions. Therefore, it is opposed by trade unions.

(F) Bedeaux Point Premium Plan:

This plan was developed by Charles E. Bedeaux in 1911. Under this plan, the standard time for the job is determined in terms of ‘minutes’ and is called B. Thus, there are 60 Bs in one hour. If a worker fails to complete the job within the standard time, or just finishes it within the standard time, he/she is paid just the normal time wages.

If, however, he/she can complete the job in less than standard time, he/she receives incentive bonus equal to the wages for the saved time, measured in terms of excess of B points over the actual time taken. The incentive bonus is normally paid to the workers @ 75 per cent of the time saved. The rest 25 per cent goes to the supervisor.


(i) Minimum wages are guaranteed to workers even if they are unable to complete their job within the standard time. This provides a sense of security about daily earnings to workers.

(ii) Since 25 per cent benefit of the time saved goes to the supervisor, he/she feels motivated to get higher work performance from the workers.

(iii) This plan can prove useful as a basis for scientific production control, particularly for pur­poses of estimating, planning, and controlling machine capacities and for determining standard production costs.


(i) Workers may resent sharing bonus with the supervisor, especially if the bonus is the result of their own work efficiency.

(ii) Although the earnings of a worker increase as his/her efficiency rises, the rate of increment in earnings is less than that in a straight piece-rate plan.

(iii) Much clerical work is involved in maintaining records and preparing wage accounts, which makes Bedeaux plan costlier as against many other incentive plans.

(G) Emerson Efficiency Bonus Plan:

Emerson of the USA brought out his efficiency bonus plan in 1910. Under this plan, the standard time for the job is determined scientifically and a minimum time wage is guaranteed to all workers. The efficiency of each worker is determined by comparing (i.e., dividing) the actual time taken with the standard time. Up to 67 per cent of efficiency, wages are paid by time-rate.

Bonus is given only when the efficiency level goes beyond 67 per cent. As the workers efficiency increases, his/her bonus also increases. When a worker’s efficiency varies between 67 per cent and 99 per cent, he/she receives bonus at different percentages of his/her basic wage.

When his/her efficiency is 100 per cent, the worker’s bonus is 20 per cent of the basic wage. When the efficiency is more than 100 per cent, for every 1 per cent increase in efficiency, there is a 1 per cent increase in bonus, and a worker’s total earnings comprise time wages plus 20 per cent bonus plus 1 per cent extra bonus for each 1 per cent increase in efficiency level beyond 100 per cent.


(i) A guaranteed time wage provides a sense of security to workers.

(ii) Under this plan, whenever the efficiency of a worker is 67 per cent, he/she gets a bonus. In this sense, the Emerson plan definitely provides an encouraging reward to workers.

(iii) Direct labour cost reduces rapidly when a worker’s efficiency is between 67 per cent and 100 per cent. This, however, is not the case when the efficiency level is above 100 per cent.

(iv) The plan encourages a healthy competition among workers to show higher levels of effi­ciency and earn a larger and bigger share of bonus.


(i) The lowest efficiency percentage which enables a worker to earn a bonus is very low (67 per cent), and so may result in less output than expected from workers.

(ii) There is little incentive after 100 per cent efficiency level. In this sense, the Emerson plan is not very flexible.

(iii) Wage calculations need careful attention. A great deal of clerical work is involved as effi­ciency may vary not only from one worker to another but also from one period to another.

Type # 2. Group Incentive Plans:

Individual incen­tive plans are applicable to those jobs where the output of each individual worker can be accurately measured. In some jobs, however, operations are performed through group efforts and it is not possible to ascertain the exact contribution of an individual worker in the final output—e.g., in assembly-line jobs. In such cases, group incentive plans are used.

For using group incentives, the nature of work should be such that, first, it needs joint or simultaneous efforts of more than one per­son; second, the amount of work done by the individuals in the group cannot often be separated and measured; and third, the tasks or jobs of the individuals in the group are mutually interdependent. Two main types of group incentive plans are – the Priestman bonus plan and the Scanlon plan. Both are discussed here.

(A) Priestman Bonus Plan:

Under this plan, a committee representing the management and the workers mutually sets forth the standard of performance or task standard (TS). This TS is usually set in advance every month. Then, the actual output of the group is compared with the standard output to decide about the incentive bonus.

The group concerned gets a bonus only if the actual output (AO) exceeds the predetermined standard of performance (TS). Like several other incen­tive plans, it also guarantees a minimum wage to each worker. The group supervisor also gets a share of the group bonus under this plan.

Sometimes under this plan an apprentice gets his/her bonus at twice the percentage of bonus allowed to other workers, especially where the guaran­teed wage of the apprentice is very low and when it is necessary to encourage the apprentice to improve his/her work.

The percentage of productivity bonus payable to each employee is deter­mined by the following formula:

(Pa/Wa – Pb/Wb /Pa) x 100,


Pa = Actual output during the assessment period

Wa = Number of workers in employment during the assessment period

Pb = Standard output in the base period

Wb = Number of workers in employment during the base period

Pa/Wa = Actual output per worker during the base period

Pb/Wb = Standard output per worker during the base period

(B) Scanlon Plan:

This plan was developed by Joseph N. Scanlon, a union president, with the purpose of increasing productivity by involving employees in reducing cost of operations and improving work methods. The plan relates labour cost to the total sales value to measure labour effective­ness. Incentive bonus is paid to workers based on the percentage reduction in the labour to sales ratio, comparing between base period and assessment period.

The formula for calculating per­centage reduction in labour index is as follows:

(Lb – La/Rb – Ra/Lb/Rb) x 100


Lb = Total labour cost of the base month

Rb = Total sales value for the base month

La = Total labour cost for the assessment month

Ra = Total sales value for the assessment month

Lb/Rb = Standard labour to sales ratio for the base month

La /Ra = Actual labour to sales ratio for the assessment month

Advantages of Group Incentive Plans:

(i) Group plans ensure more production and better productivity as group work creates a sense of mutual cooperation among workers.

(ii) Since the nature of work is interdependent, group plans reduce idle time and wastage of materials.

(iii) Because of interdependence of work, workers and supervisors can keep a watch over the work of one another thereby ensuring good and speedy work.

(iv) Charges of favouritism in the assignment of ‘tough’ and ‘easy’ jobs are not likely to occur in group plans.

(v) More skilled and experienced workers feel motivated to help and train less experienced workers and make influential contributors in achieving group productivity.

Limitations of Group Incentive Plans:

(i) Group plans may cause difference of opinion among workers over the question of distribution of work and bonus. Fast and efficient workers may demand larger share of bonus as against slower workers, giving rise to some discord and mutual acrimony.

(ii) The incentive for an individual worker may not be strong enough to motivate him/her to produce more. An efficient worker may always feel that his/her hard work will benefit more to those who are lazy and inefficient.

(iii) Rivalry among members of the group may defeat the very purpose of team work and cooperation.

Incentive – 3 Important Policies for Employee Incentives: Performance Appraisal Reviews, Pay for Performance and Annual Review

Employee incentives are a part of employers’ compensation policies. Incentives can be based on number of factors, such as performance, sales or other standards the company uses to reward employees for attaining organizational and career goals. For example, employees whose sales exceed the company’s expectations might be eligible for an incentive if their sales performance meets certain guidelines.

Guidelines employers use for sales incentives include actual sales figures, repeat customer sales or sales to customers within the company’s emerging markets. Employee incentives are almost always specifically outlined using eligibility criteria to eliminate gray areas about performance expectations.

Some of these policies include:

1. Performance Appraisal Reviews:

These are an integral part of compensation policies on merit increases. Employers typically require that supervisors and managers conduct performance appraisals for employees who report to them. Performance appraisals use job descriptions, performance standards and work logs to determine if employees are meeting the employer’s expectations in terms of productivity and quality of work.

2. Pay for Performance:

A pay-for-performance compensation policy is similar to a merit increase because it’s based on employee performance. The difference between a merit increase and a pay-for-performance policy is that pay-for-performance increases are not usually limited to specific percentages based on achieving a certain rating. Pay-for-performance policies increase employee salaries based on performance that advances the organization’s goals.

One of the characteristics of a pay-for-performance compensation policy is that managers have more latitude in determining the amount of a salary increase.

3. Annual Review:

HR staff should review compensation policies on an annual basis to ensure the company is maintaining a competitive edge. An example of using annual reviews to strengthen competitive compensation policies occurs when employers effect salary adjustments based on market pricing for employees with skills and qualifications in high demand.

Another example involves adjusting salaries and wages in accordance with cost of living increases. Reviewing compensation policies regularly also ensures the company is in compliance with Governmental regulations concerning fair pay, minimum wage and overtime rules.

Incentive – Incentive Programmes: Effectiveness, Components and Design

In most of the industries, the labour cost significantly contributes to the operation cost. Flexibility of labour cost is timely and relevant, and needs consideration. Multiple aspects of incentive design could effectively improve the flexibility of labour cost structure. The possibilities and limitations of flexibility need evaluation.

Research on performance management effectiveness emphasizes that the most chal­lenging areas for most of the organizations were the need to improve the ability to link organizational performance and incentive, and provide direct feedback to employees on individual performance. Incentive pay programs are also termed ‘variable pay programs’.

There are two critical questions that could improve the effectiveness of incentive programmes. These are – (a) how can changes to the incentive programme design facilitate better line of sight to business per­formance and (b) what changes could help increase differentiation of incentive pay-outs by performance.

Linking organizational performance to incentives could be a function of two critical factors:

(a) The use of organizational performance metrics in the design of incentive compensation, and

(b) Effective ongoing communication of organizational performance to the employees.

Incentive Programme Components:

Noe, et al. (2008) mentions an overview of the programmes for recognizing employee contribution. Each programme shares a focus on paying for performance. Based on three design features, four consequences, and two contingencies, the programmes differ. Apart from incentive pay, employee contributions can also be recognized by way of merit pay, profit sharing, ownership, gain sharing, and skill-based pay.

The three design features are payment method, frequency of payout, and performance measures.

The four consequences are performance motivation, attraction, culture, and costs.

The two contingencies are management style and type of work.

Incentives may be given in the form of bonus (payment method) payable weekly (frequency of payout), and based on individual output or productivity sales (performance measures). Incentives can generate a clear performance-reward connection (performance motivation), relying of the philosophy of ‘pay higher-performer more’ (attraction) creating competition among individuals (culture) who are obviously conforming to the set and maintained standards to reduce wastage (costs).

Incentives should be under control (management style) for a stable individual and output of efforts is easily measurable (type of work).

Employees at all levels in the organizational hierarchy are motivated through incentives and rewards and the chief executive officers are not an exception.

Considerations for Designing the Incentive Program:

The design of the employee bonus or incentive program is critical, aspects that need to be considered for employee incentive programs are the following elements:

1. Business goals

2. Financial goals and constraints

3. Market trends

4. Employee demographics

5. Employee preferences

6. The desired behaviour expected of an employee.

Incentive – Advantages and Disadvantages


Incentive offers the following advantages:

(i) It Attracts Efficient Employees:

Incentives offer both financial and non-financial benefits and hence it attracts efficient, hard­working and ambitious employees.

(ii) Higher Opportunities:

Efficient, hard-working and ambitious employees have higher opportunities to earn more and to occupy higher position in the organization.

(iii) Increase in Productivity and Profitability:

As incentives offer performance linked benefits, workers work hard to avail those benefits which in turn increase production, productivity and profitability of the organization.

(iv) Reduction in Labour Turnover and Absenteeism:

As workers are interested in continuity of work so as to increase their income and standard of living, performance and efficiency linked incentive plans help in reducing labour turnover and absenteeism.

(v) Good Industrial Relation:

Contended or satisfied employees always maintain good human relation and harmony. Employees give co­operation and develop team spirit among them as any obstruction on the part of worker may affect on output and reward. Thus, incentive plans help to maintain good human relation among employees and employers.

(vi) Reduced Supervision:

Incentives motivate the employees to work hard and enable them to improve their performance so as to earn more income. Therefore incentive plan reduces close supervision of workers as their concentration will always be on hard work and good performance.


Incentive suffer from the following disadvantages:

(i) Effect on Quality:

In the race to work more and earn more workers may not give importance to quality of output they are producing which in turn may affect on the progress of the business.

(ii) Effect on Health of Workers:

In view of hard, continuous and over work, workers may spoil their health resulting into labour turnover and absenteeism.

(iii) Problem of Strike and Lock out:

Once the incentive is introduced, the same is to be continued. But due to competition or depression in business or due to heavy loss, if management is unable to extend the benefit in any year, workers may resort to strike or management may have to declare lockout which may spoil the industrial relation.

(iv) Time Consuming and Expensive:

Incentives  involves heavy clerical work and maintenance of records for calculating and paying extra remuneration to workers. It also needs appointment of extra staff for recording and maintaining the records which is expensive.

(v) Difference between Efficient and in-Efficient Workers:

All the incentives make difference between efficient and in-efficient workers and reward or benefit is extended according to their efficiency and performance. This creates a sense of conflicts, superiority and inferiority feeling among the workers.

Incentive – How to Make Incentive Schemes More Effective? (Principles and Guidelines)

Whatever may be the incentive scheme, its proper implementation is very important. Certain principles and guidelines are to be followed to make any incentive scheme more effective and workable.

These are:

1. Situational characteristics and constraints of an organisation should be analysed and recognised before an incentive scheme is introduced. These constraints may relate to technology, labour market, product market, raw materials, work standards, and structural factors.

2. The incentive plans should be devised with great care and foresight to enable workers to reasonably understand the foundation and rationale upon which their incentive earnings are based.

3. The workers should be taken into confidence from the beginning and all the features of the proposed scheme -should be carefully explained to them in advance. The incentive formula should not only be understandable but should also establish some direct relationship between the earnings of the employee and the quantity and quality of his output.

Further, provision should be made for the participation of workers’ representatives in the introduction and implementation of the system in an atmosphere of good industrial relations.

4. As wage incentives are intended to reward differential performance, it should not be used as compensation for low wage. They should not become a substitute for general increase in base pay.

5. Production processes, job methods, plant layout, equipment, and material should be improved before the commencement of a wage incentive scheme. The organisation should engineer each task to determine the base method, then set standards based upon that best method, and finally instruct workers to follow the same.

6. If any changes in methods study, work measurement, and job evaluation are contemplated, workers should be trained in those new methods.

7. The incentive scheme should cover as many employees as possible to do away with market inequities and disparities in earnings.

8. If there are serious irrationalities in the pay packet or wage structure, they should be corrected before the scheme is actually introduced.

9. The incentive earnings should be sufficiently generous to convince employees that they are being adequately paid for their extra effort.

10. The basis for sharing gains of productivity should be fair to employees and are to be worked out in agreement with unions.

11. A periodic review of the working of the scheme should be undertaken if the scheme is to retain its dynamic character and with a view to applying timely correctives.

12. If expertise for designing and implementing the incentive scheme is not available in an organisation, advice and assistance of an outside expert or a consultant should be taken. An incentive scheme, if not properly worked out and implemented, can do more harm than good.

13. If the choice for increasing production lies between the system of overtime and incentive bonus, the latter should be preferred. Overtime induces workmen to earn more by slackening their pace of work during the scheduled hours. Thus, it represents a form of disguised unemployment.

14. Incentives are not to be used to induce workers to work so fast that they are unduly fatigued and their health suffers.