In this comprehensive overview of incentives, discover how they motivate employees, enhance productivity, and align rewards with performance. Explore the meaning, importance, guidelines, types, and classification of incentive systems to foster a more effective workplace environment.
Incentives in Human Resource Management: A Comprehensive Overview
Incentives serve as a crucial tool for motivating employees, linking additional compensation directly to their productivity and performance. They are essentially variable rewards granted in recognition of achieving specific results. To be effective, it must establish a clear and direct relationship between employee effort and their subsequent rewards.
These can be short-term or long-term, and can be tied to the performance of an individual, a group, or an entire organizational unit. Performance, in this context, can be measured through various metrics such as cost savings, quantity produced, quality improvements, revenue generation, return on investment, or increased profit.
1. Meaning of Incentives
The core purpose of incentives is to align employee rewards with their achievements, offering greater compensation for superior performance. This encourages individuals to strive for higher production and improved performance.
The international labour office refers to incentives as “payment by results,” though “Incentive systems of payment” is a more appropriate term, emphasizing their role in motivating workers for enhanced production and productivity.
2. Importance of Incentives
Incentives offer several significant advantages:
- Motivation for Higher Efficiency: They induce and motivate workers to achieve higher efficiency and greater output.
- Enhanced Employee Earnings: It contribute to an increase in employees’ overall earnings.
- Cost Reduction: By boosting productivity, it lead to a reduction in both total and unit costs of production.
- Increased Production Capacity: They are likely to increase the overall production capacity of an organization.
- Operational Improvements: It payments can lead to reduced supervision, better utilization of equipment, decreased scrap, less lost time, and a reduction in absenteeism and employee turnover.
3. Variables Influencing Incentive Effectiveness
The effective implementation of incentives depends on two primary variables:
- The Individual: People value incentives differently based on factors like age, marital status, economic needs, and future objectives. Enlightened managers recognize that not all individuals prioritize monetary incentives, bonuses, prizes, or tips in the same way.
- The Work Situation: This comprises four key elements:
- Technology: The operational design of machines or work systems can define the range of applicable incentives.
- Satisfying Job Assignments: Jobs incorporating fulfilling activities can offer incentives in the form of earned time-off, greater flexibility in work hours, extended vacation time, or other valued privileges.
- Feedback: Employees need to clearly see the connection between their efforts and the resulting rewards, as this provides crucial reinforcement.
- Equity: Workers consider fairness and reasonableness as integral to the exchange for their work.
4. Incentive Program Guidelines
Effective incentive programs adhere to the following guidelines:
- Tie to Performance: It must be directly linked to performance, ensuring employees perceive a clear relationship between their efforts and rewards. Both workers and managers must view the rewards as equitable and desirable. Group incentive systems should accurately reflect the collective effort of individuals within the group.
- Recognize Individual Differences: It plans should accommodate individual variations. A diverse range of incentive systems may be necessary to appeal to various organizational groups and individuals, as not everyone desires the same types of rewards.
- Recognize Organizational Factors: The chosen incentive system must be consistent with the organization’s climate and constraints. For example, a highly participative it plan would be incompatible with an organization that strictly adheres to traditional procedures. The plan should also align with organizational resources and be developed in consultation with financial officers to determine affordability.
- Continue to Monitor: It systems require continuous review to ensure they remain relevant to current technological and organizational conditions and are operating as designed.
5. Types of Incentives
Organizations often utilize a combination of incentive systems, which can be individual, group, or organizational in nature. Performance can be measured by productivity, cost-effectiveness, and supervisory ratings.
Individual Incentives:
- Tailored Systems: Individual incentive systems can be customized to individual preferences, such as a salary-plus-commission model, commission-only, or additional time off instead of increased take-home pay.
- Measurement of Capabilities: These systems can also serve to measure individual capabilities and initiatives.
- Piece Rate Systems: The most basic individual incentive system, where wages are determined by multiplying the number of units produced by the piece rate per unit.
- Differential Piece Rate: Developed by Frederick Taylor, this system pays employees at a lower piece rate for production below a standard and a higher piece rate for exceeding the standard, aiming to stimulate higher production. However, setting accurate standards for piece-rate systems can be challenging.
Incentives for Employees:
- Financial Incentives:
- Pay and allowances
- Productivity-linked wage incentives
- Bonus
- Co-partnership/stock options
- Retirement benefits
- Perquisites
- Non-Financial Incentives:
Incentives for Agents:
- Financial Incentives:
- Commission
- Profit sharing
- Non-Financial Incentives:
- Recognition programs (e.g., certificates of merit)
- Organizational climate
- Job enrichment
- Career advancement opportunities
Benefits for the Company from Agent Incentives:
- Increased loyalty and dedication of agents.
- Higher business volume due to enhanced motivational levels.
6. Classification of Incentive Plans
It can be classified as short-term or long-term, and can be linked to individual employee performance or group/unit productivity. This allows for diverse possibilities in their application.
- Long-Term Incentives: These focus on employee efforts towards multi-layered results such as innovations, strategic suggestions for increasing return on investment, market share growth, or contributions to organizational competitiveness. Examples include indirect financial support for tax-paying employees, social security plans, pension plans, and stock ownership.
- Short-Term Incentives: Provided within the current operating year, these are supplemental to basic pay and can be distributed monthly, half-yearly, or annually. They are linked to an employee’s achievements or special performance that benefits the organization, such as 100% attendance, overtime, cost reduction, improvement suggestions, or long-term association with the organization.
Types of Short-Term Incentives:
- Individual Bonus: Rewards punctuality, specialized contributions affecting quality or productivity, increased productivity, and cost reduction through modified suggestions, encouraging individual earnings and benefiting the organization.
- Length of Service Award: Recognizes and rewards long-serving employees, fostering retention of knowledgeable workers and creating a sense of pride for both the employee and the organization. These awards can be in cash or kind.
- Referral Award: A cash award given to employees who refer loyal and reliable new hires, particularly in tight labor markets.
- Suggestion Award: A common and simple incentive plan to motivate employees to utilize their creativity and gain recognition.
- Intellectual Contribution Award: Applicable to executives, this motivates intellectual contributions in suggesting or implementing creative strategies, improving performance, or achieving excellence. Awards can calculated based on the financial improvement achieved by the company and the individual’s proportional contribution.
- Special Achievement Award: Boosts executive morale by recognizing special achievements through initiative and extra effort.
- Special Behavioral Award: Encourages desired behavioral changes in employees, recognizing that performance tied to wage/salary acceptance and satisfaction of worth. The value and type of these awards vary based on the organization’s size, type, financial strength, and business nature.
- Productivity Bonus: A very common “pay-for-performance” incentive widely used across organizations.
7. Incentive Systems
Group or organizational incentive systems provide rewards to all employees within a work unit, department, division, or the entire organization, promoting cooperation and coordinated effort.
- Group Incentives: These systems can mitigate some challenges associated with individual incentives. However, they may not always lead to higher productivity than individual systems because individual effort is not as directly linked to rewards. The size of the group is a critical factor; if too large, employees may feel their individual efforts have minimal impact on overall group performance and rewards. Small group plans can encourage teamwork but may also lead to output restriction, resistance to standard revisions, and seeking gains at the expense of other groups.
- Organizational Incentives: These systems compensate all employees based on the overall performance of the organization during the year. The underlying concept is that overall efficiency depends on the organization as a whole. Common examples include Scanlon plans and various profit-sharing plans.
Scanlon Plans: A unique type of organization-wide incentive plan developed in 1927, based on the concept that efficiency stems from teamwork and plant-wide cooperation. It has two main features:
- A system of departmental and plant screening committees to evaluate cost-saving suggestions.
- A direct incentive for all employees to improve efficiency.
