Do you believe that incentive pay is truly effort-inducing; that is, drive employees to perform at their best? Discuss?
Incentive Pay: A brief outline
Incentive pay is a monetary benefit given as an addition to the normal day to day salary. This is done to improve employee morale. Incentive pay can be given in some of the following ways: bonuses, profit sharing, commissions, special reward recognition and stock options. Incentive pay may or may not be “truly” effort-inducing depending on various factors. In some cases, incentive pay may act as a motivation and improve performance of employees. But sometimes, incentive pay may be good for employees but not good for the firm. As, incentive pay may induce employees to use manipulative measures to achieve targets. Thus, employees won’t really be performing their best.
Incentive Pay is a true motivator
Incentive pay persuades new employees to join the firm, retains old and valuable employees, increases staff morale and loyalty, boosts productivity, syncs individual employee’s goals with firm’s overall objectives and build teamwork. It acts as a motivation because it tells employees what exactly is expected of them. It gives employees a clear picture of what they need to achieve in order to receive their bonuses. Thus, employees know that if they don’t reach their target or complete their goals, they will not receive the additional income. Getting their full salary is dependent upon certain behaviours that are well within their own control. For instance, paying sales people quarterly bonuses may dramatically improve both the motivation of employees and the company’s ability to reach targets.
Receiving “immediate” encouragement in terms of pay for a job well done provides immense satisfaction. An employee may not be a part of decision making or may not receive promotion at the early stage of his career. Thus, in such cases, one of the main immediate benefits an employee receives is incentive pay. In such cases, when a worker has the chance to earn extra pay for good performance, then he feels appreciated. That appreciation translates into a desire to stay at the organization to earn even more future rewards. This allows an organization to retain good workers while saving on their annual hiring or training costs. When an employer offers pay incentives for a job well done, it also shows concern of the employer towards the worker’s individual goals. At times, work can get monotonous and thus boring. During such times, these pay incentives can help motivate workers to stay productive as they are supposed to receive tangible awards after achieving budget targets.
Incentive Pay acts as a motivation but isn’t motivation “enough”
Frederick Herzberg rightly said that “True motivation comes from achievement, personal development, job satisfaction & recognition.” Thus, pay incentives may not always stimulate employees to perform better for a prolonged period of time. Key factors such as participation in decision making, promotion, recognition and fringe benefits can act as really strong drivers to bring out the best in employees.
At times, monetary incentives aren’t enough because they vary from year to year depending on employee performance. But, something like promotion lasts irrespective of performance of the employee in the future years. In some years, employees may not achieve budget targets due to uncontrollable external factors, in such years, incentive pay isn’t offered to employees. But, they don’t get demoted. Even though it is a mandatory for employees to follow their bosses, employees should still get opportunities to voice their opinions and ideas. They should also be given the liberty to be versatile on their approaches to conflicts and problems. This gives them a sense of belonging and encourages them to form a better relationship with the organization. As this relationship grows deeper, it increases the loyalty of the worker towards the organisation. Thus, many workers consistently go above their daily requirements since they feel invested in the welfare of the business.
Receiving titles and recognition can help employees fulfil their “esteem needs”. At the fourth level in Maslow’s Hierarchy of Needs, is the need for appreciation and respect. When the needs at the bottom three levels have been satisfied, the esteem needs begin to play a more prominent role in motivating behaviour of employees. Such needs cannot be met through incentive pay. Thus, firms need to recognise their employees. For instance, performer of the month. If the employees get a chance to contribute to the organisation’s success, they feel they matter. Thus, employers can greatly motivate employees if they make them feel that the success of your organisation also depends on them. This can be done by allowing employees to head projects as well as getting their consensus on major decisions that can affect the business, for instance.
“Performance Pay is a bad incentive for good behaviour”
More often than not, employees have a strong desire to resort to manipulative measures to achieve budget targets. Therefore, receiving their due share of bonuses. Since companies usually offer employees pay-for-performance compensation plans, employees have incentives to achieve targets at any costs. According to Wim Van Der Stede’s article, The Pitfalls of Pay-For-Performance, “PFP is an incentive scheme in which employees receive extra, performance- dependent compensation for their work if they reach certain performance targets.” As a result, management has a direct incentive to “paint a rosy picture” of the company's financial conditions in order to receive bonuses. In doing so, employees aren’t really performing their “best”.
The management should indulge in practices like: training and complimenting its employees, communicating effectively, and leading with integrity. This will help the management get its employees to give their “best” performance. For instance, training employees can give them plenty of room to grow. This way, they will not feel stuck to a routine job. Training equips employees to face bigger challenges and push them to their limits. It also gives employees a good idea of their own strengths and weaknesses thus providing opportunities to enhance and rectify performance. If there is effective communication, the organization will have a healthy and productive culture. Thus, employees and managers will have good working relationships with each other. Therefore, there will exist respect, empowerment, thankfulness. As a result, people feel respected and understood, which in turn increases morale and enhanced productivity and helps employees give in their best.
Conclusion: Cash vs Non-Cash Bonuses
Cash bonuses have long been one of the primary incentives offered to employees. However, study after study suggest that financial incentives are often inferior options. The fluctuating economy can make cash rewards difficult to maintain, and employees are less likely to talk about and build excitement for financial bonuses. Furthermore, monetary awards might be viewed as part of a compensation package rather than an incentive program. When an employee is at the early stage of his career, he may look forward to cash bonuses but after achieving a certain level, he isn’t satisfied with just incentive pay.
Thus, at such times, non-cash incentives have the potential to be much more effective. Unlike cash bonuses, which are easily taken for granted, non-financial incentives stand out as rewards. They tend to be more memorable and unique, and are more likely subjects for employee conversation. Travel incentives in particular offer an exciting destination and unforgettable experience. While cash incentives only appeal to an employee’s pocketbook, the uniqueness of non-cash incentives make employees feel particularly appreciated. A worker will most value the reward that makes them feel most valued.