Incentive, Recognition, and Reward Systems

Incentive, Recognition, and Reward Systems

Incentive, recognition, and reward systems are often referred as ‘incentive systems’ in short. These systems are developed on the things which can attract the employees’ attention and stimulate them to work more efficiently. These systems are intended to achieve some specific change in the employees’ behaviour and aim at improving the overall performance of the employees and hence the organization by linking the interests of the employees to those of the organization. They are developed to make the employees’ performance more effective within the environment under which the organization is functioning. They are elaborated based on the numerous ways of providing supplementary compensation in the form of fringe benefits which are based upon equity and efficiency.

There are several definitions for incentive systems. Some of these definitions are described here. In one of the definition, incentive systems are defined as ‘variable rewards granted according to variations in the achievement of specific results’. In another definition, ‘incentive systems are systems of payment emphasizing the point of motivation, which is, the imparting of incentives to the employees for higher production and productivity’. In yet other definition ‘incentive systems constitute monetary incentives which are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration, for improvements in the present and targeted results’.

The primary purpose of the incentive systems is to build a workforce of the employees in the organization which is not only motivated but also effective, efficient and accountable as well. Employees in the organization are geared to take up challenging tasks besides giving a healthy output. Besides this primary purpose, incentive systems result into the improvements in the work culture of the organization by (i) creating a positive work environment, (ii) motivating higher performance, (iii) reinforcing desired behaviour, (iv) creating a culture of recognition, (v) increasing the employees’ morale, (vi) supporting the organization’s mission and values, (vii) increasing retention of the employees and decreasing their turnover, and (viii) encouraging loyalty and identification of the employees with the organization.

The tools of incentive systems are used by the management of several organizations to motivate employees for carrying out of a task, for learning of new skills and for changing of behaviour patterns. Incentive systems can be very effective motivators when used appropriately. In case they are not appropriate then they do not inspire the employees and hence do not have the motivating effect. Effective incentive systems can help an organization to maximize its performance and to realize its full potential.

Incentive systems are a significant factor in encouraging employees and increasing their enthusiasm at work which results in improving the general performance and thus increasing the productivity. These systems, also, help in attaining job satisfaction which increases the interaction between the employees and the organization. Similarly, workplace environment plays a very important role in the designing and the development of effective incentive systems for an organization.

Implementation of incentive systems in the workplace is beneficial to both the employees and the organization. When recognized for stellar performance and productivity, employees have increased morale, job satisfaction and involvement in organizational functions. As a result, the organization experiences greater efficiency, improvement in productivity, increase in production and sales, and higher profitability. Through implementation of the incentive systems in the workplace, employees of the organization enjoy a positive and productive work environment. However, the success of incentive systems as motivators depends if the systems are implemented through a transparent scheme through an incentive systems’ policy of the organization.

Management of the incentive systems is concerned with the formulation and implementation of strategies and policies in order to provide incentives to the employees fairly, equitably and consistently in accordance with their value to the organization. It deals with the establishment of incentive strategies and the development of the design, implementation, and maintenance of incentive systems consisting of the processes, practices and procedures which aim to meet the needs of both the organization and the employees. Also, for effective incentive systems, it is essential that the organization (Fig 1) has (i) a measurable assessment criteria, (ii) a formal assessment against these criteria, and (iii) the results of these assessments are to be clear and transparent and of such a standard that a predetermined scale of incentives can be based thereon.

Fig 1 Essentials of effective incentive systems

Management of the incentive systems

Management of the incentive systems is basically the managing of expectations. The expectations which the employees have from the management in return for their contribution and the expectations which the management has from the employees in return for the incentives being given. Several expectations are built into the management-employees relationship with the introduction of the incentive systems. In these expectations, the employees are to provide their efforts and skills to the management, in return for which the management is to provide incentives for their efforts and skills.

Incentive systems are considered an important element in the management of human resource in an organization. The management of the incentive systems is essentially about designing, implementing and maintaining the incentives which help to improve organizational performance. Basically, it is the process of developing and implementing strategies, policies and systems which help the organization to achieve its objectives by obtaining and keeping the employees happier so that their motivation and commitment towards their work increases thus benefitting the organization. The incentive systems are to be designed to support the achievement of the organization’s strategies and are the incentives are to be based on a philosophy which is as per the culture of the organization.

The objectives for the management of the incentive systems include (i) development of a performance culture, (ii) creation of additional value for the organization, (iii) motivate the employees for their improved performance, (iv) development of a positive management-employees relationship, (v)  alignment of incentive systems both with the organizational goals and the employees’ values, and (vi) just and fair treatment.

Fig 2 Objectives for the management of the incentive systems

Incentive systems management is based on a set of beliefs and guiding principles which are consistent with the values of the organization and include beliefs of fairness, equity, consistency, and transparency in the operation. The philosophy recognizes that if the management invests in the employees then a reasonable return is required. Incentive systems are based on benefitting the employees differentially according to their contribution (i.e. the return on investment generated). The philosophy of incentive systems recognizes that it is to be strategic in the sense that it addresses long-term issues relating to how employees are to be valued for what they do and what they achieve. Incentive systems strategies as well as the processes and procedures which are needed for implementing the systems are to flow from the organizational strategies so that the motivation, commitment, engagement, and development of the employees can be achieved. For this, it is essential that the incentive systems are to (i) apply equitably, (ii) function consistently, and (iii) operate transparently.

Concept of incentive systems

The incentive systems are being considered as one of the important techniques for encouraging the employees to put forth their best efforts and work more efficiently. It is because these systems direct the capabilities of the employees towards working more efficiently so as to achieve organizational objectives.  The basic thing of these systems is that the systems are to have built in mechanisms to motivate the employees for putting up their best while working. It is commonly believed that if the incentive systems are properly designed and are used effectively, they can motivate the employees to perform more efficiently and thus can have a positive effect on organizational performance.

It is widely believed that employees can be motivated by incentive systems which enable them to achieve their capabilities by providing them with the goals to be attained. But the capabilities of individuals and the goals associated with them can vary widely and hence the incentive systems need a proper care during its designing so that all the pros and cons which can affect the emploees’ behaviour at work have been considered and taken care before its implementation.

Incentive systems are normally based on the expectancy theory, which suggests that employees are likely to be motivated to perform more efficiently when they perceive that there is a strong link between their performance and the incentives they receive. Generally, incentive systems are based on direct and indirect compensation. These systems can be developed as individual plans, group plans and organizational plans.

The proper design and transparent operation of incentive systems’ processes and practices are important for the success of the incentive systems.  The design and operation of incentive systems’ processes and practices is to start with the understanding of the implications of the psychological effect on the motivation of the employees, and the factors linking benefits with the performance. But these processes and practices are required to focus on the needs of the organization as well as the employees who work in the organization. These needs are most likely to be met if the processes and practices are based on an articulated and integrated approach to the development of a frame work of the incentive system’ philosophies, strategies and policies which are to support the achievement of the organizational strategies, as well as acting as levers for change.

Individual plans based approach requires individual goal setting and the individual employee needs to have a large measure of control over his own performance. In this approach, a high value is placed on individual training. An individual plans based approach is not appropriate where the objective is to promote better overall performance through teamwork, cooperation and sharing of information and knowledge, or where individual performance is not measurable. Hence a group plans based approach is more preferable since it promotes team values as well as cooperation between the employees in the organization.

Motivation of employees is a complex task and there is no single and clear strategy to employee motivation and performance. Humans are by nature inconsistent in the way they translate incentives into performance. At every point in time, the need and anticipation of an individual employee varies. For achieving success, it is necessary that the incentive systems are to be effective in motivating the employees so that they perform efficiently.

Every organization functions under different environment. Hence, there are no one-size-fits-all solutions for the incentive systems. Therefore, the incentive systems are to be designed specifically based on the environment under which the organization is functioning.

Categories of incentive systems

Incentives systems consist of awards given out when employees of the organization attain the pre-determined goals. These awards can be given on the basis of individual or group performance. They can be enjoyed immediately or they can be as deferred payment. They are not only based on the monetary benefits, but are also concerned with intrinsic, as well as extrinsic motivation. They can be categorized into three types. These are (i) monetary incentives which are linked to the performance targets, (ii) non-monetary incentives which are given by the organization to motivate the employees, and (iii) a combination of monetary and non-monetary incentives.

Monetary incentives consist of paying some extra money to the employees linked to the performance and productivity targets. In systems developed based on monetary incentives, employees are provided with some additional income. There are several ways for providing the additional money which include employee stock options, profit sharing plans, paid time off, bonuses and cash awards. Additional monetary incentives include annual or semi-annual bonuses, such as mid-year and end-of-year rewards. These incentives are expected to encourage friendly competition between the employees when linked to job performance. Monetary incentives motivate employees to produce optimally.

Employees work for monetary benefits but go the extra mile for recognition, praise and non-monetary incentives. Non-monetary incentives reward employee performance through perks and opportunities. Examples of these rewards include flexible work hours, training opportunities, and the ability to work independently. These are valuable to an employee since these incentives allow the employees to learn new skills and pursue advancement opportunities.

The recognition of a good work done by employees improves their morale. Employees who receive recognition for their work accomplishments tend to have increased morale and positive workplace behaviour. Employees’ recognition is an incentive since it is a feedback of the management to the employees of the good work done by the employees. It provides high amount of encouragement to the employees.  Employees whose exceptional work is well appreciated continuously strive to deliver exceptional work as compared to those employees who do not get appreciation.

Drawbacks of incentive systems

The use of incentive systems for motivating employees for better performance is seen to have certain drawbacks which can undermine the purpose for their use. Key factor in this area is the fact that incentive systems yield temporary compliance and fails to act as a permanent or long term motivation. In the long term employees tend to view incentive systems as entitlements thereby losing its motivation effect.

Incentive systems are normally based on certain performance criteria which are required to be measured. These measurements are to be transparent, authentic and formal. In the absence of transparent, authentic and formal measurement of the performance criteria in the organization, the incentive systems do not have their expected impact. In certain cases they can have even opposite impact.

Further, though it is widely believed and accepted that the incentive systems are powerful tools for motivating the employees for better performance, but there are problems associated with them. The difficulty stems from both the complex nature of the work environment as well as the wide range of employees within the organization. Human beings are by nature not homogeneous entity. They have a variety of needs, aspirations, as well as differing perceptions of what constitute appropriate incentive systems for effective motivation. Thus motivating the employees requires an in-depth understanding of the human nature, individual differences and perceptions of appropriate incentive systems, as well as a combination of monetary and non-monetary incentives. If the incentive systems are not properly designed and fairly implemented then such systems do not motivate the employees and can in certain cases become de-motivators.

Incentive systems are to be designed in such a manner that they enhance the satisfaction level of the employees. Only in such a case the incentive systems motivate the employees towards enhanced performance. In badly designed incentive systems the dis-satisfaction level of the employees is likely to increase. If such thing happens then the incentive systems become de-motivator.

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