Rewards and Incentives

Rewards and Incentives

Human resource is the foundation for an organization to achieve competitive advantage and succeed in a competitive and dynamic environment. In the globalized world of developed technology and internet, customers have become educated about the products, services, operating practices and personal rights as never before, and hence, the organization is to ensure that its employees are educated, trained, skilled, engaged, and motivated. In fact, globalization has put enormous pressure on the organizations to be creative, innovative, and proactive to survive in the turbulent market environment. This implies that the organization needs skillful and motivated employees to remain active and efficient in this ever-changing and ever-competitive market environment.

The concepts of rewards and incentives are frequently mistaken to have the same meaning. According to Armstrong and coworkers, rewarding people is a management process concerned with the design, implementation and maintenance of management systems which is geared to the improvement of employees’ performance. On the other hand, incentives are benefits which are promised to the employees for motivating them to achieve their best and improve productivity. Incentives can be either financial or non-financial.

Despite the distinction between rewards and incentives, the underlying aim is to improve employees’ job performance. Hence, the concepts of rewards and incentives are normally used interchangeably (Further in the article, the word incentives is only used for rewards and incentives). The incentives are crucial since it affects employees’ perception of how they are valued and hence influence the job performance, and job performance is a result of factors such as promotion, productivity, motivation, and job satisfaction.

Effective scheme of incentives has become a tool for the organizational effectiveness in the present day competitive environment. It supports the short term objectives of the organization by helping to ensure that it has the skilled, competent, committed and well-motivated employees which it needs as well as it meets the expectations of employees that they are being treated equitably, fairly, and consistently in relation to the work they do and their contribution.

An effective scheme of incentives can benefit the organization if it is managed properly. The benefits include (i) improve employees’ morale and performance, (ii) boost job satisfaction of employees, (iii) increase employee engagement, (iv) promote a certain type of behaviours, and (v) retains talents. Fig 1 shows these benefits. In this era of globalization there is need for effective scheme of incentives in order to enable the organization to respond quickly to the changes in the environment.

Fig 1 Benefits of incentive scheme

The term ‘incentive’ is used to describe material and non-material benefits given to employees in addition to their normal salaries to induce them to go that extra mile towards promoting productivity and efficiency of the organization. It is normally felt that performance of personnel, either as individuals or as members of a group is below par when compared to their capabilities, skills and capacities. In a study, it has been demonstrated that the performance normally never exceeds more than 50 % of an employee’s innate ability. Most of the employees tend to halt efforts around an estimation of costs expended (time and energy) and relative benefits received from work. This is where incentives assume significance. According to Wendell French, the purpose of incentive plans is to increase the morale and motivation of the employees to contribute to further the goals of the organization.

The incentives are very strategic for retaining the best human resources. Similarly, Harris defined a reward as an object or event which induces approach and consummator behaviour. Neckermann and Kosfeld draw a distinction between two basic types of rewards namely (i) intrinsic rewards, and (ii) extrinsic rewards.

Incentive system consists of the ‘processes and practices’ of the organization for integral rewarding its employees in accordance with their contribution, skill, and competence and their markets worth. It is developed within the framework of the organizational philosophy, strategies, and policies and contains arrangements in the form of processes, practices, structures, and procedures which provide and maintain appropriate types and levels of salary, benefits, and other form of incentives. Likewise, incentive system is a prize given to the employees as an inducement towards their performance. Incentive can also be defined as the process of developing and implementing strategies, policies, and systems which help the organization to achieve its objectives by obtaining and keeping the people it needs and increasing their motivation and commitment.

By definition, incentives are an external persuading factor that encourages the motive which positively directs the individual into working harder, matching the required performance in the organization, as to get the incentive. Incentives are also defined both as methods used by the organizations to encourage employees to work with high spirits and also as concrete and moral methods of satisfying the employees’ moral and material desires. Palmer has defined incentives as the external temptations and encouraging factors which lead the employees to work harder. They are given because of the employees’ excellent performance since they work harder and produce more effectively when they feel satisfied in the organization. In addition to this, incentives can also be defined as the consideration of the excellent performance, assuming that the salary is enough to make the employee appreciate the value of the job which also satisfies their basic needs in life. Practically, incentives refer to all of the concrete and moral methods which the organizations give in order to positively encourage the employees in a way that increase the production rate and improve the employees’ performance, which has its importance in satisfying the employees’ desires and guarantee a loyal attitude towards the organization.

The incentive theory of motivation is a behavioral theory which suggests people are motivated by a drive for incentives and reinforcement. The incentive theory also proposes that people behave in a way they believe result in a reward and avoid actions which can entail punishment.

It is broadly accepted that incentives have an impact on behaviour, however, there are long-lasting disputes on whether incentives have positive impact or negative impact. These disputes originate in the field of psychology and proliferate into other areas such as human resource management, organizational theory, and managerial accounting.

Employees can behave differently in similar situations depending on the incentives available. For example, employees can work harder on a project to earn a good review or to avoid a poor review than if they do not receive a review at all. Their motivation is their desire to receive an incentive or avoid punishment through a performance review at the end of the project.

Incentive measures, such as salaries, secondary benefits, and intangible rewards, recognition or sanctions have traditionally been used to motivate employees to increase performance. Motivators can be positive and / or negative. Reducing disincentives or perverse incentives, which favour non-conducive behaviour, can frequently be more important than inventing new incentives.

The value of the same incentive can change depending on the time and circumstance. People can value similar incentives differently. Psychological and social factors can have a role in determining which people have a motivation for different incentives. Incentives only work as motivational tools if individuals place value on the reward they receive for their actions. Incentives in the workplace, as in other facets of life, can also be positive or negative. Positive incentives provide positive assurance that the employees receive something they desire in exchange for doing their work well. Examples of positive incentives include recognition, promotions, raises, and so forth. Negative incentives correct mistakes or discourage certain behaviours. Examples of negative incentives include reprimands, demotions, pay decreases, and other kinds of penalties.

Employees’ motivation

Motivation refers to the initiation, direction, intensity and persistence of behaviour. Incentives on the other hand are external measures which are designed and established to influence motivation and behaviour of individuals, groups, or organizations. Incentive systems or structures are combinations of several more or less coherent incentives. Motivators include purposive incentives in the above sense but also all other external factors, which impact upon peoples or organizations motivation. The term ‘motivational system’ (or structures) can be used to refer to the set of such motivators, more or less persistent in nature, in place at any given time.

Motivation is an interesting, challenging, and complex area of human resource management. It is rapidly changing both in terms of its nature, understanding, functions, purpose, as well as mode of application. It is normally agreed that managements need employees to work with. These employees do not only have to show up at work but more importantly they need to be motivated to perform their duties. Motivation can be defined as a driving force which leads people to want to act, perform, or do something without pressure or undue manipulation.

Motivation can be defined in several ways. It is defined as ‘the willingness to exert a high level of effort towards organizational goals, conditioned by the employees’ ability to satisfy some individual needs’. It is broadly accepted that the motivated employees are normally outperforming the employees who are not-motivated and hence the question is how to motivate the employees. There are several theories of motivation. Despite the fact all these theories are very inspiring, the theories which are important with regards to the incentives classify the incentives into two types of motivation namely (i) extrinsic motivation which needs an instrumentality between the activity and some separable consequence as satisfaction comes not from the activity itself but rather from the extrinsic incentives obtained for performing the activity in the required way, and (ii) intrinsic motivation which is demonstrated when employees engage in an activity for their  own sake and not because of any extrinsic incentive.

Originally it was regarded that extrinsic and intrinsic motivation were additive. Nevertheless number of empirical studies conducted has proposed that dependence between intrinsic and extrinsic motivation is rather both positively and negatively interactive instead of additive. However, these findings were not accepted by all the people. For example, in one of the studies it has been concluded that incentives do not decrease intrinsic motivation. Verbal praise even leads to increase in intrinsic motivation. The only (minimal) negative effect on intrinsic motivation appears when expected tangible incentives are given to individuals just for doing a task.

Employee motivation can be enhanced through proper employee incentive system, which is undoubtedly, an important aspect of the human resource management. Nowadays, large industrial organizations manage employees of different regions and even nationalities, having different cultures and social backgrounds which make the phenomenon of employee motivation even more challenging.

It is possible to distinguish factors which have motivational effects from other capacity elements. Some are internal, others are external to or ‘in the environment’ of a given system. The question of motivation is inextricably linked with capacity and needs to be analyzed and addressed on all capacity levels which include individual employee, organization, and enabling environment.

It has been shown that motivation is an essential tool which managements use to attain not only higher performance, but also a form of inspiration to retain high performers in order to achieve higher productivity. Managements use motivation in the workplace to inspire people to work, both individually and in groups, to produce the best results for the organization in the most efficient and effective manner.

Employees only perform efficiently if their management is motivating them effectively. Management’s responsibility hence includes ‘combining good motivational practices with meaningful work, the setting of performance goals, and use of an effective reward system, to establish the kind of environment and culture which is needed to excel. In a rapidly and ever changing work environment, motivated employees are essential tools for the very survival of the organization. Motivated employees tend to be more productive and are critical for the survival of the organization.

Historical aspects

After rising through the ranks from an apprentice to a chief engineer at the Midvale Steel Company, FW Taylor developed the scientific management where he began to develop his intuition on shop management. The main idea behind Taylor’s scientific management was to link efficiency to performance. Taylor tried several techniques to improve efficiency and employees’ performance but most frequently he encountered resistance from the employees. He noticed that employees tend to slack on the job due to a situation he termed as ‘soldering’, where employees believed that if they worked faster, they would put others out of work. Soldering is a situation whereby employees perform well below their capability since they felt working harder would not earn them an additional reward. Based on his observations, Taylor concluded that a monetary incentive was the ultimate motivator for improved performance.

The earliest form of the incentive structure to employees can be traced to Taylor’s work on scientific management whereby a wage system was utilized as a means to get more output from the employees. He introduced the ‘piece-rate’ which he considered as the best way to get maximum output from the employees.  However, this Taylor’s assumption of employees was contradicted by Drucker stating that it is a misconception to assume that people do not want to work. Drucker further argued that employees have absolute control over whether they work at all and shooting people does not get the job done. In continuum of the differing views of Taylor and Drucker, there is a popular assumption or belief that the employees work at their own pace and do not care about output due to non-stringent performance evaluation scheme and monetary incentives.

In his famous book, Alfie Kohn argued that rewards are not necessary for employee motivation. He noted that manipulating people through the use of incentives and rewards works only on a short term basis, but ultimately fails and can even cause lasting problems in the long run. Drawing on a number of studies, Kohn argues that people end up losing interest in the work they do and rather do inferior work when they are enticed by grades, rewards, and incentives. He hence advocated for the total abandonment of the use of incentives as motivation in organizations.

As suggested by Burgess and coworkers, employees manipulate the quality and timing of what they do so as to maximize their financial incentives, frequently in ways that the organization neither intended nor wanted. However, in the presence of financial incentives, the employees do work harder and produce more output. Hence, it can be said in the absence of incentives, employees work lesser culminating in reduced output. This somewhat agrees with Taylor’s view. In comparison, the employees in some organizations are believed to be more adept and dedicated to their job roles and function culminating in increased output. This is frequently attributed to the rigorous and uncompromising evaluation procedures dictated by the management.

Elton Mayo is another prominent management scholar who criticized Taylor’s assumption on financial incentive as the sole essential facilitator to enhance work output. According to him, the mere application of financial incentives to stabilize turn-over or to improve quality of work is futile.

A major challenge confronting management in the present century is how to use the potential capabilities of employees to improve and accelerate organizational innovation. To achieve this goal, employees can use their intellectual capabilities to activate positive organizational changes by using their knowledge and creativity to empower such changes. According to Brian, the unreliable incentive system brings the ‘compensatory damage’ which has large detrimental effects to the financial performance of the organization. It results in considerably reduced human productivity, increased human conflict within the organization, and perceptions of internal unfairness. The incentive programme still can be doubted and questioned on its value and the fairness or equity level in its dissemination among employees.

Despite the above arguments, motivation continues to be an important aspect of every work environment. Organizational managements everywhere want employees or teams who are efficient, effective, focused, and committed to the organizational goals or mission. Employees’ performance has been noted to be highly correlated to their level of motivation. Motivation is the driving force which spurns employees’ eagerness to work. It is hence essential that in addition to the provision of the right work environment, employees get the right combination of motivational programmes to propel them to higher performance.

The Importance of Incentives

The idea of incentives triggers much consideration especially from the beginning of looking for qualified employees who are able to efficiently achieve the organizational goals. It is since incentives play a major role in the employees’ productivity. The importance of incentives originates from the need for the employees to be recognized and appreciated for their efforts. Actually, appreciating people for their efforts by giving them incentives is a very significant factor in satisfying the internal desires of an individual. The individuals’ own skills are not enough to let them work with high productivity unless there is an incentive system which encourages their internal motives and then leads very hardworking efforts.

A successful organization is the one which can efficiently exploit its employees’ skills and qualifications. Hence, extensive studies have been carried out to find a comprehensive description of how to enhance the professionalism of the employees and how the administration chooses active individuals, and also how to connect the organizational goals to the personal objectives of the employees which improve their performance. It is reasonable to say that successful organizations set an active incentive system capable of affecting the employees’ performance in a way which pushes them into working harder and maintaining the goals of the organization. In addition, it is noticeable that motivating employees can help them to overcome a lot of their obstacles at work. On the other hand, for the management to be incentivizing, it has to create confidence and an environment of harmony, security, and respect in an honest and actual manner. One is to know that appreciating or people’s work and praising their achievements do not affect one’s own success, so one is to do this directly to who deserves it or just in front of a group of people by praising their accomplishment.

Types of Incentives

Incentive is concept of material and moral values and they are also a central point for different activities in the present day organizations and work environments. Concrete incentives are what is called direct compensation systems such as salaries, perks, and bonuses. On the other hand, moral incentives are called indirect compensation systems such as the stability of the work, participating in decision-making, commitment, pertinence, promotion and appreciating the employees’ performance by thanking them. This shows that incentives are the consideration of good performance, which can be in the quality, quantity, or abundance in the work’s time or even in the costs.

Incentives have been classified into different types, and they tend to interfere. They have been classified into different ways and techniques which can be used by the management to get the highest quantity of qualification from the human performance.

Incentives can be classified according to (i) the form of incentives such as financial (tangible) incentives or non-financial (intangible) incentives, (ii) the time period for which is incentive is awarded such as for the past performance or the expected future performance, (iii) whom the incentives are primarily allocated such as individual incentives, team incentives, or incentives for overall performance of the organization, and (iv) for what incentive is given such as for results, for the right behaviour, for skills, or for meeting the job requirements, etc. Incentives can also be classified depending on their effect on each individual, while some based them on the way they are given out, or on their goals. Other ways of classifications can be put them under two main types of incentives which are (i) incentives based on the purpose, and (ii) incentives based on the kind of the incentive itself.

Incentives based on the purpose of the incentive are classified into two types. The first classification has two types (i) positive incentives, and (ii) negative incentives. Positive Incentives consists of the ways which positively impact people’s behaviour through satisfying their needs such as promising the employees of cash bonuses when they reach a level of highly qualified performance. Such incentives are helpful for both the needs and sake of the employees and that of the organization since it results into increase in the production, improving the quality, working according to high standards, and coming up with inventories along with high responsibilities. These are all positive consequences for the organization, which, in return, rewards its employees with concrete, moral, or social incentives.

Negative incentives are the ways which negatively affect people’s behaviour by threatening the employees of depriving them of some privileges such as truncating part of their salary if they violated any of the work’s principles. These ways are methods used by the management in order to reduce negative behaviours and unacceptable manners among employees such as not following orders, lack of responsibility, or laziness. This kind of methods includes ways of cautions and warning, preventing the employee of some privileges for a specific time, delaying promotion or even lowering the job position, and transfer to other departments. These methods are used as per the degree of violation. Such negative incentives are called deterrent incentives. However, the use of negative incentives is sometimes necessary for increasing efficiency in production especially when dealing with lazy employees.

Second classification of incentives based on the type of the incentive itself. As per this classification, incentives are classified into two types of incentives namely (i) concrete incentives, and (ii) moral incentives. Concrete incentives are of three types. The first type of concrete incentives is the most important one since it is considered the only source of living in addition to its being the base on which people depend in order to satisfy their basic needs and security. This kind of incentives includes salary increases, encouraging cash bonuses, commissions, periodical promotions, motivational promotions, and sharing in some of the organizational profits along with gifts for extra work. The second type of concrete incentives is the security and stability at work which is achieved through real guarantees which prevent abuse towards the employees if they commit a violation. Such guarantees create an environment of security and stability and it also softens the morale of the employees which improves their productivity. Hence, the organization is required to make a connection between the stability of the employees and their role in increasing production in the organization. This stability is given only to successful employees who work hard. The third type of concrete incentives is the enrolling the employees in training sessions help in increasing the morale of the employees, It also provide them with suitable work conditions and persuades them to work harder. This is due to the features of service which positively improve their performances in the organization.

In general, concrete incentives can be considered one of the most effective factors in encouraging the employees to work honestly when there are suitable salary increases which satisfy the employees’ needs. On the contrary, low and unfair salary increases are a major factor in neglecting the required work and low productivity, when the given salary increases do not satisfy the needs of the employees. In addition, it is noteworthy that concrete incentives are one of the old incentives which are both fast and immediate and it appreciates immediately the employees’ efforts. Also, concrete incentives can be positive such as bonuses, aids, promotions and exceptional extra cash over the salary, or they can be negative such as depriving the employees from the bonuses and promotions, or even lowering their salaries.

Moral incentives are of six types. These are (i) delegation of power, (ii) appreciating the employee’s efforts, (iii) appreciative promotions, (iv) certificates and medals for achievements, (v) appreciative and thanking speeches, and (vi) honour boards. Delegating part of the powers of senior managers to their subordinates is a big incentive for the employees since it appreciates their capabilities and creates an environment of confidence in their performance. Delegating some powers helps easing the burdens of the senior level managers and provides flexibility but it needs to have legal and physical controls as to achieve the desired success. Knowing the results of their efforts gives the employees a feeling of pride and excellence and it is considered to be an important incentive for the employees to improve their performance since they feel satisfied and appreciated in their position. Certificates and medals are given to the employees to appreciate the achievements and innovations accomplished by the employees. Appreciation and thanking speeches directed to the employees raise the moral of the employees. In honour boards the hardworking employees are listed and hence, they raise the moral of the employees.

It is worth mentioning that the moral incentives in the work environment satisfy the employees’ needs and they are the reasons for attracting the employees into the work, since such incentives satisfy a specific need for the employees. Hence, the management is not to stick only to cash incentives, which satisfy only one need for the employees and somehow neglect other social and psychological needs. So it is the moral incentives which encourage the employees by satisfying their other social and psychological needs, which creates as a result a feeling of devotion towards work and motivates cooperation among colleagues. In short, moral incentives are as important as concrete incentives regarding their role in improving human relations, increasing the employees’ productivity inside the organization. In fact, some concrete incentives work only when they are accompanied with moral incentives.

Incentive systems are meant both to motivate employees to earn more by working hard and also reinforce positive behaviour on their part by rewarding good performance for healthier organizational climate. Hence incentive is to be understood both in the tangible and intangible senses, as aimed both at encouraging and sustaining better performance from employees. Material incentives can take the form of wage payments related to employees’ performance in addition to the normal salaries given for standard work assigned, welfare related benefit programmes, fringe benefits, rewards, and recognition certificates.

Incentive management is required to have a ‘base line’ standard so that performance over and above the specified standard can be rewarded. These incentive plans are linked directly or indirectly to the standards of productivity or the profitability of the organization or to both criteria. It has been recommended in a report that, ‘under certain conditions, a wage incentive is concerned with effective utilization of manpower which is the cheapest, quickest, and surest means of increasing the productivity. The only practicable and self-sustaining means of improving manpower utilization is to introduce incentive schemes and stimulate human efforts to provide a positive motivation to greater output’.

Megginson has defined incentive wages as ‘the extra-compensation paid to an employee for production over a specified magnitude which stems from exercise of more than the normal skill, effort, or concentration when accomplished in a pre-determined way involving standard tools, facilities and materials’. Presently, the emphasis on ‘payment by results’ schemes is on team work more than individual effort.

Communication with all involved is necessary during all the phases of the incentive system. Here communication is defined as ‘creation of understanding and the transfer of meaning’ and it is considered to be a critical element in the success or failure of the incentive system. Further, for the success of the incentive system communication is required to flow not only top-down, but also in the opposite direction so that the employees are aware of the value of their incentive system. Also, incentive strategy and goals are dynamic entities and they change according to the external environment as well as internal needs.

An effective incentive system can have three objectives (i) immediate, (ii) short-term, and (iii) long term. By immediate recognition of a good performance, short- term incentives for performance can be offered monthly or quarterly and long- term incentives are given for showing loyalty over the years. Immediate incentives are given to the employees repetitively so that they can be aware of their outstanding performance. Immediate incentives include being praised by an immediate manager or it can be a tangible reward. Short term incentives are made either monthly or quarterly basis depending on performance. Examples of such incentives include cash benefits or special gifts for exceptional performance.

Incentives strategy incorporates components which are to be applied consistently in a long-term period. Fig 2 shows that the incentive system is to be internally, horizontally, and vertically integrated. Internal integration means that the components of incentive system are to form a coherent whole and appropriate types of incentives are to be used for the appropriate purposes. Horizontal integration means that the incentive system is to be aligned with other human resource management activities.

Fig 2 Integration of the incentive system in the organization

Vertical integration means alignment with the strategy, mission, and values of the organization. Incentive strategy is to include (i) goals of the incentive system, their prioritization and success criteria, (ii) statement about how the incentive system support the organizational strategy and needs of the stakeholders of the organization, (iii) list of incentive types including their description and relative importance, (iv) setting the importance of the incentives relative to other tools of influencing employees behaviours, (v) identification of procedures for updating the incentive system, (vi) selection of measures which are to be used for determining incentives including decision on what level is the measurement realized (organization-wide, division or department, team, or individual), and decision which elements of total incentives are to be linked to those measures, (vii) selection of competitive market reference points (that is subjects which are used for determining the competitiveness of the incentives package), (viii) decision on desired competitive position to the selected reference points (e.g. organizational  level of incentives can be below, equal, or above market), (ix) guidelines for solving conflicts (e.g. between internal equity and external competitiveness), (x) decision about how intensive is to be communication about incentives with stakeholders and which information about incentives is to be disclosed, and (xi) data and information management (i.e. selection of information sources, methods of data processing and reporting for decision support).

According the above framework, incentive system effectiveness is given by a degree to which the system is (i) competitive, (ii) convergent, (iii) rewarding contribution and performance, (iv) customized, (v) committing employees, (vi) communicated, (vii) cost effective, (viii) easy to change, (ix) controlled, and (x) compliant.

In short, the incentive system is required to have certain properties which include (i) it is to be based on incentives strategy, (ii) it is to be compliant with regulations in force, (iii) it is to be complaint with the organizational culture (on the other hand, it can be used as a tool for a change of the organizational culture), (iv) it is to be complaint with normally accepted ethical principles such as fairness which means that it is  operating in accordance with the principles of distributive and procedural justice (distributive justice is understood as perceived fairness of decision outcomes relative to contributions and by procedural justice is understood as perceived fairness of processes used to arrive at outcome decision), equity (which means rewarding people appropriately in relation to others within the organization), relativities between jobs are to be measured as objectively as possible, equal salary (which is to be provided for work of equal value), and consistency (which means making decisions on salary consistently and not arbitrary between different people or at different time), (v) it is to be transparent with the employees to  understand how the incentive processes work and how they are affected by them, (vi) it is to be competitive i.e. externally to attract, motivate and retain employees, (vii) it is to be unique i.e. It is impossible to become the best and differentiate by only imitating others, (viii) it is to ensure contribution of individuals and teams, (ix) it is to give employees a choice to select between various types of incentives, (x) it is to maintain behaviour which is in compliance with the organizational needs throughout all levels of the employees, and (xi) it is to be cost effective.

The fundamental procedures for the incentive scheme (Fig 3) in the organization are (i) setting incentive strategy goals and defining success criteria, (ii) review of current incentive policies and practices, (iii) measuring incentive effectiveness, (iv) evaluating incentive outcomes, (v) development of the future incentive practices, and (vi) implementation of developed practices.

Fig 3 Fundamental procedures for the incentive scheme

Incentive strategy in application

Motivation refers to the initiation, direction, intensity, and persistence of behaviour. Incentives on the other hand are external measures which are designed and established to influence motivation and behaviour of individuals, groups, or organizations. Incentive systems are combinations of several more or less coherent incentives. Motivators include purposive incentives in the above sense but also all other external factors, which impact upon employees’ or organization’s motivation. The term ‘motivational system’ can be used to refer to the set of such motivators, more or less persistent in nature, in place at any given time. Motivation can be at different levels which include (i) individual, (ii) organizational, and (iii) societal. Individuals are driven by their own desires and moral believes. Individual motivations can be ‘internal’ or ‘intrinsic’ motivation (activated from the inside) such as hobbies, caring for colleagues, or voluntary work in society, or they can be ‘external’ or ‘extrinsic’(activated from the outside) motivation, which is nurtured from the outside.

Organizational motivation, distinguished from capacity, refers to the internal motivation of the organization. Social motivations derive from the fact that people tend to identify with others and have a sense of belonging to groups. Individuals depend on others and hence have a certain loyalty to the groups they belong to. Social relations are governed by formal and informal rules. There are three dimensions of societal motivations. The first is a sense of fairness. People, groups, and organizations want to feel that they are treated fairly compared to peers or competitors. The second dimension is the existence of criteria and authority which stops unfair dealings and which encourages fair behaviour. The third is the phenomenon of ‘social pressure’. It can be appreciation or disapproval from superiors, peers or others which the person feels responsible for.

At any of these levels, there are always internal motivational factors. But it is to be recognized that motivators for improving performance can also come from external sources. For example, for organizations, motivators can reside externally in other organizations and the broader enabling environment. Also, there are interactions of motivations among these three levels. For example, individual motivations can enhance motivation of the organization, but organization also impacts on people, such as their employees or customers. They influence other organizations such as competing organizations. Organization can in several cases also be the prime entry point for motivating larger societal changes.

Incentives for individual motivation – Incentives which have impact on the motivation of employees are (i) salary and other wages, (ii) direct financial benefits, such as pension / provident fund, illness / health insurance, allowances (such as clothing, and housing etc.), subsidies, and profit sharing bonus etc., (iii) indirect financial benefits such as subsidized meals / clothing / accommodation / transport, and scholarships etc., (iv) deferred compensation such as company contribution to provident fund, and gratuity etc., (v) flexible schedules, part-time / temporary work, sabbatical leave, study leave, holidays, and vacation etc., (vi) work environment / conditions, occupational health, safety, and recreational facilities etc., (vii) amenities, school access, infrastructure, and transport, etc., (viii) job security, and career / professional development / training opportunities, (ix) feedback, coaching, and valued by organization, (x) solidarity, socializing, camaraderie, affection, and passion, (xi) status, prestige, and recognition, (xii) sense of duty, purpose, and mission, and (xiii) security, opportunities, stability, and risk.

Hence, incentives can be financial, which come in some form of payment or cash transfers. Some of the financial incentives are direct such as salary, and bonuses, etc. Others are indirect such as subsidized meals, clothes, or housing etc. It is important to make a distinction between a proper level of pay and special incentive pay to reward performance. In some sector, financial incentives are normally associated with better performance although perverse impacts can also be observed. Cash awards are shown to have a higher value where remuneration is low.

Non-financial incentives come in several forms such as gifts, rewards, and travel etc. Some are more tangible than others since they are visible and / or can be compared to financial benefits. Less tangible incentives relate for example to work flexibility, independence of working, recognition of one’s work, and the possibility of advancement. The value of non-financial material incentives seems to be perceived as a function of psychological processes.

There is also a distinction to be made between formal incentives and informal ones. Formal ones are for example salary scales and employee entitlements. Informal ones can also be legitimate depending on the context but can also represent channels reaping personal benefits through corrupt practices or patronage. There are also a range of distinctions to be made for non-materialistic incentives. Like materialistic incentives, non-materialistic incentives can also be ‘self-interested’, such as psychological benefits related to the status of power. On the other hand, they can be of a genuinely ‘altruistic’ nature, based on own desires and moral believes.

For a long time, it has been thought that intrinsic and extrinsic motivations are additive and can easily be combined to produce optimal performance. Today it is recognized that there are trade-offs. Motivations also have a dynamic nature. As the context and trends change, people also adapt their views and preferences. Different professional groups respond differently. There is an evolution over time where motivations change with age. While the opportunity for travel, for example, can be very attractive for young, single professionals, it can become an issue for an employee with a family setting. Motivations and responsiveness to incentives also is a function of gender.

Incentives for organizational motivations – Incentive systems are an important part of organizational motivation and are central to helping diagnosticians understand the forces which drive the organization. Organizational incentives refer to both the reason for employees to join the organization, and the way the organization rewards and punishes its employees. Incentive systems can encourage or discourage employee and work group behaviour. Organizations are to continually seek ways to keep their employees and work groups engaged in their work, motivated, efficient and productive. The success of the organization can depend on its ability to create the conditions and systems (formal and informal) which entice the best people to work there. Also, a good incentive system encourages employees to be productive and creative, fosters loyalty among those who are most productive, and stimulates innovation.

Incentive systems reside within the organization, its structure, rules, human resource management, opportunities, internal benefits, rewards and sanctions, etc. Whether the organizational rewards and incentive systems is based on perception or reality, they do have a considerable influence on the performance of its employees, and hence on the organization. A study of a public sector organization concludes that ‘the significance of internal factors in creating positive organizational cultures suggests that many of the changes needed to transform the organization can be initiated by the organization itself without substantial external support.

Incentives and societal motivation – Perhaps the most pervasive structural motivators and incentives are located at the societal level, such as security, rule of law, investment climate, or legislation etc. Whether or not an organization, for example, is able to achieve its purpose depends not just on only whether it is adequately resourced but on the incentives generated by the way it is resourced under prevailing rules. Several of these cannot easily be influenced from the perspective of individuals and organizations, although these play a critical role as change agents.

The motivational direction and value of several of the above are directly rooted in the prevailing management systems. This begins with inclusive democracy and a rights-based approach to development. Neither incentive mechanisms nor external interventions for capacity development bear results unless there is the rule of law and a proper legal system. A free press and a vibrant civil society serve as watchdogs to deepen inclusive democracy, bolster support for the protection of human rights, and further check the misuse of incentive mechanisms. Changing organizational culture takes time. Changing societal values, culture, and rules of the game depend on the political processes, negotiation, and in several instances is an issue of generations.

Incentive system and employees’ creativity

Incentive system plays an important role in improving the employee creativity. Effective incentive system is to focus always focus on the positive reinforcement. Positive reinforcement encourages the desired behaviour in the organization. This encourages employees to take positive actions leading to incentives. Incentives system is to be properly designed in the organization so as to reinforce positive behaviour in the employees which leads to their better performance.

Unfortunately several organizational managements tend to believe, rather erroneously that they can adequately motivate the employees by offering incentives such as higher salary, bonuses, and paid vacations. It is seen frequently that, in several cases there exist an ‘extrinsic incentive bias’ which is perpetuated by both the management and the employees. This bias does not stem from reality but are rather rooted in myths surrounding employees’ satisfaction. Different studies, however, have shown that such monetary incentives do not motivate employees and can in certain circumstances become demotivators. It has been shown through various studies that monetary incentives ‘motivates only to a point, that is, when compensation is not high enough or is considered to be inequitable, it is a demotivator’.

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