Most organizations use financial incentives to motivate their employees to exude higher performance in support of organizational goals and objectives. On an individual basis, financial incentives include piecework programs, bonuses, promotions, and merit pay raises to encourage consistent above average performance. On a broader level, financial incentives can be given to all employees according to the profitability of the organization; an act which encourages employees to harbor a vested interest in the organization's success. No matter the type of financial incentive used, it must be tied to performance in order to ensure that the employee is fairly compensated and that the organization reaches the high performance it needs and desires.
Many of us have a love/hate relationship with our jobs. While on some days we can barely drag ourselves out of bed to go to work, on other days the thought of the tasks to be done is so invigorating that we cannot wait to get started. One is truly fortunate if the latter type of mornings outnumber the former. However, all too often this does not seem to be the case. Yet, we still continue to go to work if for no other reason than that we need the paycheck.
Maslow's Hierarchy of Needs
A number of observers have posited various motivations to explain why people work. Although some theorists have tried to reduce motivation to an equation that connects the probability of increased performance with such things as the employee's perceived expectancy of obtaining a reward for doing so, other theorists have posited that different people are motivated by different things such as having one's physical needs met (e.g., food on the table and a roof over one's head), a need for the esteem of others, or some other internal incentive. Abraham Maslow, for example, described a hierarchy of needs ranging from meeting basic physiological needs (e.g., food, clothing, shelter) to safety, belongingness, and esteem needs and eventually self-actualization (see Figure 1). According to this theory, people are motivated by different things depending on where there are on the hierarchy at any given point. For example, a person who has earned a high level position in his/her career and has adequate income for whatever s/he wants to do may be able to focus on self-actualization. However, if that same person loses his/her job or investments, s/he may once again be concerned about meeting basic physiological needs.
Importance of Financial Incentives
Although virtually every organization tries to motivate its employees through financial incentives, these are not seen as motivators in the scientifically used meaning of the word. Rather, at various places on the hierarchy of needs (or other motivation theory), financial incentives give people the means by which they can meet their needs. For example, in Maslow's hierarchy of needs, a person who is out of work and fears losing his/her house could probably be easily motivated to work for a financial reward that would help him/her put food on the table or pay the mortgage. Once such immediate needs have been met, however, money or other financial incentives allow the person to meet his/her safety needs through such things as obtaining a steady job that brings in a sufficient and reliable paycheck, one's belongingness needs by providing a high enough income to allow the person to be identified with other successful people (either at the work place or through other fee-based institutions like country clubs). Money can also be used to help meet one's esteem needs as people look at the situation that money has allowed the person to attain.
No matter the theory, however, most motivation theorists recognize the fact that most people working in organizations both need and expect remuneration. Sometimes financial incentives are required to meet basic physical needs or to have the security of knowing that those needs will continue to be met for the foreseeable future. In other cases, financial incentives in the form of bonuses, raises, or promotions fill a need for recognition from others. However, no matter what motivators an employee has, from the employee's point-of-view, pay is always a consideration. Although job titles and other perquisites can be important motivators, in most cases employees need more from the organization than to know that they are helping it succeed. To motivate employees to perform at a consistently high level, the organization must give them what they want or need. In most cases, this is some kind of financial incentive that, in turn, allows the employee to obtain or work towards the reward that s/he really wants. One of the things that successful organizations do to motivate employees to contribute to the company's high performance is to link the desired performance to rewards.
The truth is that money and other financial incentives are one of the reasons why people in Western culture work. Although many of us could keep ourselves mentally and physically engaged through other activities, if one does not have the financial status to meet one's needs, a job is the most typical solution. Although other perquisites (e.g., a corner office, a more important title) can be used to reward an employee in the workplace, because of the flexibility of financial incentives to meet one's needs, they are one of the most frequently used rewards. However, to be effective in motivating the kind on the job behavior that will most effectively support the business, the financial incentives need to be linked to job performance. Otherwise, rather than reinforcing the type of behavior that supports the organization, the financial incentives can actually reinforce behavior that is contrary to the good of the organization. For example, one of the reasons that the piecework approach to paying assembly line workers has historically been so widely used is because it ties the financial remuneration that the worker receives to the number of widgets that the worker produces. The more widgets (that are within specification) that the worker produces, the more the worker gets paid under this method. However, if workers were only paid for the number of widgets that they completed -- whether or not they were within the standards for an acceptable widget -- the financial incentive might actually encourage the workers to produce more widgets that were unacceptable, thereby rewarding them for shoddy work and costing the organization money rather than saving it.
Types of Financial Incentive Plans
There are a number of common approaches to financial incentives in business.
Variable Pay Plans
Variable pay incentive plans tie the employee's pay to a predetermined measure of overall profitability for the organization in general or for the specific facility in which the employee works. In profit sharing plans, most of the employees of the organization receive a share of the annual profits of the organization, typically on a one-time, lump sum basis. In profit sharing plans, all employees share in the profitability of the company. Therefore, the more profitable the company is during a given time period, the greater the reward the employee will receive. In theory, therefore, the employee is motivated to do his/her best in order to increase the profitability of the company and, thereby, also increase his/her financial reward. There are several general types of profit sharing plans.
- Under cash plans, a percentage of the profits of the organization (usually 15 to 20 percent) are distributed to workers at regular intervals.
- Under the Lincoln incentive system, employees work in a guaranteed piecework basis and receive a percentage of the total annual profits of the organization based on their merit rating.
- Under deferred profit...
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