Employee Incentive Plans

Published June 14, 2013 by Mayrbear's Lair


For organizational leaders, superior quality service and exceptional products are the mechanisms of cooperation. Many employers express their appreciation and gratitude and recognize the contribution of their employees by rewarding them for their outstanding achievements. Reward systems are common. In fact, they have been used throughout history by merchants for example, as a device to domesticate and train animals to work for them. It is natural that organizational managers would incorporate fundamental incentive plans then to influence personnel behavior as well. Kohn (1999) proposed that rewards increase the probability of individuals achieving higher performances levels. In other words, compensation devices are used to inspire people to engage in activities with more enthusiasm.  In addition, they can change the attitude of an individual to voluntarily become more productive. On the other hand, there are some leaders who are under the impression that people can pay a substantial price for rewarding the success of their employees (Kohn, 1999). This research takes a look at the significance of incentive plans that employers design for their organizations. It is an evaluation of two different types of reward systems: (1) direct financial payment derived from a base salary, commissions, and bonuses; and (2) indirect financial benefits that include training programs, insurance coverage, and leave for holidays, vacation, sick leave, and personal time off. A closer analysis will reveal: (a) whether rewards change an individual’s behavior, (b) the people they effect, (c) how long reward systems remain effective, and (d) just what exactly are incentive plans effective at? In addition, this study examines some of the reasons compensation plan systems can fail. The conclusions derived from the evidence collected, suggests that to achieve the most successful outcomes, employers implement incentive plans that emphasize high level performances, inspire long and short term methods of motivation, and serve as a means to review and analyze operational outcomes.

business man with gifts falling down

Reward Systems

Their Function

Leaders set goals to increase an organization’s profits, improve production outcomes, provide outstanding quality service and expand their business. Employers work together with Human Resource (HR) units to attract top quality personnel. They establish reward systems to encourage higher levels of performance and inspire long-term employee loyalty. They do this by defining organizational standards and identify individuals eligible for receiving them. Arahood’s (1998) research outlined four basic kinds of compensation plans: (a) a base salary that assures income during a planned period, (b) a bonus plan with no base salary, usually as a standard method for rewarding sales staff like manufacturing representatives and distributors, (c) a combination of salary and bonus where a portion of employees’ income is at risk in the short term and contingent on actual performances rather than outcomes, and (d) a combination of salary and incentives that include additional long term income opportunities when specific goals are achieved (Arahood, 1998). These are common plans organizations include in their incentive programs to motivate both financial and operational performances from staff members. Once organizational leaders and HR units identify the company’s vision and establish specific goals, next they can design a plan that defines the skills and competency levels they require from the professionals they hire to achieve their desired outcomes. This strategy helps developers fabricate compensation plans that will serve to attract the actors best qualified to perform those skills consistently and effectively.


Direct Financial Payment Plans

The Pros

To reward employees, HR units and organizational managers resort to a variety of incentive programs and award systems to compensate employees for their outstanding achievements. One method of doing this is by way of direct financial payment. This method includes employee wages, commissions, bonuses, and other means of compensation like travel rewards, gift certificates, cash prizes, leased cars, and other similar perks. Bergen (2004) suggested that even with the trend for organizations to go lean, employers are still finding innovative ways to reward their employees through cost effective methods (Bergen, 2008). For example, in addition to salary increases based on performance achievements, leaders may resort to providing other rewards like merchandise or discounts for merchandise, gift certificates, and cash bonuses to show employees their appreciation and gratitude for excellent levels of accomplishment and their part in helping the organization reach desired outcomes. These kinds of programs make employees feel valued and give them a sense of pride for their efforts and organizational successes.

The Cons

Employers that rely on reward systems risk altering the behavior of their staff, create competitive environments, and can stifle intrinsic motivation. Kohn (1994) stated that using a reward system can send the wrong message to employees. His studies indicate that incentives are a way to redefine relationships and describe them as elementary economic exchanges that can dehumanize the recipient. It is generally accepted that seldom does it result in permanent behavior. In fact, Kohn’s research implies that reward systems can evolve into a way of punishing people (Kohn, 1999). For example, when one member of a team is rewarded for achieving the highest goals, other members who may have worked just as hard may feel they are being penalized for not achieving the same results. Additionally, it can discourage employees from taking risks and trying out new methods. In short, the study suggests that praise for recognition is a common method that is utilized to control outcomes which can eventually lead to the creation of a dysfunctional working environment. If compensation plans and award systems are not carefully constructed to yield the highest results from employees, they can prove to be disastrous.


Indirect Payment Plans

The Pros

Employers and HR managers also look towards other directions that encourage long and short term motivation from their staff by designing indirect payment and bonus plans. In this arena, they create plans that include other forms of incentives and special employee recognition events like: (a) employer paid health, worker’s compensation, and unemployment insurance, (b) employer paid holidays, vacation, sick, maternity leave and other days for personal time off, (c) stock options, (d) child care, (e) country club memberships, and (f) special luncheons, dinners, parties, and other similar types of events to acknowledge valued staff member performances. Kohn (1999) defined the efforts of employee hard work into two significant categories: failure or success (Kohn, 1999). These are what most leaders use as a starting point to determine employee indirect compensation plans. Next, they design programs that train employees efficiently so they can perform their tasks with confidence and enthusiasm. Then, leaders can determine who the key employees are and fabricate incentive plans that will motivate higher outcome levels.

The Cons

Employers also discover that there are many reasons why reward systems fail and if they are not designed effectively and monitored. For one thing, they can damage relationships and inhibit the motivation process. Marcum’s (1994) research purported that reward systems are a sure way for employees to lose interest and commitment to the original task because they are solely focused on the reward rather than organizational goals (Marcum, 1994). In fact, these methods tend to have a counterproductive effect on motivating people for the right reasons. Employees can become so focused on the end prize, they tend to ignore reason, cut corners, and use whatever methods as a means to their end, creating a wake of damage in their attempt to achieve their idea of the gold medal. When this occurs, HR units and leaders must find ways to authentically motivate their staff by reevaluating their methods and creating conditions that foster collaboration, offering more choices for individuals to accomplish their tasks. Reward systems that set the stage for a highly competitive culture, where the sole motivation is based on achieving the highest levels of success based on obtaining more compensation and praise, tend to cultivate unhealthy behavior, especially from individuals with substantial egos driven by an extreme need for attention and recognition. These types of individuals usually resort to any method to achieve their outcomes.  This is one reason it is imperative that employers determine whether reward systems make sense to the basic success of organizational goals because for some individuals, incentives merely serve as motivation to boast on how well they are doing based on the amount of goodies they receive.



Ultimately, employers and HR managers want the best of both worlds. They want to achieve organizational goals, increase their profitability, and motivate high level performances from their employees while retaining their loyalty and long term commitment. Employers are looking to achieve these goals by devising an effective compensation program that includes a base salary as well as employee benefits. Montemayor (1995) asserted that employers should use extrinsic rewards effectively to sustain and motivate employees because it represents an exchange of energy based on economic value. In short, his experiments deduced that effective pay-for-performance incentives in the workplace produce positive results and have a great impact on productivity (Montemayor, 1995). In conclusion, incentive plans serve to reward employees for outstanding achievements in performing their duties and assigned tasks. They are used as a means to reward above average outcomes and to recognize personnel for their hard work. The most common perquisites can include bonuses like first class airfare, electronic devices, supplemental retirement plans, and long term employment contracts. Even though it may discourage risk-taking, employers implement effective incentive plans, to emphasize their financial goals, motivate high performance levels, and encourage enthusiasm from their staff to help them achieve operational outcomes.



Arahood, D. (1998). How to design and install management incentive compensation plans. Wheaton, IL, USA: Incentive Compensation Publications.

Bergen, K. (2008, November 28). Companies find incentive to offer more rewards: After three down years, the employee-incentive industry is buoyed by an increase in trip rewards and more spending on merchandise. Chicago Tribune. Chicago, IL, USA: Tribune Publishing Company. Retrieved May 29, 2013, from http://search.proquest.com/docview/420054268?accountid=32521

Kohn, A. (1999). Punished by rewards. New York, NY, USA: Houghton Mifflin Company.

Marcum, J. (1994, Spring). Punished by rewards: The trouble with gold stars, incentive. National Productivity Review. New York, NY, USA: Wiley Periodicals. Retrieved May 29, 2013, from http://search.proquest.com/docview/215031998?accountid=32521

Montemayor, E. (1995, Winter). Punished by rewards: The trouble with gold stars, incentive plans, A’s, praise, and other bribes. Personnel Psychology. Durham, England, United Kingdom: Blackwell Publishing. Retrieved May 29, 2013, from http://search.proquest.com/docview/220128747?accountid=32521

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