Incentives: Financial and Non-Financial Incentives with Examples

The compilation of these Directing Notes makes students exam preparation simpler and organised.

Incentives: Financial and Non-Financial Incentives

The incentive is a positive motivational influence on a person that helps improve his performance. Thus, it can be said that all the measures taken by the management to improve the performance of its employees are incentives. The incentives can be broadly classified as financial incentives and non-financial incentives.

Financial Incentives

In today’s socio-economic condition money has become a very important part of our lives. We need money to satisfy almost all our needs as it has purchasing power. Thus, financial incentives refer to those incentives which are in direct monetary form i.e. money, or can be measured in monetary terms.

Financial incentives can be provided on an individual or group basis and satisfy the monetary and future security needs of individuals. The most commonly used financial incentives are:

(a) Pay and Allowances
Salary is the basic incentive for every employee to work efficiently for an organization. Salary includes basic pay, dearness allowance, house rent allowance, and similar other allowances. Under the salary system, employees are given increments in basic pay every year and also an increase in their allowances from time to time. Sometimes these increments are based on the performance of the employee during the year.

(b) Bonus
It is a sum of money offered to an employee over and above the salary or wages as a reward for his good performance.

(c) Productivity linked Wage Incentives
Many wage incentives are linked with the increase in productivity at the individual or group level. For example, a worker is paid 50 rupees per piece if he produces 50 pieces a day but if he produces more than 50 pieces a day, he is paid 5 rupees extra per piece. Thus, on the 51st piece, he will be paid 55 rupees.

(d) Profit-Sharing
Sometimes the employees are given a share in the profits of the organization. This motivates them to perform efficiently and give their best to increase the profits of the organization.

(e) Retirement Benefits
Retirement benefits like gratuity, pension, provident fund, leave encashment, etc. provide financial security to the employees post their retirement. Thus, they work properly when they are in service.

(f) Stock Options or Co-partnership
Under the Employees Stock Option Plan, the employee is offered the ordinary shares of the company at a price lower than its market price for a specified period of time. These are non-standardized offers and shares are issued as a private contract between the employer and employee. These are generally offered to management as a part of their managerial compensation package.

Allotment of shares induces a feeling of ownership in the employees and they give their best to the company. Infosys, GoDaddy, and The Cheesecake Factory are some of the companies that have implemented the scheme of the stock option.

(g) Commission
Some organizations offer a commission in addition to the salary to employees for fulfilling the targets extremely well. This incentive encourages the employees to increase the client base of the organization.

(h) Perquisites
Several organizations offer perquisites and fringe benefits such as accommodation, car allowance, medical facilities, education facilities, recreational facilities, etc. in addition to the salary and allowances to its employees. These incentives also motivate the employees to work efficiently.


Non-Financial Incentives

Apart from the monetary and future security needs, an individual also has psychological, social and emotional needs. Satisfying these needs also plays an important role in their motivation. Non-financial incentives focus mainly on the fulfillment of these needs and thus cannot be measured in terms of money.

However, there are chances that a particular non-financial incentive may also involve the financial incentive as well. For example, when a person is promoted his psychological needs are fulfilled as he gets more authority, his status increases but at the same time, he has benefitted monetarily also as he gets a raise in salary. The most common non-financial incentives are:

(a) Status
With reference to an organization, status refers to the position in the hierarchy of the organizational chart. The level of authority, responsibility, recognition, salary, perks, etc. determine the status of an employee in the organization.

A person at the top level of management has more authority, responsibility, recognition, and salary, and vice-versa. Status satisfies the self-esteem and psychological needs of an individual and in turn, motivates him to work hard.

(b) Organizational Climate
Organizational climate refers to the environmental characteristics of an organization that are perceived by its employees about the organization and has a major influence on their behavior. Each organization has a different organizational climate that distinguishes it from other organizations.

Some of the factors that influence the organizational climate of an enterprise are organizational structure, individual responsibility, rewards, risk and risk-taking, warmth and support, and tolerance, and conflict. When the organizational climate is positive employees tend to be more motivated.

(c) Career Advancement Opportunity
It is very important for an organization to have an appropriate skill development program and a sound promotion policy for its employees which works as a booster for them to perform well and get promoted.

Every employee desires growth in an organization and when he gets a promotion as an appreciation of his work he is motivated to work better.

(d) Job Enrichment
It refers to the designing of jobs in such a way that it involves a higher level of knowledge and skill, a variety of work content, more autonomy and responsibility of employees, meaningful work experience, and more opportunities for growth. When the job is interesting, it itself serves as a source of motivation.

(e) Job Security
Job security provides future stability and a sense of security among the employees. The employees are not worried about the future and thus work with more enthusiasm. Owing to the unemployment problem in our country, job security works as a great incentive for the employees. However, there is also a negative aspect of this incentive that employees tend to take their job for granted and not work efficiently.

(f) Employee Recognition Programmes
Recognition means acknowledgment and appreciation of work done by employees. Recognition in the organization boosts their self-esteem and they feel motivated. For example, declaring the best performer of the week or month, displaying their names on the notice board, and giving them rewards, fall under the Employee recognition program.

(g) Employee Participation
Involving the employees in decision making regarding the issues related to them such as canteen committees, work committees, etc. also helps in motivating them and inducing a sense of belongingness in them.

(h) Employee Empowerment
Giving more autonomy and powers to subordinates also makes them feel that they are important to the organization and in turn they serve the organization better.


Which among the following allowances is paid to employees in order to enable them to face the increasing price of essential commodities?
a. Bonus
b. Commission
c. Increment
d. Dearness Allowance
The correct answer is “d”.
Dearness Allowance is a cost of living allowance paid to employees, to help accommodate the constantly increasing cost of living.