Financial and Non-Financial Incentives

Motivation plays a vital role in every employee’s performance and influences their attitude towards work in various ways. Companies have established various incentives/motivational packages to boost staff morale and, as a result, increase performance. The positive motivators that aid in improving a person’s performance are known as Incentives. Both financial and non-financial incentives drive workers or employees. 

What are incentives?

An inducement that motivates or inspires one to take action in a desirable direction is an incentive. Thus, all the steps executed by a company’s management or business to increase the performance of its personnel can be classified as incentives. 

Modern businesses use many incentives to inspire their staff that can be divided broadly into two categories: financial and non-financial incentives. Let’s discuss them one by one in great detail. 

Financial Incentives 

Financial incentives are directly monetary, i.e., money that can be measured in monetary terms. Money has become a crucial component of our lives in today’s socioeconomic climate, both in urban and rural areas.

 Since money has purchasing power, it meets practically all our demands. Thus, financial incentives and promotions positively impact employee engagement and loyalty around the world.

Salaries, bonuses, retirement benefits, commission, benefit sharing or gain sharing, promotions, medical reimbursement, and employee stock ownership are all examples of financial advantages and rewards necessary for an organisation’s plan. 

Every organisation that wants to recruit and retain employees, their management must improve these financial incentives. Financial incentives can be given to them individually or in groups to satisfy employees’ monetary or future security needs. 

Types of Financial Incentives 

Financial incentives are types of remuneration linked to monetary incentives or need monetary payment. This type of incentive can come in a variety of shapes and sizes. The most prevalent financial incentives are listed below.

1. Salary and allowances 

Every employee’s primary incentive to work efficiently for a business is their salary. Basic pay, dearness allowance, house rent allowance, and other comparable benefits are part of the salary. 

Employees receive annual raises in basic pay and periodic increases in their allowances under the salary system. These raises are sometimes dependent on the employee’s performance during the year. 

2. Pay for performance 

This is the most common form of financial incentive, and most businesses are aware of this type of incentive. This is sometimes also known as “pure financial incentive.” It refers to a pay structure in which employees are paid based on their ability to meet performance goals. It’s a simple device that taps into a primary human reaction, i.e., once someone gets paid to do something, they are more inclined to do it. This is also very cost-effective. 

3. Profit-sharing 

Profit-sharing refers to a sort of financial incentive in which employees are paid out of a percentage of the company’s pre-tax income. Under this, employees typically receive a share of the company’s profits in addition to their regular pay. 

This indicates that a company or workplace will give profit-sharing payments only based on the company’s earnings or other considerations such as excellent customer service. 

Profit-sharing schemes also increase workers’ loyalty. Sharing a company’s profits with employees allows them to feel like they are a valuable part of the organisation.

Non-Financial Incentives 

Financial incentives sometimes may not be enough or adequate to motivate the workers. Managers can combine financial incentives with other incentives to increase employees’ productivity. 

In addition to meeting monetary and future security demands, an employee has psychological, social, and emotional needs that need to be satisfied. Fulfilling these social, economic, and psychological requirements is vital for their motivation. 

Non-financial incentives primarily focus on meeting these requirements and cannot be calculated in monetary form. Personal attention, business vehicles, preparation and career advancement, approval and appreciation, recognition are some examples of non-financial incentives. 

Furthermore, there is a possibility that a non-financial incentive will also include a financial incentive. For example, when employees get a promotion in their job, this increases their salary or bonus and fulfils their psychological demands because they gain more authority and their position also rises in the organisation. 

Types of Non-Financial Incentives 

Using techniques other than money, a company can stimulate good behavioural change and encourage employees to work more efficiently. Some of the most common forms of non-financial incentives have been discussed below. 

1. Recognition 

Recognition is an expression of gratitude for a level of performance, an accomplishment, or a contribution to a goal. It might be private or public, informal or formal. Employee appreciation is one of the most effective ways to empower employees.

It makes them feel valued, which increases employee recruitment and retention. When done right, recognition is a cost-effective approach to boost performance and make employees feel more invested in the company’s work. 

2. Career advancement opportunities 

The lack of job growth options has an impact on motivation and achievement. Suppose employees are provided with the opportunity to progress their careers by adopting new skills, technology, and competencies required to improve performance and promotion. In that case, they will feel appreciated and encouraged.

Employees’ productivity will also increase since they will be reminded regularly that their efforts will help them achieve their goals and increase their prospects of growth.

3. Organisation’s work environment 

Individual performance increases due to a better working environment because a better working environment increases employee happiness, which leads to increased performance. A person is motivated by a work environment where they feel they have incentives to accomplish work and are given importance for doing their job. 

Productivity declines in working environments if workers lack enough resources, software, sufficient ventilation, comfortable furniture, or lighting, making employees uncomfortable and impairing productivity.

Conclusion 

Humans are social animals; thus, financial and Non-financial incentives are equally essential to satisfy the monetary and psychological needs of the employees. Giving incentives to employees is beneficial not only for employees but also for employers. Incentives increase the productivity of employees and improve their loyalty towards organisation and organisational goals.