Incentives

In the field of human resources and compensation, incentives are specific rewards that are offered contingent on the achievement of some predetermined level of performance, or the performance of some specific type of behavior viewed as desirable by the organization. It could be argued that the earliest systems of exchange between organizations and individuals were primarily incentive based (i.e., piece rate systems in which individuals were paid a fixed rate for producing a set number of units). However, with the introduction of scientific management around the beginning of the 1900s, organizations moved to paying a fixed base wage or fixed annual salary. For most jobs, with the exception of sales and some lower-level jobs, monetary incentives played a secondary role as a type of additional method of motivating desired performance beyond that offered by performance appraisal and merit raises.

For organizations today, incentives serve as a way of attempting to influence future behavior toward some behavioral or production goal. Thus, they serve as a supplement to base pay or annual salary. However, unlike the base pay a person receives, incentives can be lost as well as gained. That is, if individuals do not meet the desired level of performance, or fail to perform the desired behaviors, then they do not receive the promised reward. So, incentives differ from the pay one receives from one's job, in that incentives are directed at future behavior, whereas pay can be viewed as an exchange for past behavior. A second difference is that incentives can be lost if the behavior or performance does not occur, whereas one's base pay is guaranteed regardless of one's performance, given one works the required number of hours.

There are three general types of incentives commonly used by organizations. The first is monetary incentives. The second is nonmonetary, tangible incentives such as trips, gifts, or stock options. The third is praise or positive verbal reinforcement. Each type of incentive will be discussed briefly, primarily from the perspective of its practical application in modern organizations. This will be followed by a brief discussion of major theoretical approaches to the explanation of the effects of incentives on performance.