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Disadvantages and Advantages of Incentive Pay Programs

 In a day and age when finding top talent is competitive, employers must develop creative ways to attract and keep valued employees. For some time, employers have resorted to giving their employees incentive pay to retain top talent. Pay incentive programs come with advantages and disadvantages for businesses and employees.

Incentive pay is compensation used to encourage employee productivity. This payment is usually performance-based compensation that motivates employees to reach goals or objectives. Businesses establish incentive pay programs for individuals, teams, and the entire company.

Incentive pay is sometimes used interchangeably with the term bonus. However, bonuses are incentive pay, and they usually refer to payments given at special times of the year, for example, holidays or end-of-year bonuses. Further, the term incentive pay also infers the sense that the companies offer rewards to drive future performance, and this might only sometimes be the case with a bonus.

Companies can offer both non-monetary and monetary incentive pay. Monetary examples of incentive pay are sign-on bonuses, equity, stock shares, and quarterly or yearly bonuses, and non-monetary examples of incentive pay include gym memberships/wellness programs, travel rewards, or awards.

Employees can receive incentive pay through various programs. A sales incentive pay program might deploy competitive strategies to motivate top performers. These programs track performance, usually with a software program, and offer bonuses and commissions to those reaching sales benchmarks.

The channel incentive program is another type, but companies deploy it with partners and external vendors to distribute goods and services. Companies use channel incentive programs to encourage/motivate partners and vendors to continue to do business with them.

While an incentive pay program naturally motivates employees to perform, it can also cause other issues. For example, it can create conflicts when employees come into a disagreement about whether each deserves the incentive or not. Some employers address this by asking employees to be discrete regarding their incentive pay, but even this is highly discouraged because it violates the National Labor Relations Act (NLRA). Enacted in 1935, this legislation protects workers' rights to collective bargaining and to associate with one another freely without fear of reprisal.

Also, some employees might decline to participate simply because the pay is not guaranteed. Why exceed performance when there is a chance that you might not reach the goal or objective needed to meet the standard for receiving the pay? Risk-averse employees might instead choose to focus on activities that guarantee pay.

Also, companies sometimes need to set clear standards for reaching pay incentive goals/objectives. Because standards are unclear, employees might not understand the process and view the incentive pay program as unfair.

Finally, businesses might fail to align the incentive pay program with their goals. For example, a pay incentive program at a sales company that aligns its incentive with sales performance gets the employee to generate sales, and thus giving a bonus is relatively inexpensive to the company, but another program, not aligned with sales performance and one that generates no income, costs the company.

However, the advantages outweigh the disadvantages in accomplishing a few main organizational objectives. For one, incentive pay programs increase employee morale, and employees who are happy with their place of employment continue to perform for extended periods and are likely to remain with the company.

From an organizational perspective, improved performance positively impacts the business's overall growth. Incentive pay is one method for aligning company goals/objectives with employee compensation.