Incentives Meaning, Scope, Types, Advantages and Disadvantages

Table of Contents:-

Meaning of Incentives
Prerequisites for an Effective Incentive System
Scope of Incentives Schemes
Incentive Schemes in Labor-Intensive Manufacturing
Types of Incentives
Advantages of Incentives
Disadvantages of Incentives

Meaning of Incentives

Employers provide incentives to workers in recognition of their outstanding performance. Employers use payments by results to recognize and compensate top-notch employee performance. Incentives vary for each individual based on their performance, distinguishing them from fixed wages and salaries.

Incentive systems are tools to support individual or group behaviour at work. An effective incentive system encourages employees to be creative and innovative. It promotes a sense of loyalty among competent and productive employees. Incentives can be monetary and non-monetary.

According to Kemmerer and Thiagarajan, “An incentive is something that influences people to act in certain ways. An incentive system is a collection of incentives and a set of procedures for using them. Organisations use incentive systems to motivate their employees”.

According to Burrack and Smith, “An incentive scheme is a plan or programme to motivate individuals for good performance. An incentive is most frequently built on monetary rewards, but may also include a variety of non-monetary rewards or prizes”.

Prerequisites for an Effective Incentive System

Key principles given below guide the development of an incentive scheme to meet organizational goals.

1) Definite and Quantifiable Objectives

Incentive schemès should have specific and quantifiable objectives to facilitate good control and to maintain energy.

2) Reduction in Production Cost

The incentive scheme should lower the production cost.

3) Motivation

It is a natural phenomenon people don’t do anything without a purpose. Therefore, an incentive plan should motivate the employees to perform better.

4) Simple to Administer

The incentive scheme should be simple for management to manage, with low cost and effort.

5) Guarantee of Minimum Wages

When selecting an incentive scheme, it should ensure the minimum wages in case of unavoidable circumstances which are beyond the control of workers.

6) Payment for Increased Production

The incentive scheme should minimise the wastage of raw materials and defective work. On the contrary, goods and increased production deserve recognition and rewards.

7) Easy to Understand

The scheme should be easy for the workers to understand. They should be able to compute their wages on their own.

8) Efficacy

The scheme should establish a connection between effort and efficiency to attain the desired objectives.

9) Compliance with Policy and Labour Law

An incentive plan should be according to the labour laws and should not be against any policy or regulation of the country.

10) Well-Timed Disbursement of Incentives

Workers should receive incentives the moment they complete their tasks. This motivates the employees to seek out and eagerly wait for such challenging tasks.

11) Technical Standards to Attain the Levels of Performance

Developing standards for a good incentive scheme is a fundamental requirement based on scientific principles. This makes the rules to be objective. For other productivity, these standards should be realistic and attainable so that they can inspire workers to enhance.

12) Unrestricted Wages

Incentives should inspire workers to commit considerable effort to boosting production, resulting in increased wages.

13) Reducing Labour Turnover and Absenteeism

The incentive scheme should be lucrative so that workers are regular in their jobs on a long-term basis.

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Scope of Incentives Schemes

The scope of the incentive plan is extensive, with the possibility of limitations in specific industries. They are:

1) Industrial units where the productivity of the individual or group is difficult to measure or is not possible due to technical and psychological situations.

2) Industrial units where quality control is essential or in specific groups of workers where high quality is extremely important.

3) Industrial units where the working conditions are hazardous for the life of an employee and it is hard to keep an eye on the use of safety measures.

Incentive plans readily apply to all industrial units, except the three mentioned categories. For example, textile industries, mining industries, cloth industries, leather and rubber industries, etc. In industries such as construction and chemicals, incentive schemes have proven to be effective.

Incentive Schemes in Labor-Intensive Manufacturing

It is evident from the fact that result-based payment systems are efficiently applied in those organisations where there are managerial experts and technical staff to guarantee efficient production, quality control and work measurement. However, this system gives positive outcomes in small businesses which use remedial support from expert services for designing incentive plans.

Incentive schemes are often considered important and to be widely used in those manufacturing processes which are labour-intensive. However, their implementation in fully automated plants is doubtful. Incentive schemes also have a vital role in machine-based organisations. However, this fact is not justified because an operator can easily destroy a CNC machine and a software programmer can easily place a virus in the computer system, if incentives are not given to him. This is the only reason why machine-based organisations are encouraged to use incentive plans.

It should be a rule in new organisations to avoid the introduction of incentive plans at least for the initial five years for employees. They should be given payment based on time because this initial time is crucial for any organisation to establish itself in the market. When the organization implements these measures, it becomes easier to sell additional units of products. Incentives also affect the output and its quality and in the initial stage, any poor quality of output will hamper the prospects of newly established business.

Types of Incentives

Incentive schemes/plans can be classified into two different types as follows:

1) Monetary Incentives: Monetary incentives are those incentives which are paid in the form of money or kind.

2) Non-Monetary Incentives: Non-monetary incentives are those incentives which are not provided in the form of money or goods These types of incentives do not directly benefit the employee. Despite being non-monetary, these incentives play a role in motivation by stimulating the employees to work hard.

Advantages of Incentives

The main advantages of incentives are as follows:

1) Promotes Safety at the Workplace

The incentive system motivates the employees to work with all safety measures, thereby avoiding any risk of life in the organisation. This, in turn, makes the workplace more secure to work and at the same time also saves the organisational cost which could have been incurred in case of any mishap.

2) Increases Employee Commitment

The incentive for high-quality work makes employees committed towards their organisation. The incentive system in any organisation shows that the employees as an asset, which in turn makes employees, feel appreciated and valued.

3) Accomplishment of the Set Targets

Employers can set rational goals and reward their employees using an incentive system. An incentive system also helps the employee to achieve the set objectives of the organisation.

4) Decreases the Labour Turnover Ratio

It is quite evident that people would like to come to work and remain in the job for a longer time if their hard work is valued and appreciated. This approach helps reduce employee turnover, leading to a more stable and efficient workforce.

5) Decreases the Total Expenses of the Organisation

The incentive system aims to reduce the total cost of an organisation, by motivating the employees to increase efficiency and reduce labour cost.

6) Creates Team Spirit

Incentive systems promote better efficiency and production, reduce stressful work environments and facilitate building team spirit among employees.

7) Enhances Productivity

The foremost benefit of the incentive system is the increased efficiency of the employee, which in turn increases the productivity of the organisation. For example, In many organizations Salespersons are provided with incentives based on their sales volume. These incentives given by the organisation serve as a source of motivation for them to maximize their sales efforts. Many organisations also give their productive employees a good amount of money in the form of bonuses, to keep them motivated.

8) Boosts Employee Morale

Incentives also infuse zeal and an energetic attitude among the workers to contribute cheerfully to the achievement of organisational objectives. For example, if an employee does overtime for six months, then he should be given a bonus for his efforts. Employees, if given rewards feel that the organisation appreciates their hard work, which in turn motivates them to work more hard than before and ensures their loyalty towards their organisation

Disadvantages of Incentives

The disadvantages of Incentives are for the following reasons:

1) Increases Danger of Accidents

Sometimes, to earn the incentives, employees go beyond their capacity to perform and therefore avoid following safety rules. This increases the chances of accidents in the organisation.

2) Standards are Based on Past Performance

Generally, past performance is set as a benchmark to measure the actual performance of the worker which is not an easy task. Many organisations play safe by fixing a standard of performance, which is the average of performance in the past years, but it cannot be considered as a perfect basis for setting a performance standard.

3) Leads to Higher Labour Costs

Incentive systems usually incur more expenses on the labour, especially when they are being paid by the result, e.g., paper-making and coal mining industries.

4) Induces Fear in Workers

Incentives create a feeling of fear in the workers, in case any technological upgradations are implemented in the organisation. For example, the introduction of new machines develops a feeling of fear among the workers about whether or not they will be able to produce high output as required for getting incentives while working with the new devices.

5) Creates Feelings of Jealousy among Workers

The workers who perform well are being rewarded exceptionally well, in comparison to those who are not able to perform well. This creates a feeling of jealousy among employees whose performance is subpar.

6) Leads to Increased Expenses

The quality of the product or service can only be assured with rigorous and vigilant supervision. However, strict monitoring and supervision can lead to increased expenses for the organization.