Business managers can motivate their workers in several ways. These rewards can be divided into financial rewards and non-financial rewards.
What are financial rewards?
Financial rewards, or non-monetary factors, are methods that a business organization can use to motivate its workers by using some form of monetary payments, or directly linked to money.
As money is an important reason why people go to work, business managers need to consider what is the best way of using it to achieve a well-motivated workforce.
If the lowest payments can promote motivation without overly increasing the costs, then they should be considered to keep the business competitive in the marketplace.
Popular financial rewards
The range of non-financial motivators is very extensive. The most common payment rewards include:
- Wages
- Salary
- Commission
- Bonus
- Performance-Related Pay (PRP)
- Profit sharing
- Share ownership scheme
- Fringe benefits
Let’s take a look at them in details now:
1. Wages. Wages are the reward for labor services usually paid to unskilled workers. Their rate typically depending on the worker’s experience and responsibilities. Wates are expressed as an hourly, daily or weekly rate (time-based rate) or as a measurable quantity of output (piece-based rate):
a. Time-based wage rate. Payment based on hours worked. Suitable for non-production jobs where output is difficult to measure. Offers security but may not directly motivate higher performance. It is simple and straightforward, offers security of income, but does not directly link pay to effort or output, potentially leading to demotivation.
b. Piece-based wage rate. Payment based on units produced. Encourages productivity but may compromise quality and create unfairness if rates are not set properly. It rewards productive workers, incentivizes faster work. But, may compromise quality, lead to worker stress and dissatisfaction.
2. Salary. Salary is the reward for labor for employees whose work effort is not directly linked to production, e.g. team supervisors, managers and professional staff such as teachers or doctors. It is fixed annual income paid monthly, usually for professional (doctors, teachers, engineers, etc.), supervisory and managerial staff. It offers security of income, improves cash flow for the business, but it does not link pay directly to effort or output, potentially leading to complacency.
3. Commission. Commission is the reward to a sales person for each sale made. This payment is based on a percentage of sales made, commonly used in personal selling. For example, a real estate agent might get paid 1% (the commission) of the value of each apartment or house personally sold. So, an agent that sells a USD$1,000,000 property would earn USD$10,000 in commission. It is a strong incentive for sales staff to perform well in order to sell more products, but there is income uncertainty which may lead to pressure tactics and disregard for customer service.
4. Bonus. Bonus is the reward made in addition to the contracted wages or salary often linked to achieving specific performance targets. It is based on criteria agreed between managers and workers, e.g. the increase in output, productivity, sales revenue, or the number of additional customers acquired. It motivates employees to achieve goals, rewards performance beyond expectations, but can be demotivating, if targets are unrealistic, may lead to conflict in team-based schemes.
5. Performance-Related Pay (PRP). Performance-Related Pay (PRP) is a reward scheme to reward individual employees or teams for exceeding performance targets. It is usually paid in the form of a bonus payable in addition to the basic salary for above-average work performance. It is widely used for those workers whose output is not measurable in quantitative terms, such as management, supervisory and administrative jobs. PRP creates incentives for high performance, fosters a performance-oriented culture, but can damage team spirit if overly competitive, requires careful target setting and management. Performance-Related Pay (PRP) can be paid in various ways such as:
a. Pay rise which an increase in a person’s pay due to meeting or exceeding his/her performance targets.
b. Performance bonus which is paid to workers who have reached output or quality targets, e.g. sales staff might receive a cash bonus for reaching their sales targets.
c. Gratuity which is paid to staff who complete their employment contracts, e.g. international schools typically pay teachers an end-of-contract bonus based on the employee’s annual salary.
6. Profit sharing. Profit-sharing is an additional payment to all staff based on the profits of the business, usually paid once a year. This additional payment is often distributed among employees. It is often in the form of a cash payment or shares in the company. It aligns employee interests with company success, fosters teamwork and collaboration, but smaller share size may not be a significant motivator, reduces available profits paid to owners (reduced dividends) and to be reinvested in the business (reduced retained earnings).
7. Share ownership schemes. Share ownership schemes refer to granting employees ownership of company shares, either as rewards or at significantly discounted prices. It is often used as an alternative to awarding a cash bonus or profit sharing in order to avoid paying out cash. It aligns employee interests with shareholder value, potentially increases commitment, but it is complex to implement, may dilute existing shareholders’ value.
8. Fringe benefits. Fringe benefits are given (separate from pay such as wages or salary) to only some or all employees. These perks are non-cash benefits provided by the employer, such as health insurance, discounts to buy the firm’s products, paid time off, company car, pension schemes, subsidizes meals, gym memberships, free uniforms, business-class travel, etc. They enhance employee recruitment and retention, improve employee well-being, but can be costly for the business, may not be equally valued by all employees.
While financial rewards are necessary to encourage work effort, they alone may not always be sufficient to ensure that workers are motivated to work to their full potential. Therefore, other non-financial methods need to be considered.
