Incentive Pay

Finding Balance: Incentive Pay Pros and Cons Weighed Up

June 21, 2022
min read

Wondering what the incentive pay pros and cons are? Are monetary rewards really the best way to retain top talent? Monetary rewards are certainly a good way to motivate your staff.

According to research done by the Kelley School of Business, monetary rewards can be a powerful influence on employee performance. Although effective, like any other reward system, it does have some drawbacks.

Below, we’ve highlighted all the benefits and downsides of incentive pay models so you can make an informed decision when it comes to rewarding your team.

What is Incentive Pay?

Incentive pay can be defined as performance-based compensation that’s given to employees as a reward for achieving certain goals or pre-set objectives.

Incentive pay can either be casual or structured. Some forms include commission, extra paid leave, employee gifts, or company stocks.

Incentive pay is often created with a specific employee in mind to ensure that each employee gets what they truly desire. However, you can also establish incentive pay models for different departments in a company or for the entire company itself.

The goal of incentive pay is to reward employees who truly go above and beyond. It serves as a motivational tool and can help you get the most from your team. If implemented correctly, incentive pay structures should be a win-win situation for both the company and its employees.

Related: What’s The Difference Between Merit Pay Vs Incentive Pay?

Why is it Important To Weigh Up Incentive Pay Pros and Cons?

When it comes down to it, you want the best for your company and for your employees. To see if an incentive pay program will work for your unique company culture, you need to understand the incentive pay pros and cons.

By weighing up the benefits of incentive pay against the disadvantages, you will know if monetary motivation is the logical next step for your workforce. 


Helping You Hone in on Problem Areas

A performance-based pay program can help you to identify the top-performing divisions and employees of your company. In a similar fashion, it can also help to identify employees who are not contributing as much as their peers. 

Quantifying an employee’s contributions and then investigating the reasons for this can allow you to establish why they are not performing optimally.

Maybe your in-house training is lacking or perhaps there is no follow-through when it comes to managing projects. Oftentimes, a lack of communication regarding job expectations is one of the primary causes of a decrease in job performance. 

Whatever the problem may be, monetary incentives can help you to identify which areas of your business are in need of improvement. The goal here is to focus on the employees in need of guidance and to formulate a strategy that will help you overcome your company hurdles.

Of course, this isn’t the only way you can pinpoint areas in need of improvement. Incentive pay can also be contingent on performance appraisals. 

By talking to your employees regularly, you will have a great opportunity to delve into their performance goals and struggles. This will help you to create a custom employee growth plan. Whenever an employee achieves a certain objective, you can reward them with incentive pay.

Retaining the Top Performers

When looking at incentive pay pros and cons, you’ll agree that one stellar benefit is the ability it gives you to differentiate between great and average performing employees. This knowledge allows you to spend your financial resources wisely and reward those who really deserve it.

In turn, top performers who are recognized and rewarded for their hard work are more inclined to remain at the company for years to come. In short, your employees will realize that hard work equals more monetary rewards, so they’ll remain driven.

Driven employees will translate into high-quality products and services delivered to your clients and increased sales, which makes your company look great. 

Happy employees also tend to tell other people about their great work environment. That way, you won’t have a hard time attracting more talented employees to your company.

Attracting the Best Candidates

Knowing what kind of people perform optimally at your company can help you to better strategize onboarding processes. Data from your incentive pay program can be used to vet candidates with similar personalities, ambitions, and attributes to top performers. 

In other words, an incentive pay program can help you to hire the right people from the start, saving you time, money, and other resources. In the long run, this will also help to decrease turnover costs, allow you to streamline your recruitment process and boost employee morale.

Related: Incentive Pay Plan — Definition & Examples Outlined For HR


May Create Unclear Performance Metrics

While all incentive pay pros and cons are valid, this drawback might be the most important one of all. Each employee is unique. This can make it challenging to create a universally fair incentive pay system that takes every relevant factor into account. 

There are many aspects that are harder to measure when it comes to someone’s job performance. However, employees may still see these unmeasurable things as valid when their job performance is put under the spotlight.

It is best to be crystal clear when it comes to your workforce’s performance metrics. You have to spell out precisely how much monetary value each performance metric is worth. This will help dispel confusion and prevent misunderstandings.

If you don’t do this, your employees may start to believe they’re not receiving the financial reward promised. To make it easier, use tools that calculate how much compensation each employee is entitled to based on their performance and responsibilities. 

Overemphasis on Money

Top performers who regularly receive extra compensation for outstanding work could theoretically reach a cap on their additional earnings. If those employees only care about their extra earnings, then not receiving it could prove disastrous for their performance.

Ideally, this is not the type of employee you want to attract. Your company’s goals, culture, and overall vision could be negatively affected. 

To avoid this, be sure to establish an incentive pay system that aligns with your company’s goals. Your monetary reward system should never undermine the integrity of your company’s work or reputation.

Negative Effect on Profitability

When it comes to truly understanding incentive pay pros and cons, it is vitally important that you do your homework before implementing a performance-based compensation program. Not doing so could result in dwindling profits.

Many companies have been swept away by the idealist notion of rewarding top-performing employees with incentive pay, which is a fine thought in itself. 

However, not all companies plan ahead enough and establish whether it's a viable option. Often times this results in a negative effect on employee productivity.

When it comes down to it, there should be a balance between the additional compensation given and the amount of work required. If the incentive pay offered is too little, it won’t motivate your workforce. On the other hand, if it is too much, then your company’s profits could suffer.

In Summary

It is important to take the holistic picture into consideration when considering incentive pay pros and cons. Every disadvantage of monetary incentivization can be turned into a benefit if it’s dealt with correctly. 

At the end of the day, employees want to be recognized for their hard work. Incentive pay allows you to do just that.

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