Incentive Pay

How To Apply Incentive Theory to Employee Rewards

June 3, 2022
min read

Incentive theory comes from motivation theories of the 1940s and 1950s. It was developed by behavioral psychologist B. F. Skinner.

Employee rewards programs based on incentive theory increase employee performance and will help motivate employees to stay with their current company.

Let’s take a look at how the theory works and how we can use it in practice.

What Is Incentive Theory?

Incentive theory says that people are more likely to do things that lead to a reward. This theory suggests that we are motivated by external forces.

Incentives can either be positive or negative, depending on the desired result. Positive incentives encourage good behavior, while negative incentives discourage poor behavior. 

Negative incentives can help correct mistakes but should be used with caution. Most psychologists agree that behaviors are more likely to be repeated when they’re positively reinforced.

How Does Incentive Theory Work?

External forces act as motivators outside of the individual. Employee incentives like a promotion, bonus, and extra time off are extrinsic motivators.

Other forms include social and emotional incentives, like being praised or getting attention. External motivators can often influence someone who’s not initially interested in a certain activity to get more involved.

Incentive Theory In The Office

Incentive theory can be applied to the corporate world in a few different ways. Below we will share examples to help you better understand how to apply the theory in your company with employee incentives.

We will look at both monetary and non-monetary incentives.

Examples Of Monetary Incentives


Cash bonuses can be used regularly to reward a company’s employees. Bonuses are often used to celebrate important goals that an employee has achieved.

Many companies use sign-on bonuses for employees working with the company for a short time.


Commissions are another common form of incentive, especially for those who work in sales. Retail employees and real estate agents are examples of employees who receive a commission as an incentive.

Sales agents often still earn a basic salary or wage. The commission is then added on top of that as an employee incentive to encourage the individual to sell more of a certain product or service.

Retirement Plans

This kind of incentive gives employees long-term benefits after they’ve retired. There are many ways that companies present these incentives, including 401(k) plans.

Sometimes the company also contributes to the retirement plan by “matching”. This means that the company matches the employee’s contributions to the retirement plan.

Stock Options

Offering employees stock incentives lets them buy a certain number of shares of the company’s stocks at a predetermined price. 

In some cases, a company can offer these stock options at a lower-than-market price for their staff members. Stock options are employee incentives that offer them long-term financial benefits. 

Related: How To Use Rewards As Incentive Pay

Examples Of Non-Monetary Incentives


A promotion represents two things to the employee: personal growth and a better income. A promotion also gives the employee an increased sense of job security. 

An employee should usually be given a promotion at the same time as a raise in salary.

Without the opportunity to progress in their career, many employees will lose interest in their company and look for better positions elsewhere. This makes job promotions a key employee incentive that promotes strong performance.


Recognition and appreciation are often used as rewards for hard work, goal achievement, or for staying with the company for many years. Companies often offer a monetary reward along with recognition.

Another way of giving recognition is praising an employee during a team meeting. Commending an employee in front of others will emphasize the work ethic others should try to display.

Training and Development

Opportunities to develop professional skills can be an important motivator for employees. Companies can offer tuition reimbursement, seminars, and company training programs.

A company can also conduct a job shadowing program. Employees work alongside colleagues in a different area or level of the company. This exposes the employee to more aspects of the organizational processes and boosts morale.

Job Security

Job security can motivate employees immensely. When an employee receives tenure or when a probationary period ends and they are made a permanent staff member, it makes them feel more secure.

Annual performance reviews can boost employees’ sense of job security. Performance reviews offer positive and constructive feedback, which is good for the employee and the company.

Employment Perks

A business that uses employee rewards to incentivize certain behaviors can retain and attract better employees.

An example of a highly effective job perk is offering more flexibility to employees. This can include allowing responsible, self-motivated people to manage themselves. 

Employees then have the freedom to set their own working hours and place of work as well as how they choose to do their work. 

This helps to maintain a good work-life balance, and it’s one of the most sought-after job perks. 


In an era where much of the focus has turned to the individual, it’s important for companies to revamp their office environment. This means creating a space that allows and encourages employees to do their best.

Implementing incentive theory within the workplace is likely to elevate culture and work ethic. Additionally, top-performing employees are more likely to stay with their company long-term, decreasing annual employee turnover.

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