Incentive Bonuses In Business: The Pros And Cons

In this article, we will discuss the definition of incentive bonuses. We will also break down the pros and cons.

8
 min. read
April 8, 2022
A group of employees having a discussion in a casual meeting room

It is becoming increasingly popular for companies to implement incentive bonuses. Bonuses show your employees that you’re grateful for the work they are doing. They generally incentivize employees to work harder to meet the desired goals. 

In this article, we will discuss the definition of incentive bonuses. We will also delve into the pros and cons to help you decide whether it is worth implementing in your organization. 

Last of all, we’ll explain the main types of incentive bonuses.

What Are Incentive Bonuses?

Incentive bonuses are payments made to employees to reward them for good performance. The main objective of a bonus is to increase and maintain an employee’s productivity. 

Specific goals are set that the employee needs to achieve to obtain the bonus. Usually, there is also a time period in which the goal needs to be met. Seeing as there is a reward attached, employees are more incentivized to achieve the goal. 

Now let’s look into the main reasons incentives are beneficial.

Benefits Of Incentive Bonuses 

1. Improves Productivity and Motivation 

Offering incentives is an effective way to increase employee productivity in the workplace. Your employees generally become more motivated to achieve their goals when a reward is offered.

One research study also reported that when financial incentives are implemented in the right way, they can lead employees to feel more competent and autonomous. This encourages employees to stay with your company.

An increase in productivity will have an overall positive impact on the company’s turnover and profits. Your customers will benefit because the quality of the work and product improves. 

Your company will see a noticeable reduction in costs because outputs increase when employees are more productive.

Motivated employees are happy employees and happy people are essential for success. 

Not only do incentives motivate employees to earn their rewards, but they also encourage them to strive for higher achievements in the workplace. 

2. Encourages A Positive Environment For Team Collaboration 

Incentives are especially effective at boosting team performance and research shows the improvement can be up to an incredible 40%!

Incentives paid to teams can be a fantastic way to encourage collaboration when there is a project that requires group effort.

The benefit of a team incentive includes improved communication and creativity as team members bounce ideas off each other.

This forges stronger bonds between team members and fosters interdependence. These are beneficial because there is less separation between individual and team contributions.

Team incentives also decrease barriers that may arise due to each member having a different background as it encourages employees to work together.

3. An Increase In Loyalty To Your Company 

Rewarding your employees for achieving their goals will improve loyalty to your organization because it shows you recognize the value they add to the company. If you incentivize your people, they feel greater purpose with your company, which is one of the best ways to ensure loyalty. 

Incentive programs can also draw job seekers. Sign-on bonuses can be beneficial here because they help recruit high-performing individuals from other companies.

4. Incentives Do Not Need To Be Complicated

If you keep the process relatively straightforward and plan carefully, an incentive program can be very easy to implement and maintain. The less complicated the program, the more likely it will succeed.

As an employer, you will first need to determine adequate bonus amounts to be paid to employees when goals are met. Once confirmed, you’ll need to meet with the employees who are eligible for the program and explain the new rewards system. 

During your discussion, it needs to be properly communicated what the structure and requirements of the incentive program are. The bonus amount should also be addressed so your people know what they’re working towards.

Once all of this has been covered, simply monitor progress, make adjustments where necessary, and ensure hardworking employees are paid out in a timely manner.

5. Incentive Bonuses Financially Support Employees 

Incentives are an additional payment on top of the employee's normal salary. If an employee achieves their goal, they will receive an extra financial cushion. If your people are achieving goals that bring more money to your organization, why not pay it forward and support their financial wellness?

The extra money will help your employees buy assets which can increase their overall wellbeing. A more reliable vehicle or a home closer to work are just two examples that can indirectly benefit an employee’s company. 

Bonuses can have a few disadvantages, which we will explain in the next section. There are ways to prevent these problems, which we will also discuss.

Disadvantages Of Incentive Bonuses 

1. Incentives Might Tempt Some Employees To Act Unethically

Employees may feel overly pressured to meet a target they feel they cannot do without breaking the rules. If they’re not meeting their goals in time, they may act in an unethical manner. 

Unethical actions include dishonesty, fraud, and poor decision-making. These unethical actions could threaten the integrity of both the employee and your company.

It’s important to be clear about the rules and monitor the system for potential warning signs.

2. Employees May Only Comply Temporarily 

Incentives are not always effective in the long run if they are not carefully planned. The company may experience increased employee productivity in the short term because employees are excited and strive to earn the reward.

Once the employee receives an incentive or bonus, their productivity levels might decrease if they have nothing else to work towards. 

The way to prevent this is to ensure the reward system is oriented towards long-term productivity with new goals and rewards to look forward to.

3. Potential Risk Of Conflict In The Workplace

In a company, transparency regarding incentives is often expected. If an employee feels that a coworker does not deserve an incentive, or if incentives are not awarded fairly in their view, there is an increased risk of conflict. 

Employees may feel that there is ongoing, tense competition among them, which decreases the potential for healthy competition and ultimately creates a toxic work environment. 

4. Employee Satisfaction Can Be Negatively Impacted 

Incentives can increase employee motivation and work satisfaction, but not when there is too much stress over meeting unrealistic deadlines and targets.

Bonuses can push employees to work harder and improve their work ethic. This pressure can become too much and they give up as their goal is out of reach, which drastically decreases their job satisfaction and productivity.  

So, for a rewards system to work, it’s important for employees not to be overly stressed by unattainable demands.

5. Incentives May Create A Sense Of Entitlement

Incentives can create a sense of entitlement if employees begin to feel it’s their right to receive a reward without having earned it. 

This can arise when an employee has control over the incentive program and can essentially reward themselves. This makes it critical to keep administration of the incentive program under a separate department. 

How To Overcome Potential Disadvantages: Show Appreciation And Reward Employees With Recognition

You should not hesitate to show your employees that you value what they bring to your business.

As we discussed, incentives assist a great deal in showing your employees that you value them. But there are many other ways you can reward employees for their efforts.

One option for showing your appreciation is by spending one-on-one time with them. You can use the chance to praise them for their efforts, which boosts motivation.

You can also offer development opportunities to employees who show promise. By doing this, you recognize what they bring to your company, and you invest in their training and career development in the workplace.

Another fantastic way to show employee appreciation is by rewarding productive behaviors that are not typical or expected. This is an excellent approach to recognizing any of your employees’ good efforts, aside from the specific goals they are set to achieve.

The Main Types Of Incentive Bonuses 

A bonus can be monetary or non-monetary. Examples of non-monetary bonuses include travel incentives, gifts, time off work, or vouchers. 

Some types of one-off monetary incentives include sign-on, retention, and referral bonuses. A sign-on bonus is a monetary incentive offered to employees with skills in high demand as a drawcard to get them to join the company.

A retention bonus is a payment to an employee to encourage their loyalty. It shows the employee that their job is secure with their current employer, especially during difficult periods such as company mergers and restructuring. 

Referral bonuses are given when an existing employee refers a candidate for an available position and the candidate is hired.

Occasional bonuses are once-off payments given to an employee for any reason the employer deems suitable and at any given time.

Performance bonuses are given for good performance. They are often a percentage of the employee’s salary.

Conclusion 

Incentive bonuses are used in organizations to motivate employees to achieve goals. They can include monetary amounts or they can be in the form of vouchers, time off, team outings, etc. 

There are many benefits to implementing incentive structures, such as increased job satisfaction, motivation, teamwork, communication, and loyalty to your business. 

It may also bring forth disadvantages in that employees can feel pressured to achieve unrealistic goals and resort to unethical behavior to meet targets. 

Overall, implementing incentives will generally have a positive effect on your organization, provided they are well thought out. Rewarding your people creates a happy and healthy working environment with high productivity.