Should Your Company Use Incentive Compensation?

Should Your Company Use Incentive Compensation?

Should Your Company Use Incentive Compensation?

Incentive compensation is one form of the popular “pay for performance” compensation models organizations are using to foster better performance through financial rewards. While using incentives like raises, bonuses, and merit awards seems to be the norm for many of today’s organizations, some experts question the effectiveness of this strategy. Let’s take a closer look to find out whether incentivizing performance is the best choice for your company.

Extrinsic Vs. Intrinsic Rewards

To understand whether incentive pay will work for your organization, it’s important to first know the difference between intrinsic versus extrinsic rewards. The former might include the sense of accomplishment or making a difference an employee gets through their work, while the latter refers to financial rewards, such as bonuses.

Forbes argues that extrinsic rewards can motivate repetitive behaviors (i.e., consistently meeting sales goals), but in order to inspire creativity and innovation, employees need intrinsic rewards, too.

What Are Intrinsic Motivators?

Employers can use specific intrinsic motivators to encourage strong performance in their employees. For instance, skills development and advancement opportunities are two intrinsic motivators you can build into your total rewards program to compel employees to continue performing at their best. According to Fortune magazine, managers can also motivate employees intrinsically by empowering them through new challenges, and communicating the company strategy so each employee feels connected to it.

Ultimately, very few employees (if any) can be effectively motivated by money alone. Nonetheless, using incentives can be used to drive performance, as long as it is part of a larger strategy used to drive engagement and motivation. By coupling incentive plans with additional strategies like a comprehensive total rewards program, you can inspire better performance both intrinsically and extrinsically.


HRsoft is a leading provider of strategic talent management software that improves manager effectiveness and business results. Our full suite of cloud-based HR software solutions includes applicant tracking software, compensation planning software, total rewards software, stay interview software, performance management software, and content management software. To learn more about our Compensation Management Software, COMPview, click the button below!

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