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What are Incentives?An Incentive as a form of additional compensation is any extrinsic reward factor that motivates an employee or manager or team to achieve an important business goal on top of his/her/their intrinsic motivation. It is a factor aiming to shape or direct behavior. In an optimal form, executives and employees should be remunerated well (but cost-effectively) where they deserve it, and not where they do not. Pay-offs for failure should be kept to a minimum. Furthermore, to be effective, a layered or gradual approach is better than an all-or-nothing incentive. A smart executive reward scheme is one of the pillars to ensure entrepreneurial behavior and maximizing shareholder value (Compare: Value Based Management). An incentive is unlike coercion, in that coerced work is motivated by the threat or use of violence, punishment or negative action, while an incentive is a positive stimulation. Marketing/Customer IncentivesNote that incentives are also being used in marketing, typically to promote conversions. Typical conversions are an initial purchase, a repeat purchase, the signup for a newsletter, a referral, etc. Some types of marketing incentives are: free samples, free trial periods for a limited time, sweepstakes, contests, ebooks, white papers, coupons, buy one - get 2 offers, free bonuses with a purchase, loyalty points, and even cash payments. Categories of Employee Incentives. Classes
Furthermore, incentives can be either a:
Limitations of Incentive Compensation. DisadvantagesThe complexity of organizations and human beings, imperfect knowledge at the moment of incentive definition, and unintended consequences after implementation makes defining and implementing incentives much more complex than many people think. Also the communication of an incentive plan, its measurement (Compare: Economic Value Added) and its management (Compare: Performance Management) are factors that should not be neglected. Imperfect incentives or poorly managed ones can easily lead to unexpected windfalls or to unintentional side effects. For example, employee Employee Stock Options aim at increasing the productivity of the Chief Executive Officer and other top executives by offering a remunerative incentive if they make the stock price rise. The problem is that CEOs can increase the stock price by either:
Similarly, paying corporate executives proportionately to
the size or revenues of their firm may cause them to pursue mergers to grow
their companies, to the detriment of their shareholders' interest.
Compare with: Employee Stock Ownership Plan | Employee Compensation | Management by Objectives | Employee Benefits | Value Based Management | CSFs and KPIs | Results-Based Leadership | Economic Value Added | Balanced Scorecard | Stretch Goals | Customer Loyalty Program |
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