Choosing the Perfect Incentive Plan for your Company

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Performance Incentives play a huge role in motivating employees and giving them clear direction towards what’s expected of them. A good incentive structure gets the desired result from employees while maintaining their positive mindset towards their job and the company. On the other hand, a weak incentive structure might create a dissatisfied workforce and inefficient spending on incentives.

With the article this week, we wanted to throw some light on the various options you have when deciding the perfect incentive structure for your employees. Incentives, in this case, are material benefits over and above one’s normal pay that encourage employees to meet their targets.  In this article, we’ll look at three major forms of incentives, namely Target based, Ratings based and ESOPs.

1) Target based incentives:

This is as simple as it gets.  Employees have their targets laid out and if they manage to hit it they get paid a lump sum.  This structure of performance incentives is used in many companies for its simplicity and straight forward approach.  Since goals are set objectively, they are easier to track and explain.  On the other hand, this method does not address an employee’s relations with his peers and may dilute his interest towards areas that don’t affect his targets.


  1. It’s easy to understand for the employee and also easy to implement
  2. Limited resources are spent on implementation and tracking
  3. The system is fair and transparent
  4. Can be implemented at shorter intervals (monthly or quarterly)


  1. Areas that don’t affect targets may be ignored
  2. It doesn’t reward positive employee relations
  3. Once targets are achieved, employees may tune down their efforts

2) Ratings based incentives

The Ratings based incentives system addresses areas that cannot be quantified.  This includes relationships between peers as well as relationships between bosses and employees.   Superiors and subordinates rate an employee on how efficient they think he/she has been.  A cumulative rating score is calculated and incentives are paid out based on the rating.

This method addresses more than targets and takes into account behavioural elements like professionalism, discipline and dependability.   It also promotes a healthier peer to peer relationship. However, downsides include lengthy procedures and diluted focus on targets.  Employees can get a higher rating by influencing their peers irrespective of their targets.


  1. Values relationships between peers
  2. Identifies problem areas that cannot be quantified
  3. Also serves well as an appraisal with ample feedback
  4. Motivates employees beyond their target accomplishments


  1. Is a lengthy and resource consuming process
  2. Can’t be done at short intervals due to the high costs associated
  3. There is danger of the focus towards targets being reduced

3) ESOPS (Employee stock ownership plan)

ESOPS have been around since the 19th century and seem to hit two birds with one stone. The ownership of company stocks motivates employees in the interests of the company and the incentives are tied to the overall success of the company.   The upside of this form of incentive is that it gives employees a sense of ownership and motivates them to do their role in order to increase profitability.  On the other hand, ESOPs can reward non-performing employees and doesn’t help set individual goals.


  1. Involves employees in the overall productivity of the company
  2. Motivates employees to work in the best interest of the company
  3. Reduces staff turnover and attracts new recruits


  1. Employees who don’t contribute much to productivity can be rewarded equally
  2. Reduces morale of the workforce if stocks aren’t performing well
  3. There are costs associated with distributing and maintaining ESOPS

Apart from monetary incentives, there are non-monetary perks that cannot be ignored and may also be equally effective in retaining employees and motivating them.  Let’s take a look at some of the most popular non-monetary incentives.

  1. Food: Free food and a stocked up refrigerator is often bragged about when speaking of one’s workplace.  Companies like Google and SAP Labs that made the “Best Places to Work” list in India do not ignore this element in their list of employee perks.
  2. Pick-up and drop: Convenience sells and while company transport is a necessity in some cases, adding this as a perk instantly raises an employee’s morale.
  3. Rewards and recognition: While monetary rewards are always preferred, recognition in terms of awards is a big plus.  This can be a fairly useful form of motivation that doesn’t cost much.
  4. Exclusive memberships: A tie up with a local gym or food outlet can add to the feeling of being “exclusive” that can also lead to improved morale.
  5. Sponsored education: Certifications and courses paid by the company can not only improve employee skills but also motivate employees by boosting their careers.
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