What are the Different Types of Incentive Plans?

There are many different types of incentive plans, with the annual performance bonus being the best known. Profit sharing plans are also very common, and most people in the workforce have hopefully experienced at least one of these approaches. Other, less well known plans can include cash rewards for reaching a specific goal, merchandise rewards, additional vacation time, peer review plans, and salary at risk plans.

Every different type of incentive plan has both benefits and drawbacks. An annual performance bonus is very infrequent, once yearly, and therefore difficult to link to performance. This type also tends to cause to employees to focus on what makes them look good, sometimes at the expense of what may be best for the company's bottom line.

Plans with a profit sharing component work well in that they tend to emphasize that what is best for the company is also best for the employee. When company profits increase and more money is available for bonuses, the employees get more money. During lean times, however, bonuses can be quite small. For small companies, this large fluctuation in compensation can become a problem. There is also a problem with this approach in that there is sometimes a long delay between the time when the effort that earns the profit occurs and the time when the bonus is paid.

Some incentive plans can be counter productive. A salary at risk plan, for example, gives employees a minimum base salary, and they can only earn the full salary if certain performance objectives are met. Plans of this type tend to cause employees to become discouraged, particularly if the performance objectives seem out of reach. This approach feels like a punishment to the employee, an approach known as negative reinforcement. Studies have shown that positive reinforcement of desired behavior is much more effective.

Often, a company will use different types of plans at the same time. This approach allows the company to take advantage of the benefits of the various incentives while minimizing their disadvantages. Those that use merchandise prizes, for instance, can be very closely linked to a specific activity, while one that uses long term objectives can also be in place to help keep all of the employees motivated and focused over the entire year.

Using different types of incentive plans within the same company allows the company to respond and motivate employees who may be very different. Some employees find it easier to focus on long term goals, while others need more immediate incentives. What motivates employees can be different also, with some desiring more vacation time while others prefer more money. Using different plans allows the employer to respond to these unique needs and find ways to encourage all workers.