The Purpose of an Employee Incentive Program
Employee incentives can be a win-win solution for both management and workers. Ideally, both the company and its employees will come out ahead when employee incentives are offered. Whether the incentive is a week-long trip to the Azores or a series of special recognition plaques, productivity is likely to surge along with morale.
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Retention
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It costs a significant amount of money to hire and train new employees. It is much more cost-efficient for a company to keep the employees it already has. Employee incentive programs can do this, as they help employees to feel valued by their employer. A 2006 study published in the business journal "Personnel Psychology" found that employee incentives can result in up to a 20 percent improvement in employee retention as well as employee productivity and company profitability.
Productivity
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Companies that implement an employee incentive program often see an uptick in profitability. It turns out that the reverse is true as well -- companies that eliminate existing employee incentive programs often see a measurable decline in productivity. Management professor Sarah Kaplan at the Wharton School of Management describes employee incentives as "what managers put in place to get people to do their jobs." Even a small incentive, such as a T-shirt for meeting a short-term goal, can be an effective carrot to entice employees to increase their output.
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Loyalty
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A paycheck doesn't automatically create company loyalty. Employees need to feel personally invested in the company to genuinely care about its success. Incentives can help increase this investment, sometimes in a literal manner, if a company chooses to offer stock options to employees. Any incentive that ties company outcomes to employee effort is likely to have a similar effect. Employees also tend to appreciate incentives, and this appreciation can carry over to the company at large.
Profitability
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The increase in retention and productivity that incentives create automatically increases profitability. A company can profit from employee incentives in another way, however. Offering employee incentives in place of salary increases when a company cannot afford to give raises can save the company money while maintaining employee morale during a budget crunch. Companies should not substitute incentives for wages when they can afford to do otherwise, though. Employees will quickly see through this strategy, and the incentives will likely have a negative effect.
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