Financial Incentives- definition, types and examples

July 2, 2021

Incentives are a form of financial reward for action, including payments to consumers. The types of actions that could result in financial rewards vary greatly. For example, a new or potential employee can be rewarded with a bonus or advancement based on their performance. This type of reward is highly motivating and has been found to increase productivity and performance.

Financial incentive payments are available for a wide range of activities to increase overall company performance. From employee awards and promotions to customer loyalty programs and new store locations, financial incentive payments are available for just about any initiative that can make a positive difference in the company’s results. One of the main reasons why many companies use incentives is that they do not want to pay out too much money.

Financial incentive payments are designed only to pay out a small portion of the employees or executive salary, thereby maintaining the company’s profit but without the expense of compensating that person with a large amount of cash.

Examples of financial incentives


The most common form of bonus is a monetary package that employees receive as a reward or compensation for outstanding performance at work. Bonuses are awarded to companies that perform well in a given financial year.

Retirement benefits

Retirement benefits offer long-term security to employees and motivate them to work hard and stay with a company for more extended periods. Retirement benefits may include leaving encashment—pension, pension policies, gratuity, etc.
Commission Employees are paid a commission in addition to their wages and salaries for specific businesses and companies.
This encourages employees to work hard and pushes them to achieve their performance goals. The performance is often reflected in the commission. This is common in real estate and sales.

Fringe benefits

Fringe benefits can vary from one organization to the next, but typically they include medical benefits, car or housing allowances, educational and recreational amenities, and provisions. These benefits are provided in addition to an employee’s wage and salary.


Profit-sharing programs are a way for corporations to retain and motivate staff. This means that staff members receive a share of the organization’s earnings.
Salaries (including allowances). The primary financial incentive payment that employees receive is their salary. Additional allowances such as travel allowance, housing allowance, car allowance, and travel allowance can be given depending on the company. An employee’s salary can be increased each year to reflect inflationary changes or as a performance bonus.

Productivity wages

Productivity wages are paid to employees according to the ability to produce a product or service. Factory workers may receive additional wages if they produce more than the expected production levels per employee.
Other financial incentive programs include a stock option (economic incentives) that allows employees to buy the company’s ordinary shares at a lower cost per share. This benefit is usually offered to employees who hold managerial positions.

Non-Financial incentives

Employees need to be satisfied, not only in monetary terms. Everyone has psychological, emotional, or social needs. These needs have a noticeable impact on the motivation, satisfaction, productivity, and performance of employees. These are the reasons for non-financial incentive programs.
Non-financial incentive examples include, but are not limited to, job security and career advancement possibilities, job enrichment and employee participation, employee status and organizational values, traditions, or climates. Employee recognition and rewarding are other examples.

Other incentives

One incentive that a company can offer to customers is financial incentive conditions. They might get an extra one if they buy four units like a lottery incentive program.
In this instance, the seller is trying to get consumers to buy lots of four instead of one or two.
One way that companies can attract more customers is to hold a raffle or draw. To check if they won, customers can open their chocolate bar wrapper and see what’s inside.

Importance of Financial Incentives

Incentives can be a powerful motivator for employees because of the additional funds. A company that offers a monetary reward for outstanding work performance or team recognition is more likely to foster positive working environments, encourage supportive relationships, and promote higher quality outputs. There are many reasons why financial incentives are essential for the workplace.

Employee satisfaction is increased
Recognize individual performance
Encourages collaboration and teamwork
Encourages employees to reach company goals
Increased performance measures.

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