An incentive scheme refers to the sum of all incentives offered to employees of a company (or more generally to the members of an organization) to maintain their performance and ensure their continued presence within the organization.
A key feature of incentive schemes is their steering effect, which arises from the goals the scheme is designed to achieve. Gmür and Thommen (2005) distinguish and combine six fundamental orientations:
- Performance Orientation: A performance-oriented incentive system is characterized by a high proportion of variable compensation, which primarily depends on individual performance (performance-based pay). Short- and medium-term successes usually take precedence over contributions to long-term development. Advancement opportunities are primarily based on achieved results, while seniority or qualifications are secondary.
- Strategy Orientation: In a strategy-oriented incentive system, the continuous alignment with the company’s strategic market goals is central. The incentive structures change with the strategic priorities. Such a system requires clarity regarding the company’s strategic resources and core competencies.
- Flexibility Orientation: A flexibility-oriented incentive system aims to ensure the adaptability of the company. This involves promoting broad qualification profiles (multiple qualifications, meta-qualification, qualification-based pay) and incentives for the operational flexibility of employees.
- Development Orientation: While flexibility orientation emphasizes short-term adaptability, a development-oriented incentive system supports long-term adaptability to market developments. It values innovation contributions more than short-term performance outcomes, both in terms of variable salary components and promotion opportunities within the company. Training opportunities are especially important in such a system.
- Integration Orientation: An incentive system that places more emphasis on the performance and results of teams and departments than on individual contributions (team incentives) strengthens the cohesion among employees. A capital participation model open to all employees (employee stock) or a profit-sharing plan that does not differentiate by individual performance aims primarily at integration within the company.
- Retention Orientation: Retention-oriented incentive systems aim at employee commitment, primarily focusing on minimizing absenteeism and unplanned turnover. Seniority is an important criterion for promotion, and variable compensation also takes the length of employment into account (employee retention).
The incentive system of a company extends across its compensation and training policies, performance evaluation systems, promotion decisions (promotion), and the design and organization of tasks.
According to Klimecki and Gmür (2005), the elements of an incentive system can be classified into three groups, each with different consequences for the company’s freedom of action and its motivational effect on employees:
- Free Material Incentives: These are monetary benefits provided by the company, depending on demands or performance, and can be freely used by the employee. The motivational effect partially relies on their free usability. The downside for the company, compared to binding incentives, is the liquidity outflow.
- Bound Material Incentives: These are company-provided financial benefits whose further use by the employee is restricted. Key bound incentives include insurance benefits, capital participation, and fringe benefits.
- Insurance Benefits: Complement statutory mandatory insurance, becoming more important as state security systems reduce their benefits. These benefits often expand the statutory pension system and provide tax advantages, while also strengthening employee retention (deferred compensation).
- Capital Participation: Can be classified into equity or debt-based capital. Employee stock and GmbH/partnership shares are examples of equity participation, while profit-sharing rights, silent participation, and employee loans represent debt participation. Besides liquidity effects, companies hope capital participation increases employee identification and commitment to the organization.
- Fringe Benefits: These are non-cash benefits such as company cafeterias, childcare facilities, sports activities, use of a company car, or discounted company housing. These benefits help create an image as an attractive employer (employer branding).
- Non-Material Incentives: These are benefits the company can offer without additional effort, fulfilling current needs (motives) of the employees. They can be classified into key categories of needs:
- Security Incentives: Provide high job security (security need).
- Social Incentives: Foster a strong team culture and solidarity among employees, or offer access to closed social circles (e.g., clubs) (belongingness need).
- Status Incentives: Arise from titles or awards an organization can offer. These are particularly important in public-sector organizations with specific title hierarchies (e.g., universities or diplomatic services). Companies can also award recognition that holds value beyond the organization (recognition need).
- Self-Actualization Incentives: Arise from offering roles or tasks that allow individuals to realize their own ideas and visions. Ongoing education and training can also serve as an incentive if it allows personal growth (self-actualization need).
- Power Incentives: Result from the company hierarchy. Assigning responsibility and managing subordinates offer opportunities for influence to achieve personal goals and assert one’s ideas (power motive).
Non-material incentives are often closely linked to financial incentives, as promotions typically involve both a salary and a power increase. These incentives can be cost-neutral for a company.
Source:
Pelago Health
