Incentives are now commonplace and a key part of pay in the private sector. It is through incentives that executives have the opportunity to generate personal wealth. They are also increasingly important for other employees to fund essential major purchases. Measures have changed and become broader for many short-term incentives (STIs). Measures generally remain more narrow or have not been present in long-term incentives (LTIs). Various factors shape the design of incentives, including business strategy, market competitiveness, pay for performance, governance best practice, affordability and motivation/engagement.
We review the principal theories of motivation and the findings on engagement. These indicate that, in general, incentives are not the primary driver of motivation/engagement. The influence of reward may vary with the type of employee and the organizational setting. On balance however, incentives do reinforce and support performance via communications and enhanced focus – and poorly functioning incentives can demotivate or disengage. Incentives have become a supporting element of the wider performance management system in many organizations.