What is an employee incentive program?

An employee incentive program is a structured plan that uses rewards to motivate employees. These plans use a combination of extrinsic and intrinsic rewards. An extrinsic reward is something tangible, such as a certificate of achievement. An intrinsic reward is an internal motivator, such as a sense of purpose.

Employee incentive programs work by influencing employee behavior. A well-structured program can motivate employees and increase retention rates.

Benefits of employee incentive programs

Employee incentive programs can help you achieve the following benefits:

• Lower turnover rates: Offering incentives might motivate employees to stay with your company, lowering your turnover rate and reducing your recruitment costs.
• Increased motivation: When employees feel valued, they’re more likely to be satisfied with their jobs. Some incentives also motivate team members to work harder, causing them to be more productive.
• Improved culture: Creating an incentive program embeds recognition and reward practices into your organizational values, which can strengthen your company culture. In a strong culture, team members experience a sense of belonging. They’re also more likely to commit to your organizational goals.
• Boosted employee engagement: Incentive programs can boost employee engagement by recognizing your team’s contributions, supporting professional growth and making employees feel appreciated.
• Progress toward strategic goals: Some employers link incentives to their strategic goals, enhancing their success. For example, you can offer spot bonuses to employees who reach a certain production rate.
• Enhanced collaboration: Team incentives can promote bonding among department members, enhancing collaboration and creating a sense of camaraderie.
• Improved work-life balance: Some incentive programs include wellness initiatives, flexible work arrangements or other rewards that can help employees improve their work-life balance.

Examples of monetary employee incentives

Monetary incentives have financial value, so they’re often tied to achieving specific goals. For example, it’s common to link bonuses to the amount of revenue generated or the number of projects completed.

Consider incorporating these monetary incentives into your company’s employee incentive program.

1. Spot bonuses

Spot bonuses, also known as spot awards, are small cash prizes given to employees for achieving specific goals. For example, a nurse who covers multiple shifts for sick coworkers might receive a $100 bonus for helping meet staffing needs. Spot bonuses get their name because they’re spontaneous, or “on the spot,” rather than planned.

2. Project bonuses

Some employers celebrate the completion of a project with project bonuses. Employees usually receive these bonuses if they meet specific criteria, such as completing a project on time and under budget. For example, an employer might offer a $500 bonus to every team member who helps launch a new software package before the end of the year.

3. Performance bonuses

Performance bonuses are regularly scheduled cash awards based on an employee’s success. These bonuses are often based on job performance metrics, ensuring employees are rewarded for measurable contributions. Companies generally pay performance bonuses when employees contribute directly to their financial success and growth.

Annual or quarterly performance bonuses are a popular way to track employee performance goals and reward top performers. For example, you can offer a quarterly bonus to the salesperson who sells the most vehicles.

4. Merit-based raises

A merit-based raise is a salary increase based on an employee’s performance. Some team members receive merit increases for exceeding performance expectations, while others receive them as a reward for taking on new responsibilities. Employee performance reviews can help you determine who should receive a merit increase, as they help assess job performance.

Unlike many other monetary incentives, merit-based pay increases reward employees with long-term salary growth rather than rewarding them with a lump sum. 

5. Profit sharing

Profit sharing involves distributing some of your company’s profits to employees. When team members know that they have an opportunity to earn extra compensation, they’re more likely to remain committed to your company’s goals. Profit sharing also rewards multiple employees, so it can enhance collaboration and strengthen your company’s culture.

Employers with profit-sharing programs typically set aside a certain percentage of their annual profits and distribute it according to a set schedule. For example, you might want to set aside 10% of your profits each quarter. One of the benefits of profit-sharing programs is that they help team members understand how their work affects your company’s financial performance.

6. Referral bonuses

Referral bonuses reward team members for connecting your company with quality candidates for open positions. An employee referral program can help you save time during the hiring process. Employees who enter your applicant pool via personal referrals are also likely to stay longer, as they tend to have more information about your company’s culture and policies.

To increase referral quality, consider requiring new hires to stay with your company for at least six months before you pay a referral bonus. This can motivate employees to refer only applicants who are well-suited for open roles.

7. Gain-sharing plans

Gain sharing is different from profit sharing because it involves distributing gains, not profits, to team members. A gain is some amount of money saved by increasing efficiency. For example, if an employee makes a suggestion that helps you reduce equipment maintenance costs by $50,000 in one quarter, you might want to give them a portion of the savings.

Gain sharing motivates employees to find ways to increase productivity, reduce waste or use fewer resources. It can also help you increase profitability by minimizing company expenses.

8. Gift cards

Some employers use gift cards to reward employees for their performance. These cards serve as an alternative to cash at restaurants, retail shops and other businesses. If you decide to hand out gift cards, consider choosing businesses in your neighborhood. Employees might be able to use their gift cards to order lunch or do some shopping on their lunch breaks.

9. Stipends

Stipends are fixed amounts of money that help employees cover certain costs. For example, you might offer a stipend to help employees enroll in external training programs or purchase self-study materials. Giving stipends shows team members that you’re committed to their development, which can increase motivation and enhance loyalty.

Employee ownership and recognition incentives

Employee ownership and recognition incentives go beyond traditional rewards by giving employees a real stake in the company’s success and making them feel valued. Incorporating ownership and recognition into your employee incentive strategy can help you motivate employees, increase job satisfaction and create a culture that inspires employees to do their best work.

1. Employee stock ownership plans (ESOPs)

Employee stock ownership plans (ESOPs) make shares of company stock available to team members. Once an employer sets up an ESOP, it buys shares and allocates them to employee retirement accounts. Team members don’t have to pay for the shares, but they can benefit financially if the value of the stock increases.

When employees understand their performance directly impacts the value of their shares, they might be motivated to improve their performance and remain committed to the company’s goals. ESOPs also encourage employees to think like owners, promoting innovation and creativity. For example, an employee who participates in your ESOP might offer a suggestion for reducing product packaging costs, making your company more profitable.

2. Peer-to-peer recognition programs

Peer-to-peer recognition programs empower employees to acknowledge and celebrate each other’s achievements. Unlike traditional top-down recognition methods, these programs encourage employees to actively participate in building a positive work environment. By recognizing their peers for outstanding work or effective collaboration, employees can help foster a culture of appreciation and support.

This approach increases job satisfaction and strengthens employee retention, as team members feel valued by both their colleagues and the organization. Peer-to-peer recognition can be implemented through digital recognition platforms, shout-outs during team meetings or even informal thank-you notes, making it a flexible, effective employee recognition strategy.

3. Service awards

Service awards honor employees for their loyalty and long-term commitment to the company. These awards typically recognize milestones such as five, 10 or 20 years of service. Examples of service awards include gift certificates or additional paid time off. Some companies maintain a catalog of gifts for each service milestone. Employees can browse these catalogs and choose their own rewards, making service awards more meaningful.

Celebrating important milestones shows employees you appreciate their dedication. Service awards can also increase morale and motivation, leading to lower voluntary turnover rates. Consider using these rewards to promote loyalty and reinforce your company culture.

4. Public acknowledgment and appreciation

Public acknowledgment and appreciation are key elements of an effective employee incentive program. Recognizing employee achievements in a public forum, such as company-wide meetings, newsletters and social media, shows you value individual and team achievements.

This type of recognition motivates employees and creates a positive work environment where everyone feels included. By making recognition visible, you can encourage employees to strive for excellence and actively contribute to your company’s culture.

How to start an employee incentive program

Designing an effective employee incentive program is crucial to motivating and engaging employees. Well-structured programs motivate staff and foster a culture of participation and commitment.

Follow these steps to create an employee incentive program:

1. Identify the behaviors or results you want to reward.
2. Determine how often you want to reward employees.
3. Establish a budget for your incentive program.
4. Gather input from employees.
5. Communicate the program details to all team members.
6. Monitor progress and gather feedback.
7. Update the program as needed to keep employees motivated.

1. Identify the behaviors or results you want to reward

Be specific about what you want to achieve with your employee incentive program. Do you want to boost sales, improve work quality, reduce waste or increase customer satisfaction? Knowing what you hope to achieve can help you develop a program that suits your business needs.

2. Determine how often you want to reward employees

How often you distribute incentives affects the cost of the program and impacts employee motivation levels. Think about whether you want to offer incentives on a daily, weekly, monthly or quarterly basis.

3. Establish a budget for your incentive program

Offer incentives that work with your budget. Many forms of recognition cost nothing, while ESOPs and profit sharing require substantial investments. Consider working with your Finance Manager to determine an appropriate budget for your incentive program.

4. Gather input from employees

Find out what motivates your employees by asking them. Involving team members in the process helps them feel valued and increases employee engagement. You can gather feedback by conducting one-on-one meetings, holding group discussions or doing pulse surveys.

5. Communicate program details to all team members

Next, announce the new incentive program to your employees. Consider having a meeting, sending a company-wide email or asking department managers to communicate the changes to their team members. Describing each incentive thoroughly can help employees develop realistic expectations.

6. Monitor progress and gather feedback

After you launch your employee incentive program, track the results to determine how it affects your business. If possible, use objective performance metrics, such as retention rates and satisfaction scores, to determine if the program is a success. You might also want to conduct regular surveys to determine if employees are satisfied with the program.

7. Update the program as needed to keep employees motivated

Over time, a company’s needs change. You might also hire new employees or make other changes within your organization. Update your incentive program to document these changes and keep employees motivated.