Employee incentive programs are more than just a means to attract and retain top talent. If implemented correctly, they can increase engagement in the workplace and drive productivity through the roof. After all, there's a reason 90% of top-performing organizations use incentives to reward their salespeople. As a small-business owner, you can use noncash rewards to motivate your team members, boost their morale and help them grow professionally.

Why Employee Recognition Matters

Over 80% of American employees prefer incentives over higher wages, reports a 2018 survey conducted by the Association of International Certified Professional Accountants. Some prioritize flexible work hours or the ability to work remotely. Others are looking for jobs offering tuition reimbursement. These incentives help create a culture of recognition, showing employees that their hard work is valued.

About 25% of business professionals want recognition for their effort, not just for major accomplishments. About 85% would be happy to hear a simple "thank you." As it turns out, growth opportunities — not bigger paychecks — have the greatest impact on employee motivation. Creating a culture of peer-to-peer recognition is key to retaining top talent and reducing turnover.

When employees are valued and rewarded for their good work, their satisfaction rises. This leads to greater motivation and productivity. From an early age, people crave recognition from their peers, teachers and parents, which continues to hold true as they build their skills and enter the workforce. Show your employees that you care, and they'll respond with loyalty and higher performance.

Even if you're a small-business owner, you can still implement and manage reward programs. Simple things, such as offering a week off at the end of the year, can make all the difference. For example, you may reward top performers with training sessions, guitar lessons, yoga classes or whatever interests them. Consider ditching the nine-to-five schedule and allow them to rotate shifts or work remotely once or twice a week.

Employee Recognition Fuels Work Performance

A 2014 Gallup survey revealed that less than one-third of employees were not engaged in their jobs. Another 17.5% were actively disengaged. Surprisingly, these were the highest employee engagement levels reported since 2000.

If your people are disengaged, they won't push themselves hard enough to do their jobs and grow professionally. Incentives can improve their morale and performance, increasing productivity across the organization. Engaged employees put more energy into their work and stick with the company longer. Reward programs can also shape their social interactions within and outside of work, leading to more efficient team dynamics and better work-life balance.

Extra time off, gift cards, gym memberships and other rewards may also reduce employee stress, which can further boost their morale and reduce conflict in the workplace. About one-quarter of American workers view their jobs as the primary stressor in their lives.

Something as simple as rewarding good work with event tickets or wellness programs can help decrease stress levels and increase job satisfaction. Depending on your employees’ needs, you may offer reimbursement for day care, free access to mental health counselors, on-site gym facilities or even game rooms.

Successful Employee Incentive Programs

Successful brands like Google, Amazon, IKEA and Netflix go back and forth to keep their staff happy. Netflix and Virgin Group, for instance, are offering unlimited vacation. Their employees are free to take time off and show up for work when they want — and no one tracks their hours. The leadership focuses solely on results.

Google, on the other hand, rewards its staff with free food. Employees have access to on-site snack bars that are placed strategically between different teams to encourage collaboration. Those who work for Twitter get breakfast and lunch for free. Also, there are free snacks on every floor.

Evernote's employees enjoy free house-cleaning services every two weeks, while more than half of Motorola's staff can work remotely. In addition to free food and drinks, Facebook's employee incentive programs include $4,000 in "baby cash" and reimbursement for day care among other perks. Those who are lucky enough to work for popular tech brands like Dropbox or Zynga have access to game rooms, basketball rooms and music studios.

Incentive Plans vs. Compensation Packages

By now, you should have a better understanding of employee incentive programs and their perks, but how do they differ from compensation packages? Generally, the term "compensation" refers to wages and other cash rewards paid to employees in exchange for their services, such as sales commissions. The basic components of employee compensation include:

  • Guaranteed pay, such as base salary and cash allowances (fixed monetary rewards)
  • Variable pay, such as incentives and bonuses (not-fixed monetary rewards)
  • Employee benefits, such as health insurance and paid sick leave
  • Equity-based compensation, such as stock options

Different companies have different compensation strategies in place. For example, some offer high base salaries and low incentives, while others offer low base salaries, high incentive pay and rewards tied to business performance. Therefore, incentives are a component of total compensation and may include monetary or nonmonetary rewards. Noncash compensation, such as free snacks and gym memberships, are focused on employees' needs, hobbies and lifestyles.

Employers may also offer performance, growth or sales incentives. It's not uncommon for top performers to receive stock options and other long-term incentives for their good work. However, many companies manage to create low-cost, high-impact incentive systems that may include trophies, plaques, gift cards or creative awards.

Developing a Compensation Strategy

Employee compensation depends on a number of factors, including but not limited to the industry standards, cost of living, employee qualifications, labor negotiations and supply and demand. For example, if there are very few people with specific skills, you may need to offer a more generous compensation package to attract qualified candidates. An effective compensation plan should be well-structured, reasonably competitive and affordable for the company.

There are several aspects to consider when developing your strategy. Companies with a conservative pay philosophy, for instance, offer high base salaries and low incentives. This approach works best for established organizations and can make it easier to attract younger employees. The downside is that it may lower your chances of attracting high performers.

Organizations with a variable pay philosophy offer low base salaries and rely heavily on performance incentives, making them appealing to high performers. However, since the rewards depend on employee performance, some workers may only do what is required in order to get paid. Others may work a lot harder but fail to achieve the metrics on their incentive plans.

Choosing the Right Approach

Each type of compensation plan has advantages and drawbacks, and what works for one company may not work for another. Some employees are passionate about the latest tech, so they may take less pay to work for a startup if they believe in its potential. Others are driven by competition and may prefer to work for organizations offering performance-based rewards.

As an entrepreneur, you need to be realistic about where your business is right now, what kind of people you need to achieve your objectives and what you can offer in return. Make sure your compensation plan aligns with your overall business strategy.

Consider your organization's culture and overall performance as well as what you want to reward. Keep your employees' needs in mind at all times. Identify your top strategic objectives, determine who will be responsible for what and then design a compensation plan that rewards and acknowledges hard work.

Low-Cost, High-Impact Incentives

Small-business owners may not be able to compete with big industry players on wages, but they can offer incentives to attract and retain talent. Start by conducting a survey to find out what would motivate your employees. If, say, your company has a strict dress policy, you may give them the chance to show up in a T-shirt and jeans once a week. This way, they will be more comfortable and save money on office wear.

Flexible work hours, free coffee, extra vacation days, coupons, gift cards and concert tickets are all examples of employee incentives that any company can afford. A simple "thank you" on a gift card or a handwritten note can go a long way toward employee satisfaction. You may also create a wall of fame for top performers or name something in their honor, throw surprise pizza parties, organize team-building events or have company picnics. The key is to think outside the box.

Remember to celebrate small accomplishments too. You could run a 5K together as a team, host a book-of-the-month club or host training sessions and workshops. If you work with programmers and other tech enthusiasts, consider hosting hackathons and reward the winners with cool gadgets or software programs. A subscription to Forbes or other business magazines can make a great gift for career-driven employees.

Potential Drawbacks of Employee Incentives

Incentive plans can build trust and give your staff a reason to work harder. However, they may also be perceived as manipulative or unfair when structured inappropriately. If certain employees get all the praise, their peers may think that you're playing favorites. For this reason, it's wiser to offer group incentives rather than individual rewards, but on the negative side, group rewards can make it difficult for your employees to see how far they got on their own.

Performance-based incentives often encourage competition in the workplace, which may lead to conflicts. Some employees may try to sabotage the efforts of their peers or work on their own rather than as a team. Monetary rewards can increase pay inequality and create frustration among those who believe their efforts are not acknowledged. These scenarios can be detrimental to your business as a whole and can affect teamwork.

Monetary rewards are particularly problematic, as they may create a sense of inequality. Additionally, more money doesn't always mean greater loyalty. Nonmonetary incentives, on the other hand, may not generate enough excitement to drive results and can be an organizational nightmare. For example, employees who work overtime or have a lot on their plate may prefer to go home and spend time with their families rather than attend team-building events.

At the end of the day, financial incentives carry higher risks but may work in certain situations, such as when you're trying to hire top talent or motivate your sales team. Nonmonetary incentives involve lower costs and are less likely to cause workplace conflicts — the key is to focus on your employees' needs and wants. Ideally, conduct a survey in your organization and then run a cost-benefit analysis. This way, you'll be better able to develop employee incentive programs that drive tangible results.