Understanding the Link Between Incentive Pay & Employee Motivation

Understanding the Link Between Incentive Pay & Employee Motivation
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Incentive pay is additional pay or a higher wage paid to boost the productivity of an employee. The various forms of incentive pay include merit pay, pay-for-performance, variable pay plans, individual or group bonus plans, profit-sharing, gain-sharing incentive plans, or even a salary raise.

Motivation is the activation or inducement of goal-oriented behavior such as job performance.

The classical reinforcement theory that focuses on the relationship between a target behavior (such as work performance) and its consequences (such as pay) forms the basis of incentive pay to motivate employees. This theory premises a positive link between incentive pay and employee motivation under the assumption that since wages or salary is what ultimately brings people to work, increased wages as incentive pay would lead to increased motivation.

The behavioral school of management, however, holds that even though individuals experience increased happiness when their pay rises, the intensity of desire for wealth remains negatively correlated with psychological wellbeing. McClelland’s theory of needs, for instance, classifies employee needs into three: need for Achievement, Affiliation, or Power. Victor Vroom’s theory holds motivation as a function of Expectation, Instrumentality, and Valance. Money thereby alone does not motivate, and the extent of motivation depends on the motive for acquiring wealth, in which psychological needs play an important role.

ImageCredit: flickr.com/Stuart Caie


How has research ranked incentive pay? Employee motivation strategies work, but with limitations.

A 1998 study by Jenkins, Gupta, and others that analyzed thirty-nine studies conducted over four decades substantiates the claim that cold hard cash motivates workers irrespective of job conditions or settings. This research also concludes that while higher pay makes employers happier, this does not necessarily translate to better performance, but absence of adequate monetary incentives causes resentment and dysfunctional teams.

A 2006 study conducted by Perry and his colleagues that analyzed the diverse literature on the topic holds that financial incentives improve task performance, but their effectiveness is dependent on organizational conditions such as differences in employees’ preferences for specific incentives. The basis for effective incentives depends on the employees’ preference for instrumental materialism or terminal materialism. Instrumental materialism entails using material goods as a means for attaining personal goals and fulfillment, whereas terminal materialism involves using material possessions to achieve social status and elicit envy. A meta-analysis of 72 field studies finds that monetary incentives improve task performance by 23 percent, social recognition improves task performance by 17 percent, and feedback elicits improvement of 190 percent. Another finding of this research is that small group incentives sustain high levels of productivity and satisfaction for group members, on par with individual incentives.


Surveys conducted by many compensation experts validate research findings and establish pay for performance as a major way of attracting, motivating, and retaining employees. A May 2009 report on employee morale by Watson Wyatt reveals that 41 percent of employees believe that pay and benefit changes made by their employer in the past year have a negative effect on work quality and customer service. This comes when 61 percent of employers reduced or suspended bonuses and only 35 percent of employers rewarded top employees for performance.


An alternative school of opinion discounts the role of incentive pay on long-term employee motivation. It holds that employees tend to look at what employers do for them at present and forget what was done in the past. It advocates that incentives help bring forth short bursts of output to gather the immediate reward but such increased effort would not become the normal course of events. This opinion, however, remains unsubstantiated, whereas the positive link between incentive pay + employee motivation remains established.


  1. Jenkins, Jr, G. D., Mitra, A., Gupta, N., & Shaw, J. D. (1998). “Are Financial Incentives Related to Performance? A meta-analytic Review of Empirical Research.” Journal of Applied Psychology, 83, 777-787.
  2. Perry, J. L., Mesch, D., & Paarlberg, L. (2006). “Motivating Employees in a New Governance Era: The Performance Paradigm Revisited.” Public Administration Review, 66, 505-514.
  3. Sears, Donald, on The Ladders. The Work Blues Have Many a Worker Down. https://www.career-line.com/job-search-news/the-work-blues-have-many-a-worker-down/. Retrieved 26 October 2010.