Financial methods of motivation involve rewarding employees with monetary incentives to encourage higher performance, productivity, and commitment. These strategies are especially significant in performance-oriented businesses, aiming to align employee output with company goals.
What Are Financial Incentives?
Financial incentives are monetary rewards used by businesses to influence employee behaviour and encourage effort. These incentives help attract talent, reduce turnover, and motivate staff to meet business objectives. They appeal particularly to extrinsically motivated individuals—those who are driven by external rewards like pay.
The core financial incentives explored in this section are:
Piece rate
Commission
Salary schemes
Performance-related pay (PRP)
Each method varies in effectiveness depending on the nature of the job, organisational goals, and the workforce's preferences.
Piece Rate
Definition
Piece rate is a payment system where employees are paid per unit of output or per task completed. The formula for calculating pay is:
Total Pay = Units Produced × Pay per Unit
For example, if a worker is paid £2 per item and produces 100 items, they earn:
100 × £2 = £200
This method is commonly used in manufacturing industries, particularly where output can be measured easily and consistently.
Advantages
Increases productivity: Employees are directly rewarded for producing more, encouraging faster work.
Low fixed labour costs: Employers pay only for what is produced, helping control expenses.
Self-managed pace: Workers manage their own speed, possibly reducing the need for close supervision.
Disadvantages
Quality may decline: Workers may focus on quantity at the expense of quality, especially if there are no quality control checks.
Potential for burnout: The pressure to work quickly can lead to stress, fatigue, and high employee turnover.
Demotivating for complex tasks: If the task is difficult or not easily quantifiable, piece rate systems can seem unfair.
Example
A fruit-picking farm pays workers £0.50 per kilogram of fruit picked. One worker picks 120kg in a day and earns:
120 × £0.50 = £60
Another picks 80kg and earns £40. The system rewards output but may push workers to skip breaks or pick unripe fruit to maximise pay.
Best Use Case
Suitable for low-skill, repetitive, measurable tasks, such as assembly lines or textile work.
Less suitable in roles requiring team collaboration, creativity, or complex problem-solving.
Commission
Definition
Commission is a type of payment based on sales performance. Employees earn a percentage of the sales value in addition to, or sometimes instead of, a base salary.
The commission formula is:
Commission = Sales Amount × Commission Rate
For example, if a salesperson earns 10% commission on a £1,000 sale:
£1,000 × 0.10 = £100
Advantages
Incentivises high performance: Employees are motivated to increase sales to boost earnings.
Variable costs for employer: Businesses pay more only when sales increase, protecting cash flow.
Self-motivated employees: High-performing sales staff often prefer commission-based roles.
Disadvantages
Reduces collaboration: Sales staff may compete instead of cooperating, harming team culture.
Customer experience can suffer: Employees might use pushy tactics to meet targets.
Income uncertainty: Commission-based roles can result in inconsistent earnings, especially in seasonal industries.
Example
A luxury car dealership pays a 3% commission on sales. A salesperson sells a car worth £60,000:
£60,000 × 0.03 = £1,800
This rewards high-value sales but may encourage aggressive selling and competition among staff.
Best Use Case
Effective in individual sales roles like real estate, financial services, and retail.
Inappropriate for jobs where performance isn’t easily measured or is heavily team-based.
Salary Schemes
Definition
A salary is a fixed annual payment paid in equal monthly instalments. It does not fluctuate based on hours worked or units produced. Salary schemes are standard for professional, managerial, and office-based roles.
For example, a salary of £36,000 a year is paid as:
£36,000 ÷ 12 months = £3,000 per month
Advantages
Income stability: Employees benefit from consistent pay, aiding budgeting and financial planning.
Suits complex roles: Encourages focus on quality, innovation, and long-term outcomes rather than immediate outputs.
Builds loyalty and trust: Employees feel secure, fostering commitment to the organisation.
Disadvantages
No direct link to performance: Employees may not be motivated to go beyond basic requirements.
Potential for complacency: Without performance-linked bonuses, some workers may underperform.
Harder to reward top performers: Standardised salaries can demotivate high achievers if pay remains the same regardless of effort.
Example
An HR manager earns £42,000 annually regardless of the number of employees recruited each month. Their work is evaluated on overall contribution rather than specific outputs.
Best Use Case
Ideal for skilled and strategic roles, such as lawyers, engineers, and marketers.
Works well in team-based environments where collaboration and long-term planning are key.
Performance-Related Pay (PRP)
Definition
Performance-related pay links an individual’s pay to their performance, typically assessed through appraisals, key performance indicators (KPIs), or achievement of specific goals.
There are two main types:
Bonus schemes: Lump sums paid when targets are met.
Incremental pay increases: Permanent raises tied to performance.
Advantages
Promotes goal alignment: Employees focus on objectives that matter most to the business.
Encourages personal development: Workers strive for excellence to earn bonuses or raises.
Rewards high performers: Helps retain ambitious and skilled employees.
Disadvantages
Appraisal subjectivity: Reviews may be inconsistent or biased, undermining fairness.
Short-termism: Employees may focus on immediate goals rather than long-term impact.
Not suitable for all roles: Difficult to apply where results are hard to measure or heavily team-dependent.
Example
A department manager receives a £2,000 bonus for reducing costs by 10% over the financial year. Their actions—renegotiating supplier contracts and streamlining workflows—directly support business efficiency.
Best Use Case
Useful in project-based or target-driven roles, such as team leads or sales managers.
Less effective in creative, research, or collaborative roles where individual impact is hard to quantify.
Comparing Financial Incentives
Each financial method motivates in different ways and is influenced by:
Nature of the Job
Piece rate is appropriate for manual and repetitive tasks.
Commission suits individual sales roles with measurable results.
Salary schemes work best in complex or collaborative environments.
PRP is ideal for roles with clear goals and appraisal systems.
Employee Preferences
Some employees value income security (salary), while others prefer earning potential (commission).
Generational factors may influence preference: younger workers may seek performance bonuses; older workers may prefer predictability.
Organisational Culture
A competitive culture supports commission and PRP.
A team-oriented culture is better suited to salaries with group-based bonuses.
Firms that value innovation and creativity may avoid overly rigid financial incentives.
Budget Considerations
Commission and PRP can be cost-effective, paying more only when targets are achieved.
Salaries are stable but may lack flexibility.
Piece rate may reduce waste but could increase rework costs if quality suffers.
Real-World Business Examples
Amazon
In certain warehouses, Amazon has trialled performance bonuses for packaging targets. While output increased, criticisms emerged over worker well-being and pressure to meet demanding quotas.
John Lewis Partnership
Uses PRP and profit-sharing schemes to reward staff annually based on company performance, supporting a culture of shared success.
Carphone Warehouse (UK)
Combines a basic salary with a commission scheme for sales staff. High performers can double their pay through successful upselling of accessories and contracts.
HSBC
Senior managers receive bonuses based on long-term targets such as growth, cost control, and customer satisfaction, illustrating how PRP can align executive performance with strategy.
Evaluation of Effectiveness
Financial vs Non-Financial Incentives
Financial incentives often provide strong short-term motivation, especially in roles with quantifiable outputs.
However, non-financial methods (e.g. recognition, autonomy, development opportunities) often support long-term engagement.
Combining both types may yield the best results—for instance, using PRP alongside job enrichment and flexible working.
Measurability and Sustainability
Financial incentives are easily measurable, which supports fairness and transparency.
But over time, they can lose impact if they become expected or feel routine.
Employers must review and adapt schemes to remain motivating and competitive.
FAQ
Financial incentives can initially boost performance but may lose their motivational power if overused or expected as standard. Over time, employees may come to see bonuses or commission as entitlements rather than rewards, reducing their impact. This phenomenon is linked to diminishing marginal returns—each additional reward has less effect. Without non-financial motivators such as recognition, career progression, or job satisfaction, employees may become disengaged, especially if pay alone fails to meet psychological or social needs.
Not all employees are equally motivated by money. Some are driven by personal achievement, autonomy, or a sense of purpose. Younger staff might favour performance bonuses, while older or more experienced employees may value stability and work-life balance over variable pay. Cultural background, personality type, and career stage also play a role. Therefore, financial incentives must be tailored to workforce characteristics, and businesses should consider combining them with non-financial motivators to reach a wider range of employees effectively.
Yes, financial incentives—especially those based on individual performance—can foster unhealthy competition, reduce collaboration, and create resentment if perceived as unfair. Commission-based systems might lead to a “winner takes all” mentality, where employees focus solely on their own goals, ignoring team objectives. In appraisal-driven PRP systems, biased assessments can cause dissatisfaction and mistrust. To prevent these issues, businesses must ensure transparency, fairness, and balance in incentive structures while promoting teamwork and shared success through team-based bonuses or recognition schemes.
Businesses should monitor several key indicators to assess success: employee productivity levels, absenteeism rates, turnover, and overall job satisfaction. If a scheme increases output and reduces staff churn without harming morale or customer service, it is likely effective. Regular employee feedback can highlight how the scheme is perceived, while benchmarking against competitors can provide insight into industry standards. Reviewing performance against business goals—like revenue targets or cost reductions—will also help determine if the incentive aligns with long-term strategy.
Subjective appraisals may lead to inconsistent or biased decisions, causing employees to question the fairness of their rewards. If staff feel their efforts are not accurately evaluated, trust in management can decline, reducing motivation rather than increasing it. Employees may also focus on pleasing appraisers rather than performing the job well. To reduce this risk, businesses should use clear, measurable criteria and involve multiple reviewers in the appraisal process, ensuring objectivity and transparency in performance-related pay decisions.
Practice Questions
Analyse the benefits to a business of using performance-related pay (PRP) to improve employee motivation. (6 marks)
Performance-related pay can motivate employees by directly linking financial rewards to performance outcomes. This encourages staff to meet specific targets, improving productivity and aligning individual goals with business objectives. High-performing employees feel recognised, which may boost morale and retention. PRP can also support a results-driven culture and allow businesses to control labour costs by rewarding only those who exceed expectations. However, the success of PRP depends on fair appraisal systems and measurable performance criteria; otherwise, it may demotivate staff. Overall, if implemented correctly, PRP provides a strong financial incentive that enhances motivation and business performance.
Evaluate the effectiveness of using commission as a method of motivation in a retail business. (10 marks)
Commission can effectively motivate retail staff by rewarding high sales performance with increased earnings, encouraging employees to upsell and maximise revenue. It aligns individual effort with business goals and reduces fixed wage costs. However, excessive reliance on commission may lead to aggressive selling, damaging customer relationships and team collaboration. Inconsistent sales patterns can also lead to income instability, causing stress and dissatisfaction. For commission to be effective, it should be balanced with base pay and monitored to ensure customer service standards are maintained. Overall, while commission boosts performance, it should be part of a broader motivation strategy.
