Incentives are anything that persuade a person to alter their behavior in the desired manner. They are powerful tools that can be used to influence certain desired behaviors or actions, often adopted by governments and businesses. Incentives can be broadly broken down into two categories: intrinsic incentives and extrinsic incentives.
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Intrinsic Incentives: These are internal rewards that come from within a person, such as personal satisfaction, enjoyment, or a sense of accomplishment.
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Extrinsic Incentives: These are external rewards that come from outside a person, such as money, prizes, or recognition.
In business, the objective of incentives is to increase employee productivity, improve industrial and interpersonal relations, and increase the overall profit of the organization. Incentives can be generally classified as financial (monetary) incentives and non-financial (non-monetary) incentives.
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Financial (Monetary) Incentives: These are incentives that are in the form of money or can be measured in monetary terms, such as bonuses, raises, profit sharing, and stock options.
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Non-Financial (Non-Monetary) Incentives: These are incentives that are not in the form of money, such as recognition, praise, certificates of achievement, and gifts.
Incentives are most studied in the area of personnel economics, where economic analysts focus on how firms make employees more motivated through pay and career concerns, compensation, and performance evaluation. Incentives matter because higher incentives amount to greater levels of effort and therefore higher levels of performance.
