Navigating Benefits

Employee Incentive Programs: Which One Is Right for Your Business?

  • Employee incentive programs help motivate your employees and ensure they'll want to stay with your company
  • There are many programs to choose from including: annual cost of living raises, merit increases, long-term incentives and non-monetary incentives
  • No matter which one you choose, make sure the program works for your employees and your business

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Posted by September 28, 2017

Your employees need a reason to want to stay with your company. Thus, employee incentive programs are important. So, what incentive program is best for your company? Here are the pros and cons of different employee incentive programs so you can decide which is right for your business.

Annual Cost-of-Living Raises

Pro: Everyone can look forward to a raise at year-end.

Con: All you have to do to get the raise is not get fired. That’s a pretty low standard. While there is value in keeping employees’ salaries steady—which is what a cost-of-living raise does—it also doesn’t reward high performers, which are the people you want to keep around.

Merit Increases

Pro: Increases are based on performance, so your best employees earn more money than others. It helps keep top performers happy and encourages poor performers to work harder. It can be combined with a cost-of-living increase, so everyone gets a little something but top performers get a lot.

Con: Unless you have unlimited funds, you can end up “punishing” people for working in a high-performing group. There’s only so much money to go around. If everyone works hard and achieves a lot, their raise drops. This can also result in employees wanting to keep the glory to themselves instead of working as a team.

Long-Term Incentives (Stock, Retirement Plans, etc.)

Pro: This is great for retention. If you grant employees stock that vests in five years, you help ensure that they will be there five years from the time it’s granted. Retirement plans are very important to many people; having a 401k or similar plan with a company match is a big draw.

Con: The legalities behind stock grants can be difficult for a small business. Retirement plans, of course, don’t have that drawback. Additionally, if your company needs a lot of entry-level people, this won’t be a great way to incentivize your employees.


Pro: If bonuses are based on individual performance, it encourages employees to meet their goals. If a bonus is more like profit-sharing, where everyone benefits if the company does well, it can also motivate employees to greater success. Employees often find a $500 bonus far better than the equivalent of $10 more pay per week. Additionally, if you pay out bonuses regularly, employees are hesitant to leave because they’d miss out on a bonus payment.

Con: Bonuses are often based on factors outside an individual employee’s control. You may be a great engineer, but if the sales team is atrocious then there is no profit-sharing to go around and no availability for bonuses. The IRS requires high withholding on bonus checks, so people are often disappointed with the actual check.

Non-Monetary Incentives

Pro: This is cheap! Praise, title bumps, public recognition and other non-monetary options can be super motivating. Employees often love having their ego stroked more than an actual pay increase.

Con: If you only opt for these incentives, employees will eventually give up and leave, no matter how effuse your praise and how pretty your certificates. These things are best done in conjunction with other programs.

No matter what you choose, make sure the program works for your employees and for your business.

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