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This paper follows up on previous research by the London-based Chartered Institute of Personnel and Development (CIPD). It addresses two basic questions: 1) How do different forms of financial incentives affect motivation and performance? 2) What are the effects of nonfinancial forms of recognition? In answering those questions, the authors cover related areas, including definitions of incentives and recognition, how they are supposed to work and what moderating factors influence their impacts. The authors recommend that managers institute systems that maximize the benefits of incentives and recognition while following three principles: 1) Design rewards that reflect the reality of the individual jobs and teams in which they are given; 2) Link rewards clearly and consistently to performance; and 3) Make sure that rewards schemes as well as how they are administered are seen as fair.
Although pay is a fundamental right in employment, rewards more broadly can be used to motivate employees and improve performance. Put simply, above-average rewards signal "to employees that they deserve to be rewarded for superior contributions" (Marchington et al. 2021).
If employers are to maximize this opportunity, they have several decisions to make. At the level of strategy and principles, views differ on what should be prioritized. For example, whereas some emphasize the importance of fairness, others argue for a need to be able to set rewards individually to attract and keep the best people. At an operational level, views differ about the most effective methods of using financial incentives, or indeed whether they are the best approach at all. In particular, nonfinancial forms of recognition are a related practice that can supplement, or replace, financial incentives.
In a previous Chartered Institute of Personnel and Development (CIPD) review, we took a broad look at the behavioral science of rewards (CIPD 2015) and we have also published various reports on the drivers and problems of excessive executive pay (CIPD n.d.). In this report, we take a deeper dive into two specific questions that have important implications for how to motivate staff and maximize performance:
I How do different forms of financial incentives affect motivation and performance?
I What are the effects of nonfinancial forms of recognition?
In answering these, we cover related questions, including what incentives and recognition are, how...