What is an Incentive?

Definition: An incentive is an element introduced in a relationship to induce a particular response. It is a way to stimulate a desired behavior.

What Does Incentive Mean in Business?

The power behind an incentive is based on the satisfaction that comes from receiving a reward. When an individual receives a compensation for doing something it creates the stimulus to keep doing it the same way or even better. The size of the incentive is sometimes what triggers a better response but there’s also an emotional element that must be taken into account. In employment relationships, incentives are used to promote certain activities or behavior.

For example, when it comes to sales, companies regularly design incentive programs for sales-related employees in order to increase revenues. On the other hand, incentives are also employed to improve the work environment healthiness or to increase productivity. An economic bonus issued to those who get to work at time during a given month will help a company persuade its employees to be more punctual; or a clean-desk bonus will induce employees to be more organized within their work space.

Example

Let’s say for example that a company called Pizza Place Co. wants to increase the punctuality of its pizza delivery service. Customers have been complaining about too many delayed deliveries and this is affecting their business negatively, since they are losing some regular customers. The company’s manager designed an incentive program aimed to reward the delivery personnel.

The company will measure the number of complaints received within a week and whoever gets zero complaints will get a $150 bonus. Employees with 1 to 5 complaints will get a $50 bonus and employees with more than 5 complaints will get no bonus.

By employing this strategy, Pizza Place’s manager is looking to reduce late deliveries as much as possible in order to increase revenues and keep customers loyal to the company.