Salary Regular fixed lump-sum payment to staff, typically paid monthly.
Advantages
- Provides job security.
- Workers know that they will receive a regular income.
Disadvantages
- Employees might not always be maximally motivated and productive.
- They know that if they do more or less the same amount of work every month, they will receive their fixed salary; this can reduce productivity.
Wages (time based) Staff is paid per hour of work (daily or weekly).
Advantages
- In case workers need to stay over hours, they will receive extra payment.
- workers feel their work is being valued.
Disadvantages
- The pay workers receive is not linked to the amount of output they receive; therefore, they might ‘go slow’ in order to make sure they work over hours to receive more income.
Wages (piece rate) Staff is paid per unit/batch of output.
Advantages
- Workers know that if they are more productive, they will be rewarded for that.
- They see that their work has a monetary value.
Disadvantages
- Workers might concentrate more on quantity produced and less on quality.
- This might increase costs for the business as quality check/assurance systems would need to be put in place.
Commission Staff is paid with respect to their sales results – an employee gets a percentage for each unit sold.
Advantages
- The very nature of the financial reward is the advantage.
- Workers will try to achieve the best sales results possible, which would result in a higher financial reward, while the business benefits from higher sales.
Disadvantages
- External factors affecting sales (recession, inflation) affect the income of the workers, which is demotivating; there’s nothing they can do in case they can’t sell more goods because of recession or inflation.
- Financially oriented, staff might make arrangements with customers that put the organization in a disadvantageous position. (a banker might give out a short-term loan to a business without previously checking whether the business can pay for it, which is disadvantageous for the bank).
PRP (profit-related pay) The income of the employee depends on the profitability of the company.
Advantages
- It can be motivating for the workforce.
- If the business shares the profit of the whole organization with the staff, this gives them a sense of ownership over the business and belonging. The success of the company = their success.
Disadvantages
- External factors affecting sales (and thus profitability) of the business automatically affect employees, which can prove to be demotivating as they have no power over the factor causing decreased sales.
Performance Related Pay Rewards employees (in individual, teams or as a workforce) who meet certain goals
- Pay rise
- Performance bonus
- Gratuity
Advantages
- Creates incentives.
- Fair, since hard work is rewarded.
- Helps to develop a performance culture.
Disadvantages
- Targets can be unrealistic.
- Can be stressful.
- Inappropriate for jobs where quality overrides quantity (e.g., doctors).
- Non-financial motivators may be neglected.
Employee share ownership schemes Rewards employees by giving or selling them (at a discounted rate) shares in the company. This works well because that way, success of the company has a direct financial benefit to shareholders.
Advantages
- Keeps employees engaged.
- Helps retain staff.
- Makes employees feel responsible.
Disadvantages
- Might not yield direct profits.
Fringe payments (perks) Financial benefits to employees in addition to their wage or salary (e.g., health insurance, housing allowance).
Advantages
- Encourages employee loyalty.
- Help meet an employee’s safety needs.
- Make workers feel valued as employers provide extra benefits to enhance wellbeing.
Disadvantages
- Costly.
- People high up in the company will receive very expensive benefits.
Frequently Asked Questions: Financial Rewards in Business
Financial rewards are a key part of compensation and motivation strategies.
