What is an Incentive Policy?

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  • Written By: Terry Masters
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 18 October 2019
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An incentive policy is any system adopted to motivate the behavior of people. When applied in a business context, it is the use of reward strategies by a company to motivate employees to do or not to do something that is usually of benefit to the company. A company can also adopt motivating strategies to attract customers, but those programs are often called loyalty programs to distinguish them from incentive policies for employees.

Incentives can take almost any form. The pertinent assessment in designing an incentive policy for employees is what type of motivator will encourage or reward behavior without encouraging bad habits. Encouraging behavior by providing an incentive can have the negative effect of creating a response that teaches employees not to do their best work unless they are incentivized. In that case, a company would have a workforce that is unhappy with its base salary and inclined to go beyond the strict parameters of a job description only when exceptionally compensated. The company is then trapped in a cycle that ultimately limits the company’s ability to maximize its human resources.


The three typical general categories of incentives in the employment context are financial incentives, recognition-based incentives, and specialty awards. Financial incentives reward work performance with a financial gain, such as an end of the year bonus or stock options. Recognition-based incentives replace a pay-for-performance paradigm with one that is based on a prestige factor, such as an employee-of-the-month program or a special parking spot. Specialty awards tend to happen on an ad hoc basis, rather than according to a precise schedule or announced program, and result in the employee receiving something unique, like tickets to a ball game or the use of the company vacation property.

Not all incentives are designed to benefit a company’s bottom line. A company can also design an incentive policy to achieve outcomes other than an increase in work productivity. Some companies make it a goal to encourage their employees to adopt healthier behavior or to volunteer through the company’s community engagement program. In order to encourage workers to make these sorts of lifestyle changes, the company might offer any type of special incentive.

If a company has a human resources department, it is typically responsible for designing and managing the company’s incentive policy, unless the incentive is financial and tied strictly to a financial barometer, such as sales. Creatively designing incentives can make the difference between a happy and engaged workforce and one that is disengaged. Incentive policies are always subject to a cost-benefit analysis, however, both in the specific results obtained and the type of work atmosphere encouraged as a result of their availability.


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