Employee Incentive Programs: 7 Types (+ Setting Up Your Own)

Employee engagement plays a significant role in ensuring the productivity, satisfaction, and loyalty of employees. One effective strategy for keeping engagement high is to implement employee incentive programs, which motivate employees and contribute to the overall success of the organization.

Although incentive programs are often thought of as strictly rewards for specific achievements, they can also simply be company-wide programs that incentivize high-quality work. Examples of incentive programs range from bonuses and other monetary rewards to nonfinancial perks, such as flexible work arrangements, team-building activities, and wellness initiatives.

Here are some employee incentive programs you can implement, along with some recommendations on when to best use them as well as possible downsides or pitfalls. We also included the steps you need to take to set up your own program.

1. Employee Referral Programs

An employee referral program is a recruitment strategy where current employees are encouraged to recommend qualified candidates from their professional networks for job openings within their company, often with incentives for successful hires.

This type of incentive program is most effective when a company is rapidly expanding, seeking specialized roles, or aiming to reduce recruitment costs. They work well in industries with tight labor markets or for positions that require niche skills like UI/UX design, AI, and cloud computing.

Rewards for successful referrals can include cash bonuses, extra vacation days, gift cards, or even experiential rewards like concert tickets or spa days. The bonus amount often varies based on the position’s seniority or difficulty to fill.

Employee Referral Program Example: InMobi

In a frequently reported story, mobile marketing company InMobi went all out when it was in need of engineering managers. Successful referrers of engineering managers were given a set of wheels—a Royal Enfield motorcycle for Indian employees and a Vespa for US employees. As a result, the company’s referral rate more than doubled to 50%.

Using this type of incentive can lead to higher quality candidates because employees tend to recommend individuals who possess the necessary skills and fit well with the company culture. Additionally, it reduces time-to-hire as referred candidates typically move through the pipeline faster, bypassing initial screenings and often receiving priority. Employee engagement also improves as employees feel empowered to shape their work environment, take pride in successfully referring someone, and may receive rewards for successful placements.

An employee referral program loses its efficiency when the company’s network becomes saturated, leading to a decrease in the quality or diversity of referred candidates. There’s also the risk of straining workplace relationships if a referred candidate doesn’t perform well or if employees feel pressure to refer candidates even when they don’t know suitable individuals.

Check our guide on creating an employee referral program.

2. Flexible Work Arrangements

Flexible work arrangements allow employees to have more control over when, where, and how they work, improving work-life balance and job satisfaction.

The most common types of flexible work arrangements include the following:

Remote work: Allows employees to work from locations outside of traditional office settings, typically from home or other remote spaces.
Flextime: Allows employees to choose their own work hours within certain limits set by the company. Instead of the usual 9-to-5 grind, you might have core hours when everyone needs to be available. Outside of that, however, everyone can start earlier or work later.
Compressed workweeks: This type fits a full week’s work into fewer days. Instead of the typical five-day workweek, you might have four 10-hour days or three 12-hour shifts.
Job sharing: In this set up, two part-time employees team up to cover one full-time position. They split the responsibilities, hours, and sometimes the benefits of the role.

Flexible Work Arrangement Example: DuckDuckGo

DuckDuckGo‘s no core work hours policy is a good employee incentive program because it fosters flexibility and autonomy, allowing employees to work when they are most productive and balance their personal lives effectively, resulting in increased job satisfaction and improved work-life balance. This approach promotes a healthier work culture and can lead to higher levels of motivation and productivity among the workforce.

Flexible work arrangements yield even more benefits outside of just improving employee work-life balance, reducing stress, and increasing job satisfaction. It also increases productivity as employees work during their most effective hours and in environments where they focus best, often leading to higher quality output. It also reduces commute stress, which contributes to the overall well-being of employees.

Flexible work arrangements also come with challenges, such as communication difficulties, potential for overwork, and maintaining team cohesion. Additionally, implementing flexible work arrangements may require investment in technology and new management approaches. Despite these challenges, many organizations are finding ways to successfully implement and manage remote and hybrid work models.

Here’s our guide on creating a flexible work schedule policy.

3. Employee Recognition Programs

An employee recognition program is a formal system for acknowledging and rewarding employees’ contributions, achievements, and behaviors that align with company values and goals. Employee recognition programs are most effective when implemented consistently throughout the year rather than as periodic events. They work best in organizations where specific, measurable goals are set and achieved or where employees consistently demonstrate company values.

The most common rewards for employee recognition are public acknowledgment and verbal praise. However, you can also give recognition by rewarding your employees with gift cards, extra paid time off, or small bonuses. You can create a point-based system for redeeming various rewards.

Explore different employee appreciation ideas you can use to show your appreciation and recognition to your employees

Recognition Program Example: Unilever

The Unilever Heroes Award is a global program that recognizes employees for exceptional contributions to the company throughout the year. Awardees are invited to the exclusive Change Leaders Conference, attended by around 400 Unilever senior managers annually.

When employees receive consistent recognition and appreciation for their efforts and achievements, their motivation and engagement levels also increase. This, in turn, encourages employees to strive for excellence. Additionally, when employees feel valued and appreciated, they are more likely to remain loyal to the organization.

While recognition programs can be great, they’re not without their pitfalls. If the rules aren’t clear or fairly applied, you might end up with some employees feeling left out. There’s also a risk of inadvertently fostering employees who lose their inner drive and only work for that pat on the back.

4. Team-building Activities

The best time to use team building activities is when you notice a dip in morale or collaboration, after significant changes like restructuring or new hires, or at the start of major projects. Regular, quarterly, or biannual events can also keep team spirit high year-round. Just be mindful not to overdo it—you want employees excited, not burnt out.

Mix team-building activities with a blend of tangible and intangible rewards. Think along the lines of extra paid time off, catered lunches, or even small bonuses. But don’t underestimate the power of public recognition, like “Team Player of the Month” awards or featuring top performers in company newsletters. The key is to tailor rewards to what your team values most.

Team-building Activity Example: Salesforce

Salesforce uses charitable activities as part of its team-building efforts. It has a program called “1-1-1 Model,” where it donates 1% of employees’ time, 1% of its equity, and 1% of its products to nonprofit organizations. As part of the team-building efforts, employees participate in volunteer events and charity projects, which contribute to the community while promoting teamwork and a sense of purpose among the staff.

Team building can work wonders for workplace dynamics. It boosts communication, builds trust, and helps employees see each other as real people, not just coworkers. This often leads to better collaboration, increased productivity, and a more positive work environment. Plus, it can be a great stress-buster and morale booster, especially during tough times.

While team building can be great, it’s not without its challenges. Some employees might see it as forced fun or a waste of time, especially if it’s poorly planned or adds stress to their normal workload. There’s also the risk of activities backfiring if they’re too competitive or make some team members uncomfortable. If overdone, it can start feeling like a chore rather than a perk; thus, balance is key.

Looking for some inspiration for your next team building? We have compiled a list of more than two dozen team building activities you can do either indoors or outdoors.

Employee profit sharing is a compensation program where a company distributes a portion of its profits to employees in addition to their regular salary. This typically occurs on a set schedule, often annually or quarterly, aligning with financial reporting periods. It’s most effective when implemented during periods of growth or strong performance, as it directly ties employee rewards to company success. However, it’s crucial to maintain consistency even in leaner times to keep employees motivated and invested in the company’s long-term success.

Profit sharing can take the form of cash bonuses, stock options, or contributions to retirement accounts. The amount often depends on factors like the employee’s salary, tenure, or performance. Some companies opt for a flat percentage across the board, while others use a tiered system.

Profit sharing details are typically included in an employee’s total compensation package, making them a potential point of negotiation during job offers, promotions, or salary reviews. This allows employees to consider the full value of their compensation when making career decisions or discussing their overall remuneration with employers.

Profit-sharing Example: Robert W. Baird & Co.

Robert W. Baird & Co. is a financial services firm that offers a profit-sharing program, distributing a portion of the company’s profits among eligible employees based on predetermined criteria. As a result, 70% of the company’s associates are shareholders. This initiative fosters a sense of ownership, motivation, and alignment of interests while encouraging long-term engagement and loyalty among the workforce.

Profit sharing can be a powerful motivator. It gives employees a stake in the company’s success, often leading to increased productivity and loyalty. It can foster a more entrepreneurial mindset among staff, encouraging innovation and cost-saving measures. From a recruitment standpoint, a solid profit-sharing plan can be a major selling point for attracting top talent. Plus, it’s a great way to share the wealth and show appreciation for your team’s hard work.

While profit sharing sounds great on paper, it’s not without its challenges. In lean years, reduced or nonexistent payouts can lead to disappointment and decreased morale. There’s also the risk of creating a short-term focus, with employees prioritizing immediate profits over long-term stability. Some staff might feel it’s unfair if they don’t see a direct link between their individual efforts and company profitability. Lastly, it can be complex to administer, especially for smaller businesses, and may require careful financial planning to ensure it doesn’t strain cash flow.

6. Employee Wellness Initiatives

Wellness initiatives work best when implemented consistently throughout the year rather than as one-off events. Launch major programs at the start of the year when motivation for health goals is high. Boost engagement with seasonal challenges or themed months (like “Stress-Free September” or “Mindful Meditation May”). The key is to make wellness an ongoing part of company culture, not just a temporary fad.

Just like the team-building rewards, mix tangible and intangible rewards to keep things interesting. Think gym membership subsidies, fitness trackers, or extra time off for health appointments. Nonmonetary rewards like “Wellness Champion” recognition or prime parking spots for top participants can be effective too. Just remember, the best rewards are those that actually support and encourage healthy behaviors.

Wellness Initiative Example: Intuit

Intuit’s “Fit for Life” program reimburses employees for meditation and mindfulness classes and provides incentives for adopting stress-reduction habits, such as walking and listening to calming music. Mindfulness resources are available on the company’s website, and employees can also access “mindful moment” tips displayed on whiteboards in conference rooms.

A well-designed wellness program can pay dividends in multiple ways. It often leads to reduced healthcare costs and absenteeism. Employees who feel their employer cares about their well-being tend to be more engaged and productive. These initiatives can boost morale, reduce stress, and foster a more positive work environment. They’re also great for your employer brand, potentially making it easier to attract top talent who value work-life balance.

There’s a risk of creating a “wellness culture” that unintentionally shames or excludes those who can’t or choose not to participate. Also, poorly designed programs might be seen as just another corporate obligation rather than a genuine benefit. And if not carefully managed, these initiatives can be costly without delivering clear ROI. Lastly, there’s always the challenge of maintaining long-term engagement—the initial enthusiasm often diminishes over time.

Get a more in-depth look at employee wellness programs and some expert tips on how to implement one in your workplace in our employee wellness programs small business guide.

7. Performance-based Bonus

Performance-based bonuses are typically awarded on a predetermined schedule, often annually or quarterly. Some companies tie them to fiscal year-end results, while others opt for more frequent payouts to maintain motivation throughout the year. In sales roles, monthly or even real-time bonuses based on targets can be effective. The key to ensuring its efficacy is to balance it between making it frequent enough to motivate and infrequent enough to be substantial.

Performance-based bonus is different from an employee recognition program. The former rewards employees for achieving specific measurable goals or targets, while the latter acknowledges and appreciates an employee’s behavior, contribution, or achievement that aligns with company values.

The most obvious reward is cash, but don’t limit yourself. Consider stock options, additional paid time off, or even experiential rewards like trips or tickets to events. Some companies offer a choice between cash and other incentives, allowing employees to select what they value most. The amount often correlates with individual or team performance metrics, company profitability, or a combination of both. Ensuring the reward feels proportionate to the achievement is key in maintaining its motivational power.

Performance Bonus Example: Lehigh University

Lehigh University, a private research university in Pennsylvania, has an active spot bonus program that rewards individual employees for contributions or performance that go “above and beyond.” Supervisory-level administrators can nominate someone below them in the chain of command for a spot bonus that generally ranges from $300 to $3,000, based on the achievement.

Performance-based bonuses can be powerful motivators. They can drive productivity, encourage goal achievement, and foster a results-oriented culture. For employees, they offer the potential for increased earnings beyond base salary. From a company perspective, they allow for flexible compensation that scales with business performance. These bonuses can also aid in retention, especially of top performers who see a clear financial benefit to their hard work.

While attractive, performance-based bonuses come with potential drawbacks. They can create stress and unhealthy competition among team members. There’s a risk of short-term thinking, with employees focusing on bonus-related metrics at the expense of other important aspects of their job.

If poorly designed, they might incentivize unethical behavior or gaming of the system. Employees might come to expect bonuses, leading to disappointment in lean years when payouts are smaller or nonexistent. There’s also the challenge of fairly setting and measuring performance metrics, especially for roles where output isn’t easily quantifiable. Worse, it can lead to discrimination lawsuits when employees feel some are more favored than others. Lastly, they can be a significant financial commitment for the company, potentially straining budgets in tough times.

Considering giving your employees a bonus? Read our article on how to calculate employee bonuses.

How to Set Up an Employee Incentive Program

Setting up an effective incentive program for employees requires careful planning and consideration. Here are some steps to guide you through the process:

Step 1: Define the Objectives

Clearly identify the objectives of your incentive program. Are you aiming to improve performance, boost morale, increase retention, or achieve specific business goals? Understanding your objectives will help you design a program that aligns with your desired outcomes.

Step 2: Determine the Budget

Establish a budget for your incentive program. Consider how much you are willing to invest in incentives and rewards. This will help you determine the types of incentives you can offer and the scale of the program.

Step 3: Understand Employee Preferences

Conduct surveys or gather feedback from your employees to understand their preferences and what motivates them. This will help you tailor the program to their needs and increase its effectiveness.

Step 4: Select the Right Incentives

Based on the objectives and employee preferences, choose the types of incentives you will offer. These can include monetary rewards such as bonuses or raises, nonmonetary rewards like recognition and appreciation, professional development opportunities, or other creative incentives that align with your organizational culture.

Step 5: Set Clear Criteria and Metrics

If you are using incentives as a reward for specific tasks, establish clear criteria and metrics for earning incentives. Make sure they are transparent, measurable, and fair. Clear expectations will help employees understand what they need to achieve to earn rewards and promote a sense of fairness within the program.

Step 6: Communicate the Program

Clearly communicate the details of the incentive program to all employees. Explain the objectives, criteria, eligibility, and types of incentives they can earn. Provide clear instructions on how employees can track their progress and how rewards will be distributed.

Step 7: Track and Measure Progress

Implement a system to track and measure employee progress toward the incentive goals. This can be done through performance evaluations, sales metrics, or other relevant data points. Regularly review and assess the progress to ensure the program remains effective and take notes for future adjustments if needed.

Step 8: Recognize and Reward Achievements

When employees reach their goals or meet the criteria, promptly recognize and reward their achievements. Publicly acknowledge their accomplishments, present rewards in a timely manner, and ensure consistency and fairness in the distribution of incentives.

Step 9: Evaluate and Refine

Continuously evaluate the effectiveness of your incentive program. Gather feedback from employees and assess the impact of the program on employee engagement, performance, and overall satisfaction. Make necessary adjustments and improvements based on the feedback and outcomes to enhance the program’s effectiveness.

Step 10: Promote Program Participation

Actively promote and encourage employee participation in the incentive program. Regularly communicate program updates, share success stories, and create excitement around the incentives. Encourage managers and team leaders to support and reinforce the program to ensure maximum participation.

Frequently Asked Questions (FAQs)

Incentive programs work because they tap into employees’ intrinsic motivation and provide tangible rewards for their efforts and achievements. By offering incentives, organizations create a sense of purpose, increase engagement, and drive desired behaviors, ultimately leading to improved performance, productivity, and job satisfaction.

The frequency of incentivizing employees depends on various factors, such as the nature of your business, the specific goals you want to achieve, and the budget you have allocated. In general, it is recommended to have a mix of short-term and long-term incentives to keep employees engaged and motivated. Regular recognition and smaller rewards can be given frequently, while larger incentives or bonuses can be tied to specific milestones or achievements.

There are several ways to use financial incentives to motivate employees. These include the following:

Performance bonuses
Profit-sharing
Commission structure
Salary increases
Stock options
Referral bonuses

While financial incentives can be effective, it’s important to balance them with nonmonetary motivators like recognition, career development opportunities, and a positive work environment. Additionally, you should also consider its tax implications, as most monetary rewards are taxed as regular income for employees.

To ensure the effectiveness of employee incentive programs, you should do the following:

Provide clear and transparent communication
Tailor programs to employee preferences
Have regular evaluations and adjustments
Align incentives with organizational goals

Bottom Line

Employee incentive programs are a powerful tool to keep employees engaged, motivated, and satisfied. By implementing well-designed programs that recognize and reward employees’ efforts and achievements, organizations can create a positive work culture and drive better performance. With clear communication, tailored incentives, regular evaluation, and alignment with organizational goals, companies can maximize the impact of their incentive programs and enjoy the many benefits they bring, including increased productivity, improved retention rates, and attraction of top talent.

Employee Referral Program Example: InMobi

Flexible Work Arrangement Example: DuckDuckGo

Recognition Program Example: Unilever

Team-building Activity Example: Salesforce

Profit-sharing Example: Robert W. Baird & Co.

Wellness Initiative Example: Intuit

Performance Bonus Example: Lehigh University

About the Author

Genevieve Que

1. Employee Referral Programs

Employee Referral Program Example: InMobi

2. Flexible Work Arrangements

Flexible Work Arrangement Example: DuckDuckGo

3. Employee Recognition Programs

Recognition Program Example: Unilever

4. Team-building Activities

Team-building Activity Example: Salesforce

5. Employee Profit Sharing

Profit-sharing Example: Robert W. Baird & Co.

6. Employee Wellness Initiatives

Wellness Initiative Example: Intuit

7. Performance-based Bonus

Performance Bonus Example: Lehigh University

How to Set Up an Employee Incentive Program

Step 1: Define the Objectives

Step 2: Determine the Budget

Step 3: Understand Employee Preferences

Step 4: Select the Right Incentives

Step 5: Set Clear Criteria and Metrics

Step 6: Communicate the Program

Step 7: Track and Measure Progress

Step 8: Recognize and Reward Achievements

Step 9: Evaluate and Refine

Step 10: Promote Program Participation

Frequently Asked Questions (FAQs)

Why do incentive programs work?

How often should I incentivize my employees?

How do you incentivize employees with money?

What are some incentive program best practices?

Bottom Line

About the Author

Genevieve Que