What’s it: Financial motivation is an encouragement to employees to do something involving monetary compensation or the like. Companies have many variations to motivate employees. Salary or wages are the most common to encourage them to work hard and effectively. Others may involve bonuses, commissions, and shareholding programs.
Why is financial motivation important?
Financial motivation may not have a longer-lasting effect than non-financial drives. It keeps employees satisfied even though it may not motivate employees in the long run. However, it often plays an essential role.
Take the salary case. Wages are essential to meet basic needs. For example, employees use salaries to buy food, drink, clothing, housing, and pay for their children’s education. In other words, such incentives allow them to survive and make their lives better.
Then, although it only fulfills basic needs (physiological needs), salary plays an important role in satisfying other needs. Now take the self-actualization and esteem needs in Maslow’s hierarchy of needs as examples.
With money, employees can take training and further education to develop their skills and abilities. And they may take money out of their personal pocket to pay for it.
Once proficient, employees can actualize their competence in the workplace. So, without money, they cannot develop, and of course, what will be actualized?
In addition, with better abilities and skills – facilitated by money – they can excel and earn appreciation from the company. It satisfies the need for esteem.
Long story short, in this case, money becomes a means to meet other needs. Money is not everything to motivate, but motivating requires money.
Indeed, money may have a temporary motivating effect. For example, employees may find their pay rises. As a result, they may be eager to work in the early months after a raise. But, in the following months, their bad habits may reappear, for example, arriving late.
What are the types of financial motivation?
Financial motivation involves money or money-related things to encourage employees to perform better. It can vary between companies, depending on management policies in each. For example, it could take the form:
- Profit-related pay
- Performance-related pay
- Share ownership scheme
- Fringe benefits
Wages are irregular compensation to workers. Unlike salary, it is not fixed, and they may not receive it if they are absent from work – for example, due to illness. There are two types:
- Time-based wages – based on hours worked or per day. So, if they work fewer hours, they earn less.
- Piece rate – based on output produced or per project. If they can produce more output, workers earn more money.
Salaries represent lump sum, and regular payments are usually paid monthly. Unlike wages, salaries do not depend on the total hours worked, or the output produced. Therefore, even if employees are absent, they still get the same payment.
Bonuses are extra payments beyond the base salary. Sometimes companies give them away – usually paid annually – but sometimes they don’t.
Companies may pay bonuses based on company performance or individual performance. For example, when it exceeds the targeted profit, the company pays bonuses to all employees. In other cases, the company gives it only to a few high-performing individuals where they achieve the set targets.
Commission is compensation based on the sales generated, usually calculated as a percentage of the sale value. It is usually given to the salesperson.
For example, the company offers a 10% commission on the sale price. If a salesperson sells 20 units of a product for $100, he earns a commission of $200 = 10% x 20 units x $100. Thus, the more products they sell, the more commissions they receive.
Profit-related pay or profit-sharing is a bonus based on the company’s profit performance. The company distributes it to employees if it reaches or exceeds the targets set, usually at the end of the year. However, if the profit target is not achieved, there is no bonus.
Performance-related pay is a bonus based on individual performance. Unlike profit-related pay, it is not available to all employees. Instead, the company gives it only to top performers.
For example, the company distributes bonuses if employees reach the set targets. If they don’t reach the target, they don’t get a bonus.
In other cases, it applies to team performance rather than the individual. For example, a team working on a project and meeting targets set by the company. As a result, all team members will get a bonus, regardless of their individual contribution.
Share ownership scheme
Share ownership schemes can be an employee stock ownership plan (ESOP) or a management stock ownership plan (MSOP). It is a program to motivate employees and management by owning shares in their company.
As shareholders, employees and management can own more wealth if the company’s stock price rises. And, it requires their hard work to make the company achieve sustainable competitive advantage. Thus, stock investors will be interested in collecting and buying company shares, pushing the price up.
Fringe benefits are non-cash rewards to employees. It can be retirement benefits, insurance, gym facilities, tuition reimbursement, and educational scholarships.
What facilities are provided varies between companies. For example, some may only provide insurance and pension benefits. Meanwhile, others may be more complete.
What to read next
- Financial Motivation: Why It Matters and Types
- Wage: How it works and Types
- Time-Based Wage: How it Works, Pros and Cons
- Piece-rate Wage: How it Works, Advantages and Disadvantages
- Bonus: Types, Advantages, Disadvantages
- Salary: Influencing Factors, Advantages, Disadvantages
- Commission-Based Pay: How it Works, Pros, Cons
- Performance-Based Pay: How it Works, Pros, Cons
- Share-Ownership Scheme: Its Importance, Pros, and Cons
- Fringe benefits: Examples, Advantages, Disadvantages
- Profit-Sharing as a Motivator: How it Works, Advantages, Disadvantages