Pros and cons of employee incentive programs

By Kim Rohrer|5 min read|Updated Apr 12, 2024

Employee incentive programs can increase workplace satisfaction and reduce turnover by as much as 43%, but they can also undermine the efforts they’re supposed to support.

For example: if you use incentive programs to boost employee retention, you could end up with retention that’s contingent on receiving incentive bonuses.

Simply plugging a bunch of incentive programs into your company won’t solve your problems. The key to sustainable, long-term retention and high employee engagement is making sure your programs are tailored to your company culture and business needs.

There’s a few different issues you can run into when implementing employee incentive programs. Below, we’ll outline the pros and cons of incentive programs, and provide recommendations for mitigating any risks.

An employee incentive program is a combination of initiatives, small and large, to reward and recognize high-performers.

The right incentives can increase employee engagement and retention on both the individual and team level.

Whether you’re co-located, hybrid, or fully-remote, you’ll want to think about how you’re giving all team members the opportunity to participate.

Employee incentives are a boon to engagement and retention. But incentives are just one piece of the puzzle. Engagement is made up of everything from career growth to manager responsiveness to connection to the company mission.

While incentives are invaluable for motivating team members, they can also become a problem if they’re too heavily weighted in employee’s minds. If the incentives change or go away, your employees may be quick to leave as well. Ideally, you want them to be loyal to you, not to the incentive.

To ensure you’re not overindexing on misaligned incentives, evaluate your programs regularly. Consider the context of business health, employee feedback, and data about performance and attrition.

Instead of releasing the same programs as your competitors, or trying to keep up with every company you read about, set clear goals so that you can strategically align your incentive programs to achieve those specific goals.

Pro: Rewarding high performance incentivizes employees to perform at their best through positive reinforcement.

A little healthy competition amongst teammates (if that’s culturally appropriate for you) or rewarding performance with something like a President’s Club may motivate people to push for top results.

If your culture is more collaborative than competitive, this might not be the right direction for you to take. But with the right consistent success metrics in place, performance incentives can be incredibly motivating.

Con: Rewarding only your top performers can create an aggressive environment or compound inequities within your organization.

Some employees might feel compelled to skirt the rules or “cheat” to earn incentives, Also consider that bonuses in the form of travel or fine dining with the C-suite may not be accessible to all employees, particularly those with caregiving responsibilities outside of work.

💡Tremendous Tip: Consider incentivizing personal improvements, high levels of effort, or “side-skills” (like coaching a junior team member or improving presentation skills), not just the obvious end results like exceeding quota or releasing ahead of schedule. And ensure your incentives are equitably accessible.

Pro: Employee gifts can be an excellent way to increase engagement, with 75% of employees reporting increased feelings of connection for up to 3 months following receiving an appropriate gift.

Con: The wrong gift can really backfire. Our research showed that 31% of employees feel demotivated when they receive a poorly conceived gift. Not everyone wants a holiday ham, a company-branded water bottle, or a random household object. And without tying a physical gift to the reason behind the gift, you risk being seen as wasting money on frivolous garbage people don’t even want.

💡Tremendous Tip: Consider the diversity of your employee population and think carefully before sending a homogenous gift to all employees. Either choose something that’s thematically specific to the cause for gifting, or stick to something flexible like gift cards or cash.

Pro: Recognizing a team’s collective efforts can be an effective way to encourage collaboration, boost morale, and foster a sense of camaraderie.

It gives folks that “we’re in this together” mindset, which may be something you want to focus on if your organization is facing challenging times, if some teams are struggling to work together, or if you have audacious goals that will require serious cross-functional collaboration.

Incentivizing teamwork with clear financial gains that reward the collective is absolutely a tool to have in your toolbox.

Con: Of course, anyone who’s been on a group project before can relate to the feeling of unfairness that comes when people who did not contribute equally are receiving an equal share of the reward.

This is always something to look out for when you’re implementing team-specific rewards to avoid building resentment on a team with uneven individual performance.

You also want to be sure that when you’re focusing on team results, you’re not ignoring either stellar performers (whose work may not get recognized individually) or poor performers (whose struggles may be minimized).

💡Tremendous Tip: Make sure you’re considering team-specific rewards in addition to, not instead of, individual awards to ensure folks are not being left out. Team rewards are not an excuse to kick back and forget about individual performance management.

Pro: Promotions are a hugely beneficial component to incentive programs, and one that many companies overlook and fail to invest in appropriately.

Especially if your company employs frontline workers, don’t underestimate the value of committing to developing your employees long-term. Investing in clear levels and promotion tracks that include paths for both managers and individual contributors will have outsized impacts.

94% of employees have said they would stay with a company that had meaningful career development opportunities, and when you consider the value of retaining their institutional knowledge (and the pure cost of external hiring), promoting from within is crucial.

Con: Effective promotion incentive programs take time and intention to get right. If you don’t have the existing structure to promote equitably, you risk exacerbating the problem.

Many companies don’t employ a consistent criteria for determining eligibility, which leads to confusion, mistrust, and inequity.

Only 25% of employees are confident about their career prospects at their company; they don’t know how to approach development and aren’t sure if managers will be able to help them.

You also want to be careful to avoid creating a homogenous environment – it’s advantageous to have diversity on your team, and depending on where your organization is, you may want to bring in external candidates who can bring new perspectives.

💡Tremendous Tip: Create clarity on your job levels, career development paths, and expectations for promotion-readiness. Share successful promotions enthusiastically internally, too - show what’s possible and people will be motivated to grow.

Pro: In the years since the start of the Covid-19 pandemic, there has been an 85% increase in support for mental health (and nearly half of employees are supportive of wellness programs in general).

Showing employees that you care about their overall wellness, not just their productivity as workers, is a powerful way to create an engaged workforce.

Con: There is a fine line between supporting employees’ wellbeing and intruding on their personal (and HIPAA protected!) health information. Surprisingly, weight-loss incentive programs are still seen as appropriate in many workplaces, despite research about this being more harmful than helpful in most cases.

And whatever you do, don’t tell employees you’re encouraging healthy habits to save the company money on healthcare costs (trust us, it doesn’t go well).

💡Tremendous Tip: Be conscious of maintaining employees’ privacy and encouraging holistic wellbeing in whatever way is most impactful for the individual. Focus on flexible options rather than a blanket approach to keep inclusivity top of mind.

When you’re thinking about how to incentivize employees, watch out for some common pitfalls: inconsistency, favoritism, and seemingly irrelevant rewards will tank your efforts.

Creating unnecessary competition can damage a cohesive team, and promoting people without proper support will create an imbalanced and unstable workforce.

Employee incentive programs can be a fantastic way to encourage your team to elevate their performance, increase engagement, and retain valuable employees. Just make sure you’re thoughtful about your programming.
There are many options to consider, like performance bonuses, gifts, team rewards, promotions, and increased wellness programs. Choose the right program for the occasion and your employees will feel seen, appreciated and motivated.
Take care to match your incentives to your company goals, so that they’re meaningful and relevant - employees don’t just want random programs. They want to know that their work aligns with company goals, and that they’re stretching towards rewards that feel aligned with their growth.

If you plan to send employees rewards to recognize their efforts, make sure to give them the gift of choice. We give employees more than 2,000 ways to redeem their rewards, including Amazon gift cards, Venmo payouts, Visa prepaid cards, and direct deposit.

Employee rewards aren't one-size-fits-all. Tremendous has something for everyone. Sign up now and send your first reward in minutes, or take a demo to see how it works.