The purpose of Incentives as Nontraditional Compensation

Employees who work under a financial incentive system find that their performance determines their pay in whole or in part. As a result, incentives reinforce performance on a regular basis. Unlike raises and promotions, the reinforcement is generally quick and frequent – usually with each paycheck. Since the worker sees the results of the desired behavior quickly, that behavior is more likely to continue. Employers benefit because payouts are in proportion to productivity. And if the system motivates employees to expand their output, recruiting expenses for additional employees and capital outlays for new work stations are minimized.

The higher productivity growth rates of the Japanese, for example, may be due to their incentive system that encourages labor to take a direct interest in raising productivity.

Many experts believe that incentives contribute to Japan’s success. More than one-fourth of an industrial worker’s pay in Japan may arrive as an annual bonus, tied to company profits. Some economists think that this form of payment helps explain why Japan’s savings rate is triple compared to that of the United States. And since companies can adjust labor costs by adjusting their bonuses, layoffs may not be necessary. This may help explain why unemployment level in Japan seldom raises above 3 percent.

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