Whether you are a small business owner or a human resource professional you will find it essential and advantageous to incentivize your employees occasionally to ensure a smooth running, effectiveness, and expansion of your business. Incentivizing brings great benefits. It enhances employee morale and renews dedication which in turn cultivates efficiency, higher productivity, better customer service, and results in greater sales revenues and ultimately profits. Incentives can be categorized into two – monetary and non-monetary incentives. Monetary incentives are quite straightforward and represent quantifiable cash benefits. Non-monetary incentives come in the form of opportunities or tangible gifts which have an underlying monetary value as well.

This article defines and explains monetary and non-monetary incentives in more detail and highlights the difference between two.

Definitions and meanings

Monetary incentives

Monetary incentives are solid cash rewards which are presented to employees for exceptional performance or attainment of long term goals. As the name suggests monetary incentives have a monetary value and the employees can instantly recognize their exact worth. Such cash rewards can take several forms like merit pay, scheduled bonuses or commissions, stock options, mutual funds, and other forms of profit sharing and even extended vacation time.

Monetary incentives are the most straightforward method of showing appreciation and encouraging motivation. Since they hold an undoubted appeal for all employees, they more or less help maintain a positive work environment. They are clear and easily understood by employees. They help solve the challenges of a small business owner like lack of proper management or a stringent budget who can easily offer an annual reward instead of a pay raise. They also do not require any working on behalf of the management and no personalization is required as money speaks for all.

Despite being obvious, monetary incentives can create a turbulent workforce environment since they are mostly awarded to the top achievers only. This causes colleagues to become competitors and battle each other to attain their desired goals. They may create hurdles for each other disrupting teamwork and affecting the company at large. In short, they may crush the spirits of the employees who are left out. There are also some instances when an employee cannot relate his accomplishment to the incentive and denies it inhibiting the anticipated improvement.

Non-monetary incentives

Non-monetary incentives are presented for exceptional job performance or attainment of special goals that add value to the company such as achievement of sales goals, completing professional training, certifications and conducting successful research programs etc.

They don’t have a consistent form and are specifically tailored according to the needs of the employees. This implies that the management or the business owner has to take several considerations into account before handing them out like employee age, career-stage and proximity to retirement from job etc. This has to be managed by the human resource (HR) department that should conduct a comprehensive evaluation program to match employee preference.

Motivational non-incentive rewards do not involve cash but are replaced with opportunities and benefits like vehicle provision and allowances, healthcare benefits, life insurance, and provision of electronic gadgets.This shows that non-monetary incentives also have basic monetary value and are also worthwhile. Research has also proven that employees further appreciate when given a choice in these allowances.

Companies are now witnessing a new incentivizing trend by using tangible rewards that are known to have multiple positive effects on the business. This is due to the simple reason that employees tend to appreciate tangible gifts more because it empowers them to show it off in their circle. There are many examples of such gifts like gift cards, tickets, gadgets, branded apparel, watches etc. and the possibilities are just limitless. Employees feel that the boss is being thoughtful and kind and view them in a favorable light.

This insight can be leveraged to the company’s benefit. If the employee is photographed with the incentive showing his accomplishment and the picture is displayed publicly, it will not only be a reminder for him but will boost the spirits of all other employees. The incentive can also be advertised during the recruitment stage for marketing.

Difference between monetary and non-monetary incentives

The main points of difference between monetary and non-monetary incentives are given below:

1. Represent different forms

Monetary incentives represent quantifiable cash rewards presented for accomplishments, whereas non-monetary incentives have multiple forms like opportunities, allowances and include gift items etc.

2. Effect on employee behavior

Research has shown that monetary incentives encourage compliance in associates whereas non-monetary incentives amplify innovation and risk-taking in their decisions.

3. How employees perceive them

Since monetary incentives are clear, employees understand their worth easily. In the case of non-monetary incentives employee reaction is unpredictable; some might appreciate gifts, and others might deem them useless items.

4. How long can there impact last

Monetary incentive might feel like an addition to the salary and be forgotten. Tangible gifts and opportunities, in addition to offering bragging rights, can be used for longer duration and have lasting impact.

5. Main reason for backfiring

Monetary incentives are rendered useless when competitors find themselves in a race to achieve set goals and attempt to sabotage each other in the process. Non-monetary incentives lose their purpose when employee preferences aren’t taken into account properly.

6. How do they effect the budget

Monetary incentives are hard on the budget. In comparison, non-monetary incentives clearly enjoy a greater influence while they only take a small portion from the budget.

7. Role of the management before incentivizing

Monetary incentives hold a universal value and do not require any work. They are granted instantly. Non-monetary incentives require planning and employee evaluation to make them effective and successful.

Monetary versus non-monetary incentives – tabular comparison

A tabular comparison of monetary and non-monetary incentives is provided below:

Monetary incentives vs Non-monetary incentives
Have different forms
Take the form of measurable hard cash benefits. Take the form of opportunities or tangible gifts with primary monetary value.
How they influence employee behavior
They encourage compliance in employees for the achievement of benchmark. They encourage risk-taking and innovation to surpass goals.
Employee perception
Are straightforward and employees can discern their exact value. They are inconspicuous and employee reaction is unpredictable.
How long are they remembered
Might be absorbed into the salary, and forgotten earlier than non-monetary incentives. Acts as a long lasting reminder of employee’s achievement.
How they backfire
Creates an unequal work environment and colleagues become rivals and competitors. If employee needs aren’t considered the purpose of the incentive fails.
Impact on  budget
Hard on the budget. Moderate on the budget with higher impact.
Work required by management
No forethought or work is required. Forethought and working to evaluate the needs of employees is required by the management.

Conclusion – Monetary vs non-monetary incentives

Monetary and non-monetary incentives differ in form, role and impact. Different employees therefore perceive them differently. Wrong decisions and management deficiencies can hamper business functions. As in the case of many business owners, you will have to experiment with monetary and non-monetary incentives before you can choose the best one for your employees. Nonetheless, the target for all incentives is the same; cater employee needs and increase job satisfaction to benefit the business as a whole.