IOSR Journal of Business and Management (IOSR-JBM)

e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 17, Issue 7.Ver. II (July. 2015), PP 64-70
www.iosrjournals.org

Incentive Systems: Issues and Challenges

R Sujatha1, Abhilasha Dudeja2
1, 2
(Department of Management, Amity Business School, Amity University Uttar Pradesh, India)

Abstract: This paper aims to study the fundamental issues in the administration and implementation of
incentive schemes by Human Resource Department. Burack and Smith has defined an incentive scheme is a plan
or programmes to motivate individual or group performance. An incentive scheme is frequently built on
monetary rewards but may also include a variety of non-monetary rewards or prizes. The research uses a
descriptive research design to explore employee’s perceptions about incentive systems. The primary data is
collected from 120 employees of organizations in Information Technology Enabled Services (ITES) Sector in
Delhi Metropolitan Region using questionnaire. The questionnaire is analyzed with the help of mean analysis,
cross tab, coefficient of variation and factor analysis. The data was analyzed using factor analysis. Data
Analysis revealed four components that acts as challenges in implementation of competent incentive system in
ITES sector are ‘Timely implementation and communication of incentives’, ‘Transparency and monitoring of
incentive schemes’, ‘Inequity and Relevancy’ and ‘Consistency’.
Key Words: Incentive system, HR functions, Implementation of incentive schemes, Challenges of incentive
systems, ITES Sector.

I. Introduction
Incentive systems refer to performance linked compensation paid to improve motivation and
productivity of employees. They are designed to stimulate human efforts for improvement in the present and for
the future goals. An Incentive is extrinsic reward that motivates an employee, manager and team to achieve
business goals on top of their intrinsic motivation. It is a factor aiming to shape or direct behaviour of
employees in the desired direction. Employees should be remunerated well for their dedication and
determination towards work. Incentives are a subset of rewards. Incentive can help to create a climate of healthy
competition within employees. Incentives motivate the employees to work harder as it encourages competition
amongst the staff, which in turn creates a self-perpetuating increase in results and goal achievement. Further, it
will reduce absenteeism and turnover. There are however, a number of disadvantages associated with incentives
also. Sometimes if the employees feels that the incentive which were awarded were unfair then it can have
negative affect as well on the employees‟ enthusiasm and can reduce their productivity. The sense of inequity
can tremendously affect the emotions of an employee and it becomes very difficult for an organization to make
their employees understand why this inequity has been created.
This study will try to explain the various issues faced by an organization in administrating and
implementing competent incentive system. The research has been done on Information Technology Enabled
Service (ITES) companies of Delhi Metropolitan Region but the results can be used and verified for other
industries as well and for the companies situated in different regions. The aim of the study was to understand the
underlying issues in administering the incentive system like conflicts, evaluation, transparency etc. On the basis
of these factors questionnaire is made and administered with 120 employees of Information Technology
Enabled Service (ITES) sector. The questionnaire is analysed with the help of mean analysis, cross tab,
coefficient of variation and factor analysis. Cross tab shows details about how scores vary with gender and
found that female are more satisfied with current incentives as compared to males. The grouping of variables is
done by comprising all variables into 4 main components which are completely independent of each other
through factor analysis. The four main components which are perceived to be main issue for administrating and
implementation of incentive system are:
1. Timely implementation and communication of incentives,
2. Transparency and monitoring of incentive schemes,
3. Inequity and Relevancy and
4. Consistency (with respect to performance).

II. Review Of Literature

Moshik Lavie and Christophe Muller (2011), analytically investigates the incentive scheme of
perpetrators of violent conflicts. It provides a rational equilibrium framework to elicit how monetary incentives
and survival concerns shape a participant‟s decision to participate in a conflict. In the model, a leader decides to
award soldiers with financial incentives. Civilians finance the militia via donations and soldiers decide on the

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 Incentive Systems: Issues And Challenges

actual fighting and indulge in looting. Authors explored the scheduled decision-making that takes place on the
path toward a violent conflict and study the principal–agent relationship that exists between the leader and the
militia. In addition, they analyzed the effect of several internal factors (productivity and survival risk) and
external factors (relative economic resources, opponents‟ military strength) on the intensity of the conflict. This
research paper proposes the model in which the relationship was drawn between soldiers fighting decisions were
set on the basis of personal mortality risk and the level of identification with the cause of war. Further, the
results were linked between monetary incentives and participation in fighting and demonstrate a substitution
effect of looting and donations as monetary incentives.
According to Allison A. (2010) stated that while executing an incentive plan, various concerns are
needed to be confirmed that the plan becomes successful. However, it is important to note that incentive plans
cannot ensure employee productivity; it must be coupled with effective human resources practices in order to
ensure a successful work environment. HR practices like suitable reward system, inaugurating all-inclusive
performance management systems, extensive and effective communication are to be kept in mind with incentive
systems and also the top management should support the compensation plan.
Jayant Kale (2009) studied the issue of managerial retention by examining the relation between
managerial incentives and voluntary turnover. Author‟s research has found that firms have a higher inequality in
their compensation schemes were more likely to have higher turnover rate. Author has also studied that mangers
not only compare their compensation internally with their peers but also they compare in the markets as well.
Both internal and external factors are responsible for the turnover rate. The likelihood of resignations is also
affected by the mix of short-term and long-term compensation, equity ownership in the firm, and the overall
level of compensation inequality among top executives.
Dan Ariely (2006) stated that employees are paid as per their performance in various types of jobs,
which is usually seen as an enhancing factor for productivity of an employee in comparison to the employees
who are receiving non contingent pays. However, psychological research suggests that excessive rewards can
also result in a decline of performance. Research has been conducted as a set of experiments in the U.S. and in
India to test whether very high monetary rewards can decrease performance. In this research the subjects worked
on were different tasks and received performance-contingent payments that varied in amount from small to very
large relative to their typical levels of pay. With some important exceptions, very high reward levels had a
detrimental effect on performance. These results challenge the assumption that increases in motivation would
necessarily lead to improvements in performance.
Martin Holtmann and Mattias Grammling (2005) Well-crafted incentive schemes can have positive and
powerful effects on the productivity and efficiency of the employees. Conversely poorly developed schemes can
have serious negative effects. Incentive schemes must be transparent so that employees who are directly affected
can easily understand the calculation of payments. Thus the system should not be overly complex. Furthermore,
the “rules” should be made known to everyone and should not be changed arbitrarily. In addition, it is essential
that the incentive scheme should be perceived fair, so that the goals set out by the scheme must be attained, and
better performing employees must indeed be rewarded with higher salaries. Author explains the golden rule that
everyone must be able to achieve a higher compensation by working better and harder.
Ruth W. Grant and Jeremy Sugarman (2004) had conducted a research which considers that whether
there is ethical appropriateness of doing research in incentives with human subjects or not. Authors have worked
on determining whether incentives are considered unethical form of undue influence or coercive offer. Research
explains that understanding the ethical issue of undue influence. By doing so author found that, for the most
part, the use of incentives to recruit and retain research subjects is harmless but in some cases like incentives
become problematic when conjoined with the following factors, singly or in combination with one another: the
subject is in a dependency relationship with the researcher, where the risks are particularly high, where the
research is degrading, where the participant will only consent if the incentive is relatively large because the
participant‟s aversion to the study is strong, and where the aversion is a principled one. The factors were
identified and the kinds of judgments they require differ substantially from those considered crucial in most
previous discussions of the ethics of employing incentives in research with human subjects.
Edwin A. Locke (2004) stated that, every experienced executive knows the importance of rewarding
good performance and also how difficult it is to design an incentive system that works as it is supposed to. A
recent article in the Wall Street Journal reported that Hewitt Associates found that 83 per cent of companies
with a pay-for-performance system said that their incentive plans were “only somewhat successful or not
working at all.”

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 Incentive Systems: Issues And Challenges

III. Research Methodology

3.1 Research Design and Sampling
The research design taken for this study was descriptive in nature. Quantitative research was used in
the study. All the employees who were provided with incentives are the universe sample for study. Sample unit
which is taken for this study is a single respondent who was working in the private sector in ITES companies
and who receives incentives in their pay structure.

3.2 Sampling Technique and Sample Size

Convenience sampling is used in the study. Pilot study was conducted by taking sample size of 30.
Pilot study showed that all the responses are valid and the questionnaire is reliable. Later, the sample for this
study was 120 respondents from Information Technology Enabled Services (ITES) Sector operating in NCR
region. Firstly, the questionnaire was distributed to employees. The filled questionnaire were received back and
analysed.

3.3 Tool for Data Collection

Primary data as well as secondary data were collected for the study. The tool for primary data
collection was Questionnaire filled by the employees to explore their perception on incentive systems.
Questionnaire is used to analyse issues underlining in administering competent incentive systems. The
questionnaire consisted of close ended questions which helped the researcher in knowing their views on aspects
of incentive system. For the purpose structured questionnaire was formed. A five point Likert scale is used on
the scale of 1-5 where 5: strongly agree while 1: strongly disagree. Secondary data was collected from Journals,
research papers, articles, and internet.

IV. Data Analysis

Descriptive statistics in the form of arithmetic means and standard deviations for the respondents were
computed for the multiple dimensions that have been assessed through the questionnaire are presented in Table
1. “I believe there is no monitoring on implementation of schemes” has the highest mean which states that the
particular statement is agreed by maximum people whereas “I believe incentives are main reasons of jealousy
and conflicts in the organization” has the minimum mean value which states that this statement has been agreed
by least number of people.

Table 1: Descriptive Statistics Showing Mean and Standard Deviation

Descriptive Statistics
Std. Analysis
Statements
Mean Deviation N
The deliverable on my work is defiantly because of incentives I receive. 2.8000 1.192413 120
I believe incentives are never implemented in the company. 2.5500 0.89677 120
I believe incentives are not communicated to employees 2.5000 1.12014 120
I believe most of the employees remain unaware of the incentive schemes. 2.9000 0.99916 120
I believe there is no clarity in the schemes of incentives. 3.4000 1.18393 120
I believe there is an inequity with delivery of incentives. 3.3000 1.08155 120
I believe there is a lag of time between preferred incentives and reward relationship 3.2500 1.04721 120
I believe the incentive schemes are not relevant to job holders need. 3.6000 1.24617 120
I believe there is no monitoring on implementation of schemes. 3.8750 0.93091 120
I feel KPA/KRI`s never kept in mind while designing the incentives. 3.0000 1.32842 120
I believe biasness and prejudice are major hindrance for the incentive implementation. 3.0500 1.38327 120
Incentives have made me more reluctant to change my job 3.4750 0.92548 120
I believe there is a lack of transparency in administration of incentives. 2.7500 1.20398 120
I believe incentives are main reasons of jealousy and conflicts in the organization. 2.3500 1.15700 120

I feel incentives exert continuous impact on my performance 2.9250 1.10888 120

Table 2 indicates that females are more satisfied with the incentives as compared to males as most of
the females (28 out of 45) having scores less than median. Whereas most of the males (that is 49 out of 75) are
showing scores which are above the median value. This shows that males are not satisfied with the current
incentive system as compared to the females. Same questionnaire was given to all the employees considered in a
sample but the response of female employees regarding the incentive systems were more positive in comparison
to male employees.

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 Incentive Systems: Issues And Challenges

Table 2: Cross-Tab between Gender and Score of Respondents

Gender
Male Female Total
Scores less than median value 26 28 54
median or more than median value 49 17 66
Total 75 45 120

The coefficient of variance which shows variance of a variable or question within the sample and can
be compared to other statement or variables is represented in Table 3. For example: „I believe there is no
monitoring on implementation of schemes‟, this statement has least coefficient of variance which means that
sample has shown maximum consent on this variable. This statement can be ranked as 1. Whereas „I believe
incentives are main reasons of jealousy and conflicts in the organization‟ can be ranked as 15 as it has the
highest coefficient of variance which means for this statement sample has not shown a consensus. Sample has
given mixed responses for this variable. Thus all statements or variables are ranked according to their coefficient
of variance.

Table 3: Coefficient of Variance and Rank

Statements Coefficients Of Variance Rank
I believe there is no monitoring on implementation of schemes. 0.239 1
Incentives have made me more reluctant to change my job 0.266 2
I believe there is a lag of time between preferred incentives and 0.323
reward relationship 3
I believe there is an inequity with delivery of incentives. 0.328 4
I believe most of the employees remain unaware of the incentive 0.344
schemes. 5
I believe the incentive schemes are not relevant to job holders 0.347
need. 6
I believe there is no clarity in the schemes of incentives. 0.348 7
I believe incentives are never implemented in the company. 0.35 8
I feel incentives exert continuous impact on my performance 0.378 9
The deliverable on my work is defiantly because of incentives I 0.425
receive. 10
I believe incentives are not communicated to employees 0.44 11
I believe there is a lack of transparency in administration of 0.436
incentives. 12
I feel KPA/KRI`s never kept in mind while designing the 0.443
incentives. 13
I believe biasness and prejudice are major hindrance for the 0.45
incentive implementation. 14
I believe incentives are main reasons of jealousy and conflicts in 0.492
the organization. 15

KMO and Bartlett‟s test is computed and is represented in Table 4. This test gives forcibility of data
into a particular component. A measure of forcibility of greater than 0.5 indicates that acceptable level of
forcibility. The value of 0.661 indicates good level of forcibility of data to proceed for factor analysis.

Table 4: KMO and Barlett’s Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.661
Bartlett's Test of Sphericity Approx. Chi-Square 1713.476
Df 105
Sig. 0

Communalities were computed and are represented in Table 5. Communalities indicate the amount of
variance in each variable that is accounted. Extraction communalities are estimates of the variance in each
variable accounted for by the components. All the values of communalities in this table are high, which
indicates that the extracted components represent the variables well.

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 Incentive Systems: Issues And Challenges

Table 5: Initial and Extraction Communalities

Communalities
Initial Extraction
The deliverable on my work is defiantly because of incentives I receive. 1.000 0.801
I believe incentives are never implemented in the company. 1.000 0.834
I believe incentives are not communicated to employees 1.000 0.833
I believe most of the employees remain unaware of the incentive schemes. 1.000 0.784
I believe there is no clarity in the schemes of incentives. 1.000 0.848
I believe there is an inequity with delivery of incentives. 1.000 0.775
I believe there is a lag of time between preferred incentives and reward relationship 1.000 0.835
I believe the incentive schemes are not relevant to job holders need. 1.000 0.795
I believe there is no monitoring on implementation of schemes. 1.000 0.822
I feel KPA/KRI`s never kept in mind while designing the incentives. 1.000 0.569
I believe biasness and prejudice are major hindrance for the incentive 1.000 0.768
implementation.
Incentives have made me more reluctant to change my job 1.000 0.759
I believe there is a lack of transparency in administration of incentives. 1.000 0.940
I believe incentives are main reasons of jealousy and conflicts in the organization. 1.000 0.349
I feel incentives exert continuous impact on my performance 1.000 0.752
KPA: Key Performance Area, KPI: Key Performance Indicator

Total variance was computed and is represented in table 6. The left most third section of the table
contains initial Eigen values: the Eigen values of all possible components. The components are ranked in order
of how much variance each component is account for. There are 15 variables or statements entered into the
analysis, but that doesn‟t mean each variable is a component. For each variable, the total variance that it
explains expressed as a percentage of all the variance. The middle part of the table contains information for
those components with Eigen value more than 1: in Table 6 there are such 4 components. The value 76.434
implies that four extracted components as per shown in table explains 76.434% of the variance.

Table 6: Total Variance Explained

Extraction Sums of Squared Rotation Sums of Squared
Component

Initial Eigenvalues Loadings Loadings

% of % of
Varianc Cumulativ Varianc Cumulati % of Cumulativ
Total e e% Total e ve % Total Variance e%
1 5.180 34.534 34.534 5.180 34.534 34.534 4.015 26.766 26.766
2 3.521 23.472 58.006 3.521 23.472 58.006 3.608 24.050 50.816
3 1.470 9.798 67.804 1.470 9.798 67.804 2.388 15.918 66.734
4 1.295 8.630 76.434 1.295 8.630 76.434 1.455 9.700 76.434
5 .910 6.070 82.504
6 .828 5.521 88.025
7 .596 3.971 91.996
8 .401 2.675 94.670
9 .255 1.697 96.367
10 .176 1.175 97.542
11 .152 1.015 98.557
12 .076 .505 99.062
13 .064 .427 99.489
14 .052 .347 99.835
15 .025 .165 100.000

Figure 1: Screen plot showing Eigen values of questions

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 Incentive Systems: Issues And Challenges

Fig 1 shows variables that are having Eigen values greater than 1, representing steep part of graph.
Thus, the factors having values greater than 1 can be extracted as independent factors from the graph. The
factors with the largest eigenvalue have the most variance and, down to factors with small or negative
eigenvalues are usually omitted from solutions. Factors with eigenvalues of 1.00 or higher are considered to be
worth analysing. A scree plot is interpreted as follows: the number of factors appropriate for an analysis is the
number of factors before the plotted line turns sharply right.
Table 7 shows rotated component matrix which explains the variable fits better in which component for
example for Ques1 that is „The deliverable on my work is defiantly because of incentives I receive‟ highest
value among all components is for component number second that is 0.676. This variable fits best in component
2 group. In the same way for the last statement „I feel incentives exert continuous impact on my performance‟
maximum rated value is 0.857 and this value lies in component 4. Thus this statement is grouped with the
variables of component 4. In the same way grouping is done for all 4 components.

Table 7: Rotated Component Matrix

Components
1 2 3 4
The deliverable on my work is defiantly because of incentives I receive. 0.077 0.676 0.516 -0.269
I believe incentives are never implemented in the company. 0.866 0.110 0.102 -0.248
I believe incentives are not communicated to employees 0.873 -0.092 0.204 0.145
I believe most of the employees remain unaware of the incentive schemes. 0.785 -0.266 0.085 -0.300
I believe there is no clarity in the schemes of incentives. -0.857 -0.318 -0.082 -0.076
I believe there is an inequity with delivery of incentives. -0.119 0.085 -0.868 0.012
I believe there is a lag of time between preferred incentives and reward 0.620 0.193 0.501 0.404
relationship
I believe the incentive schemes are not relevant to job holders need. 0.495 0.041 0.661 -0.333
I believe there is no monitoring on implementation of schemes. 0.262 -0.800 0.034 -0.334
I feel KPA/KRI`s never kept in mind while designing the incentives. -0.156 0.539 -0.504 -0.028
I believe biasness and prejudice are major hindrance for the incentive -0.076 -0.873 0.026 -0.008
implementation.
Incentives have made me more reluctant to change my job 0.343 0.771 -0.025 0.214
I believe there is a lack of transparency in administration of incentives. 0.531 0.630 0.479 0.177
I believe incentives are main reasons of jealousy and conflicts in the 0.006 0.467 -0.353 -0.078
organization.
I feel incentives exert continuous impact on my performance -0.068 0.097 -0.059 0.857
KPA: Key Performance Area, KPI: Key Performance Indicators

Data is analysed by means of principal component analysis and is shown in Table 8. The components that can
be thought of as representing four different HR challenges are:
1. Timely implementation and communication of incentives,
2. Transparency and monitoring of incentive schemes,
3. Inequity and Relevancy,
4. Consistency (in relation to impacting performance

Table 8: Principle Component Analysis

Component 1 Component 2 Component 3 Component 4
0.873 -0.873 -0.8680 0.857
0.866 -0.800 0.661
-0.857 0.771
0.785 0.676
0.620 0.630
0.539
0.467

The most important challenge in front of HR professionals is component 2 that is Transparency and monitoring
of incentive schemes as it has maximum number of variables under it.

V. Conclusions
An HR manager should keep in mind various steps in administration and implementation of incentive
schemes. Development of incentive schemes should be relevant to the needs of employees and could be
achieved by asking the employees to design their own incentives which can give clear idea about needs of
employees. These schemes should be properly communicated to line managers and employees by clarifying
them two points: how company value their contribution & what company are paying for. Basic training should
be provided to all line managers regarding incentives. These schemes should be communicated timely without
any gap between performance and reward relation. After designing incentive schemes it can be implemented by
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 Incentive Systems: Issues And Challenges

thorough communication between the organization and employees. Incentives should be audited regularly to
assess its effectiveness. Its relevancy to the present and future needs should be periodically checked by
monitoring internal and external relativity. If incentives are properly communicated; implemented, continuously
improved and employees feel that their organization is fair as per their pay and performance, it can lead to
retention of employees and high productivity.

VI. Implications For Future Research

In order to derive any conclusions on issues underlying administering of competent incentive system,
different samples from various organizations are needed to test to make the instrument standard. Secondly,
interviewing the managers to know what could be done to minimize the discrepancies related to incentives.
Third, developing a framework with the help of certain policies, procedures and methods to create a positive
perception about incentives among the employees.

References
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An experimental study, European Journal of Political Economy, 20, 673-694.
[3]. Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar. (2009). Large Stake and Big Mistakes. Review of Economic
Studies Limited, 76, 451-469.
[4]. Donald Dale, Jeffrey Rudski, Adam Schwarz, and Eric Smith. (2007) Innumeracy and incentives: A ratio bias experiment Judgment
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[5]. Edwin A. Locke. (2004). Linking Goals to Monetary Incentives. Academy of Management Executive, 18(4).
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[7]. Nancy Gallini, and Suzanne Scotchmer. (2002). Intellectual Property: When Is It the Best Incentive System? National Bureau of
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