The Purpose of 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 workstations are minimized. As one economist observed:
With fixed wages individual workers also have little incentive to cooperate with management or to take the initiative in suggesting new ideas for raising productivlty. At the level of the individual worker, higher productivity has no immediate payoff-wages are fixed for the length of the contract. The immediate effect of higher productivity is, in fact, negative. less labor is needed, and the probability of layoffs rises.