Incentive vs. Reward: Meaning, Key Differences & When to Implement

I’m going to take you back to a Morning meeting of mine, which has stuck with me. We were in a sluggish mode, deadlines were slipping away, and morale was crashing down.

Sitting around the table, our CEO turned to me and asked, “What would keep you moving ahead? A bonus for hitting targets, or a thank-you for going above and beyond?” This question has never really left my head since then.

This triggered me to reflect on my experiences both as a team member craving recognition and as a team lead seeking ways to inspire. I realized for a fact that sometimes what stands out is not only the promise of what’s to come but also the appreciation for something already done.

Continuing on the same train of thought, I have been in the industry for a long time now, and I have witnessed firsthand how confusing it can be to know when to use incentives vs rewards.

If you have ever struggled to choose between incentives and rewards, you should join me in this learning journey.

This blog will clarify the differences between the two in practical and actionable terms. Additionally, we’ll explore how combining both can truly unlock outstanding results, ultimately helping you drive impact while making employees feel valued. Let’s dive in!

What Exactly is an Incentive?

Defining Incentives: Future-Focused Motivation

Incentives are tools designed to inspire and encourage employees to take action, exert effort, and drive them toward achieving specific goals. They are pre-determined offerings promised beforehand that create anticipation among employees and drive them to take specific actions to meet certain behaviors and outcomes.

Incentives are not strictly limited to rewarding past performance but are more oriented toward motivating employees to strive for something in the future.

Research states that Businesses in the U.S. collectively spend $176 billion on incentive programs.

To get a deeper understanding, let us understand the core characteristics of incentives:

• Proactive: Incentives ignite a sense of proactiveness among employees, setting the stage for them to act promptly and achieve the desired outcome.
• Conditional ("If-Then"): They are linked directly to performance. For example, "If you hit this target, then you’ll receive a bonus."
• Time-bound: They are often time-bound, which requires employees to meet specific criteria within a set time frame.
• Goal-Oriented: Incentives are tied to clear and tangible objectives that both the company and employees value.
• Designed to Stimulate Effort: The central goal of incentives is to drive effort. It’s about pushing employees to go above and beyond.

According to research, 51% of sales professionals stated that earning potential had a significant influence on their job satisfaction.

Common Examples of Incentives

These examples will leave your doubts behind and strengthen your understanding of incentives and how they function.

• Sales commissions: Salespeople often receive a commission for meeting or exceeding sales targets. This motivates them to close more deals and secure better results.
• Performance Bonuses: Employees are offered bonuses after achieving specific performance targets.
• Extra PTO: Some companies also prefer offering extra paid time off when collective targets are met, thereby promoting team cohesion and unity.
• Stock Options: For senior or higher-level employees, stock options serve as a long-term incentive, motivating them to strive for the company’s growth and future success.

Recommended Resource: Incentive Theory: Meaning, Psychology, Types & Implementation

What are Rewards? The Reactive Recognition

Defining Rewards: Acknowledging Past Achievements

Rewards are reactive tools that are offered in response to achieving desired behaviors or outcomes. They serve as a recognition of the employees’ service, efforts, performance, achievements, and behaviors.

Rewards play a pivotal role in reinforcing behaviors that suitably align with organizational values and objectives.

To get a deeper understanding, let us understand the core characteristics of rewards:

• Post-Performance: They are conferred in response to completed tasks or achievements.
• Recognition-Focused: Rewards are prioritized to recognize and value employees’ contributions by highlighting their accomplishments.
• Tangible or Intangible: Rewards can take multiple forms, either tangible or intangible, such as monetary bonuses or emotional recognition. It depends on what resonates most with employees.

Research from Loyola University Chicago found that intangible rewards—like purpose, growth, and recognition—often have a stronger impact on engagement than tangible perks.

Common Examples of Rewards

Here are some common examples that demonstrate the effective use of rewards for motivating continued success.

• Employee of the Month Award: This reward celebrates outstanding employees for their performance and contribution to the organization.
• Spot Bonuses for Exceptional Work: These are instant rewards for going above and beyond on a specific task or project.
• Public Praise: Acknowledging employees’ efforts in front of their peers stands out to be an incredibly impactful reward.
• Team Lunch After a Successful Project: Celebrating a team’s collective effort with a team lunch or gathering helps reinforce collaboration and success.

Recommended Resource: The Ultimate Guide To Employee Rewards and Recognition

Incentive vs. Reward: Key Differences

Although we have covered the basics of both the incentives and rewards, a tabular representation of the key differences will bring more clarity about their features and guide you on how to approach them accordingly.

Strategic Application in the Workplace: Driving Performance & Engagement

You can usher in a wave of change in your employees’ performance and engagement by strategically applying incentives and rewards. Understanding how to design and effectively implementing both incentives and rewards can contribute to a more productive and motivated workforce.

Let us dive into a detailed discussion below:

Leveraging Workplace Incentives: Strategies for Success

You can push incentives to their full potential when you align them with business objectives and design them with a clear purpose. The right incentive strategy can ignite motivation, drive results, and build a culture of excellence. Let’s understand them better.

Types of Effective Workplace Incentives

The types can be categorized as follows:

• Monetary Incentives: These include sales commissions, cash bonuses, and profit-sharing programs that directly reward employees for their achievements.

• Non-Monetary Incentives: These come in the form of flexible work hours, extra time off, or additional training opportunities. These rewards are particularly appealing to employees who seek a work-life balance or career growth.

• Individual Incentives: These incentives are designed to recognize individual performance, such as bonuses tied to personal key performance indicators (KPIs) and personalized rewards tailored to employees’ preferences.

• Team-Based Incentives: They are specifically designed to encourage collaboration and team achievement. They include group bonuses for achieving team targets or rewards for completing projects successfully as a team.

Benefits of Well-Designed Incentive Programs

Well-designed incentive programs are a storehouse of benefits both for employees and the organization, which we will be discussing ahead:

• Increased Productivity: Aligning incentives with productivity goals is a way to keep employees motivated to work harder and deliver higher performance.

A comprehensive study reported that incentive programs running for a year or more led to an average 44% increase in performance.

• Achieving Specific Business Goals: When you tie incentives directly to business objectives (project deadlines or sales targets), you help your company achieve those goals while simultaneously fostering long-term growth.

• Skill Development: Non-monetary incentives, such as training opportunities and mentorship programs, are the most effective means of helping employees develop new skills and advance in their careers.

• Driving Desired Behaviors: Well-designed incentives have the potential to promote and encourage desired behaviors (such as teamwork, innovation, or customer satisfaction) that contribute to the overall success of the organization.

Best Practices for Implementing Incentive Schemes

The success of incentive programs highly relies on their implementation. Hence, abiding by its best practices is the key. Let’s dig in:

• Clear Goals: Be very clear about the goals you want your employees to achieve from the beginning. Communicate the goals without leaving any room for doubt.

• Attainable Targets: Set realistic and attainable targets that do not make employees feel overwhelmed or discouraged. Instead, the targets should be such that they boost employees’ motivation.

• Transparency: Be transparent about how the entire incentive system works. Shed clarity on how the incentives are earned and what behaviors are taken into consideration.

• Alignment with Company Values: Incentives should be offered in a way that reinforces the company's core values and long-term vision. Ensure that employees’ efforts are rewarded by simultaneously aligning them with the company’s mission.

The Power of Workplace Rewards: Building a Culture of Recognition

Rewards are not just limited to recognizing achievements; they play a fundamental role in creating a culture of recognition within an organization. Let’s delve into an in-depth discussion to grasp the true potential of rewards and how they can be effectively implemented.

Types of Meaningful Workplace Rewards

Here are some examples of impactful rewards that you can utilize by aligning them with individual preferences and organizational goals.

• Public Recognition: This involves acknowledging an employee’s achievements in front of their team or across the company, such as during town hall meetings or across company-wide communications. Public recognition boosts pride among employees and reinforces the behavior that earned them recognition in the first place.

• Personal Appreciation: A personal "thank you" or note of appreciation can go a long way in boosting employee motivation. Personal acknowledgment helps build trust and strengthen individual relationships.

Source: Vantage Recognition and Rewards

• Spot Awards: These awards are given on the spot to employees for demonstrating exceptional performance or going above and beyond. The specialty of Spot awards is that these are immediately and spontaneously conferred without delay, making them more impactful.

Source: Vantage Recognition and Rewards

• Career Development Opportunities: Growth-oriented opportunities such as workshops, mentorship, and additional training serve as a reward for employees seeking to advance their careers.

• Unique Experiences: Rewards need not always be tangible or materialistic. Instead, you can offer unique experiences, such as a vacation, company retreat, or tickets to an event, that can make employees feel valued and give them experiences to reflect on.

• Personalized Gifts: Customizing gifts to an employee's personal preferences can be a unique approach to rewards. Whether it is a gift card, a hobby-related item, or something tailored to their interests, it demonstrates thoughtfulness and recognition of individual tastes.

Benefits of a Strong Reward & Recognition System

A well-structured rewards and recognition program is a repository of benefits for both the employees and the organization. Let’s understand them further:

• Improved Morale: Regularly recognizing and rewarding employees directly boosts employee morale. This, in turn, makes them feel appreciated and motivated to perform their best.

• Employee Retention: Rewards provide a sense of validation for work, making employees feel valued. As a result, they are inclined to stay with the company, thereby reducing turnover and the associated costs of hiring and training new staff.

• Loyalty: When employees witness that their contributions are truly appreciated and acknowledged, they feel the urge to swear their allegiance to the organization.

• Positive Company Culture: Recognition woven into the organizational fabric can possess immense power to cultivate a positive and inclusive workplace culture. Here, employees support each other and strive for collaborative success.

• Reinforcing Values: Rewards are the most effective means of reinforcing behaviors that align with organizational goals, such as teamwork, innovation, or customer service excellence.

Strategies for Effective Employee Recognition

While creating an effective employee recognition strategy, all you need to consider are certain key factors and prioritize them. They are as follows:

• Timeliness: Immediately recognizing employees after an achievement makes recognition feel more relevant and impactful. Delayed recognition can lose its charm.

• Specificity: Try to be specific about the employee’s role in deserving recognition. Instead of going for a generic "Great job!", say something like, "Your quick thinking on the project saved the client’s deadline and made a huge impact." This makes a difference.

• Sincerity: Add a touch of authenticity while recognizing and not for the sake of it. Employees can really spot the difference. Authentic appreciation goes a long way in building trust.

• Fairness: Ensure that recognition is distributed equally, giving employees an opportunity to get recognized for their efforts. This helps in building a sense of fairness by keeping favoritism at bay.

• Making It Visible: Make recognition visible across the team or company. Ensure to highlight achievements in team meetings, newsletters, or company-wide emails. This enables the entire organization to celebrate one another's successes.

This is where the need for recognition and reward platforms comes into the picture. Platforms like Vantage Recognition and Rewards help streamline and simplify the entire recognition and reward process, making it easy to publicly recognize employees with a visible recognition feed and track achievements in real-time.

The Sweet Spot: Integrating Incentives and Rewards for Maximum Impact

From our earlier discussion, you have definitely garnered a solid understanding of both incentives and rewards, their power, and their differences. But here’s an intriguing thought: how about we blend both tools?

Do you know that combining both can heighten their potential to achieve remarkable results?

By adopting a balanced approach that integrates the two, you can create a comprehensive motivation strategy that ensures employees remain engaged, focused, and motivated across different stages of performance.

As discussed above, the key here is to understand that incentives focus on motivating employees to achieve specific goals, and rewards, on the other hand, are recognition for accomplishing those goals. When you blend these two, employees can get the benefit of both.

To illustrate this further, I will highlight an example scenario. This will help you understand better.

Example Scenario:

Let’s take the example of a sales team. A company might set up an incentive where the team gets a bonus if they are able to meet a sales target for a particular quarter. This incentive ignites the team to work harder, collaborate, and achieve results.

Once the target is met, the company can also reward the top performer with recognition, such as "Employee of the Quarter," or offer an exceptional experience, a team lunch, or a personalized gift.

As you can see, the incentive spurred the effort and action to meet the target, while the reward recognized and celebrated the top performer’s exceptional strategy and execution.

This combination not only drives results but simultaneously reinforces the value of teamwork, strategy, and individual contribution.

The Psychological Underpinnings: Why Incentives and Rewards Influence Behavioral Changes

We have established the fact that incentives and rewards are powerful tools for motivating employees. But have you tried to ponder why they work?

To understand this, we must go beyond surface-level observations and examine the underlying psychological factors at play.

It will help you know how these motivators drive behavior and the kind of impact they create on long-term employee engagement and performance.

Extrinsic vs. Intrinsic Motivation: Finding the Balance

At the crux of incentives and rewards lies the concept of motivation. It is categorized into two types: extrinsic and intrinsic.

• Extrinsic Motivation: This type of motivation is particularly driven by external factors, such as incentives or rewards. For example, an employee can be motivated to meet a sales target because of the monetary bonus or a prize attached to it. This happens to be the primary focus of most incentive and reward programs.

• Intrinsic Motivation: In contrast, intrinsic motivation emanates from within. It’s driven by personal satisfaction, enjoyment, or fulfillment of a task. For example, an employee may take pride in delivering excellent performance for it values and seek joy from doing it well rather than seeking external validation.

It has been observed that organizations are more prone to tapping into extrinsic motivation. But they mustn’t undermine intrinsic motivation.

If employees are only drawn towards external rewards, they may end up losing sight of the internal satisfaction that erupts from contributing to meaningful work.

Well, in the long run, a balance between both motivations is the key to sustainable engagement.

Key Behavioral Theories at Play

Let us delve into some behavioral theories to understand better why motivators work.

1. Operant Conditioning (B.F. Skinner)

One of the foundational theories of behavioral psychology is B.F. Skinner’s operant conditioning. The theory states that behaviors can be shaped by positive reinforcement.

• Positive Reinforcement: This involves rewarding a desired behavior to increase its repetition. In the context of employee motivation, rewards take the form of positive reinforcement, reinforcing the behaviors that contribute to organizational success.

• The Promise of Reward (Incentives): Incentives, on the other hand, tend to tap into the anticipation of a reward. The promise of a future reward appeals to employees and motivates them to perform tasks in a way that aligns with company goals, thereby proactively shaping behavior.

2. Expectancy Theory (Victor Vroom)

Developed by Victor Vroom, expectancy theory is built on the belief that motivation is driven by the expectation that effort will lead to performance, which, in turn, leads to a reward. This theory is encapsulated in the formula:

Effort → Performance → Reward

Employees are generally motivated to put in more effort when they believe their effort will contribute to a successful performance and, ultimately, earn them a reward. In this model, incentives are the key motivators that create the belief that effort is met with rewards.

3. Self-Determination Theory (Deci & Ryan)

Developed by Deci & Ryan, Self-Determination Theory (SDT) emphasizes the importance of autonomy, competence, and relatedness in fostering intrinsic motivation. The theory states that when employees feel they have control over their actions (autonomy), are skilled enough at what they do (competence), and feel connected to others (relatedness), they are more inclined to be intrinsically motivated.

Potential Pitfalls and How to Avoid Them

Irrespective of how powerful these tools are, they do come with their own set of potential risks. Having said that, organizations must be aware of these pitfalls and address them so that their motivation strategies do not backfire.

• The Over-Justification Effect: This occurs when external rewards, like bonuses or recognition, are overly prioritized and replace internal motivation. Employees tend to lose their intrinsic drive if they focus solely on the rewards, leading to diminished motivation once the rewards are removed. To avoid this, organizations must be cautious to prevent over-rewarding behaviors that employees find fulfilling.

• Unhealthy Competition or Focus on Metrics Over Quality: Excessive competition for rewards among employees can also lead to adverse outcomes, such as unhealthy rivalry, lack of teamwork, or unethical behavior. Additionally, an overemphasis on specific metrics can also shift employees' focus away from attaining overall quality and long-term success. Ensuring a balance between recognition and collaboration is key here.

• Ensuring Fairness and Equity: One of the significant risks in incentive and reward systems is the unfair distribution of rewards. If employees perceive that rewards and incentives are distributed unfairly, it can lead to dissatisfaction and create a toxic work environment. Transparent, equitable, and inclusive recognition systems are central to maintaining trust and morale.

Optimizing Your Incentive and Reward Strategy with a Rewards and Recognition Program

Having a robust incentive and reward strategy is easier said than done. It requires a proper approach and the right set of tools to help you optimize your strategy. Having said that, platforms such as Vantage recognition and rewards can come as your savior to put your incentive and reward strategy on track. This platform has the potential to empower your company in designing, managing, and keeping track of effective programs that are likely to drive engagement, performance, and loyalty.

• When you recognize someone for their contribution, the platform enables you to incentivize it with the help of redeemable points. These points can be redeemed through gift cards from a range of vendors.

• The customizable reward catalogs enable you to offer a wide range of options, including corporate offers, cashback offers, flash deals, merchandise, and experiences. The automated milestone awards ensure that you can celebrate your employees’ years of service through a customized catalog of rewards.

The platform, however, goes beyond incentivizing and rewarding. It offers robust analytics that helps you keep track of employee participation, measure engagement, and derive actionable insights to refine your strategy continuously.

This data-driven approach simplifies the entire process, brings in more visibility, and ensures fairness across your organization.

FAQs

Can something be both an incentive and a reward?

Yes, sometimes the lines blur, or one can lead to another.

Which is more effective: incentives or rewards?

It depends on the goal and context; a mix is often the best approach.

How do I choose the right incentives/rewards for my team?

Consider company culture, employee preferences, and specific goals.

How can technology help manage employee recognition and incentives effectively?

Lead back to your platform's benefits: scalability, tracking, personalization, and fairness.

This article is written by Riha Jaishi, a content marketing professional at Vantage Circle specializing in recognition and rewards. As she draws from her years of experience in employee recognition and rewards, she continues weaving narratives through her thought-provoking blog posts. For any related queries, contact editor@vantagecircle.com