How Employee Incentives Work

In the early 1980s, Microsoft began hiring hundreds of new employees to feed its growing software empire. For years, the start-up company had fewer than a dozen employees. But now, with a slate of new products on the horizon, it needed to fill its ranks with new programmers. The hours would be long and the pay would be low, applicants were told, but as Microsoft employees, they would be assured a generous package of stock options. Hundreds of new employees took them up on the deal, and over the next 10 years, they quickly saw their initial stock offerings blossom into multi-million dollar fortunes. By 2000, it was estimated more than 10,000 employees had become "Microsoft millionaires" as a result of the stock policy [source: Bick].

Many former Microsoft millionaires still say that it felt like they won the lottery. In fact, they were simply reaping the benefit of one of history's most lucrative employee incentive plans. From their first day of work, Microsoft employees knew that their compensation would be directly tied to the success of the company. The harder they worked, the faster the company grew -- and the faster the company grew, the more valuable their stock became.

Of course, not all companies are subject to that kind of meteoric growth. That's why many choose to implement wage incentive plans. Under these plans, every employee is paid the same base rate, but exceptional employees are given a bit extra come payday -- a "bonus."

To be effective, experts recommend that bonuses be equal to at least 10 to 30 per cent of annual income. If an employee makes $50,000 a year, for instance, he or she should be rewarded with nothing less than $5,000 [source: Lowenberg]. Top employees need to be shown that they're a cut above the rest, and if their wage is topped up with anything less than 10 per cent, it could be seen as nothing more than a token gesture.

Wherever possible, bonuses should be awarded based on measurable performance indicators, such as "number of sales closed" or "number of employees served." Many companies will also combine incentive programs with increased training. That way, not only do employees know how to improve their performance -- they're also the given the skills to do so.

Even if employers can't swing the high costs associated with a wage-based incentive plan, management experts agree that any incentive program is better than none at all [source: Daniels]. A gift certificate, an extra day off -- even a phone call. In the end, an incentive plan is all about recognition. As long as employees feel that their hard work is getting recognized, they'll be prompted to keep going.

Turn the page to find out why flight attendants can make rock-bottom wages and still love their jobs.

Low pay. Cramped working conditions. Unruly passengers. At first glance, flight attendant would appear to be one of the worst jobs on the planet. There's not much room for advancement; work days can stretch as long as 14 hours [source: Reiter]. And the pay is notoriously low. In fact, starting flight attendants could probably make more money as a McDonald's shift manager [source: Reiter].

Still, every year, thousands of men and women sign up to become flight attendants. What remains, however, is the allure of travel. Flight attendants may work long, difficult hours, but when they clock out, they could find themselves anywhere -- from Paris to Dubai. In the words of one flight attendant, "I just can't believe someone is paying me to be somewhere so amazing" [source: SkyWaitress].

Whether employees are serving coffee at 20,000 feet or selling car insurance, travel is a huge motivator. Breathing new air, tasting new food, seeing new places -- and who doesn't like to think of themselves as a "jet setter"? Higher wages are one thing, but if employees can be tantalized with "incentive travel," they'll be scrambling to become top performers.

For many companies, incentive travel takes the form of an annual trip that only the company's top employees are allowed to attend. It could be a week at a Caribbean resort, a cruise or a whirlwind tour of New York City -- whatever it is, companies will usually strive to make it as desirable as possible. They offer trips that their employees can't always buy themselves: style, entertainment and ample supplies of beverages.

It may sound expensive, but if done right, a travel incentive plan can end up being much cheaper than a similar-priced wage-incentive plan. A $5,000 cash bonus can easily get overlooked among an employee's pay stubs. Give an employee a $5,000 vacation, on the other hand, and he or she will return with starry eyes.

Besides, a good incentive travel program will pay for itself: Whatever money a company puts into a trip will come back to them in terms of increased employee performance. There's also benefit to having a group of top employees relaxing in the same place. They'll network, they'll build friendships, and they may even brainstorm new ideas. Who knows how many big ideas have been spawned over martinis at the hotel bar?