Extrinsic rewards are external incentives provided to employees as a form of encouragement or compensation for completing a task or achieving certain goals. Extrinsic rewards are often, but not always, financial in nature.

The Importance of Extrinsic Rewards

Extrinsic rewards play a crucial role in motivating employees and shaping their behavior. They act as tangible recognition of an individual's efforts and achievements, making them feel valued and appreciated.

One of the key reasons these rewards are important is that they can be used to align individual goals with organizational objectives. By rewarding behaviors and outcomes that contribute to the company's success, employers can guide their workforce toward desired results. This is especially effective in large organizations where personal motivations might not always align with company goals.

Extrinsic rewards can also help attract and retain talent by making the company more appealing to potential employees. Similarly, these rewards can help retain top performers who might otherwise seek opportunities elsewhere.

Intrinsic vs. Extrinsic Rewards

Intrinsic rewards are internal, psychological rewards that employees get from doing meaningful work. They are self-administered and involve feelings of satisfaction, accomplishment, and fulfillment. On the other hand, extrinsic rewards are external incentives provided by the organization. They include tangible benefits like salary increases, bonuses, promotions, or awards; as well as social recognition like employee-of-the-month programs. Some of their key differences are:

• Nature of the reward: Extrinsic rewards originate from external sources, such as compensation, bonuses, and awards. Intrinsic rewards originate internally within an employee, like satisfaction or feelings of achievement.
• Source of motivation: The motivation of extrinsic rewards comes from external sources, driving employees to perform well to obtain these rewards. For intrinsic rewards, the motivation is driven by an employee’s own internal aspirations, like the satisfaction from doing their job well.
• Impact on performance: Extrinsic rewards can boost short-term performance but risk undermining long-term motivation if over-relied on. Intrinsic rewards are linked to long-term positive effects on performance, motivation, and job satisfaction.

Pros and Cons of Extrinsic Rewards

There are both advantages and disadvantages to utilizing extrinsic rewards within an organization.

Pros

• Extrinsic rewards can provide immediate motivation to complete a task or achieve a goal. For instance, bonuses can motivate employees to reach targets.
• They can enhance performance, especially for straightforward, routine tasks where the path to the goal is clear.
• Extrinsic rewards such as bonuses or awards are straightforward to implement and understand.
• Providing extrinsic rewards shows that the organization values its employees and their efforts, which can help improve commitment to the company.

Cons

• Over time, the effectiveness of extrinsic rewards can diminish, requiring higher rewards to achieve the same level of motivation.
• If not managed properly, extrinsic rewards can create unhealthy competition, envy, or feelings of unfairness among employees.
• Employees may come to believe that they should always receive a reward for certain types of behavior or reaching certain goals, which means they may not be motivated in areas without them.
• Relying heavily on extrinsic rewards can undermine intrinsic motivation – the internal desire to perform a task for its own sake.

Extrinsic Rewards Examples

Some common examples of extrinsic rewards in the workplace are:

• Monetary rewards: These are some of the most common types of rewards and may include things like salary increases, bonuses, and profit-sharing.
• Benefits and perks: Benefits like extra vacation days, more flexibility around working from home, or even things like health insurance.
• Recognition and awards: Employee of the month awards or giving public recognition to employees who have reached important goals.
• Gifts and prizes: Physical items such as gift cards, tickets to events or experiences, company merchandise, and more.
• Professional development opportunities: Training, workshops, or educational courses.

Using Extrinsic Rewards in the Workplace: Tips for HR

If you’re planning to use an extrinsic reward structure in your workplace, there are several key tips to keep in mind:

• Clearly define what your rewards are and the criteria for earning them: Employees should understand what is expected of them and what they can do to earn these rewards.
• Align the rewards system with your organizational goals: Ensure that the rewards offered are in line with the company’s objectives. For instance, if teamwork is a priority, rewards should be structured to promote and recognize collaborative efforts.
• Offer a variety of rewards, including non-monetary incentives: Employees may not all be motivated by the same things. Tailor and personalize rewards where possible to resonate better with employees.
• Ensure fairness and transparency: Apply the reward system consistently across all departments and levels. Inconsistency can lead to perceptions of favoritism and demotivate employees.
• Balance extrinsic rewards with intrinsic ones: While extrinsic rewards are effective, they work best when combined with intrinsic motivators like meaningful work, opportunities for growth, and positive workplace culture.
• Regularly review and update the rewards system: As the company evolves, so should its reward system. Regularly assess the effectiveness of the rewards and make adjustments as needed. This also keeps the program fresh and engaging.