“What are Incentives? Why are they important? Illustrate and explain examples.”
The term “Incentive” in the economy could be a general term; the term, which is important in the different sphere of the life, in economics if one does not know that, what incentives are then one, can never understand that what is economics. However, an American economist says “Economics in it’s entirely is a study of people’s response to incentive”. The term incentive is related to the economies, so it is a clear fact that incentives are central to do the study from the economical point.
Incentives could be defined as the benefits, rewards, or something which motivates you to do something, there could be the own decision and action of a person involves in the term. No one does something, for no reason, however, trade and economies can be related to the term incentive because when, a person or a customer buying anything, he/she have the concepts or the benefits of the product in the mind, so every action is done can be called as a human nature. Human nature can be described as the wish for something that is always related to the study of economies.
Types of Economic Incentives with Examples
The incentives help the people to behave in a certain way, there are the preferences, desire, and need associated with the incentive, economic incentives can be related to the preferences, economic disincentives can discourage the behavior of the people, taxes can be a good example of disincentives, as the people never feel happy, in paying the taxes. The product and services in the economy can be more expensive, there are the extrinsic incentives and the intrinsic incentive that are also related to the growth of the economy, as both are the accumulation of the wealth.
Extrinsic incentives can be related to the rewards, which are given in the form of the bonuses, output or profit, it is also related to the social status and the power, it depends on the power of the people, however, these incentive are better and can work better as compared to the other incentives. Moreover, the intrinsic incentives are the incentive related to the internal, which can be related to psychological perspectives. Example getting the satisfaction from the work, the intrinsic incentives gives motivation to the people so they feel themselves the important part of the organization, they can be motivated by managers, they can be given the appreciations on the work they have done.
Financial incentives are the incentives that are more dominant, in the economic field; the employment of any employee is related to the remuneration and the salaries, to win a certain amount of money. The employees of the company may be performed in the better way, example, if there is the idea of the product promotion, then employee could be called to do the promotion and in that sense the incentive, can be given to him in the form of money. However, to promote those products or the services, the employee will work effectively to win a certain amount of money.
Moral incentives are also there, which can also motivate the people to do good in the society, however, it could be related to the good and bad of the society, there are the moral actions in the moral incentives. Moreover, people do not do bad to get the moral incentives and these incentives can be related to the term, welfare evolution, as the people will do the effort to bring the welfare in the society. People do not behave in the bad manner or the things where there are bad consequences so welfare evolution can be bought in the society and organizations can be effected through moral incentives (Acs, Szer, & Autio, 2015).
You may also study: Types of Group Incentives Plans and Gain Sharing Plans
Importance of Incentives
Incentives can be described as the inducement, they can be related to the demand and supply, cost and benefits and the scarcity, however, there is the need to identify that what rewards should be given to the workers. Intrinsic and extrinsic both rewards are equally important, but there is the need to do the analyses, that how could workers and employees can be satisfied. Incentive programs are the motivational tool and there could be the higher degree of the productivity, if incentives are given in an effective way, it can increase the earning of the companies, this, economies can also give effective results.
The importance of incentives should be focused, there is the need to promote the teamwork, as the teamwork can only be promoted if the incentives are there, because incentives can promote the collaboration, and everyone can work hard to get those incentives. There will be competition in the team members that who is performing better, and who is taking the maximum advantages of the incentives. However, to boost the moral economically, an incentive can play important role in any field of the economies. The service level can be enhanced and people can be satisfied (Wheelan, 2010).
Reciprocity can also be there in the organization, as the company gets the benefits from the employees and the employees get the benefits from the company, however, people can become rich and when the people of any country are rich, they spend more in the economy and economy of the country get strengthen. Moreover, there is need to consider all the aspects of the incentives.
Lehman Brothers and Bear Stearns Study
Incentives can be given by the organization or the person, to make the other person happy, however, the organizations give the incentives to the worker, so that there could be the efficiency in their work and they can perform better. When employee know that he is going to evaluate and going to get on what he has performed, his performance can be automatically improved, moreover, there are the various studies on the incentives and the employee’s performance. A study of 2009 at the universities indicates that companies pay the considerable incentives to the employees and executives to take the risk. Lehman Brothers and Bear Stearns have the top executive teams and they have earned about $1.4 billion and $1 billion, in the form of the bonuses, cash and equity (Kille, 2010).
They have anticipated that the firms are getting benefits because the employees are happy and it is important to give benefits to the employees so that there could be productivity and profitability in the organization, the companies faced the losses because they did not anticipate the risks. The executives may fail to manage the risk, there is the need to impose the limits in the sales executives. Incentives can be related to the people and change, positive change can be brought in the organization.
In the organizations, there is need to give the incentives on the fairness basis so that employees can be motivated. There should be non-discrimination principle follows in the organizations, there should be no discrimination based on the regional, ethnic, background differences. Here come the responsible of the managers to give the incentives with the fairness, if they want the economic stability and want to run the economic functions smoothly, then there is the need to think of the employees and need to give the incentives based on fairness (Prud’homme & Song, 2016).
However, there should be no biases in the organizations, because if the employees feel the discrimination or they come to know that they are not given the incentives on the fair basis, then they can leave the organization and productivity can be affected. However, all the activities of the companies or industries are related to the economic activities because when the companies or industries get strengthen in the market , the economy of the country can also get strengthen and better results in growth can be there.
Market liberalism and liberalism, regarding to the liberty and equality for the people or employees can also be related to the fairness of the incentives as there is free market economy, and people rights are concerned, so the companies need to protect the human rights, so there could be the ethnicity or culture of market liberalism. In this way, there will be the market growth and people will work effectively, in order to get the benefits, organizational performance will be increases and the support will be given to the market economies and the personal liberty regarding human rights can be focused. To promote the worldwide philosophy of the liberalism the rights need to be promoted.
Economic Development Incentives
Economic development incentives are the incentives, which is taken by the government from the people of the country, they are may be in the form of tax, such incentives are taken to give the ultimate advantages to the people, however, the local government can also indulge in the programs, related to the economic development incentives.
There are the works in the country or cities; collective action problems are being focused in the countries through indulging the economic development, through taking the incentives, the work is done in the remote areas of the city or country, however, the poor areas or poor populations focused through concerning the economic development incentives. Through focusing on the economic development incentives there can also be the emphasis on the big push model, as there will be the welfare of the economy. It is the need of the citizens because countries are because there is the increase in the unemployment level, the poverty is there, however, development incentives can play a role in attracting the businesses, so that maximum job opportunities can be there in the country (Bardsley, 2010).
The main purpose of the economic development incentives is to make the country prosperous, there is focus on changing the condition of the people who are living in the poverty, and however, however, there are the long-term and short-term incentives plans, so that people of the country can be helped in the better way. Infrastructure can be the main target of the economic development incentives, the ultimate benefits if the incentives are there, in the country, for the people.
Incentives play an important role in the economy of the country; there can be benefits if the employees in the companies or industries work better for the incentives. However, economic development incentive can also be there and the country can be improved.
- Acs, Z. J., Szer, L., & Autio, E. (2015). Global Entrepreneurship and Development Index 2014. Springer.
- Bardsley, N. (2010). Experimental Economics: Rethinking the Rules. Princeton University Press.
- Kille, L. W. (2010, April 7). Executive compensation at Bear Stearns and Lehman Brothers, 2000-2008. Retrieved October 15, 2016, from http://journalistsresource.org/studies/economics/banks/executive-compensation-at-bear-stearns-and-lehman
- Prud’homme, D., & Song, H. (2016). Economic Impacts of Intellectual Property-Conditioned Government Incentives. Springer.
- Wheelan, C. (2010). Introduction to Public Policy. W. W. Norton & Company.