Pay or incentives, which is the best motivator for employee performance?

By Rejoice Esi Asante (PhD)

The debate as to whether or not pay, is an adequate motivator for employee performance has been on for years. There are several schools of thought on this including those who think that pay is the ultimate motivator for performance, those who believe that incentives are the best motivator and those who contend that both pay and incentives combined are the best motivators.

Human needs are insatiable. How much is enough pay or how much money can suffice for human needs is a difficult question and many managers have been baffled by it over the years. One would have concluded that a high salary should produce better performance but empirical research shows otherwise. Indications are that the link between motivation, compensation and performance are very complex.

Money may be important for attracting talent and motivating employees and also promoting performance, it may not be able to meet other personal and internal needs that motivate people to perform beyond their immediate tasks. The purpose of this article is to examine the main arguments and then provide empirical tips to determine the best course of action.

Motivators and employee performance

Motivation is the internal drive or external incentive that pushes people to take action. It explains why people want to work, to achieve a goal, earn a reward, or find meaning in their role. Highly motivated employees are more likely to take initiative, stay loyal to a company, and actively seek out opportunities for personal growth (Kushniruk, 2025).

Motivation is responsible for variations in intensity, persistence, quality, and direction of ongoing behaviour. It describes the psychological processes “that underlie the direction, intensity, and persistence of behavior or thought.

Over time, various theories have emerged to explain what motivates humans in a general sense. However, as economic needs evolved, organizational psychologists began exploring intrinsic motivators, personality traits, goal setting, and self-determination.

There is no single best motivator when it comes to employee performance because it is driven by a combination of factors. There are intrinsic motivators, based on personal values and higher-level needs such as recognition and respect, meaningful work, growth and development, autonomy and trust.

There are extrinsic and social motivators, tied to external factors such as compensation, work conditions, and job security, such as the desire to learn or grow professionally, fair compensation, flexible work arrangements, and supportive work environment and relationships, collaboration, communication, and team dynamics, respectively (Kushniruk, 2025).

There are financial and non-financial motivators in the form of incentives. While financial motivators / incentives like bonuses or salary increases, may offer quick wins, they’re not the only answer.

In fact, relying solely on monetary rewards can sometimes lead to short-term results without addressing the deeper needs of employees. On the other hand, non-financial incentives, like career development opportunities, recognition, and work-life balance, play an important role in maintaining long-term engagement and loyalty (Nagral, 2025).

Employee performance refers to how well (or poorly) employees fulfills their duties and reach their goals. (Visier, 2025). High performers achieve goals faster for organisations, while low performers produce the opposite effect. Motivation therefore, is a key driver of employee performance, where motivated employees are more productive and satisfied.

It impacts performance by increasing productivity, reducing turnover, improving quality and higher job satisfaction. Noorzad (2024) reports that work motivation has a positive impact on employee performance. Good work motivation increases employee performance, and employees perform and improve well, if they are well motivated.

Arguments for and against pay as motivator

There are several arguments for pay or money as the best motivator depending on the circumstances of employees. In line with Maslow’s Hierarchy of needs, pay or salary is necessary to meet the basic needs of individuals and to ensure security, create a sense of belongingness, socialization and self-esteem.

In reference to Herzberg’s theory of motivation, competitive pay is a hygiene factor where employees perceive their compensation as fair and adequate to avoid dissatisfaction. It provided for essential needs like food, shelter and well-being.

Organisations use adequate pay to attract top talents, drive short-term performance, offer attractive compensation packages to recruit high quality candidates in competitive markets, offer incentives like bonuses, commissions and performance-based pay. Additionally, organisations use competitive pay as a signal for value, a sign to employees that organisations values their skills and contributions.

Much as there are arguments for pay as a motivator, there are also arguments against it. For instance, the effect of a pay raise or bonus is likely to wears off quickly as it becomes an expected entitlement rather than a special incentive for short-term effects. There could also be a decrease in intrinsic motivation with over-reliance on external rewards rather than quality and meaning of work.

It also leads to unhealthy competition and hence a toxic work environment, discouraging collaboration and teamwork, leading to perceptions of unfairness that can demotivate staff.  Meta-analyses of experimental studies indicate that financial incentives are positively related to performance (Kim et al., 2022) and a general acceptance of the theoretical principle that incentives drive performance.

Gagné, et al. (2023), observe that while performance is an important outcome of incentives, organizations also have a duty to consider the well-being of their employees. Well-being has been rarely examined as a direct outcome of financial incentives despite being an important organizational and societal outcome (Tay et al., 2023).

Arguments for and against incentives as motivator

Incentive-based compensation according to Sabesan (2025) is a powerful strategy for driving rapid growth by linking performance, but it comes with both significant benefits and potential drawbacks. It boosts employee motivation and retention by rewarding measurable achievements, align individual goals with business objectives to improve productivity, risk promoting unethical behaviour or short-term thinking if plans are poorly designed and foster sustainable performance by balancing rewards, ethics, and transparent communication.

The incentive motivational theory suggests that reinforcement, recognition, incentives and rewards, motivate people. The theory also proposes that people may display certain human behaviors to achieve specific results, incite particular actions, or receive a reward. Incentive plans are especially common in sales, operations, and leadership roles where outcomes can be easily tracked and measured (Sabesan, 2025).

Other incentives in the workplace include bonus, based on performance levels over a period, praise, positive reinforcement and feedback about performance which may build relationship, promote trust, providing opportunities like paid training or continuing education, opportunity for higher-level career advancement, pay raise or salary increase, employees compensation for taking days off or giving additional vacation days.

The main objective of bonus incentives is to increase and maintain employee’s productivity, encourage positive environment for team collaboration, and research shows that the improvement can be up to 40% (Mirmotahari, 2022). It encourages higher performance, builds a culture of accountability and offers flexibility in rewarding contribution while increasing loyalty to the company.

Although incentive-based compensation offers many benefits, it also comes with significant risks. It can create unintentional behaviours that can harm both employee morale and organizational culture. It can encourage unethical behaviour, undermine team collaboration, a focus on short-term results, misalignment with intrinsic motivation (Sabesan, 2025). Employees may be pressured to meet targets they otherwise cannot do without breaking the rules. This could lead to unethical acts including dishonesty, fraud, and poor decision-making. These unethical actions could threaten the integrity of both the employee and the organization (Mirmotahari, 2022).

Arguments for and against using pay and incentives as motivators

Using pay and incentives as motivators presents a balanced set of arguments, with potential to drive performance but also significant drawbacks if not implemented carefully. Combining intrinsic motivators like job satisfaction and purpose with extrinsic factors like fair compensation, flexible work, and specific rewards are most effective, argued those who hold this believe. Using both motivators will increase performance and productivity, attracting and retaining talent, alignment of goals, clear recognition of values, and fulfillment of basic needs.

On the other hand, using both has disadvantages as well. It can undermine intrinsic motivation, particularly for tasks requiring creativity or complex problem-solving, short term focus, on immediate goals that yield a bonus. Other arguments against using both pay and incentives include fostering unhealthy competition, which discourages collaboration, teamwork, and knowledge sharing, potential for unethical behaviour, to secure the reward, as seen in historical corporate scandals, perceived unfairness and conflict, leading to perceptions of bias and unfairness and the effect of diminishing returns.

Contemporary views

Gagné et. al, (2023), observe that in the contemporary world of work, people need money to fulfill many needs and having secure employment and income therefore matters. To the extent that people can improve their life circumstances through money, it can help fulfill both survival and psychological needs (Di Domenico & Fournier, 2014). However, placing too much weight on compensation to motivate performance relative to other means to motivate workers, such as providing autonomy through good work design and giving adequate feedback to enhance employee feelings of competence, have been proven to be productive.

Contemporary views of employee performance have shifted from traditional annual appraisals to a continuous, forward-looking, and people-centric approach, aimed at ongoing development, engagement, and alignment with organizational goals. This is coupled with a shift from evaluation to development with a focus on growth, encouraging and adopting coaching styles, empower ownership, continuous and real-time feedback and a more comprehensive and less biased view of performance.

Additionally, there is a holistic definition of performance including beyond task performance, well-being and engagement and a focus on how (behaviours, communication and collaboration) and what was accomplished (results / outcomes), aligning actions with core company values.

Suggestions and Tips for Employee Performance

Researchers have suggested the need to ensure compensations that are fair, whether pay or incentives and also reward the right behaviours without creating an incentive for related unwanted behaviours that discourage teamwork. There is a need to create direct links between employee’s actions and the eventual reward and use of goals that can be readily, objectively measured.

Organisations can offer development opportunities to employees who show promise. and invest in training and career development (Miller, 2015; Mirmotahari, 2022). To avoid the pitfalls of using either pay or incentives, organisations should combine monetary and non-monetary rewards, ensure targets are realistic and transparent, review incentive outcome quarterly, get feedback from managers and employees, use team and individual components in plans (Sabesan, 2025).

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