Advantages and Disadvantages of Reward Systems for Employees: Types, Benefits, and Challenges

Keeping employees happy and motivated is no easy task. While good salaries and job perks matter, they're not always enough. Employees want to feel valued for the work they do. That's where reward systems come in.

Employee reward systems are a great way to recognize hard work, boost morale, and encourage employees to perform their best. But here's something that no one tells -
Not all reward systems work the same for every business. Some can motivate employees, while others might create problems like unhealthy competition or extra costs.

So, how do you get it right? In this blog, we'll break down the advantages and disadvantages of reward systems for employees, explore the different types, and share tips on building a system that truly works for your team.

Why Understanding Employee Reward Systems is Crucial for Business Success

Reward systems aren't just about handing out bonuses or giving a pat on the back. They play a significant role in shaping how employees feel about their work and workplace. When done right, they can transform an ordinary job into something employees are genuinely passionate about.

Let's take a moment to think about it. When people know their hard work won't go unnoticed, they're more likely to stay motivated, loyal, and productive. On the flip side, when recognition is missing, even the most talented employees may start looking elsewhere.

Source

A well-structured reward system shows employees that the company values what they achieve, and how they achieve it. It encourages the right behaviors, boosts morale, and strengthens company culture.

Ultimately, understanding how reward systems impact employee satisfaction and business performance can give any organization a competitive edge.

Types of Employee Reward Systems

Employees find motivation in different things. Some value financial incentives, while others prefer recognition or opportunities for growth.

Therefore, businesses need to understand the different types of reward systems and how they impact employee motivation and performance.

Let's break down the most common types:

1. Points-Based Reward Systems

Points-based reward system allows employees to earn points for meeting goals, hitting milestones, or demonstrating desired behaviors. Over time, these points can be redeemed for rewards like gift cards, merchandise, or experiences.

Advantages:

• Encourages consistent performance: Employees are motivated to maintain performance over time rather than just hitting short-term targets.
• Easy to track and measure progress: The accumulation of points provides a clear indicator of achievements.
• Can be gamified: Adding game-like elements, such as leaderboards, can boost engagement and make work more enjoyable.

Disadvantages:

May lead to short-term focus: Employees might concentrate on earning points rather than focusing on long-term development.

Risk of demotivation: Those who fall behind might feel discouraged if they can't catch up to top performers.

Use Case:

Perfect for companies looking to promote continuous improvement and sustained engagement, especially in roles where regular achievements are expected.

2. Performance-Based Reward Systems

Performance-based reward systems recognize employees based on specific achievements, such as hitting sales targets, completing projects, or exceeding performance metrics.

In this system, rewards can include bonuses, promotions, or other performance-linked incentives.

Advantages:

• Directly ties rewards to results: Employees know exactly what they need to achieve to be rewarded.
• Motivates excellence: Clear goals push employees to excel and take ownership of their performance.
• Encourages healthy competition: Employees are driven to outperform, boosting overall productivity.

Disadvantages:

• Risk of unhealthy rivalry: Too much focus on individual performance can create competition that undermines teamwork.
• Overlooks collaboration: Employees might prioritize personal achievements over team success.

Use Case:

Ideal for sales-driven industries or roles with clearly measurable performance metrics, such as sales, marketing, and project management.

3. Recognition-Based Reward Systems

Recognition-based reward systems acknowledge employees' efforts through verbal praise, awards, shout-outs during meetings, or public acknowledgment. This system emphasizes the value of appreciating employees regularly, both formally and informally.

Advantages:

• Builds a positive workplace culture: Regular recognition creates an environment where employees feel valued and appreciated.
• Low-cost but highly effective: Verbal praise or public acknowledgment doesn't require a big budget but can have a significant impact.
• Encourages intrinsic motivation: Employees are motivated from within when they feel their efforts matter.

A paper published in the Journal of Management and Social Sciences on the topic Effects of Recognition-based Rewards on Employees' Efficiency and Effectiveness highlights that 57% of high-performing companies use recognition plans over incentives compared to 36% of low-performing companies.

Disadvantages:

• May lack tangible value: Some employees might prefer tangible rewards over verbal recognition.
• Risk of favoritism: If not implemented fairly, recognition could appear biased, leading to resentment among employees.

Use Case:

Works best in creative or collaborative environments where teamwork and innovation are essential. It's particularly effective for roles where contributions might not always be tied to quantifiable metrics.

4. Non-Monetary Reward Systems

Non-monetary reward systems provide incentives that don't involve direct financial compensation. These include extra vacation days, flexible working hours, learning opportunities, mentorship programs, or wellness benefits.

Advantages:

• Appeals to work-life balance seekers: Many employees value time and flexibility as much as monetary rewards.
• Cost-effective: Compared to monetary rewards, these can be more sustainable for companies, especially smaller businesses.
• Boosts loyalty and satisfaction: Employees who feel supported in their personal and professional growth are more likely to stay with the company.

According to an SHRM study, non-monetary rewards can improve productivity by as much as 44% in some organizations.

Disadvantages:

• May not motivate everyone: Employees with financial priorities may not find non-monetary rewards as motivating.
• Needs careful planning: To be effective, non-monetary rewards must align with employees' preferences and needs.

Use Case:

Ideal for startups, small businesses, or organizations promoting a strong company culture where flexibility and personal growth are highly valued.

Advantages of Reward Systems for Employees

A well-designed reward system can be a game-changer for any organization. Beyond boosting morale, it can improve performance, reduce turnover, and create a culture where employees are excited to contribute. Let's explore some key benefits:

1. Boosts Employee Motivation

Rewards act as a driving force that pushes employees to give their best. When people know their hard work will be acknowledged, they naturally put in more effort.

For example, a points-based system can keep employees engaged by allowing them to see their progress and work towards tangible rewards. Similarly, performance-based rewards encourage employees to meet targets, knowing that success will be recognized.

Source: Vantage Recognition's points-based system

Even simple forms of appreciation, like verbal praise or public acknowledgment in recognition-based systems, can have a profound impact on motivation. When employees feel seen and valued, they become more invested in their roles.

2. Enhances Employee Retention

When you implement a proper rewards system, it makes your employees feel like they're part of something meaningful.

Moreover, different systems cater to diverse employee needs. For example, non-monetary rewards like flexible work schedules or extra vacation days appeal to employees seeking better work-life balance.

Gallup's research shows that people were four times more likely to leave their jobs due to factors like 'Engagement and Culture' or 'Wellbeing and Work-Life Balance' than for better 'Pay/Benefits'.

On the other hand, performance-based rewards may resonate more with ambitious employees driven by tangible goals.

Therefore, companies can significantly reduce turnover and retain top talent by offering rewards that reflect employees' preferences.

After all, when people feel valued, they're less likely to look for opportunities elsewhere.

3. Encourages Healthy Competition

Reward systems can foster a competitive yet collaborative work environment when structured correctly. Performance-based systems are particularly effective here, motivating employees to push their limits and exceed expectations.

However, the key is balance. Setting clear, achievable goals helps ensure competition remains healthy rather than harmful.

That is why it's important to encourage friendly rivalry, so that businesses can boost productivity while maintaining a positive team dynamic.

Disadvantages of Reward Systems for Employees

While reward systems can bring numerous benefits, they aren't without challenges. If poorly designed or implemented, these systems can have unintended consequences that negatively affect morale, productivity, and workplace relationships.

Let's take a closer look at some common drawbacks:

1. Risk of Creating Unhealthy Competition

Although we have discussed creating healthy competition as an advantage, you must be mindful about its extent.

Too much competition can harm team dynamics. In performance-based reward systems, employees might focus solely on individual achievements, leading to rivalry rather than collaboration.

This unhealthy competition can result in strained relationships, reduced teamwork, and even workplace conflict.

The key to avoiding this pitfall is setting clear guidelines that encourage both individual achievement and team success. Recognizing group accomplishments alongside individual ones can help balance competition with collaboration.

2. May Lead to Short-Term Focus

Some reward systems, especially points-based or performance-based ones, may push employees to focus on immediate gains rather than long-term growth. Employees might concentrate on hitting targets simply to earn rewards, potentially neglecting bigger-picture goals that drive sustained business success.

For example, a sales team focused only on quarterly targets might overlook building long-term client relationships.

To address this, companies should design reward systems that balance short-term achievements with long-term vision, ensuring sustainable growth.

3. Financial Burden for Companies

Monetary rewards can become costly over time, especially for small businesses or startups. For example, regular bonuses, profit-sharing, or expensive incentives may strain budgets if not carefully planned.

Non-monetary rewards offer the opportunity to ease financial pressure. However, they may not always provide the immediate motivation that monetary incentives offer.

Therefore, we suggest that organizations must explore hybrid reward systems that blend monetary and non-monetary options to manage costs. This allows for flexibility without compromising on motivation.

How to Balance the Pros and Cons of Reward Systems

Designing a reward system that works for everyone isn't easy. The goal is to maximize the advantages while minimizing the downsides. Striking the right balance requires thoughtful planning, flexibility, and a deep understanding of what motivates your employees. Here's how businesses can get it right:

1. Understand Employee Preferences

Employees are motivated by different things. Some value monetary rewards, while others prioritize recognition.

That is why, your first step should be to understand your team's driving factors by asking them directly through surveys, feedback sessions, or one-on-one conversations.

For example, younger employees might prefer professional development opportunities, while seasoned professionals might value flexible working arrangements.

2. Offer Flexible Reward Choices

Once you have understood the preferences, the next logical step would be providing employees with options. These options can be in the form of -

• redeemable points,
• cash bonuses, or
• extra time off.

Points-based systems are particularly effective here, allowing employees to choose rewards that matter most to them.

This approach keeps employees engaged and ensures the rewards have real value and impact. After all, a reward that resonates personally is far more motivating than a generic one.

3. Ensure Fairness and Transparency

Fairness is the backbone of any reward system. Without clear, transparent criteria, employees may perceive the system as biased or unfair, leading to frustration and disengagement.

To prevent this, businesses should:

• Clearly outline how employees can earn rewards.
• Set measurable and realistic goals.
• Communicate the program's details openly and frequently.

Transparent reward systems promote trust and ensure that all employees feel they have a fair shot at recognition.

4. Align Rewards with Company Values

Rewards should reflect what the organization stands for. For example, if collaboration is a core value, then rewards should recognize team efforts, not just individual achievements.

Similarly, if innovation is highly valued, employees who take calculated risks or suggest creative solutions should be acknowledged.

Connecting rewards to company values reinforce the organization's mission and culture, making recognition more meaningful.

Conclusion

Employee reward systems have the power to transform workplaces by boosting motivation, enhancing retention, and driving performance. However, they must be carefully designed to avoid pitfalls like unhealthy competition, short-term thinking, and financial strain.

By understanding employee preferences, offering flexible rewards, ensuring fairness, aligning rewards with company values, and adopting hybrid systems, organizations can create programs that truly resonate. The result? A motivated, engaged workforce and a thriving business.

This article is written by Nilotpal M Saharia, a Senior Content Marketing Specialist and R&R Evangelist at Vantage Circle. With a Master's in Business Administration and over seven years of experience, he has developed expertise in diverse fields, including marketing, content creation, entrepreneurship, and human resources.

In addition to being a regular contributor at Vantage Circle, Nilotpal's work has also been featured on Select Software Reviews.

For any related queries, contact editor@vantagecircle.com