Incentive Theory: Definition, Examples, Types, Application

The best way to get people to do what you want them to do is by giving them some incentive. Incentives motivate people to do anything, even at their inconvenience.

Incentive theory is a way to understand how people make choices. It helps explain why people do things like working hard or being kind to others.

It says that people are more likely to do something if they get something they want in return – things like money, a toy, a prize, or even a good feeling.

In other words, incentive theory helps us understand how rewards and motivations can influence our actions.

If you want to learn how to use incentive theory in your business or personal life, you need to read this article until the end.

So, let’s get started.

What is Incentive Theory?

Incentives can be defined as something that is given to someone to encourage them to perform a given task. This incentive can either be a reward or punishment given in other to motivate an individual to take a specific action or make a particular decision/choice.

Incentive theory can be defined as an economic concept that describes how individuals are motivated to make certain choices based on the incentives offered.

The theory assumes that humans are rational decision-makers who strive for maximum rewards while minimizing risks.

We use incentive theory to explain how humans behave, how people decide what to buy, and how much effort to put into a task.

Policymakers use incentive theory to design effective public policies, and it also helps businesses design incentives for their employees.

Incentive theory is based on the idea that people will make choices that maximize their rewards and minimize their punishments.

We can encourage people to take specific actions if we offer them sufficient incentives, such as praise, recognition, money, or other rewards. And conversely, we can also use punishments to discourage certain undesired behaviors.

Incentive Theory Example

A good example of incentive theory is a company where employers use incentives to reward their employees for desired behaviors, like meeting deadlines, achieving goals, or even simply showing up on time.

By providing rewards, employers can motivate their employees to put forth an extra effort and achieve greater success.

Another example is in a personal relationship where you are trying to encourage your children to do their chores. You could offer them a reward or incentive such as an allowance or extra privileges.

By linking positive behavior with rewards, you are more likely to see the desired result from your children.

The bottom line is, whether you want to use incentive theory in your workplace or in your personal life, just rem it is an effective tool to motivate others and get the desired results.

Assumption of Incentive Theory

There are different assumptions of the incentive theory. One of the key assumptions of incentive theory is that we people are rational and will make choices that are in our best interest.

In other words, as humans, first, we weigh the potential rewards and punishments of different choices and then choose the one that offers the most significant benefit to us.

Let’s say, for example, A company offers Billy a job that pays $10 per hour but requires him to work long hours and do tedious tasks. He may take the position if the rewards (a higher income) outweigh the potential punishments (tedious work and long hours).

On the other hand, if another company offers Billy a job that pays the same amount but has more flexible hours and interesting tasks, he may choose it instead because it provides a better balance of rewards and punishments.

Another assumption of the Incentive theory is that people are more likely to be motivated by some incentives than others.

If a reward is assured and instant, some people will be more motivated than if it is delayed or uncertain.

Let’s say, for example, A teacher gives Billy and Tom a note to duplicate, and he promises to reward them after completing the task. Billy did not participate because he thought if perhaps he completed the task, their teacher won’t reward them monetarily.

Moreso, harsh and specific punishments may impact a person’s motivation more than mild and ambiguous ones.

Types of Incentives

We have three(3) basic types of incentives: positive incentives, negative incentives, and neutral incentives.

1. Positive incentives

Positive incentives refer to the rewards you get after completing a given task. These kinds of incentives encourage people to continue their good behavior or to do better the next time.

A good example of positive reward can be tangible items like money, gifts, or privileges, or intangible rewards such as praise or recognition.

2. Negative incentives

Negative incentives refer to punishments you get when you misbehave. These kinds of punishments can be unpleasant and discouraging, so people will not repeat the same behavior.

Examples of negative rewards can include fines, demotions, suspensions, or any other form of disciplinary action.

3. Neutral incentives

Neutral incentive is the third type of incentive we have. It refers to rewards that have no direct connection to any particular behavior. These rewards can be free time, vacation days, or extra breaks during the day.

You can use neutral incentives where it is inappropriate to offer a positive incentive or when the desired behavior or outcome is already part of someone’s job duties.    

Applying Incentive Theory in Personal Relationships

You can apply the incentive theory in your personal relationships because if you want someone close to you to do something, the best way is to use incentives.

Using incentives is a powerful tool that can help improve your relationship with them. Here are some ways you can use incentive theory in personal relationships:

1. Offer rewards for completing certain tasks or achieving certain goals to show your appreciation and motivate the person to do more. The reward can be a physical gift for a special outing or dinner.

2. Give positive reinforcement when someone does something right because people are more likely to repeat a behavior if they get positive feedback. You can use verbal praise or even a hug or pat on the back.

3. Set goals together and reward each other when you achieve these goals. By doing this, you are building trust and commitment, which are essential ingredients in any relationship.

4. You can also collaborate on projects/tasks and make a team effort because working together gives you a sense of accomplishment and can be a great bonding experience.

Applying Incentive Theory in the Workplace

The three ways in which you can apply of incentives in your workplace are through positive reinforcement, negative reinforcement, and punishment.

Positive reinforcement is a reward given after desirable behavior is displayed and encourages more of the same behavior in the future.

Negative reinforcement occurs when an unpleasant consequence is removed following a desirable behavior.

Punishment involves delivering an unpleasant consequence for undesirable behavior in order to discourage it in the future.

Positive reinforcement is typically the most effective type of incentive in the workplace. Employers can create a productive and encouraging environment by offering rewards or recognition for tasks that are completed well or in a timely manner.

Rewards don’t need to be monetary either – offering additional time off or other privileges could be just as effective.

Negative reinforcement can be used to encourage workers to meet deadlines or to complete tasks on time. However, this method should be used sparingly and with care, as it can create an intimidating work environment.

An example of negative reinforcement in the workplace would be withholding a bonus until certain tasks are completed.

Punishment is not typically recommended for use in the workplace. It’s rarely effective and can lead to a hostile environment between employees and management.

Using incentive theory correctly, employers can encourage positive behavior and create an efficient and productive workplace.

Understanding the different types of incentives and how they can be applied can make a big difference in employee motivation and job satisfaction.

What Is The Difference Between Motivation And Incentive Theory

Motivation and incentive theory are related but distinct concepts in psychology and economics.

 MotivationIncentive Theory
1.Motivation is the psychological process that drives people to act and pursue their goals.Incentive theory is a concept in economics that describes how people are motivated to make certain choices based on incentives
2.In motivation, a person can be motivated to work hard because he enjoys the feeling of accomplishmentIn incentive theory, a person is motivated to work hard because he is offered a bonus for meeting specific performance goals
3.Motivation refers to a situation whereby you go to the gym to exercise because you want to improve your health.Incentive theory applies to a situation whereby you go to the gym to exercise because they offer you some discount on your gym membership
4.Motivation focuses on the psychological processes that drive behaviorIncentive theory focuses on the external rewards and punishments that influence people’s choices

What are the scopes of the incentive theory of motivation

The following are the main scope of the incentive theory of motivation:

  • Economic behavior:

One area in which incentive theory covers is how people make market choices in buying and selling goods and services.

When we understand how different incentives influence people, economists can develop better theories of market behavior and design more effective economic policies.

  • Public policy:

Policymakers are another scope for incentive theory. Policymakers can create policies more likely to achieve their desired objectives by using incentive theory to help them understand how people react to various incentives, such as urging people to increase their savings or put more effort into their academic work.

  • Business management:

The discipline of business management can also benefit from the use of incentive theory. Managers can create more effective motivational programs that help to increase employee performance and productivity by understanding how various incentives affect employees.

  • Social psychology:

Incentive theory is also relevant in social psychology by focusing on how a person’s social environment affects their thoughts, feelings, and behaviors, 

Social psychologists can improve their theories of social behavior and create more effective interventions to encourage positive social change by comprehending how various incentives influence people.

Which researcher supports an incentive theory of motivation?

Clayton Alderfer, a researcher, supports an incentive theory of motivation which states that three innate psychological needs determine motivation: existence, relatedness, and growth.

Clayton Alderfer is also the one who develops the incentive theory of motivation.

According to Alderfer, people are motivated by satisfying these needs through environmental incentives, such as rewards or opportunities for advancement.

He developed the ERG theory, an extension of Maslow’s Hierarchy of Needs that emphasizes that individuals have multiple needs that operate simultaneously.

What are the four stages of the incentive salience/sensitization theory?

The four (4) stages of the incentive salience/sensitization theory of motivation are acquisition, consolidation, persistence, and relapse.

1. The acquisition is the first stage of incentive salience/sensitization theory. This is where, as an individual, we begin associating a specific behavior or substance with pleasure or reward.

2. The consolidation stage is where the behavior becomes more frequent, and we experience greater pleasure or reward from it as an individual here. There is greater motivation to engage in the behavior or consume the substance.

3. When we get to the third stage, the persistence stage, we become dependent on the behavior to experience pleasure or reward, and now we continue to engage in behavioral use despite negative consequences.

4. Relapse is the last stage in the incentive salience theory. Here we may experience a return of the addiction after a period of abstinence, often triggered by cues or stressors associated with the behavior or substance use.

Summary and Conclusion

Incentive theory has many practical applications in both personal relationships and the workplace.

The three (3) main types of incentives mentioned in this article are positive, negative, and neutral.

And we say positive incentives are those incentives given to motivate or reward someone for desired behavior (such as praise, bonuses, and promotions).

Negative incentives are those incentives given to discourage someone from engaging in undesired behavior (such as punishments or threats). At the same time, neutral incentives are those kinds of incentives that do not actively encourage or discourage individual behavior.

The bottom line is incentive theory explains how people are motivated to make certain choices based on the incentives offered.

When we completely understand how people respond to different incentives, economists and policymakers can design policies and programs that are more effective at achieving their desired outcomes.

Recommended reading: Position Innovation: Definition, Examples, Strategy, Benefits


Tofunmi is a BA, MBA, and experienced Researcher in Business Administration and Management. He possesses outstanding communication, leadership, conflict resolution, organization, and teamwork skills. He enjoys teaching and reading books on startups, business, personal finance, investment, and more.

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