Financial incentives reward staff with money, such as wages, salary, bonus, commission and profit sharing. Non-financial incentives reward them in other ways, such as recognition, training, job rotation, more responsibility and better working arrangements. Exam questions ask you to compare them for one particular business. This is part of motivation at work.
Your syllabus gives the list of incentives you are expected to know, so check the Cambridge page for your code.
What does each type offer and cost?
| Financial | Non-financial | |
|---|---|---|
| Typical cost | Cash paid every month or year | Often management time or small cash cost |
| Speed of effect | Quick to introduce | May take longer to show |
| Risk | Staff may focus only on what is paid | May feel empty if pay is the real complaint |
| Fits well when | Staff can directly change the measured result | The complaint is about the job, treatment or schedule |
The table is a guide to thinking, not a rule. The case decides.
How do you compare two incentives?
- State what the business wants, for example more sales or fewer people leaving.
- Name each incentive and its type.
- Cost each one using numbers from the case where you can.
- Say what each is likely to do, using a clue from the case.
- Choose one and give a condition. Say when your choice would stop being sensible.
Worked example
Perabot Maju is a furniture shop in Penang with five sales staff. Each sells about RM60,000 a month on a basic salary of RM2,200.
The owner is choosing between a 2% commission on sales and flexible shift swaps that cost no extra cash.
The shop’s gross profit is 35% of sales. The owner estimates that commission would lift each person’s sales by 10%, but this is only an estimate.
Step 1, state the aim. The owner wants higher sales.
Step 2, cost the commission before the change. 2% of RM60,000 = RM1,200 per person. For five people, RM1,200 × 5 = RM6,000.
Step 3, estimate the effect. With a 10% rise, sales per person are RM66,000. Total sales are RM66,000 × 5 = RM330,000, up from RM300,000.
Step 4, compare gross profit after commission. Without commission: 35% × RM300,000 = RM105,000. With commission: 35% × RM330,000 = RM115,500, minus commission of 2% × RM330,000 = RM6,600, gives RM108,900. The gain is RM108,900 − RM105,000 = RM3,900 a month.
Step 5, judge with a condition. Commission pays for itself only if the 10% rise happens. The staff in this case can influence sales directly, so the idea fits. Shift swaps cost no cash but do not address the sales aim as directly.
The mistake to watch for
A common slip is to claim one type always works better.
Mistaken answer: “Financial incentives are better because everybody needs money, so they motivate more than non-financial ones.”
This says nothing about the business. It also ignores the cost of the incentive.
The correction is to compare the two options on the same case facts: aim, cost, likely effect and a condition. Here the commission gains RM3,900 only if sales rise 10%, which is the sentence that makes the answer specific.
Check yourself
1. A salesperson earns a RM2,000 basic salary plus 3% commission. Sales for the month are RM45,000. Find total pay.
Show answer
Commission = 3% × RM45,000 = RM1,350. Total pay = RM2,000 + RM1,350 = RM3,350.
2. Classify each as financial or non-financial: a profit-sharing payment, job rotation, praise from the owner at a staff meeting, an annual bonus.
Show answer
Profit-sharing: financial. Job rotation: non-financial. Praise: non-financial. Annual bonus: financial.
3. Staff at a cafe in Melaka are leaving because shifts are announced the night before. The owner is considering a RM100 monthly bonus. Is this a good fit? Give one reason.
Show answer
It fits poorly. The clue is unpredictable shifts, not low pay, so a fixed rota is a more direct answer. A bonus costs RM100 for each person every month and leaves the cause unchanged.
Where this leads next
The next lesson asks when one incentive fails on certain tasks: why one incentive may not suit all tasks. You can also use the ratios tool to practise reading cost against output.
If you can describe both types but your conclusions feel unsupported, our teachers can work on that in online one-to-one Business tuition.