Monetary and Non-Monetary Incentives (ISC Class 12)
Updated 17 October 2026 · Fact-checked
Monetary incentives are rewards paid in money or measurable in money, such as bonus, commission, profit sharing, perquisites and medical reimbursement. Non-monetary incentives satisfy psychological and social needs and cannot be measured in money: status, recognition, job security, job enrichment, participation, career advancement, empowerment and organisational climate.
Understand Monetary and Non-Monetary Incentives
Meaning of motivation (short recap). Motivation is the process of inspiring people to work willingly towards the organisation's goals by satisfying their needs. An *incentive* is the reward or inducement that is offered to bring this about. Incentives are of two broad kinds.
1. Monetary (financial) incentives
Rewards given in the form of money, or that can be measured in money.
| Incentive | What it is |
|---|---|
| Pay and allowances | Basic wage or salary with dearness, house rent and other allowances. |
| Productivity-linked wage incentives | Extra payment linked to output above a standard. |
| Bonus | Additional payment, often yearly, beyond the wage. |
| Commission | A percentage of sales or business brought in. |
| Profit sharing | A share in the profits of the firm for employees. |
| Co-partnership / stock options | A chance to own shares of the company, usually on easy terms. |
| Retirement benefits | Provident fund, pension and gratuity. |
| Perquisites | Benefits with a money value: car, housing, medical reimbursement, club membership. |
2. Non-monetary (non-financial) incentives
Rewards that satisfy psychological, social and esteem needs and are not measured in money.
| Incentive | What it is |
|---|---|
| Status | The position or rank in the organisation (title, cabin, authority). |
| Appreciation and recognition | Praise, awards, certificates and public acknowledgement. |
| Job security | Assurance of continued employment. |
| Job enrichment | Adding responsibility and challenge. |
| Participation in management | Involving employees in decisions that affect them. |
| Career advancement | Training and chances of promotion. |
| Employee empowerment | Giving authority and freedom to act. |
| Organisational climate | A healthy, fair and friendly work environment. |
| Competition | Healthy rivalry that raises effort. |
3. Monetary versus non-monetary incentives
| Basis | Monetary | Non-monetary |
|---|---|---|
| Nature | In money or measurable in money | Not measurable in money |
| Needs satisfied | Mainly lower-order (physiological, safety) | Higher-order (social, esteem, self-actualisation) |
| Effect | Quick but may fade soon | Slower but lasting |
| Cost to firm | A direct cash cost | Little direct cost |
| Suitable for | Operative staff, lower income levels | Managers and higher levels (but useful for all) |
4. Traps to avoid
- Medical reimbursement is monetary: the employer pays money for the employee's medical bills, so it is measurable in money. Do not treat it as non-monetary because it is a 'facility'.
- Job security is non-monetary though it protects income; retirement benefits (provident fund, pension) are monetary.
- A promotion with higher pay has both a monetary and a non-monetary side; if the question is about career advancement and status, call it non-monetary; if about higher pay, call it monetary.
5. Choosing the incentive (case skill). Identify the need that the employee is trying to satisfy: a worker struggling with expenses responds to cash; a senior executive who has a good income responds more to recognition, challenge and autonomy. A good plan mixes both kinds.
6. Motivation versus morale (also in the syllabus)
| Basis | Motivation | Morale |
|---|---|---|
| Meaning | The inner drive to act so as to satisfy a need | The attitude, spirit and confidence of employees towards work and organisation |
| Nature | An individual concept | Mostly a group concept, also individual |
| Cause | Unsatisfied needs and incentives | The overall work environment |
| Relation | A cause: motivated people raise morale | An effect: high morale reflects motivated people |
| Evidence | Effort and enthusiasm of the individual | Absenteeism, turnover and grievances of the group |
7. Importance of motivation (short list)
*To the employer*: higher productivity; better use of resources; lower absenteeism and turnover; acceptance of change; good industrial relations. *To the employees*: need satisfaction, higher earnings and recognition, job satisfaction, growth.
Monetary and Non-Monetary Incentives: key facts
- Monetary incentives
- Pay and allowances
- Bonus
- Commission
- Profit sharing
- Stock options
- Retirement benefits
- Perquisites
- Money or measurable in money.
- Non-monetary incentives
- Status
- Recognition
- Job security
- Job enrichment
- Participation
- Career advancement
- Empowerment
- Organisational climate
- Not measurable in money.
- Needs satisfied
- Monetary: lower-order needs | Non-monetary: higher-order needs
- Link with Maslow.
How to answer Monetary and Non-Monetary Incentives questions
Questions ask for classification of an incentive, a distinction, an odd-one-out, or a choice of incentives in a case.
- 1Ask: is the reward paid in, or measurable in, money? If yes, it is monetary.
- 2Check the trap items: medical reimbursement is monetary; job security is non-monetary.
- 3For a distinction, write both sides in full sentences on each basis.
- 4In a case, match the incentive with the need of the person in the case, then name one limitation.
Monetary and Non-Monetary Incentives in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Non-monetary incentive
Suppose a software firm names the best programmer of the month on its notice board, gives her a certificate and lets her choose her next project.
Which kinds of incentive are these? Which needs do they satisfy?
Try it first, then show the solutionSolution
- Public naming and a certificate are recognition.
- Choosing a project is empowerment; none is money.
Answer: Non-monetary incentives (recognition, empowerment); they satisfy esteem and self-actualisation needs.
Memory hook: Cannot be counted in rupees: non-monetary.
Monetary incentive trap
Imagine a company that pays an employee's hospital bill up to a stated limit each year.
Is medical reimbursement a monetary or non-monetary incentive?
Try it first, then show the solutionSolution
- The employer pays a sum of money.
- It has a direct money value to the employee.
Answer: Monetary incentive: it is a payment in money.
Memory hook: If a cheque is written, it is monetary.
Tricks to remember Monetary and Non-Monetary Incentives
Short memory aids. Say each one aloud once, then use it on a question the same day.
Rupee test
If you can count it in rupees, it is monetary; if you can only feel it, it is non-monetary.
Use it when: Classification.
SARJ-PCEO
Status, Appreciation, Rich job (enrichment) & job security; Participation, Career, Empowerment, Organisational climate.
Use it when: Non-monetary list.
Monetary and Non-Monetary Incentives: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Classify · 2 marks · Short answerBoard level
Classify as monetary or non-monetary: (i) profit sharing; (ii) recognition; (iii) company car; (iv) participation in management.
Try it first, then show the solutionSolution
- Profit sharing and a company car are money or measurable in money.
- Recognition and participation are not.
Answer: (i) Monetary; (ii) non-monetary; (iii) monetary (perquisite); (iv) non-monetary.
Example 2: Odd one out · 1 mark · MCQBoard level
A firm offers its employees (I) a company flat to live in, (II) a place on the committee that plans work schedules, (III) an annual stock-option grant and (IV) a letter of appreciation. Which two of these are monetary incentives?
(a) I and III
(b) II and IV
(c) I and IV
(d) II and III
Try it first, then show the solutionSolution
- A company flat is a perquisite and stock options are a share-based reward, both measurable in money.
- Committee membership is participation, and a letter of appreciation is recognition: both non-monetary.
Answer: (a)
Example 3: Distinguish · 4 marks · Short answerHarder board level
A founder wants to know why her HR head recommends both a cash bonus and a recognition programme. Using four bases, explain how the two kinds of incentive differ, in complete sentences.
Try it first, then show the solutionSolution
- Nature: monetary incentives are paid in money or are measurable in money; non-monetary incentives cannot be measured in money.
- Needs: monetary incentives satisfy mainly lower-order needs; non-monetary incentives satisfy higher-order needs.
- Effect: monetary incentives have a quick but short-lived effect; non-monetary incentives are slower but lasting.
- Cost: monetary incentives are a direct cash cost; non-monetary incentives cost little directly.
Answer: Four differences: nature, needs, effect and cost.
Example 4: Motivation versus morale · 4 marks · Short answerHarder board level
A manager uses the words motivation and morale as if they meant the same. Correct him by giving four differences in complete sentences.
Try it first, then show the solutionSolution
- Meaning: motivation is the inner drive to act for a need; morale is the group's attitude and spirit.
- Nature: motivation is individual; morale is mostly a group concept.
- Cause: motivation comes from unsatisfied needs and incentives; morale comes from the whole work environment.
- Relation: motivation is a cause that helps raise morale; high morale is an effect and reflects motivated employees.
Answer: They differ in meaning, nature, cause and relation.
Example 5: Incentive plan · 8 marks · Long answerHOTS / competency
Suppose a delivery firm has two groups of staff: young riders on low pay with high living costs, and senior managers who earn well but feel their work is routine. Design a plan with two suitable incentives for each group, explain the choice with reference to needs, and state one risk of relying on money alone.
Try it first, then show the solutionSolution
- Riders: monetary incentives such as a bonus linked to deliveries and a fuel allowance, since their lower-order needs are unsatisfied.
- Managers: non-monetary incentives such as job enrichment (new projects and authority) and recognition awards, because their lower needs are already met.
- Reason: a satisfied need no longer motivates, so the incentive should match the unmet need.
- Risk of money alone: the effect fades, higher-order needs stay unmet and rivals can match the cash.
- A mixed plan would include some recognition for riders and a performance bonus for managers.
Answer: Monetary incentives for the riders, non-monetary for the managers, with a mixture for both; money alone fades and leaves higher needs unmet.
Where students lose marks in Monetary and Non-Monetary Incentives
The slips examiners see most often, and what to write instead.
Mistake: Treating medical reimbursement as non-monetary
Medical reimbursement looks like a facility, so students wrongly class it as non-monetary.
Wrong working
Medical reimbursement is a facility, so it is non-monetary.
Right working
Medical reimbursement is a payment of money, so it is a monetary incentive.
Do this: If money is paid, it is monetary.
Usually costs: 1 mark.
Mistake: Using motivation and morale as synonyms
Both talk about willingness to work.
Wrong working
Motivation is the group's spirit towards the organisation.
Right working
Motivation is the individual's inner drive to satisfy a need; morale is the group's attitude and spirit.
Do this: Motivation = individual drive; morale = group spirit.
Usually costs: 1-2 marks.
Mistake: Listing incentives without the need they satisfy
The syllabus is about factors influencing motivation.
Wrong working
Non-monetary incentives: status, recognition.
Right working
Non-monetary incentives such as status and recognition satisfy esteem and other higher-order needs.
Do this: Add the need and the effect.
Usually costs: 1-2 marks.
Mistake: One-sided distinction
Only the monetary side is written.
Wrong working
Monetary: given in money.
Right working
Monetary incentives are given in money; non-monetary incentives are not measurable in money.
Do this: Both sides, same basis.
Usually costs: 1-2 marks.
Exam tips
- Medical reimbursement is a common odd-one-out trap: it is monetary, so apply the rupee test.
- The syllabus asks for the difference between monetary and non-monetary incentives and between motivation and morale: prepare both tables.
- In case-based questions, name the incentive, state its type and explain the need it meets.
- Mention at least one limitation of an incentive whenever an evaluation is asked.
Practice questions on Monetary and Non-Monetary Incentives
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 1 mark · Very short answerBoard level
Name any two non-monetary incentives.
Hint
Think of status and security.
Answer
Any two of status, recognition, job security, job enrichment, participation in management, career advancement.
Q2 · 1 mark · Very short answerBoard level
State whether the following is a monetary incentive: a share of profits given to employees.
Hint
Money.
Answer
Yes, profit sharing is a monetary incentive.
Q3 · 4 marks · Short answerHarder board level
Explain two monetary incentives and two non-monetary incentives that a retail chain can use for its sales staff.
Hint
Commission and recognition.
Answer
Monetary: commission, a percentage of sales that rewards extra effort; a yearly bonus for achieving targets. Non-monetary: appreciation and recognition, such as awards for top sellers; career advancement, such as training and promotion to supervisor.
Q4 · 4 marks · Short answerHarder board level
Why are non-monetary incentives said to have a more lasting effect than monetary incentives? Give two reasons with examples.
Hint
Higher-order needs and loyalty.
Answer
Non-monetary incentives satisfy higher-order needs such as esteem and self-actualisation, which cannot be satisfied permanently by cash; for example, recognition builds pride that remains. They also build commitment and loyalty to the organisation, such as through job enrichment and participation, whereas the effect of a money reward fades once the money is spent or a rival offers more.
Q5 · 4 marks · Short answerHOTS / competency
Suppose a manager believes that the only way to motivate employees is to raise their pay every year. Evaluate this belief using ideas from Maslow's and Herzberg's theories.
Hint
Satisfied need; hygiene factor.
Answer
The belief is incomplete. Pay meets physiological and safety needs, and once these are satisfied they no longer motivate (Maslow). In Herzberg's terms, salary is a hygiene factor: it prevents dissatisfaction but does not motivate. Employees whose lower needs are met respond to recognition, responsibility and growth, so non-monetary incentives are also needed.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.Is a bonus monetary or non-monetary?Show answer
Monetary.
2.Is job security monetary or non-monetary?Show answer
Non-monetary.
3.Which kind of incentive suits lower-order needs?Show answer
Monetary incentives.
4.Is motivation an individual or a group concept?Show answer
An individual concept.
5.Name two perquisites.Show answer
Any two of company car, housing, medical reimbursement, club membership.
Monetary and Non-Monetary Incentives: frequently asked questions
Is promotion a monetary or non-monetary incentive?
It has both sides: higher pay is monetary, while status and career advancement are non-monetary. Decide by what the question stresses.
Are perquisites monetary?
Yes, because they have a money value to the employee.
Which incentive works better?
It depends on the person's unsatisfied need. A good plan uses both kinds.