Division of rewards into two types was recognized for the the first time after Herzberg’s Two-Factors Theory. According to this theory the reasons for employees getting satisfied is one set of factors whereas the reasons for getting employees getting dissatisfied is just another set of factors.
In simple words only motivators can motivate employees and not the hygiene factors.
If we study the theory deeply we will understand that motivators or the factors that motivate employee are such factors which directly relates to the job itself i.e. what he actually do as part of his job or what his responsibility is etc or if we sum it up in a more sophisticated manner then we can say that motivators are factors connected directly with the job content and are thus called intrinsic factors as they are connected with the job or they are “inside” the job.
On the other hand hygiene factors are those factors that are not related to the job itself rather the things that are “around the job” i.e. the environment in which he is working, the people with whom he interacts etc. or summed up in better words hygiene factors are related with job context and are thus called extrinsic factors as they are not connected with the job directly but are “outside” the job.
Understanding these two factors and implementing it in a reward system we get two different kinds of rewards i.e.:
Intrinsic rewards actually fulfills employee’s intrinsic factors or motivators and thus motivates him. Examples include; giving challenging task, involving in decision making process, giving a higher rank in hierarchy etc all these rewards do not required to have increased salary as well and employee may be working at higher management rank without an increase in the salary and still more motivated.
Extrinsic rewards actually fulfills employees extrinsic factors or hygiene factors and thus do not let him start thinking about leaving the company. Examples include; pay rise, bonuses, paid leaves, annual recreational plans etc.
Another fact that can be observed from the above discussion and examples is that intrinsic rewards are mostly qualitative in nature and cannot be quantified for example more respect, recognition etc. Whereas extrinsic rewards are more of a quantitative in nature.