There are three important point related to the effective administration of incentive plans:
1. Incentives. Incentives systems are effective only when management is willing to pay incentives based on differences in individual or team performance.
2. Motivation. Incentives must be large enough to motivate and reinforce exceptional performance.
3. Standards. Incentive systems must be based on clearly defined and accepted performance standards effectively communicated to employees.
There are a number of types in incentive programs, which are described in the following sections.
1. Individual Incentives
Many factors are involved in the design of an individual incentives plan. For example, most incentive plans are designed to set production rates according to the technology used. Incentive payments for hourly employees are based upon the number of units produced, by the achievement of specific performance goals, or by productivity improvements in the organization. Who would be including in incentives? The incentives system should be designed with a focus on specific employees in mind – such as production middle managers, sales people, engineering, or senior executives. Most organizations are different incentives systems for different levels. How will performance be measured? The decision whether to use an individual, team or organization wide incentive is critical. The major factor is the extent to which results can be measured at the individual or team level, whether the individual’s contribution is measured, and the effect on teamwork among unit members.
2. Piecework
One of the oldest most commonly used incentives plans is piecework. In a straight piecework plan, the employee receives a certain amount of pay for each unit produced. Compensation is then determined by the number of units produced during a specific time period. Employees often earn as much as 55 per cent more than their base pay in a piecework system. The differential piece plan enables employees whose production exceeds the standard output to receive a higher rate of all of their work than the rate rapid to those who perform below the standard. The piecework systems are more like succeed in repetitive jobs where units of output can be
reliably measured, when quality is less critical, and with a continuous flow of work. Unfortunately, it is not effective in jobs that do not have reliable standards of performance. One of the weaknesses of piecework is that it may not always be an effective motivator. If workers find that increases in output bring disapproval their fellow workers, then the need for friendship and approval may outweigh the incentive to produce more. Secondly, the standards for piece rates often tend to change, because employees discover ways to do the work in less than standard time.
3. Individual Bonuses
Individual bonuses are an incentive payment that supplements the basic wage. It has the advantage of reward workers with more pay for higher performance effort, yet still providing a basic paycheck.
4. Team Bonuses
Team bonuses are usually used when the contribution of an individual employee is either not measurable or when performance depends on team cooperation. Which work process requiring more teamwork and coordination among workers, team bonuses are very popular. Most team bonus plans are tied to such measurable outputs as company profit, improvements in quality, or
cost reductions. Team bonuses, like individual incentives plans, often improve employee motivation. This allows the organization to:
- Reward team productivity.
- Compensate team members for new skills.
- Increase overall performance
Incentives for Management Employees
Merit raises represent one of the most commonly used incentives systems for managerial level employees. They are used to motivate managerial, sales and professional employees where raises can be directly related to performance. Merit increases are usually separate from the person’s base pay.
5. Sales Incentives
Sales incentive plans are often based on the same factors as individual incentive programs. The drive needed in selling demand highly motivated sales personnel. The competitive nature of selling underlines the widespread use of sales incentives. Sales incentive plans often share many of the characteristics of individual incentives, but there are also unique requirements. Sales output measures can usually be establishes as the level of sales (in shillings or units), but sales people are not paid just on sales volume. They often
provided other services, such as customer training, product development, consultation and new accounts, which involve complex measures of performance. A critical first step for a sales incentive program then is to determine the most important performance factors.
In general, sales performance maybe measured by the total sales volume and by their ability to generate new accounts. If measures are used such as promoting new products and providing customer service, then more complex measures may be used. Setting performance standards for sales are not without problems because sales performance is often affected by external factors beyond the control of the salesperson. There are economic and seasonal fluctuation, differing levels of competition, changes in demand, and more lucrative sales territories which can all affect an individual’s sales level. Because sales volume along not be an accurate an indicator of the effort salespeople have expanded many organizations set quotas based on sales potential. In designing an incentive plan for sales people, there are also the problems of rewarding extra sales effort and compensating for promotional activities that may not impact directly on sales.
6. Managerial and Executive Incentives
There is research to support the use of incentive systems for executives, which are usually related to the strategic goals of the organization. Incentives for managerial and executives are believed to have an impact upon organizational performance although there is little data to support this belief. In most cases executive incentive plans are linked to net income, return on investment, stock price, or total dividend paid. These incentives are usually paid in the form of bonuses and stock options. CEO’s often receive over half of their compensation from incentives resulting in criticism of what they actually contribute to the corporation.
Pros and Cons of Executive Bonuses
Are top executives really worth the exorbitant salaries and bonuses they receive? The answer usually depends on whom you ask. Corporate compensation committees feel that big bonuses are necessary as a way to reward superior performance as a ‘fact of business life’ reflecting market trends for CEO compensation. However, as previously noted, strong criticism is being voiced regarding the high salaries and bonuses being paid to senior executives. Others point out that some critics often find executive may receive record bonuses even though their organizations are performing poorly and employees are being asked to take wage and salary cuts or layoffs.
7. Executive Perquisites
In order to recruit and attract top people executives usually receive special benefits termed perquisites. Perquisites or perks are recognized by executives as important in the organization, the extras used to supplement basic compensation. Perks also serve as status symbol to both insides and outsiders. Perquisites also provide tax savings to executives, because most perks are not taxable as income (although this is constantly changing). The more common perks range from company care special parking expenses accounts, plush offices chauffeurs, country club memberships, special vacations, physical exams an executive dining room, and liability
insurance. Perks are an entrenched feature of executive compensation.
8. Team profit Sharing Plans
There has been an increase in the number and type of team or group incentive plans. Team incentive plans are becoming preferable to individual incentives as a result of the increasing use of team-based approaches. An effective team incentive plan is based on the same factors an individual plan is based on the same factors as individual plans. The measures differ in that a team plan is based on some measure of team productivity. Team plans are particularly effective when team work is essential and when the essential system is
trying to involve the level of participation. Team plans are used when jobs are so interested that it is difficult (or impossible) to identify individual output measures. The size of a team usually ranges from 5 to 20 people, depending upon the task and the required coordination between team members. The smaller the team, ‘the higher the identification on team performance’. There is increasingly evidence that team incentives increase productivity.
9. Gain sharing Plans
Gain sharing plans try to reduce the amount of labour required for a given level of output (cost saving) or increase the output for a given amount of labour (productivity increase). The method for determining the standard production rate and the incentives rate must be clearly defined. Gain sharing plans are based on the assumption that better cooperation among workers and between workers and manages will result in greater effectiveness.
