1. Incentive Pay Systems
Chapter 14

2. Incentive Pay Plans
Pay plans designed to relate pay directly to performance or productivity
Used in conjunction with a base wage and salary system
Incentive pay plans attempt to strengthen the performance –reward relationship
Motivate employees
Incentive systems can be categorized on the basis of individual, group, or organizational level
Advantage
Not permanent and must be earned each year
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3. Individual Incentives
All types of individual incentives tied in some measure to performance of individual
Advantage
Employees can readily see relationship between what they do and what they get
With group- and organization-based plans, relationship is often not so clear
Drawback
Competition among employees may produce negative results
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4. Piece Rate Plans Simplest and most common type of incentive plan
Employer pays employee a certain amount for every unit he or she produces
Differential piece rate plan – Devised by Frederick W. Taylor
Pays one rate for all acceptable units produced up to some standard and a higher rate for all pieces produced if output exceeds standard
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5. Plans Based on Time Saved
Standard hour plans
Similar to piece rate plans; a standard time is set in terms of time it should take to complete a particular job
Incentive plans based on time saved give an employee a bonus for reaching a given level of production or output in less than standard time
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6. Plans Based on Commissions
Incentive plan that rewards employees, at least in part, based on their sales volume
Many salespeople work under this type of plan
Straight commission basis – Pay is entirely determined by their volume of sales
Combination of salary plus commission – A guaranteed base salary plus a commission on sales
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7. Individual Bonuses
Bonus – Reward that is offered on a one-time basis for high performance
May be in cash or in some other form (trips etc.)
Advantage – Must be earned each year and organization is not obligated over long run
Drawback – Can become an extension of salary and occurs
When awarding bonus becomes practically guaranteed since it is not tied to profits or some other measure of performance
Merit pay increase – Reward based on performance but also perpetuated year after year
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8. Suggestion Systems
Systems that usually offer cash incentives for employee suggestions that result in either increased profits or reduced costs
Can provide means for
Making employees feel more a part of the organization
Improving communications between management and employees
The systems involve specific procedures for submitting ideas and utilize committees to review and evaluate suggestions
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9. Incentives for Managerial Personnel
Generally take the form of
Annual bonuses
Some type of stock option
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10. Annual Bonus
Most plans provide a year-end bonus based on that year’s performance, usually measured
In terms of profits
Sometimes measured by other means
Annual cash bonus – Most common type of incentive
Typically, bonus is paid in cash as a lump sum soon after end of performance year
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11. Stock Options for Managerial Personnel
Designed to give managers an option to buy company stock at a predetermined, fixed price
If price of stock goes up – Individual exercises option to buy stock at the fixed price and realizes a profit
If price of stock goes down – Stock option is said to be “underwater,” and the manager does not purchase the stock
Intent is to provide incentive for managers to work hard and increase company profits, thus increasing price of the stock
Drawbacks
Some executives become concerned with pumping up short-term value of the stock to increase their personal wealth
It dilutes the holdings of current shareholders
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12. Group Incentives
Incentives based on group rather than individual performance – Recommended where jobs are interdependent
Based on such factors as profits or reduction in costs of operations
Encourages employees to exert peer pressure on group members to perform
Drawback
Members may not perceive direct relationship between individual performances and that of the group
Different groups can become overly competitive with one another to the detriment of the entire organization

13. Organizationwide Incentives
Incentives that reward all members of the organization based on the performance of the entire organization
Common organizationwide incentive plans include
Gain-sharing plans
Scanlon-type plans
Employee stock ownership plans (ESOPs)