Business
Incentive Compensation
Incentive compensation refers to a form of payment or reward that is tied to an individual's performance or the achievement of specific goals within a business. This type of compensation is designed to motivate employees to work towards the company's objectives and can take the form of bonuses, profit sharing, or stock options. Incentive compensation is often used to align the interests of employees with those of the organization.
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10 Key excerpts on "Incentive Compensation"
- Ronald R. Sims(Author)
- 2002(Publication Date)
- Praeger(Publisher)
While these reasons are still offered, contemporary arguments for incentive plans focus on pay- for-performance and link compensation rewards to organizational goals. An organization's efforts to mesh compensation and organizational objec- tives is driven by the hope that employees will assume " ownership" of their jobs, thereby improving their effort and overall job performance. Incentives are designed to encourage employees to put out more effort to complete their job tasks- effort they might not be motivated to expend under hourly and/or seniority-based compensation systems. Financial incentives are therefore offered to improve the market for U.S. goods and services in a global economy. Researchers and H R M professionals have identified the following major advantages of incentive pay programs: • Incentives focus employee efforts on specific performance targets. They provide real motivation that produces important employee and organizational goals. • Incentive Compensation is directly related to operating performance. If perform- ance objectives (quantity and/or quality) are met, incentives are paid. If objectives are not achieved, incentives are withheld. • Incentive payouts are variable costs linked to the achievement of results. Base salaries are fixed costs largely unrelated to output. • Incentives are a way to distribute success among those responsible for producing that success. • Incentives foster teamwork and unit cohesiveness when payments to individuals are based on team results. TOWARD SUCCESSFUL INCENTIVE PLANS As noted previously, today's compensation systems must be strategic in nature, and pay in particular must go beyond individual or group incentive pay and seek to provide a mechanism for an organization to use all ele- ments of compensation, direct (cash compensation) and indirect (benefits), to forge a partnership between the organization and its employees.
eBook - PDF- Susan L. Verhulst, David A. DeCenzo(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
Individual incentive plans reward individual performance. Those who perform better generally receive more merit pay. These programs are usually aligned with performance management systems for employees who have achieved performance goals. For individual incentives to work, employees need to understand performance expectations and how they are measured. This may be a number of products produced, items sold, or reduction in mistakes made. Employees also need to have adequate control over their out- put. Employees will not be motivated if productivity is influenced by factors such as poorly functioning equipment, inadequate inventory, or being dependent on another’s output. 26 Commissions Commissions are a type of individual incentive common for sales workers. Salespeople new to a position frequently earn a guaranteed commission amount for a short time, usually less than 3 months. Since sales are seasonal in many industries, salespeople can draw income from future commissions in periods when sales are down. When sales increase, commission payments are reduced by the amount of the draw. Sales people not earning enough to cover the draw may end up paying back the difference. Many sales positions earn a salary plus a commis- sion or straight commission. Salespersons working for wireless providers commonly earn a specific amount for new activations and a commission on sales of equipment and accessories that may be around 10 percent. Retail salespersons earn average commission rates between 3 and 5 percent of sales on top of hourly wages. Real estate agents earn approximately 3 percent and car salespeople earn an average of 30 percent of the net profit the dealer earns on the vehicle sold. Commission rates for some industries are tiered, meaning they increase as sales volume increases. 27 Bonuses Bonuses are awarded to individuals or groups as an incentive for a spe- cific type of behavior or a reward for performance.
eBook - PDF- David A. DeCenzo, Stephen P. Robbins(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
Typically given in addition to—rather than in place of—the basic wage, incentive plans can add a dimension to the wage structure we have previously described. 31 Incentives can be paid based on individual, group, or organization-wide performance—a pay-for-performance concept. Individual Incentives Individual incentive plans pay off for individual perfor- mances. 32 Popular approaches include merit pay, piecework plans, time-savings bonuses, commissions, and stock options. One popular and almost universally used incentive sys- tem is merit pay. Under a merit pay plan, employees who receive merit increases have a sum of money added to their base salary. Somewhat similar to a cost-of-living raise, merit pay differs in that the percentage of increase to the base wage rate is attributable solely to performance. Those who perform better generally receive more merit pay. Although the merit pay plan is the most widely used, the best-known incentive is undoubtedly piecework. Under a straight piecework plan, the employee is typically guaran- teed a minimal hourly rate for meeting some pre-established standard output. When output exceeds this standard, the employee earns so much for each piece produced. Differential piece-rate plans establish two rates—one up to standard, and another when the employee exceeds the standard. The latter rate, of course, is higher to encourage the employee to beat the standard. Individual incentives can be based on time saved as well as output generated. The employee can expect a minimal guaranteed hourly rate, but in this case, the bonus is achieved for doing a standard hour’s work in less than sixty minutes. Employees who produce an hour’s work in fifty minutes obtain a bonus percentage (say, 50 percent) of the labor saved. Salespeople frequently work on commission. Added to a lower base wage, they earn a percentage of the sales price. On toys, for instance, it may be a hefty 25 or 30 percent.
eBook - PDF- Scott Snell, Shad Morris(Authors)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
The success of an incentive pay plan depends on the organizational climate in which it must oper-ate, employee confidence in it, and its suitability to employee and organizational needs. Importantly, employees must view their incentive pay as being equitable and related to their performance. Perfor-mance measures should be quantifiable, be easily understood, and bear a demonstrated relationship to organizational performance. Piecework plans pay employees a given rate for each unit satisfactorily completed. Employers imple-ment these plans when output is easily measured and when the production process is fairly standardized. Bonuses are incentive payments above base wages paid on either an individual or team basis. A bonus is offered to encourage employees to exert greater effort. LO 1 LO 2 Summary Standard hour plans establish a standard time for job completion. An incentive is paid for finishing the job in less than the preestablished time. These plans are popular for jobs with a fixed time for completion. Paying employees a straight salary allows them to focus on tasks other than sales, such as service and customer goodwill. A straight commission plan causes employees to emphasize sales goals. A combination of salary and commission or bonus provides the advan-tages of both the straight salary and the straight com-mission form of payments. The Scanlon and improshare gainsharing plans pay bonuses to employees unrelated to profit levels. Each of these plans encourages employees to maximize their performance and cooperation through sugges-tions offered to improve organizational performance. LO 3 Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience.
eBook - PDF- Greg L. Stewart, Kenneth G. Brown(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
How Do Compensation Packages Align with Strategy? 439 rewards other than salary and wages. Organizations are required by laws and tax regulations to provide similar benefits to all employees. Benefits thus rep- resent an element of compensation that is not at risk. Benefits also represent a form of long-term compensation that builds loyalty and binds employees to an organization. This makes benefits a valuable component of compensation plans for organizations with an internal labor orientation. One common form of at-risk reward is the individual incentive. An individual incentive is a reward that is based on the personal performance of the employee. Individual incentives often can easily be linked to performance behaviors and outcomes. These incentives have a clear line of sight, which makes them powerful motivators. Yet, individual incentives also have the potential to destroy cooperation among employees. Workers who focus too much on achieving high individual performance often harm the overall performance of the group. 14 Individual incentives must therefore be carefully structured to encourage personal effort without destroying group coopera- tion. At the individual level, paying people by the hour rather than a salary has also been found to make employees much more conscious of the value of time, 15 which can increase their motivation. Focusing on time can, however, have negative effects such as employees being less willing to volunteer to do tasks for which they are not paid. 16 Another form of at-risk reward that is common in compensation packages is the group incentive. A group incentive is a reward based on the collective performance of a team or organization. Because individual incentives can harm cooperative effort, many organizations use group incentives to focus workers’ attention on contributing to the shared goals of the broader group. 17 However, group incentives present their own problems.
eBook - PDFOrganizational Psychology and Organizational Behavior
Evidence-based Lessons for Creating Sustainable Organizations
- Steve M. Jex, Thomas W. Britt, Cynthia A. Thompson, Cynthia A Thompson(Authors)
- 2024(Publication Date)
- Wiley(Publisher)
Bonuses Compared to merit pay, an advantage of incentive pay and bonus compensation is that both are more concretely tied to performance. For example, real estate agents know that variations in their paychecks are linked to the number of homes sold. A man- ager who receives an annual bonus typically knows why it is being paid. Because of the timing of merit pay, it is often difficult for employees to draw any connections between their increase and their perfor- mance. Another advantage, at least with lump-sum bonuses, is that they are more psychologically meaningful to employees. When an employee receives a 3% merit increase (which is typical), this makes only a negligible difference in their take-home pay and, as a result, is often taken for granted. In contrast, a lump-sum payment of 3% of one’s annual salary is more likely to attract the attention of the employee. Incentive pay and bonuses are also advan- tageous to organizations for financial rea- sons because these systems make it much easier for the organizations to link their labor costs with their ability to pay (Lawler & Jenkins, 1992). For example, under incentive and bonus systems, employees are paid well when the organization is finan- cially successful. During lean years, how- ever, incentive and bonus payments are much lower. In the case of incentive pay, researchers have generally found a positive impact on performance. Jenkins et al. (1998) con- ducted a meta-analysis of 39 studies con- ducted in both laboratory and field settings and found the corrected correlation between Employee Motivation 472 financial incentives and performance quan- tity to be .34. Financial incentives had no impact on performance quality. This meta- analysis also revealed that the impact of financial incentives was greatest in experi- mental simulations and when studies were conceptually grounded in either expectancy or reinforcement theory.
eBook - PDF- Greg L. Stewart, Kenneth G. Brown(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
Merit bonuses present a potentially useful alternative to merit pay increases. Think once again of the professor example. Instead of providing an annual salary increase, a university might decide to provide an annual bonus. Now, instead of receiving a salary increase that is guaranteed for future years, the professor will need to earn the bonus again each year. Such an arrangement places more of the salary at risk and clearly communicates an expectation for ongoing high performance. Current trends suggest that merit bonuses are taking the place of merit raises in more and more organizations. Over the past 10 years, employers have tended to offer slightly lower bonuses, but the number of employees receiv- ing bonuses has increased. For instance, Whirlpool Corporation, which makes household appliances, recently overhauled its entire pay-for-performance sys- tem to increase the emphasis on bonuses and decrease the emphasis on raises. Such systems are designed to strengthen perceptions that pay truly depends on performance, which in turn increases motivation. 46 Merit bonus A one-time payment made to an individual for high performance. What Are Common Group and Organizational Incentives? 481 Most of us are familiar with group incentives. Think of siblings who are taken out to share a pizza when they work together to clean the house. How about members of a football team who must all run extra sprints because someone makes a mistake? Rewards in many organizations are similarly based on shared behaviors and outcomes. As described in Chapter 4, work is increasingly being structured around teams rather than individuals. Because providing individual incentives often destroys teamwork, organizations are adopting group-based incentives at an increasing pace. Common group-based incentives include team bonuses and gain-sharing plans. Most businesses also use organizational incentives to encourage employees to develop a sense of ownership in the organization.
eBook - PDFManaging Employee Performance and Reward
Concepts, Practices, Strategies
- John Shields, Michelle Brown, Sarah Kaine, Catherine Dolle-Samuel, Andrea North-Samardzic, Peter McLean, Robyn Johns, Patrick O'Leary, Geoff Plimmer, Jack Robinson(Authors)
- 2015(Publication Date)
- Cambridge University Press(Publisher)
239 Part 4 Rewarding employee performance Having considered the main options and processes associated with base pay and benefits, we can now consider the remaining major area of reward practice, namely, performance-related rewards. Also known as ‘incentive plans’, these are rewards that are contingent or ‘at risk’ in some way, rather than being ‘fixed’ or ‘guaranteed’, as is the case with more traditional forms of base pay. For this reason, such rewards are also commonly referred to as ‘contingent’ or ‘variable’ pay plans. Moreover, while many such rewards are financial in nature (i.e. performance pay or cash incentives), performance-related rewards may also take a non-financial form. The six chapters in part 4 offer a detailed coverage of the main types of individual and collective performance-related rewards and of key themes and debates associated with such rewards. Chapter 11 outlines the main types of performance-related rewards, considers some of the general motives for adopting performance-contingent rewards, and overviews the main arguments and supporting evidence for and against such plans. Chapters 12 to 15 examine specific types of performance-related reward plans that are commonly applied to line employees and managers, with particular emphasis on plan usage, strengths and weaknesses. Plans covered include individual merit pay; recogni- tion awards; results-based individual incentives; collective short-term incentives; and collective long-term incentive plans in the form of broadly based employee share plans. While these chapters focus chiefly on ways of recognising and rewarding the per- formance of those who comprise the majority of a typical organisation’s workforce, namely, line employees, supervisors and line managers, middle managers and profes- sionals, the final chapter in part 4 (chapter 16) considers the special case of incentive plans for executive-level employees.
eBook - PDFPay
Why People Earn What They Earn and What You Can Do Now to Make More
- Kevin F. Hallock(Author)
- 2012(Publication Date)
- Cambridge University Press(Publisher)
The most extreme form of pay on the other end would be to pay her staff either by the hour or by the haircut or as some fraction of the revenue they generate for the business. A discussion of taxi drivers could be nearly identical to this discussion of people who cut hair. There are many other ways that individuals can be paid incentive pay. These include stock and stock options, which are described elsewhere in this book in detail. Other forms of incentive pay could be merit pay, based on, for example, the performance someone has had in the previous year. This type of incentive is often added to the base pay from the previous year to form a new base pay the following year. A form of pay similar to merit pay is a bonus. The major difference between a bonus and the typical merit pay is that the bonus is only one- time, in the sense that it is not added to the base. So a person earning $41,000 who is granted $1,000 in merit pay has a base pay of $42,000 the following year. Someone earning $41,000 and being granted a $1,000 bonus still has $41,000 base pay. There are a series of “group” incentive plans such as stock and stock options (if employees are granted stock or stock options or hold stock or stock options, then when the firm’s stock price goes up, they all benefit – Evaluating Performance, Incentives, and Incentive Pay 123 this is a real group incentive plan). Some firms also offer profit-sharing programs where all workers may share in some fraction of the profits. This fraction is usually predetermined and can be capped, depending on the arrangements. Critics of Incentive Pay Although many people are great fans of incentive pay, and I have described several success stories of paying with incentive pay in this chapter and elsewhere in this book, there are some strong critics of incentive pay. Chief among these critics are Kohn (1993), Pfeffer (1998), and Pink (2010).
eBook - PDFManaging Employee Performance and Reward
Concepts, Practices, Strategies
- John Shields(Author)
- 2007(Publication Date)
- Cambridge University Press(Publisher)
Incentive plans may not always backfire in the manner suggested by Kohn and other critics, but they can certainly create their own problems in relation to effi- cacy and fairness. As we work our way through each of the main types of performance-related reward in the chapters that follow, it is most important that we keep this caveat firmly in mind. Discussion questions 1 Should performance pay be used to drive change to an organisation’s culture? 2 Is Kohn right or wrong about incentive plans? 3 Is Heery right in arguing that the pay of ordinary employees should not be put at risk? 4 Why do incentive plans so often fail? 5 Why might an organisation choose to use both individual and group incentives? Chapter Fifteen MERIT PAY FOR INDIVIDUAL PERFORMANCE Merit pay is the most widely applied of the individual performance pay plans, and it takes two main forms: merit increments and merit bonuses. With merit increments – also known as merit raises – each employee typically receives an increase in base pay based on their annual performance assessment ranking or rating. These payments are referred to as merit raises or merit increments because they take the form of a permanent addition to base pay. By contrast, merit bonuses take the form of stand-alone payments that do not flow into the individual’s base pay and must be re-earned each performance round. In this chapter, we examine each of these two variants of merit pay, beginning with merit increment plans, which are the more traditional of the two. Merit increments In a typical traditional merit pay system, merit payments are delivered in the form of cumulative annual increments to the individual’s base pay. The practice rewards employees for performance in a previous time period – typically one year – and, once given, each merit increment is ‘folded’ into base pay. In the USA and many other Western countries, annual merit incre- ments still constitute the main form of regular base pay adjustment.
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