1. Piecework plans
2. Management incentive plans
3. Behavioral encouragement plans
4. Referral plans
Piecework Plans
Generally, companies use one of two piecework plans. The first typically found in
manufacturing settings, rewards employees based on their individual hourly production
against an objective output standard. For each hour, workers receive piecework incentives
for every item produced over the designated production standard.
The second type of piecework incentive plan establishes individual performance standards
that include both objective and subjective criteria. Units produced represent an objective
standard and overall work quality is a subjective criterion.
Management incentive plans award bonuses to managers when they meet or exceed
objectives based on sales profit; production, or other measures for their division
department or unit. Management incentive plans differ from piecework plans in that
piecework plans base rewards on the attainment of one specific objective and management
incentive plans often require multiple complex objectives.
Employees may receive monetary bonuses under referral plans for referring new
customers or recruiting successful job applicants. In the case of recruitment, employees can
earn bonuses for making successful referrals for job openings.
1) Individual incentive plans can promote the relationship between pay and
performance. Employees strive for excellence when they expect to earn incentive
awards commensurate with their job performance.
2) Individual incentive plans promote an equitable distribution of compensation
within companies. That is, the amount employees earn depends upon their job
performance. The better they perform, the more they earn. Ultimately, equitable pay
enables companies to retain the best performers.
3) Individual incentive plans is their compatibility with individualistic cultures
Team-based incentives are similar to individual incentives with one exception. Each group
member receives a financial reward for the attainment of a group goal. Teams or groups
may receive incentive pay based on criteria such as customer satisfaction, safety records,
quality, and production records. Companies allocate awards to each worker based on the
group‘s attainment of predetermined performance standards. Human resource experts
allocate rewards in one of three ways:
Gain sharing describes group incentive systems that provide participating employees with
an incentive payment based on improved company performance for increased productivity,
increased customer satisfaction lower costs, or better safety records [15] Gain sharing was
developed so that all employees could benefit financially from productivity improvements
resulting from the suggestion system. Most gain sharing programs have three components:
Leadership philosophy
Employee involvement systems
Bonus
Advantages of Group Incentives
The use of group incentive plans has two advantages for companies.
1) Companies can more easily develop performance measures for group incentive
plans than for individual incentive plans. There are obviously fewer groups in a
company than individuals. Thus, companies generally use fewer resources such as
staff time to develop performance measures.
2) Greater group cohesion is the second advantage associated with group incentive
plans. Cohesive groups usually work more effectively toward achieving common
goals than do individual group members focusing on the specific tasks for which
they are responsible.
Group members may feel uncomfortable with the fact that other members’ performance
influences their compensation level. Exemplary performers are more likely to feel this way
when other group members are not contributing equally to the attainment of group goals.
The lower performance of a few group members may lead to lower earnings for all
members of the group. Discomfort with group incentive plans is likely to be heightened
where incentive compensation represents the lion‘s share of core compensation.
Profit sharing plans. Employees earn a financial reward when their company’s profit
objective is met.
Employee stock option plans. Companies grant employees the right to purchase '
shares of company stock.
Profit sharing plans pay a portion of company profits to employees, separate from base
pay, cost-of-living adjustments, or permanent merit pay increases. Two basic kinds of profit
sharing plans are used widely today.
The use of a profit sharing plan has two main advantages, one for employees and the other
for companies.
There are three main disadvantages associated with profit sharing plans.
Under employee stock option plans, companies grant employees the right to purchase
shares of company stock. Company stock represents total equity of a company. Employee
stock options provide an incentive to work productively, with the expectation that
collective employee productivity will increase the value of company stock over time.
Two other basic kinds of stock plans are widely used today.
i. Employee stock ownership plans (ESOPs) place company stock in trust accounts for
employees. The purpose of ESOPS is similar to deterred profit sharing because these
trusts are set aside on employees’ behalf as a source of retirement.
ii. Stock compensation plans represent an important type of deferred compensation for
executives. Deferred compensation is supposed to create a sense of ownership,
aligning the interests of the executive with those of the owners or shareholders of
the company over the long term.