Performance-Linked Pay

Dr. Urvashi Sharma

What is a Reward?

A reward is a benefit that is provided in recognition of

achievement, service, commendable behavior, etc. A reward
is given to an employee only after he / she has provided
evidence of his /her positive behavior and achievements. The
aim of a reward is to show the employees that their work and
effort are valued, and is given as an appreciation for the work
already completed, as well as a motivation to keep improving
their quality of work. Rewards can be in the form of money
or can even be non-monetary in nature. Monetary rewards
may be in the form of salary increments, bonuses, etc.
Examples of non-monetary rewards include promotions, paid
time off, flexible work hours, etc.
What is an Incentive?

Incentives are benefits that are promised to employees to

motivate them to achieve their best and to improve their
behavior, productivity, and output continuously. Incentives
are granted to workers that perform below par, and to
encourage them to achieve the desired level of performance
or set goal. An example of an incentive would be, rewarding
a $200 gift certificate to an employee achieving 30% increase
in sales for the month. Examples of other incentives include
sales commissions, employee stock options, better offices and
work spaces, higher allowances, etc. The aim of an incentive
is to motivate and encourage employees to achieve desired
performance, efficiency, and levels of output.
What do incentive mean?

An incentive scheme is a plan or program to

motivate individual or group performance. An
incentive program is most frequently built on
monetary rewards (incentive pay or a monetary
bonus)
WHAT DO YOU MEAN BY
INCENTIVE WAGE PLANS?
Incentive wage systems are considered to be incentive
management systems.

Traditionally, incentive wage plans have been thought of

as payment plans based on the output of the employee.

But incentive wage systems of today go far beyond the

simple single objective of payment for output.

Now-a-days incentive wage systems are so designed that

the employee feels satisfied intrinsically as well as
extrinsically.
FUNDAMENTAL OBJECTIVES OF
WAGE INCENTIVE PLANs
A set of well-defined and communicated incentive
wage system aims at rewarding the employee more
effectively for his efforts and services rendered to the
firm than the simple base pay system. It aims at
bringing congruency between the objectives of
management and those of the employees.
The objectives of incentive wage systems have been
made clear by McGregor (1960) when he defines
them as A FORMAL METHOD PROVIDING AN
OPPORTUNITY FOR EVERY MEMBER OF THE
ORGANISATION TO CONTRIBUTE HIS BRAIN
AND CREATIVITY AS WELL AS HIS PHYSICAL
EFFORT TO THE IMPROVEMENT OF
ORGANISATIONAL EFFECTIVENESS..
 Incentive wage systems provide the
opportunity for development to each and
every employee by linking pay to efforts for
development.
They aim at increasing the pride of the worker
in himself and his job.
They also attempt at seeing that each
employee gets paid accurately for what he
does, in direct proportion.
 Benefits

To business To employees
retain existing employees enhance the quality of working
increase their motivation, morale life
and loyalty reward employee efforts
boost productivity add value to the employment
link individual and business contract
performance
focus employees on achieving
targets
build teamwork
Indirect benefit, e g free health
assessments may reduce absences.
SYSTEMS OF WAGE PAYMENT
& INCENTIVES :
INDIVIDUAL INCENTIVES PLANS:
Individual payment schemes include
payment by results, piecework and bonuses,
work measurement (including measured day
work) and appraisal and performance related
pay
Many sectors of employment use pay
systems that contain direct links to
individual performance and results.
1. BASED ON TIME:
a) Halsey Plan
b) Rowan Plan
c) Emerson Plan
d) Bedeaux Plan
HALSEY PREMIUM PLAN :

The slow worker is paid time wages and efficient worker is paid
some bonus in addition to the time wages ( normally 50% of wages
for the time saved).
For example:

Standard time(s) = 10 hours

Rate (R) =Rs 4 per hour
Time Taken (T)= 6 hours
Rate of bonus (P)=50% of time saved
TOTAL WAGES = T X R+(S-T)XP X R
=6X4+(10-6) X 50%X4
= Rs 32.00
In halsey plan, the employee gets 33.33% benefit of wages for the
time saved.
 ROWAN BONUS PLAN
It is similar to halsey plan except the calculation of bonus.
Here bonus is calculated by taking proportion of time saved
to standard time.

EARNINGS=HOURS WORKED x RATE PER

HOUR+(TIME SAVED /STANDARD

TIME x HOURS WORKED x RATE

PER HOUR)
BEDEAUX PLAN

In this plan, standard time is expressed in minutes and

are known as Bs.

Bonus is paid to the worker at the rate of 75% of the

waged for time saved, the rest 25% goes to the foreman.
S= standard time
T= actual time
R= rate of wages
Total wages (w)= S x R + 75% of value of time
saved
 EMERSON PLAN
A minimum wage is guaranteed to the workers. Conditions
of work are standardized and a standard output is fixed
which is to be completed within a specified time .
The pattern of incentive under this plan is as under:
if workers output is:
# less than 66.7% of the standard, he gets time wages.
# 66.67% to 80% of the standard, bonus payable is 4%.
# more than 80% till 90%, bonus is 10%.
# between 90% to 100% bonus is 20%.

After 100% 1 per cent bonus is given for every additional 1%

efficiency.
2. BASED ON PRODUCTIVITY:
a) TAYLOR PLAN
b) GANTT TASK & BONUS WAGE PLAN
TAYLOR PLAN
Standard task is established. Two piece
rates are laid down.
The lower rate for those workers who fail to
complete the standard task within the
allotted time and higher rate for those who
complete the task within or less than the
standard time.
GANTT TASK & BONUS WAGE
PLAN

DEVELOPED BY HENRY L. GANTT.

A worker who fails to complete the task
within the standard time receives wage for
actual time spent at the specified rate.
Workers who achieve or exceed the standard
get extra bonus varying between 20% to 50%
of the hourly rate for the time allowed for the
task.
Group Incentives

Compensation system which links pay to a

group's combined performance measured by
reduction in costs, increase in productivity,
progress in attaining firm's objectives, etc.
Scanlon plan

It was developed by Joseph Scanlon of the

United Steelworkers of America in 1927.
It has two main aspects:
Adopting a measure for increased productivity.
Sharing the gain accrued from that increased
productivity.
There are four degrees of
cooperation in this plan:

Information cooperation by gathering

information.
Advisory cooperation through the process of
consultation.
Constructive cooperation by making
suggestions for improvement.
Joint union-management decision making.
Scanlon plan today have 4 principles:

Identity
Participation
Equity
Managerial competence
Rucker plan

It was developed by Eddy Rucker Nickels

Company.
The philosophical base of this plan is same
that of Scanlon plan but a major difference is
the base used to establish a measure of
productivity.
It is the value added by manufacture for each
dollar of input of payroll costs.
The procedure used is:

Identify a base period that provides data that

will be valid and useful for establishing
standards.
Generate data
Sales Value of Production (SVP).
Cost of Materials, supplies, services, etc.
(COM).
Cost of Labor (COL).
Using these data, make the following standards:
Value added (VA)= SVP-COM.
Labour Contribution to VA (LCVA)=COL/VA.
Economic Productivity Index
(EPI)=1.00/LCVA.
Expected Value of Production
(EVP)=EPI*COL.
Labours contribution to savings are deposited
in a bonus pool with two-thirds of the bonus
paid to the employees monthly
Individual Incentives

Under a system of individual incentives,

all or a portion of an individuals pay is
tied to their performance.
 Group Incentives
Improve Organizational
Performance
Organizational Measures

Measured Periodically
 Team / Group Incentive
Plans
Gain-Sharing Plans
Profit Sharing Plans
Earnings-at-Risk Plans
Principal Pay Strategies

1. Performance-related Pay:-
. Pay systems where the pay received by the employee
is varied according to the work output achieved.
. In addition to payment-by-results it also includes
merit-based approaches.
. It consists of three sequential stages which are:-
. Measurement needs
. System of measuring individual employee
performance against those measures
. Assessment of performance
How to make PRP effective?

Integrating with performance management by

managers who have the willingness and the skill to
manage.
Trust between the manager and employee
Measurable work activity with validity and reliability
Systematic assessment of performance.
Variable Pay

A pattern where the employer divides an

employees salary into two partsfixed and
variable, whereby the fixed part of the salary is
credited to an employee every month and the
variable aspect follows as per the goals and
targets achieved.
Variable pay is:
not a part of salary
not guaranteed
based on individual, group, or organizational
performance.
 Variable Pay: Incentives for
Performance
Some people perform better
and are more productive than
others
Better performing employees
should receive more
compensation

Variable
Pay Assumptions

Part of compensation should Some jobs contribute more

be tied directly to to organizational success
performance and results than others

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Successful Variable Pay Plans

Effective Incentive Plans

Plan Rewards the

Plan Fits the Plan effectively
Appropriate
Organization Administered
Actions

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Common purposes of variable pay include:-

rewarding individual performance,

rewarding group performance (e.g., completing a
project, meeting organizational objectives, reducing
costs),
encouraging employees to increase productivity, and
controlling payroll costs.
Why Variable Pay Plans Fail

Plan incentives are Plan doesnt reward

not seen as desirable doing a good job

Employees
View of Variable Pay
Plan

Plan rewards
teams/groups rather Plan doesnt motivate
than individuals

Plan doesnt increase

base pay

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Benefits of Variable pay plan

Encourage team-work
Promotes open lines of communication
It aligns rewards with key business priorities
Links compensation with profitability
Provides job stability
Types of Variable Pay Plans

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 Individual Incentives
Piece-Rate Systems
Straight piece-rate system
Differential piece-rate system
Bonus
Spot Bonuses
Special Incentive Programs
Performance awards
Recognition awards
Service awards
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Why Organizations Establish Variable
Pay Plans for Groups/Teams

Group/Team-
Based Variable
Pay Plans

Improve
Increase
Improve Tie pay to team customer service
employee
productivity performance or production
retention
quality

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 Design of Group/Team
Incentive Plans
Group/Team Incentive Plan
Issues

Decisions About
Distribution of Timing of
Group/Team
Group/Team Group/Team
Incentive
Incentives Incentives
Amounts

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 Group/Team Incentives
Distributing Rewards
Same-size reward for each member
Different-size reward for each member

Problems with Group/Team Incentives

Rewards in equal amounts may be perceived as unfair
by employees who work harder, have more capabilities, or
perform more difficult jobs.
Group/team members may be unwilling to handle
incentive decisions for co-workers.
Many employees still expect to be paid according to
individual performance.

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Conditions for Successful
Group/Team Incentives

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 Organizational Incentives

Profit Sharing

Primary Objectives Drawbacks

Increase productivity and Disclosure of financial

organizational performance
Attract or retain employees
Improve product/service
quality
Enhance employee morale
information
Variability of profits from year
to year
Profit results not strongly tied
to employee efforts

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Framework Choices for a Profit-Sharing Plan

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 Employee Stock Plans
Stock Option Plan
A plan that gives employees the right to
purchase a fixed number of shares of
company stock at a specified price for a
limited period of time.
If market price of the stock is above
the specified option price, employees
can purchase the stock and sell it for
a profit.
If the market price of the stock is
below the specified option price, the
stock option is underwater and is
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worthless to employees.
 Employee Stock Plans
Employee Stock Ownership Plan
(ESOP)
A plan whereby employees gain significant
stock ownership in the organization for which
they work.
Advantages
Favorable tax treatment for ESOP earnings
Employees motivated by their ownership
stake in the firm
Disadvantages
Retirement benefit is tied to the firms future
performance
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Management tool to fend off hostile takeover
 Executive Compensation
Executive Salaries

Executive Benefits

Elements of
Executive Perquisites
Executive
(Perks)
Compensation
Annual Executive Incentives
and Bonuses

Performance Incentives:
Long Term vs. Short Term

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Forms of Performance-Linked Reward System

Merit pay
Skill-based pay
Bonus schemes
Team rewards
Organization-based schemes
Annual bonus
Gain-sharing
Profit-Sharing
EVA
Stock Options
Merit-based Pay or(Individual Performance-related
pay)

It involves the following steps:-

Determination of result-oriented merit rating
procedures.
identifying job factors and their relative importance.
Formulation of a scale of reward.
Communication of the basis of monetary reward
Skill-based Pay

Links pay to the level of schemes used in the job and

application of additional skills by the persons
carrying the job.
It can take two forms :-
Conventional
Progressive
Bonus Schemes

Relates the pay or part of the pay received by the

employee to the various aspects like-
number of items they produce or process
Time they take to do a certain amount of work
Types :-
Individual piece work
Work measure schemes
Measured day work
 Individual Incentive Plans
Advantages Disadvantages
Rise in productivity Conflict may arise
Lower production costs Resistance by the

Increases earnings of
employees towards new
technology
workers Increased turnover of
employees
Team Rewards

Gain-sharing Plans:- a formula-based

organisation or factory-wide bonus plan, which
provides for employees to share in the financial
made by a company as a result of its improved
performance.
It is different from profit-sharing plans.
 Gain-sharing plans
Advantages Disadvantages
a. Enhancement in a. Do not pay more for
coordination, better performance
teamwork, and sharing b. Lesser motivation
of knowledge c. Pays bonus even when
b. Social needs are the is not earning
recognised profits
c. Acceptance of change
d. Employees produce
ideas an efforts
e. Focus on cost-saving
Profit-sharing Plan

Plans which require a designated profit target to be

met before any payouts occur.
 Group Incentive Plans

Advantages Disadvantages

Positive impact on organisation and

individual performance
Cooperation is a desired behaviour
Increased participation of employees

Line-of-sight may be lessened

Increased turnover
Increased compensation risk
Organization-based Schemes

Annual bonus
Goal-sharing plan
Profit-sharing plan
ESOP
EVA
Questions???????

Gain-sharing v/s profit-sharing???

Variable pay?
Inividual piece work?
Merit-Pay category????
Types of variable pay???
THANK YOU