5.2.7 Incentives

Compensation fluctuates according to

– A pre-established formula
– Individual or group goals because group goals are different from individual goals
– Company earnings

Incentives adds to base pay

It controls costs because the employee is being paid for his/her extra effort and for the benefits brought to the organization.

Motivates employees

Incentive Pay Categories




Individual incentive plans

– Quantity of work output (How many units produced)
– Quality of work output (What was the quality of the product or service being produced or served)
– Monthly sales (How much sales was generated)
– Work safety record (How many hazard or errors are being reduced.
– Work  attendance (If the absent is reduced or attendance is good)

Group Incentive

Performance  Measures

Group incentive plans
–  Customer satisfaction
–  Labor cost savings
–  Materials cost savings
–  Reduction in accidents
–  Services cost savings

Company-Wide Performance  Measures

Company-wide incentive plans
–   Company profits
–   Cost containment/prevention
–   Market share
–   Sales revenue

Individual Incentive Plans (Piecework plans)

• Awards based on individual 
      production vs. company standards
•   Awards based on individual
       performance standards using
       objective & subjective criteria
•   Quantity and / or quality goals

Advantages and disadvantages of Individual Incentive Plan

• Advantages
– Helps relate pay to performance
– Promotes equitable distribution of compensation
– Helps retain best performers
– Compatible with individualistic cultures and societies

• Disadvantages
– May promote inflexibility
– Unrealistic standards may hamper employee motivation
– Setting performance standards is time consuming
– Factors beyond employee’s control may affect outcomes
– Factors not rewarded may be overlooked

Group Incentive Plans

• Rewards employees for their
   collective performance
• Group incentive use has increased in industry
• 2 types
–   Team - based  or small group
–   Gain sharing

Company-Wide Incentive Plans

• Rewards employees when company
    meets performance standards
•  2  Types
–   Profit sharing plans
–   Employee stock option plans

Competitive Strategies

• Lowest - cost
–   Lower output costs per employee
–   Individual & group incentive plans
–   Behavioral encouragement plans

•   Differentiation
–   Unique product or services
–   Creative, risk - taking employees
–   Long - term  focus
–   Team - based incentives