Incentive systems

Incentive systems exist for almost every type of job from manual labor to professional, managerial, and executive work. The more common incentives are discussed in the following pages.

1. Piecework : piecework is an incentive system that compensates the worker for each unit of output. Daily or weekly pay is determined by multiplying the output in units times the rate per unit. For example, in agricultural labor, workers are often pain a specific amount per bushel of produce picked. Piecework does not always mean higher productivity, however. As the Hawthorne studies showed, group norms may have a norm significant impact if peer pressure works against higher productivity. And it may be difficult to measure a person’s contribution (for example, a receptionist), or an employee may not be able to control the output (as with an assembly line workers).

2. Production Bonuses: production bonuses are incentives paid to workers for exceeding output goals. Often employees receive a base pay rate. Then through extra effort that results in output above the standard, they get a supplemental bonus, which is usually figured at a given rate for each unit of production over the standard. One variation rewards the employee for saving time. For example, if the standard time for replacing an automobile transmission is four hours and the mechanic does it in three, the mechanic any be paid for four hours. A third method combines production bonuses with piecework by compensating workers on an hourly basis, plus an incentive payment for reach unit produced.

3. Commissions: In sales jobs, the seller may be paid a percentage of the selling price or a flat amount for each unit sold. When no base compensation is paid, total earnings come from commissions. Real estate agents and automobile sellers are often on this form of “straight commission,” as are a growing number of retail clerks.

4. Pay for knowledge / Pay for skills Compensation
Pay for knowledge and pay for skill compensation systems reward employees with higher pay as an incentive for the increased knowledge or skills they acquire.

Most organizations have traditionally designed their compensation systems around specific jobs. The wage and salary structure of these systems has typically been based on job analysis and evaluations, this process determines a job’s worth and salary range. In recent years, however, a new alternative to this job based approach has been developed, this new system pays employee’s for the skills and knowledge they possess, rather than for the job they do or a particular job category.

Whether the compensation system is called knowledge based pay, employee does but on the range of jobs the employee can do. Employees are rewarded for each new knowledge or skill. These learning based pay system evaluate the employee’s worth to the employer. Increased skills and job mastery give management greater staffing flexibility. The increased employee knowledge also may reduce the total number of workers needed and may lead to higher quality results. The higher pay and greater diversity of work may mean higher levels of satisfaction and therefore lower absenteeism and turnover. At the same time, the HR department creates a continuous learning organization where continued growth is valued by employees and the company. In short, employees are paid more because they are worth more.

5. Profit sharing and stock option plans (PSSOP)
Profit sharing is scheme whereby employers undertake to pay a particular portion of net profit to their employees on compliance with certain service conditions and qualifications. The purpose of introducing profit sharing schemes has been mainly to strengthen the loyalty of employees to the firm by offering them an annual bonus (over and above normal wages) provided they are on the service rolls of the firm for a definite period. The share of profit of the worker may be given in cash or in the form of shares in the company. These shears are called bonus shares.

Merits of PSSOP
1. It is likely to induce motivation in the workers and other staff for quicker and better work so that profits of the firm are increased which in turn increases the share of workers therein.
2. It helps in supplementing the remuneration of workers and enables them to lead a rich life.
3. The idea of sharing the profits inspires the management and the workers to be sincere, devoted and loyal to the firm.
4. It attracts talented people to join the ranks of a firm with a view to shear the profits.
5. Workers do not require close supervision, as they are self-motivated to put in extra labor for the prosperity of the firm.

Demerits of PSSOP

1. Workers tend to develop loyalty toward firm discounting their loyalty toward trade unions, thus impairing the solidarity of trade unions.
2. Profit sharing scheme is, in practice, a fair weather plan. Workers may get nothing if the business does not succeed.
3. Management may dress up profit figures and deprive the workers of their legitimate shear in profits.
4. Fixation of workers share in the profits of firm may prove to be a bone of contention in the long run.

6. Co-partnership
In this system, the worker gets his usual wages, a share in the profits of the company and a shear in the management of the company as well. Thus, employees share the capital as well as profits. When co-partnership operates with profit sharing the employees are allowed to leave their bonus with the company as shares (bonus shares). This system is an improvement over all other systems of wage payment in that it implies both profit sharing and control sharing. It also offers recognition of the claim of the dignity of labor as the worker is viewed as partner in the business. This would, in turn, create a sense of belonging among workers and stimulate them to contribute their best for the continued prosperity to the company.

7. Fringe Benefits
The term fringe benefits refers to the extra benefits provided to employees in addition to the normal compensation paid in the form of wage or salary. Many years ago, benefits and services were labeled “fringe” benefits because they were relatively insignificant or fringe components of compensation. However, the situation now is different, as these have, more or less, become important part of a comprehensive compensation package offered by employers to employees.

The main features of fringe benefits, as they stand today, may be stated as under:
a. They are paid to all employees (unlike incentives which are paid to specific employees whose work is above standard) based on their membership in the organization.
b. They are supplementary forms of compensation.
c. They help raise the living conditions of employees.
d. They are indirect compensation because they are usually extended as a condition of employment and are not directly related to performance.
e. They may be statutory or voluntary. Provident fund is a statutory benefit whereas transport is a voluntary benefit.

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