The oldest form of compensation is the individual incentive plan, in which the employee is paid for units produced. Today, the individual incentive plan takes several forms: piecework, production bonus and commissions. These methods seek to achieve the incentive goal of compensation. One or more of these methods may be there in your workplace as well.
Straight piecework usually works like this: an employee is guaranteed an hourly rate (probably the minimum wage) for performing an expected minimum output (the standard). For production over the standard, the employer pays so much per piece produced. This is probably the most frequently used incentive pay plan. The base rate and piece rates may develop from pay surveys.
A variation of the straight piece rate is the differential piece rate. In this plan, the employer pays a smaller piece rate up to standard and then a higher piece rate above the standard. Experience show that the different piece rate is a more effective incentive than the straight piece rate, although it is much less frequently used.
Production bonus systems pay an employee an hourly rate, and then a bonus when the employee exceeds standard.
Commissions are paid to sales employees. Straight commission is the equivalent of straight piecework and is typically a percentage of the price of the item. A variation of the production bonus system for sales is to pay the salesperson a small salary and commission or bonus when she or he exceeds standard (the budgeted sales goal).
Individual incentives are used more frequently in some industries (clothing, steel, textiles) than others (lumber, beverage, bakery), and more in some jobs (sales, production) than others (maintenance, clerical).
For incentive schemes to work, they must be well designed and administered. It has been observed that incentive plans are likely to be more effective under certain circumstances these are when:
a. The task is liked
b. The task is not boring
c. The supervisor reinforces and supports the system
d. The plan is acceptable to employees and managers and probably includes them in plan design.
e. The standards are carefully designed.
f. The incentive is financially sufficient to induce increased output.
g. Quality of work is not especially important.
h. Most delays in work are under the employees control
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