Individual employee incentive and recognition programs

Incentive payments for hourly employees may be determined by the number of units produced, by the achievement of specific performance goals, or by productivity improvements in the organization as a whole. In the majority of incentive plans, incentive payments serve to supplement the employee's basic wage.

Piecework

One of the oldest incentive plans is based on piecework. Under straight piecework, employees receive a certain rate for each unit produced. Their compensation is determined by the number of units they produce during a pay period. At Steelcase, an office furniture maker, employees can earn more than their base pay, often as much as 35 percent more, through piecework for each slab of metal they cut or chair they upholster. Under a differential piece rate, employees whose production exceeds the standard output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard.
Employers will include piecework in their compensation strategy for several reasons. The wage payment for each employee is simple to compute, and the plan permits an organization to predict its labor costs with considerable accuracy, since these costs are the same for each unit of output. The piecework system is more likely to succeed when units of output can be measured readily, when the quality of the product is less critical, when the job is fairly standardized, and when a constant flow of work can be maintained.
Under the piecework system, employees normally are not paid for the time they are idle unless the idleness is due to conditions for which the organization is responsible, such as delays in work flow, defective materials, inoperative equipment, or power failures. When the delay is not the fault of employees, they are paid for the time they are idle. Standard Hour Plan Another common incentive technique is the standard hour plan, which sets incentive rates based on a predetermined “standard time” for completing a job. If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate. For example, if the standard time to install an engine in a half-ton truck is five hours and the mechanic completes the job in four and a half hours, the payment would be the mechanic’s hourly rate times five hours. Standard hour plans are particularly suited to long-cycle operations or those jobs or tasks that are nonrepetitive and require a variety of skills.
The Wood Products Southern Division of Potlatch Corporation has successfully used a standard hour plan for the production of numerous wood products. The incentive payment is based on the standard hours calculated to produce and package 1,000 feet of wood paneling. If employees can produce the paneling in less time than the standard, incentives are paid on the basis of the percentage improvement. Thus, with a 1,000-hour standard and completion of the wood paneling in 900 hours, a 10 percent incentive is paid. Each employee’s base hourly wage is increased by 10 percent and then multiplied by the hours worked.
While standard hour plans can motivate employees to produce more, employers must ensure that equipment maintenance and product quality does not suffer as employees strive to do their work faster to earn additional income.

Merit Raises

Merit raises can serve to motivate managerial, sales, and professional employees if they perceive the raises to be related to the performance required to earn them. Furthermore, theories of motivation, in addition to behavioral science research, provide justification for merit pay plans as well as other pay-for-performance programs. For employees to see the link between pay and performance, however, their performance must be evaluated in light of objective criteria. If this evaluation also includes the use of subjective judgment by their superiors, employees must have confidence in the validity of this judgment. Most important, any increases granted on the basis of merit should be distinguishable from employees’ regular pay and from any cost-of-living or other general increases. Where merit increases are based on pay-for-performance, merit pay should be withheld when performance is seen to decline.

Problems with Merit Raises Merit raises may not always achieve their intended purpose. Unlike a bonus, a merit raise may be perpetuated year after year even when performance declines. When this happens, employees come to expect the increase and see it as being unrelated to their performance. Furthermore, employees in some organizations are opposed to merit raises because, among other reasons, they do not really trust management. What are referred to as merit raises often turn out to be increases based on seniority or favoritism, or raises to accommodate increases in cost of living or in area wage rates. Even when merit raises are determined by performance, the employee's gains may be offset by inflation and higher income taxes. Compensation specialists also recognize the following problems with merit pay plans: 1. Money available for merit increases may be inadequate to satisfactorily raise employees’ base pay.
2. Managers may have no guidance in how to define and measure performance; there may be vagueness regarding merit award criteria. 3. Employees may not believe that their compensation is tied to effort and performance; they may be unable to differentiate between merit pay and other types of pay increases.
4. Employees may believe that organizational politics plays a significant factor in merit pay decisions, despite the presence of a formal merit pay system.
5. There may be a lack of honesty and cooperation between management and employees. 6. It has been shown that “overall” merit pay plans do not motivate higher levels of employee performance.24 Probably one of the major weaknesses of merit raises lies in the performance appraisal system on which the increases are based. Even with an effective system, performance may be difficult to measure. Furthermore, any deficiencies in the performance appraisal program (these were discussed in Chapter 9) can impair the operation of a merit pay plan. Moreover, the performance appraisal objectives of employees and their superiors are often at odds. Employees typically want to maximize their pay increases, whereas superiors may seek to reward employees in an equitable manner on the basis of their performance. In some instances, employee pressures for pay increases actually may have a harmful effect on their performance appraisal.

Incentives for Sales Employees

The enthusiasm and drive required in most types of sales work demand that sales employees be highly motivated. This fact, as well as the competitive nature of selling, explains why financial incentives for salespeople are widely used. These incentive plans must provide a source of motivation that will elicit cooperation and trust. Motivation is particularly important for employees away from the office who cannot be supervised closely and who, as a result, must exercise a high degree of self-discipline. Unique Needs of Sales Incentive Plans Incentive systems for salespeople are complicated by the wide differences in the types of sales jobs. These range from department store clerks who ring up customer purchases to industrial salespersons from McGraw-Edison who provide consultation and other highly technical services. Salespersons’ performance may be measured by the dollar volume of their sales and by their ability to establish new accounts. Other measures are the ability to promote new products or services and to provide various forms of customer service and assistance that do not produce immediate sales revenues. Performance standards for sales employees are difficult to develop, however, because their performance is often affected by external factors beyond their control. Economic and seasonal fluctuations, sales competition, changes in demand, and the nature of the sales territory can all affect an individual’s sales record. Sales volume alone therefore may not be an accurate indicator of the effort salespeople have expended. In developing incentive plans for salespeople, managers are also confronted with the problem of how to reward extra sales effort and at the same time compensate for activities that do not contribute directly or immediately to sales. Furthermore, sales employees must be able to enjoy some degree of income stability.

Types of Sales Incentive Plans Compensation plans for sales employees may consist of a straight salary plan, a straight commission plan, or a combination salary and commission plan. A straight salary plan permits salespeople to be paid for performing various duties not reflected immediately in their sales volume.

On the other hand, the straight commission plan, based on a percentage of sales, provides maximum incentive and is easy to compute and understand.

Why Incentive Plans Fail * Performance pay can’t replace good management. * You get what you pay for. * “Pay is not a motivator.” * Rewards punish. * Rewards rupture relationships. * Rewards can have unintended consequences. * Rewards may undermine responsiveness. * Rewards undermine intrinsic motivation.

Implementing Effective Incentive Plans * Ask: Is effort clearly instrumental in obtaining the reward? * Link the incentive with your strategy. * Make sure effort and rewards are directly related. * Make the plan easy for employees to understand. * Set effective standards. * View the standard as a contract with your employees. * Get employees’ support for the plan. * Use good measurement systems. * Use a complete set of standard. * Make the incentive plan part of a comprehensive, commitment-oriented