Incentive is a special reward that drives an employee to perform beyond the normal level of performance. Also incentive can identify as something additional than base salary. Basically incentive pay for performance. This link reward cost and organizational performance. Incentive alternatively called as variable pay and contingent pay.
Management of incentives can defined as the process of development, implementation, and maintenance of a fair and adequate system of incentive.
If employee perform in normal level of performance or non performance in normal level both of those receive base salary and wages.
- Provide real motivation for the employee.
- Incentive payments are variable costs link to the achievement of result.
- Good way to evaluate organization hard work prople1s performance.
- Help to attract only top performances, when salary budgets are low.
- Incentive encourage team work and unit cohesiveness. (When payments based on team result)
Types of Incentive Plan
Individual Incentive Plan
Focus on individual job performance. This discourage team work. This may develop “hostiled atmosphere” among employees some may be jealous on others. Performance threshold in minimum level of performance to qualified to meet incentive payment.
- Piece work
– Straight peace work
Employee pay a sum for each unit produce by him.
Ex: organization pay 1$ per 1unit. Normal produce 50 units per 1hour if employee produce 60 units per 1hour. Other extra units also pay as using same peace amount.
– Differencial piece rate
Employee paid piece rate for each of the units upto standard outputs. Higher piece rate for each unit produce over the standard.
Ex: Upto 50 units per 1hour organization pay 1$ per 1 units. Extra units than 50 units per 1hour, each piece paid as 3$.
- Standard hour plan
Employer pay incentive if employee complete the work in less than standard time. This method use service organizations.
One time payment usually per year. This is an additional income for the employee. Common among managerial and incentive employees.
2 ways of paying bonuses
– Certain Parentage of base salary.
– Monthly wise ( give monthly salary as bonus )
- Merit pay
Paid based on employee individual performance measured through employee performance evaluation system. Usually become a part of employee base pay. This payment add for base salary. After that also calculate EPF and ETF amounts. Merit pay is cumulative.
- Lum-Sum Merit pay
This not add to the base salary. This is not cumulative. After job performance review, calculate this amount.
Team Incentive Plan
Focus on group job performance and paid collectively. For high performance organization pay high incentive. This motivate employees to engage with team work.
- Team incentive plan
Organization give time frame for team, if they achieve target within the given time period then they receive incentive.
- Gain sharing
Advantage which have obtain by effort of employees.
Advantages- Increase cohesiveness
Increase employee motivation
Organization team culture will be develop
Knowledge sharing will happen
Disadvantages – Free-write effect ( some people are gain incentive without performing)
Inter group conflicts happen
Low performance people become demotivate
Complex payout formula difficult to understand for everyone
Organizational Incentive Plan
Focus on entire organizational performance. Incentives are paid organizationally. This reduce competition among employee. Encourage all employees work together to generate better organizational outcomes. Based on hierarchy incentive amount will depend.
- Profit sharing
Shares profit among all the employees within organization.
- Stock options
This is the way of achieving employee ownership. This give employees the opportunity to buy a company shares at a previously fixed price.
- Employee stock ownership
That gives employees certain tax and financial advantages when stock is granted to employees.