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Thursday, November 17, 2011

Rewards and Incentives

What is Reward?

The term reward is defined as “something that increases the frequency of an employee action“. That is assuming that it guaranteed a positive reinforcement to the employees that will make them acts as desired by the organizations goals and objectives. To achieve desired goals, reward systems should be closely aligned to organizational strategies. Sharing on the idea of most business experts that “the only way employees will fulfill your dream is to share in the dream”. This can be done when the employees and employer are committed to fulfill one dream and that is to make the organization to develop.

Critics on reward system contend that rewards succeed at securing one thing only and that is temporary compliance. Further, it does not create an enduring commitment to any value or actions. It does not motivate, they punished; they rupture relationships, they ignore reasons, they discourage risk taking, they even undermine interests. The more desirable the reward the more demoralizing it is to miss out.

What is Incentives?

Incentive is a positive motivational influence that can sometimes be equated or synonymously called as bonus: which is an additional payment (or other remuneration) to employees as a means of increasing output
Incentive Pay Systems

Incentive pay systems include incentive plans that provide financial or non-financial rewards to employees who make substantial contributions to organizational effectiveness. Some plans tie rewards to the output of individual employees, others reward the productivity of groups but, still others are based on the overall profitability of the organization.

Purpose of Incentives

Incentive pay systems are designed to encourage employees to achieve specific organizational goals, such as increasing profits, lowering costs, raising productivity, improving product quality. Some organizations have two or more incentive plans operating simultaneously, such as an individual bonus scheme plus an organization-wide-profit-sharing plan

Types of Incentive Plans

1. Individual incentive plans
2. Group incentive plans
3. Productivity gain sharing plans
4. Profit-sharing plans

These types of Incentive Plans are all variable pay in which it is a compensation, other than base wages or salaries, in which payment fluctuates according to some standard.  However just to give distinction merit pay is not variable in the sense that merit increases are simply added to an employee’s base pay and remain a permanent part of the person’s regular compensation. Individual Incentive Plans are reward systems tied to the performance of individual employees that takes into several forms, depending on the category of workers for which they are designed.

Incentives for Production Workers

Individual incentive plans for production workers typically offer additional financial compensation to those employees who produce work over and above a specified quantity and/or quality. This type of incentive plan when properly designed, it can contribute to organizational efficiency by raising worker productivity and lowering the production cost of each unit. Such plans are intended to assist in increasing efficiency, however, not to accomplish it alone.  In manufacturing, for example, incentive plans are often designed in conjunction with acceptable changes in work methods to sustain efficiencies gained through time-and-motion studies or through work simplification.  In other words, some job-design strategies can be used to organize tasks more efficiently or to simplify them, and the incentive system is designed to motivate the worker to use the more efficient methods.

Piece-rate plan (or piecework plan)

This type of plan gives compensation to employees based on the number of units produced.  In most piece-rate plans, the worker is guaranteed a base rate, or minimum hourly wage that assumes a certain rate of production, and is paid extra for production above that rate. One form of this type is the straight piece-rate plans, in which the worker is paid an additional set amount for each unit produced above the standard.  Another form is differential piece-rate plans, in which the worker who exceeds standard production is compensated at a higher rate for all work than workers who satisfy only the minimum standard. For either type of plan, base rates are often determined through job evaluation and wage surveys, whereas production standards are frequently established by time-and-motion studies.

Production-Bonus Incentive Systems

In this type of incentive system the workers who surpass minimum production standards are given a bonus payment based on cost savings associated with higher productivity. One form of this incentive system is called, standard-hour plan, under which there is called “standard time” for completing a particular job or task is established. The worker is paid the standard rate even when he or she completes the job in less than standard time. For example, if the standard time for a particular job is nine hours, and an employee completes it in six hours, the employee’s earnings are still nine times the hourly rate.
Another is measured day-rate plan. Under this plan, employees are rated every two or three months on several factors, such as productivity, quality of work, dependability, and versatility. If rated high, they may make as much as 20 percent above the current pay rate. This merit rating fixes the wage until the next merit rating, when the individual’s pay may be raised or lowered. This plan differs from typical merit-rating plan in that it gives significantly greater weight to productivity, and wages can be reduced if the rating falls.

Incentives for Sales Personnel

One form of incentive for sales personnel is called, Sales-pay plans that feature commissions, or other bonuses based on the number of items or dollar volume sold by the employee. This form also is considered as individual incentive plans. One of the advantages of commission payments is that they tend to be tied to revenues and profits of the company. Therefore, if the economy experienced recessions the company is saved by the idea that the firm can’t be forced by the employee to give bonuses because if the economy suffers then there is little sales it would also mean that there is no bonus to be paid for the employees. In short, when a firm is faced with a recession, a commission system automatically allows it to lower its costs. However, the main disadvantage is to employees because on a straight commission, of course, their standard of living is less secure than if they were paid base salary.

Incentives for Managerial and Professional Employees

Performance bonuses of some kind are the most frequently used incentive plans for management and exempt employees. The details vary greatly from company to company.  For example, bonuses may be allocated on the basis of an overall judgment about a manager’s or a professional’s contribution, or end-of-year bonuses may be allocated on the basis of the extent to which the person attains the objectives agreed on at the beginning of the year.

One form of this is the spot bonuses which are cash awards for extraordinary achievement or performance. This means that this form of incentives for managerial employees qualify any person as long as he is spotted doing well in his job. Since this type of incentive is not regular, they are given on a more spontaneous basis and are usually intended to award individual performance that is not regularly recognized other ways.
In one study of 191 companies, 26 percent used spot bonuses. Unlike more traditional bonus plans that focus on managerial and professional employees, workers in most categories tend to be eligible for awards under spot-bonus plans.

Another is bonuses as one-time payments rather than as additions to the base salary. In which, are known to be gradually gaining acceptance in the business world. One advantage of such bonuses is that they do not further inflate a salary structure if it is decided that the structure is too high.  A disadvantage, quickly seen by employees, is that bonuses do not increase benefits such as pensions and insurance, which are usually tied to salary level.


In paying bonuses several options are available to firms that would help them design an effective reinforcement system that will fit on the nature of firm they have. Firms can pay bonuses by weekly, monthly, quarterly, semi-annually, or annually.

Frequent vs. Infrequent Payouts

Adherents of frequent payout system of bonuses argue that, since bonuses are designed to reinforce behaviors of the employees that are desirable to the company therefore the more frequent the payout system the more effective it is to reinforce desired behavior for the employee. The major purpose of variable pay system is to encourage employee involvement and teamwork in pursuit of continuous improvement. It is believed that the moment there is a need to reinforce certain behaviors reinforcement incentives are viewed to be more effective when it is in the right time. However, on the other side are the infrequent payout adherents. Their arguments are the following. First, infrequent payout tends to have a big effect on the substance of the reward in short it will make larger payouts. A 600 dollar a month is better than a 50 dollar a month. Second is that it provide a “smoothing effect” which means that if the firm incurs loss, the firm will not carry the burden of paying bonuses to those employees who have excellent performance on the months that the company is incurring the loss. Paying a bonus at the end of the year might give the company enough time to recover the losses incurred over the months. Therefore it gives a good position to the company to afford. Lastly, is that infrequent payout system tend to lower administrative costs, the more frequent the reward or incentive system the more time the administration needs to prepare for administering it. While infrequent payout system would at least need less time to prepare it.

Another type of incentive is called royalty compensation which may be a particularly effective incentive for scientists and inventors. Under a royalty compensation plan, key development and research people can participate in the commercial success of the products they create.

Employee Stock Ownership Plans

Employee Stock Ownership Plans (ESOP’s) allow employees at any level to buy company stock. Purchases are made through payroll deduction or made by the company through a profit-sharing plan. Generally, employees are eligible to sell the stock or withdraw dividends only on retirement or termination of employment, when they must pay taxes on those assets.

One form of the ESOP is the stock option plan. Under such a plan, the executive, manager, or professional, and more recently the rank-and-file employee is granted the right to buy a certain number of shares of the company’s stock at a given price by a specified date. If the value of the stock goes up substantially over the predetermined price, the person makes a significant profit when the option is exercised. If the stock price goes down, the option is not exercised. The number of shares allocated is determined by an appraisal of the person’s performance, or as a general bonus to celebrate the firm’s profitability, or as a way to add to the motivation of employees.

One version of the sock option takes the form of stock appreciation rights (SARs). Under a SAR plan, an executive can relinquish the right to purchase the stock and receive an amount equal to the increased value of the stock from the date the stock option was granted.

Team Incentive Plans

Because jobs can be interdependent, it is sometimes difficult to isolate and evaluate individual performance. In these instances, it is often wise to establish incentives based on group or team performance. For example, an assembly-line operator must work at the speed of the line. Thus, everyone working on the line is dependent on everyone else. With team incentive plans, all team members receive incentive pay based on performance of the entire team. Depending on the specific situation, the team may be as large as the entire organizational work force or as small as three or four members of a work team. Many team incentive plans are based on such factors as profits or reduction in costs of operations.

Organizational Incentives

Reward members based on the performance of the entire organization. With such plans, the size of the reward usually depends on the salary of the individual. Most organization wide incentive plans are based on establishing cooperative relationships among all levels of employees.

Productivity Gain-sharing Programs

Different companies know gain-sharing by different names, such as profit sharing, performance sharing, or productivity incentives. These programs generally refer to incentive plans that involve employees in a common effort to improve organizational performance and then reward employees immediately when their performance improves. Gain-sharing is based on the concept that employees and the company share the resulting incremental economic gains. While many variants of gain-sharing exist, they are all based on the same principles.

First, the company must be able to measure its output; Then, when employees reduce labor costs by increasing productivity, they share in the savings. For example, if it is determined that 25 percent of net production costs should be attributable to labor costs, any improvement below this target would be put into a bonus pool to be shared with employees.


One of the newest and most popular productivity-gain (PG) plans is deeveloped by Mitchell Fein which focuses on the number of hours saved for a given number of units produced by subtracting from the hours allotted for those units the hours it actually took to produce them. The savings realized by producing the units in a shorter than expected time are then shared by the firm and the worker. It differs from most PG plans in that participative procedures such as production committees and consideration of employee suggestions for improving efficiency are optional. For this reason, executives and union officials who place less value on employee participation but are nevertheless interested in increasing efficiency may find improshare an appropriate incentive system.

The Scanlon Plan

A well-known gainsharing plan that not only allows but also requires extensive participation which is based on a ratio of labor costs to productivity. When labor costs decline in relation to productivity, the employees are entitled to a share of the savings through bonus payments. When labor costs do not go down, of course, there are no savings to share. Ordinarily, all employees benefit from cost savings, including production, clerical, sales and supervisory personnel. The Scanlon plan is distinguished by its emphasis on union-management cooperation and committee participation by employees at all levels.

Spot gainsharing (SGS) plans are productivity gainsharing plans with a fixed time frame and are adapted to solving specific problems. SGS plans have been used, for example, to solve serious backlog problems without adding employees. Once the backlog problem has been solved, or the expiration date reached, the plan is terminated.

Non-Monetary Rewards

Non-monetary rewards should form one important part of a complete employee recognition program along with monetary rewards. Each motivates employees differently. Just like monetary rewards, non-monetary rewards can be used for either individual or team rewards. Managers must know when to use these rewards. Some other employees may see motivating others with money as vulgar, and are disincented by such offers. This second group of employees is more likely to be motivated to improve their performance through the use of nonmonetary rewards such as being thanked publicly at a departmental function, having lunch with the head of the organization, or receiving an extra day off. The desired outcome of rewards and recognition programs is to improve performance. Non-monetary recognition can be very motivating, helping to build feelings of confidence and satisfaction. An American Society for Training and Development (ASTD) report on employee retention research identified consistent employee recognition as a key factor in retaining top-performing workers.

Cafeteria Plans

Cafeteria plans are fringe-benefit plans that allow employees to choose the benefits they want from their employer, including cash in lieu of other benefits. Employees may choose among a variety of taxable benefits, such as cash, or nontaxable benefits, such as health coverage. The basic requirements of cafeteria plans are that they be in writing, give employees choices among cash and other benefits, and not discriminate in favor of highly paid employees. A plan must offer at least one taxable benefit and at least one nontaxable benefit. One advantage of this type of plans is that both employer and employee receive certain tax advantages (which may not be as important for nonprofit organizations as for for-profit companies). Another is that employees have the freedom to choose cash instead of unwanted or unneeded benefits. By offering a cafeteria plan, it may be easier to shift more of the cost of employee benefits to the employees. An association can provide its employees with a mechanism to avoid taxation of the employer-provided benefits.

Taxable Benefits

Even under a cafeteria plan, certain benefits may be taxable to the employee. Cash is taxable. But so are other benefits that are treated like cash - for example, vacation pay, group term life insurance coverage in excess of $50,000. (Note: This section cited the plan on the US settings since this types of plans originates in the United States).

Nontaxable Benefits 

To be nontaxable, the benefit must be a "qualified" benefit under Section 125. Such qualified benefits include accident or health plans, disability benefits, accidental death and dismemberment benefits, the first $50,000 of group term life insurance, a group dependent care assistance plan, and a group legal services plan.
If a nontaxable benefit is chosen
The employee and the association avoid social security taxes and the employee avoids income taxes. If the employee takes cash, the employee and the association are subject to social security taxes. The employee also has to pay income tax on the cash.

Excluded Benefits

Some employee benefits cannot be included in a cafeteria plan. These include scholarships, employee discounts, and no-additional-cost services, such as free registration at the associations own events. In most cases, a cafeteria plan cannot offer a benefit that defers compensation, although it can offer employees the opportunity to make elective contributions to a 401 (k) plan.

Three Types of Cafeteria Plans

Benefits under a cafeteria plan are usually offered in one of the following three forms:

1.      Flexible spending account
2.      Full flex
3.      Premium conversion

Flexible Spending Account

In this version, employees typically reduce their salaries by a uniform amount during a 12-month period and set up accounts. Money is then taken from these accounts to pay for medical expenses not covered, such as deductibles and coinsurance. Account reimbursements are tax-free. In other words, the employee is reimbursed from his or her account for qualified expenses after they have been incurred, and this reimbursement is not taxed.

Full flex (also called "core" or "buffet")

Full flex is the most complex plan, giving employees the greatest amount of choice. A full flex plan carries risk for the association, if benefits are not properly priced. Full flex is also the costliest and most time-consuming type of cafeteria plan in terms of design, administration, maintenance, and implementation.

Premium Conversion 

The simplest form of flexible, wherein the employee elects to have his or her salary reduced, and the amount of the reduction is used to pay for one or more nontaxable benefits. By contributing on a pretax basis, the employee saves federal and state income taxes in most states. The employee and employer save on social security taxes (except for life insurance).

A cafeteria plan also gives the employee greater choice in determining how the employer's dollars are spent on his or her behalf. Introducing wider choice and more options can satisfy the diverse needs of employees, perhaps without increasing employer costs.

1 comment:

  1. Very informative, keep posting such good articles, it really helps to know about things.