Today we will discuss some of the different incentive plans organizations can use for
individual employees, sales people, executives and managers, as well as some organization-wide
plans. We will not talk about any of the motivation theories discussed in your textbook so be
sure to read about them in chapter 12.
In order to have an idea of how incentives work, we need to spend some time discussing
what motivates people. What motivates you to do things? Not just in work, but in all
of the things you do? Is it money, or flexibility in your schedule? Everyone is different and
it is important to note that no single motivation technique will work for every employee.
Incentives are financial rewards above and beyond regular salary.
Frederick Taylor popularized the theory of scientific management and the use of financial
incentives in the late 1800s. He believed employees engaged in something known as
Systematic soldiering, the tendency of employees to work at the slowest pace possible and to
produce at the minimum acceptable level. He believed by providing financial incentives
you could motivate people to work harder. What he did not take into account, and which
we now know is the Law of Individual Differences, which says people differ in personality, abilities,
values, and needs. Thus, people react to different incentives in different ways.
Managers should be aware of employee needs and fine-tune the incentives offered to meet
their needs. They should also keep in mind that money is not the only motivator.
Here are the results of a research study that shows the breakdown of the type of incentives
most preferred by employees. As you can see a large majority of employees enjoy travel
and would love to have their employer fund a vacation for them. However, not all organizations
can afford to do something of this magnitude, especially small businesses.
There are many different types of incentive plans and we will briefly discuss each one
beginning with individual incentives. There are two main types of individual incentive
plans: piecework plans and merit pay. The first individual incentive, piecework, is
paying the worker a sum, or piece rate, for each unit he/she produces. There are several
pros and cons of piecework. One example of an advantage is that the plan is easily understood.
However, there can be problems with the quality of the product produced if the incentive is
based on only the number of units created.
The other individual incentive, merit pay, is a permanent, cumulative salary increase
the firm awards to an individual employee. The raise can be based on the individual's
performance alone or on a combination of both individual and organization performance.
Here is an example of a merit pay program that is based 50% on individual performance
and 50% on organizational performance.
You can see that if both the individual and the company have outstanding performance then
the employee will receive all of the merit pay and if the employee's performance is good
but the company's performance is only marginal then 50% of the total raise possible is granted.
When considering incentives for professional employees, the options become more diverse.
Things such as bonuses, better pension plans, etc. can be used.
Organizations can also use recognition-based rewards. Studies show that recognition has
a positive impact on performance, either alone or in conjunction with financial rewards.
Combining financial rewards with non-financial ones produced performance improvements almost
twice that of using each reward alone.
Also, many organizations are using what is known as Online Reward Programs to customize
their incentive plans. Online Reward Programs are Internet sites that have a much broader
range of products than most employers could offer. Employees build up points and then
can pick and choose what reward is most important to them. This customizability makes it much
easier to bestow and deliver rewards. Now we should discuss incentives for salespeople.
Organizations that employee salespeople have to be use different types of incentives.
They can use a straight salary plan, which makes it simple to switch territories or to
reassign individuals. However, it can constrict sales and de-motivate high-performers because
there is no reward for selling more. Another option is the commission plan. This plan pays
salespeople for results, and only for results; thus, they tend to attract high-performing
sales people who see that effort clearly leads to rewards. But it may cause them to neglect
non-selling duties like servicing small accounts or cultivating dedicated customers. One last
option is a combination plan. Most companies pay salespeople a combination of salary and
commissions. Combination plans give salespeople a floor to their earnings, and still provide
an incentive for superior performance.
We also need to discuss incentives for teams. For most team incentive plans a production
standard must be set for a specific work group. The members are paid incentives if the group
exceeds the production standard. What is most important to remember about team incentives
is that you want the individuals to work as a team; therefore, they must be rewarded as
a team. If you put people into teams but reward individual performance then the team will
never really work because each person will be concerned about their own performance and
not necessarily the performance of the group. Businesses must tie rewards to goals based
on an overall standard of group performance.
While individual and team incentives are important, organizations can also create company-wide
incentive plans. One option is the Profit-Sharing Plan. Profit-Sharing involves employees receiving
a share of the company's annual profits. In other words the company takes a designated
portion of the profits and divides it among its employees. Another option is the Employee
Stock Ownership Plans (ESOP). Here a firm purchases shares of its stock for employees
so when the organization succeeds, employees are rewarded because the value of the stock
increases.
Yet another option, known as a Gainsharing Plan, is an incentive that engages some, or
all employees. in a common effort to achieve productivity objectives, with any resulting
cost-savings gains shared among employees and the company. For example, if you find
a way to reduce the amount of paper your organization uses and that saves the company money, then
the organization shares a portion of those saving, or gains, with you.
Incentives for Managers and executives can be the same as incentives offered to other
employees such as bonuses or stock options but when speaking in terms of upper management
and executives we are talking about much bigger bonuses and much larger portions of stock
that are handed out to these individuals. Almost any incentive plan can be scaled up
to the executive level.
Today we have discussed the different types of incentive programs organizations can use
to increase employee motivation. Now you should have a better understanding of how organizations
can supplement an employee's basic compensation with other monetary incentives.