Incentive schemes

Incentive schemes

 An incentive scheme ties pay directly to performance and the reward should encourage improvements in performance. It can be tied to the performance of an individual or a team of employees. The scheme should link performance to organisational goals.

There are three main types of incentive schemes

  • Performance related pay (PRP)
    • Piecework - reward related to the pace of work or effort. The faster the employee works, the higher the output and the greater the reward.
    • Management by objectives (MBO) - key results are identified for which rewards will be paid on top of salary.
    • Points system - this is an extension to MBO reward systems where a range of rewards is available based on a point system derived from the scale of improvement made such as the amount of cost reduction achieved.
    • Commission - paid on the performance of an individual typically paid to salaried staff in sales functions, where the commission earned is a proportion of total sales.
  • Bonus schemes - usually a one off as oppose to PRP schemes which are usually a continual management policy
  • Profit sharing
    • Usually available to a wide group of employees (often company wide) where payments are made in the light of the overall profitability of the company.
    • Share issues may be part of the scheme.

Incentives need to encourage effort or action towards the delivery of organisational objectives there can be potential conflict when contrasting long and short term objectives. (e.g. sales staff offering discounts to customers to win extra orders this year to get a bonus, at the expense of next year's sales)

  • Long-term incentive schemes will be those that are designed to continually motivate and deliver organisational objectives.
  • Short-term incentive schemes will be those that motivate in the short-term but do not deliver on-going motivation and are often achieved at the detriment of longer term objectives.

Remember that incentives do not have to be financial in order to motivate employees. Ongoing development and training of staff members can also be motivational for them. This is because it can improve their long-term career prospects and enable them to move into more challenging, interesting roles.

This links back to Maslow's hierarchy of needs, as offering continuous development will help to fulfil the ego and self-fulfilment 

It should be noted that this will also benefit the organisation, as it will get access to more motivated, skilled employees.

Design of incentive schemes

Rewards systems must be carefully designed to ensure that they:

  • are fair and consistent for all employees
  • are sufficient to attract and retain staff
  • maintain and improve levels of employee performance
  • reward progression and promotion
  • comply with legislation
  • control salary costs.
Created at 8/10/2012 12:24 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 11/13/2012 5:20 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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