2. INCENTIVE
An incentive program is a formal scheme
used to promote or encourage specific
actions or behaviour by a specific group of
people during a defined period of time.
Incentive programs are particularly used in
business management to motivate
employees and in sales to attract and
retain customers. Scientific literature also
refers to this concept as pay for
performance.
3. Incentive Programs
• Differ by
payment method
frequency of payout
ways of measuring performance
choice of which employees are covered
• Fitting program to situation depends on
organizational structure
management style
type of work
4. Types of Plans
• Merit Pay
• Individual Incentives
• Profit Sharing
• Ownership
• Gain sharing
• Group Incentives
• Alternative Reward Systems
5. Conditions for Effective
Incentive Plans
• Plan is clearly communicated.
• Plan is understood by employees and
management.
• Bonuses are easy to calculate.
• Employees participate in administrating the plan.
• Employees believe they are being treated fairly.
• Employees believe they can trust the company
and that they have security.
• Bonuses are awarded as soon as possible after
the desired performance.
7. Categories
1. Remunerative incentives : are said to exist where an
agent can expect some form of material reward -
especially money - in exchange for acting in a
particular way.
2. Financial incentives: are said to exist where an agent
can expect some form of material reward - especially
money - in exchange for acting in a particular way.
3. Moral incentives: are said to exist where a particular
choice is widely regarded as the right thing to do or as
particularly admirable or where the failure to act in a
certain way is condemned as indecent. A person
acting on a moral incentive can expect a sense of self-
esteem and approval or even admiration from his
8. Categories
4. Coercive incentives: are said to exist where a
person can expect that the failure to act in a particular
way will result in physical force being used against
them (or their loved ones) by others in the community -
for example, by inflicting pain in punishment or
destroying their possessions.
5. Natural Incentives: such as curiosity, mental or
physical exercise, admiration, fear, anger, pain, joy, or
the pursuit of truth, the control over things in the world
or people or oneself.
9. ADVATAGES OF INCENTIVE
PROGRAMME
• Increase in volume of output - Output of the firm
increases as the workers are motivated to increase their
efficiency to get more wages.
• Reduction of cost of production per unit - Cost of
production per unit of output declines due to decrease in
labour cost and overheads per unit.
• Reduction of labour turnover - Workers is rewarded
properly for their efficiency which results in reduction of
labour turnover.
• Reduction of idle time - Since the payment of wages is
linked with efficiency, the idle time costs are reduced to
the minimum.
10. DISADVANTAGES OF INCENTIVE
PROGRAMME
• Difficulty to fix standard time - Fixation of standard time
for implementation of incentive plans poses difficulty,
particularly if the workers slow down deliberately while
under observation to get set a higher standard time.
• More supervision required - As the workers want to
speed up the work to get more wages, more supervision
is necessary to avoid decline in the quality of work and
wastage of raw materials.
• Union opposition - Labour unions may oppose the
incentive plan because it weakens them and creates
jealousies and greed among workers. This may lead to
strikes and lock-outs.
11. INDIVIDUAL INCENTIVE PLAN
Bonus, merit pay, pay for knowledge, and
other such goal based compensation
programs aimed at linking pay with
performance.
12. INDIVIDUAL INCENTIVE PLAN
• Reward individual performance
• Payments are NOT rolled into base pay
• Performance is usually measured as a
physical output rather than subjective
ratings
13. Individual Incentive Pans
Since each direct labour employee who is
motivated by money is theoretically in "business
for him/her self" there should be a strong
inducement for high performance. A piece work
operator could care less about a fellow
operator’s performance. The relative productivity
of each individual can be readily determined.
Likewise, actual time spent on specific jobs is
also easily determined and standards set.
Individual incentives work best on singularity of
product and long runs. They lose their
effectiveness and are usually costly to maintain
in a high style, fast in-process turnover.
15. Piecework Plan
Piecework is a type of incentive program where
by the employee is paid based on each unit of
output. Employees are paid a certain rate per
unit times the number of units produced. This is
a system that works for only a limited number of
jobs such as assembly line or agricultural.
Piecework incentive programs are declining in
popularity due to the fact that it does not always
lead to higher productivity. It is also difficult to
measure a persons benefit based solely on the
units they can produce in a given period of time.
16. Piecework Plan
• A system of pay based on the number of items
processed by each individual worker in a unit of time,
such as items per hour or items per day.
• Piecework is the oldest individual incentive plan and is
still the most widely used. Here, you pay the worker a
sum (called piece rate) for each unit he or she produces.
Thus, if an individual gets $0.40 for each e-mail sales
lead he finds for the firm, he would make $40 for bringing
in 100 a day and $80 for 200.
17. Standard hour plan
A plan by which worker is paid a basic hourly
rate but is paid an extra percentage of his or her
rate for production exceeding the standard per
hour or per day Similar to piecework payment
but based on a percent premium.
18. Advantages And Disadvantages Of
Piecework Plans And Standard Hour
Plans
Advantages Disadvantages
Understandable workers on piecework
appear equitable in may resist
principle plans may promote
powerful incentives rigidity
Employees Less willing to
concentrate on output concern themselves
19. Management incentive plans
Management incentive plans can also be difficult
to create. While it is the duty of managers to
work to maximize shareholder wealth by working
for what is in the best interest of the company,
not all managers act on behalf of the company
at all times. Including stock options in
management or executive incentive plans are
often used because they “appear to reduce
excessive aversions to risk by giving managers
incentives to increase firm risk instead of
avoiding it”
20. Advantages Of Management
incentive plans
• Managers can become wealthy not by the merits of their
performance, but by merely being in the right place at
the right time. This is because “payoff from the option
includes the firm’s stock price increases due to industry
and general market trends”.
• Stock options might not actually serve as an incentive.
This happens when “stock price declines after executive
stock options are issued with the result of the options
being way out of the money”.
• Managers are often allowed to exercise their options any
time and “When managers exercise their options and sell
their shares, the pay-performance incentive is gone. This
forces the firm to issue more options or find other means
21. Disadvantages Of
Management incentive plans
• To ensure managers are paid based on their
own performance, not the movement of the
market, the exercise price of the stock options
can be adjusted for market.
• Companies may also choose to restrict the
exercise timing of stock options.
22. Bonus Pay
In order for a bonus pay plan to work, you need
to set goals that employees believe can be
reached. Before creating a bonus pay incentive
program, run metrics on the department to which
you are looking to give the incentive.
23. Profit Sharing
A profit sharing incentive plan can encompass
many aspects of the company for the entire
year. Make employees aware of the factors that
affect profit, such as sales revenue, employee
productivity and conservation of resources to
lower overhead costs. When the year is over,
determine a percentage of the profit that can be
paid to the employees as a reward for helping
the company achieve a profit.
24. Stock Incentives
You can offer shares in the company as
incentives, as opposed to paying out an
immediate cash reward. Make sure you discuss
your stock incentive plan with the stock
regulatory bodies to keep your plan in line with
the law.
25. Referral plans
To provide an incentive to encourage
current members to reach out to their
personal and professional networks and
provide qualified referrals to the Branford
Chamber.
To encourage the members to remain
connected to these referrals, mentor those
they referred and, providing a framework
to retain the new members.
26. Retirement Incentive
Rather than paying an incentive directly to the
employee, you can offer to add it to the
employee's 401(k) retirement account instead.
According to the Internal Revenue Service, a
company that sponsors a 401(k) program can
claim the cost of doing that as a deduction on its
federal taxes. The employee gets the added
benefit of tax-free dollars in her retirement
account, beyond what the employee contributes
and what the company matches.
27. Vacation Incentive
Unscheduled employee time off can sometimes
be a problem for employers. To help reduce the
use of sick days and personal days, offer an
additional vacation day for each quarter in which
the employee does not call in to work.
28. Prizes
Vacations and prizes are often good
incentives, because you can work with
your vendors to help pay for those
incentives.
For example, if one of your vendors is a
television manufacturer, you can discuss
the possibility of offering one of its
television sets as a sales incentive.
29. Individual Incentive Plan
Advantages
• Helps relate pay to performance
• Promotes equitable distribution of
compensation
• Helps retain best performers
• Compatible with individualistic culture
30. Disadvantages Of Individual
Incentive Plan
• Conflicts may emerge between employees
managers
• Introduction of new technology may be resisted
by employees
• Reduced willingness of employees to suggest
new production methods
• Increased complaints of poor maintenance,
hindering employee efforts to earn larger
incentives
31. Disadvantages Of Individual
Incentive Plan
• Increased turnover among new employees
discouraged by the unwillingness of experienced
workers to cooperate in on-the-job training.
• Elevated levels of mistrust between workers and
management
32. Group Incentive Plan
Group incentives attempt to empower people
and tend to have a levelling effect on labour's
performance. Rather than restrict production, the
group pressures the superior producer to handle
more job assignments. Group pressures may
likewise have an upward levelling effect upon
the operator who would be satisfied with
relatively low individual earnings. Therefore,
average group output often is higher than
average individual output.
33. Group Incentive Plans
• Rewards employees for their collective
performance.
• Use has increased in industry
35. Team Based Or Small Group
Plan
• Focus = smaller work groups
• While gain sharing typically measures
physical output, group incentives tend to
measure performance in terms of a
broader array such as
– cost savings
– successful completion of product design
– meeting deadlines
• Drawback: competition among teams
36. Gain Sharing Plan
• sharing productivity gains with employees
• differs from profit sharing in that instead of using
an organization-level performance measure
(profits) plans measure group or plant
performance
• better for motivation
• goes beyond money -- participation in problem
solving = key
37. Advantages Of Group
Incentive Plan
• An incentive program can play a significant role
in motivating staff to achieve organizational
goals.
• Encourage cooperation within a team.
• Cultivate managerial skills within a team.
• Group incentive plans are useful when there are
no clearly defined individual goals.
• Promoting Teamwork
• Consistency
38. Disadvantages Of Group
Incentive Plan
• competition between groups can be
unhealthy
• Perceived Unfairness
• Cost
39. Disadvantages Of Group
Incentive Plan
• Many varieties of teams
• “Level problem”
• Complexity
• Control
• Communication
