What Is an Incentive Compensation Plan?

Individual incentive plans are used to reward employees who meet job-related performance standards, including quality, productivity, customer satisfaction, safety, or attendance. When establishing personal performance standards, managers should also select factors that the employees themselves can control. A well-designed and implemented personal rewards program should reward employees based on the results of work that they are directly responsible for.

Personal reward plan

Individual reward programs require 3 prerequisites:

1. The performance of employees can be evaluated by objective methods. Objective performance standards and examples include: number of products, sales, and reduction in error rates.

2. If the employee has sufficient ability to control the results of the work, it is suitable to use the personal reward plan.

3. The implementation of the reward plan will not cause bad competition among workers and ultimately reduce product quality. Avoid bad competition.

1. Piece-based system: Usually used in manufacturing plants, the bonus of workers is determined according to the comparison of the individual hourly output of workers with the objective production standard. But consider product quality.

2. Management incentive plan: It rewards the manager when the manager reaches or exceeds his department's sales, profit, production or other goals. The most well-known management incentive plan is management by objectives.

3. Behavioral encouragement plan: It rewards employees for specific behavioral achievements, such as good attendance or safety records. For example, companies often give bonuses to employees with the highest attendance rates over a period of time.

4. Referral program: Employees who introduce new customers or recommend talents to the company can get currency bonuses. A successful referral usually means that the company will only give the referee a bonus if the referee still works with the company after a certain period of time, usually at least 30 days, and complies with company regulations. The basic point of the referral program is that the company's existing employees are more familiar with the business culture than recruitment agencies, so they can find candidates for vacant positions in the company more effectively than recruitment agencies. Employees generally recommend people to companies when they really think they are valuable, because they bear the risk of personal reputation.

The personal incentive plan is a remuneration system designed for individuals. By comparing the performance of the individual with the established standards, the corresponding reward is given according to the type of salary payment. In analyzing personal incentive plans, (U.S.) George T. Milkovich and (U.S.) Jerry M. Newman (1984) divide the four Quadrants, each quadrant corresponds to some pay type. The first dimension is the "determination method of wage rate". As the horizontal axis, the left side is "production per unit time" and the right side is "time consumption per unit of output"; the second dimension is "relationship between output and wages", As the vertical axis, the upper part is "the output level function with a constant wage" and the lower part is the "output level function with a wage." The four quadrants divided by the two dimensions correspond to some typical personal incentive plans.

The first quadrant is represented by the direct piece rate system. The output per unit of time is the basis for determining the wage rate. Wages change as a function of output. Workers' wages are directly determined by the amount of output. The more output, the higher the wage, and the two change in equal proportions.

The second quadrant is represented by the standard working hours plan and the Bedouin plan. Standard working hours plan is a collective name for all incentive plans based on the amount of work completed at a specified time as the basis for setting the incentive wage rate. First determine the wage rate, estimate the time required to complete a job, multiply the two to get the payable salary, and estimate that it will be completed before the actual work. Instead of calculating the time required to complete the entire job, Bedo's plan is to break down the work into simple actions, and then determine the working hour quota according to the standards of workers with medium technical proficiency. The characteristic of such a plan is that if the work is completed in less than standard time, the worker will receive an incentive in terms of wages.

The third quadrant is represented by the Taylor and Merrick plans. Taylor plans to determine different wage rates according to the output level. In a given time, the actual output is higher than the standard output, and the wage level is calculated at a higher wage rate; the actual output is lower than the standard output, the wage level is calculated at a lower wage rate. . The idea of the Merrick plan is the same as that of the Taylor plan, except that it sets the wage rate at three levels. The high-end wage rate exceeds the standard output. The mid-range rate is only 83% to 100% of the standard output. The low level means that the actual output is low. 83% of the standard output.

The fourth quadrant is represented by the Halsey 50-50 method, the Ron plan, and the Gantt plan. The Halsey 50-50 method first determines the time limit for completing the task. If the worker completes the task in less than the limit, the savings will be shared between the worker and the employer at a ratio of 50 to 50. The Ron plan is similar to the Halsey 50-50 method, except that the bonus for workers increases as the time required to complete the job decreases. The Gantt plan sets the time standard to a level that requires very hard work of the workers. If it fails, it can only take a predetermined guaranteed salary. If the task is equal to or less than the rated time, the salary is equal to the guaranteed salary × (1 + 120% × time savings), so wages grow faster than output.

1.Benefits of personal reward programs

1) The link between wages and performance can be strengthened.

2) Allows the company to distribute compensation fairly. In the end, the fair distribution method allows the company to retain the best performing employees.

3) In line with an individualistic culture like the United States.

2. Disadvantages of personal reward programs

1) It may lead to rigidity. Employees rely too much on supervisors to set work goals. Once employees are skilled at work, they will not be willing to increase performance as long as they get the highest bonus.

2) Supervisors must develop and maintain sophisticated performance appraisal methods to determine appropriate performance salary increases.

3) When these programs reward employees for only one aspect of their work, they can lead to bad work behavior. For example, it may cause employees to neglect product quantity, quality and customer satisfaction.