Incentive compensation refers to a host of variable pay schemes designed to tie pay to performance and thereby achieve gains in worker productivity. Such compensation devices can take the form of:
l merit pay,
l bonuses,
l profit-sharing,
l gain-sharing,
l corporate stock ownership, or
l commissions.
Choosing the proper incentive devices requires an understanding of the organization's goals. Depending on the type of incentive compensation used, the target of the incentives could be individual employees (including executive employees), work groups (such as the sales force), business units, the organization as a whole, or a combination of the above.
Why use an incentive program? Incentive compensation programs can be used:
l to attract and retain critical skills,
l to motivate effort,
l to direct behavior,
l to control costs, and
l "because they might help."
Employers must also know how and when to use incentive compensation. Merit pay or bonuses could be used based on a measure of individual performance; also, group or unit performance measures could be used, or profit sharing, gainsharing or ownership schemes could be employed based on a measure of overall organizational performance.
What plans are most effective? The effectiveness of a particular variable pay vehicle can only be rated with respect to the goals it is designed to achieve. To more accurately measure effectiveness, look at:
l business goals
l reward achievement of specific financial goals
l increase productivity
l communicate and enlist support for business objectives
l Improve customer satisfaction
l cost savings goals
l reduce operating costs
l shift costs from fixed to variable
l reduce compensation costs
l organizational goals
l foster teamwork
l reward participation/empowerment in corporate culture
l reward organizational change effort
l foster healthy competition
l human resources goals
l more closely link pay and performance
l provide an effective retention device
l provide an effective recruiting device
l encourage turnover of lowest rated employees.
A survey by ECS Wyatt Data Services (1994/95 Survey report on Annual Incentives and Other Variable Pay Programs) showed an inverse relationship between a program's effectiveness and eligibility. This suggests that variable plans may be more effectively administered when they are targeted at specific groups of workers, while perhaps employees feel less ownership or incentive when the a large percentage of the employee base is eligible to participate.
32,310, What is incentive compensation? Incentive compensation refers to a host of variable pay schemes designed to tie pay to performance and thereby achieve gains in worker productivity. Such compensation devices can take the form of: l merit pay, l bonuses, l profit-sharing, l gain-sharing, l