Individual incentive systems attempt to relate individual
effort to pay. Conditions necessary for the use of individual
incentive plans are as follows:
-Identification of individual performance: The
performance of each individual can be measured and identified
because each employee has job responsibilities and tasks that can
be categorized from those of other employees.
-Independent work: Individual contributions result from
independent work and effort given by individual employers.
-Individual competitiveness desired: Because individuals
generally will pursue the individual incentives for themselves,
competition among employees will occur. Therefore, independent
competition whereby some individuals “win” and others do not must
be desired.
-Individualism stressed in organizational culture: The
culture of the organization must be one that emphasizes individual
growth, achievements, and rewards. If an organization emphasizes
teamwork and cooperation, then individual incentives will be
counterproductive.
Piece-Rate Systems
The most basic individual incentive system is the piece-rate
system, whether of the straight or differential type. Under
the straight piece-rate system, wages are determined by
multiplying the number of units produced (such as garments sewn or
customers contacted) by the piece rate for one unit. The rate per
piece does not change regardless of the number of pieces produced.
Because the cost is the same for each unit, the wage for each
employee is easy to figure, and labor costs can be accurately
predicted.
A differential piece-rate system pays employees one
piece-rate wage for units produced up to a standard output and a
higher piece-rate wage for units produced over the standard.
Developed by Frederick W. Taylor in the late 1800s, this system is
designed to stimulate employees to achieve or exceed established
standards of production. Managers often determine the standards, or
quotas, by using time and motion studies. For example, assume that
the standard quota for a worker is set at 300 units per day and the
standard rate is 14 cents per unit. For all units over the
standard, however, the employee receives 20 cents per unit. Under
this system, the
worker who produces 400 units in one day will get $62 in
wages. There are many possible combinations of straight and
differential piece-rate systems. The specific system used by a firm
depends on many situational factors. The effects of a piece-rate
system can be seen in the HR Perspective on Safelite Glass
Corporation in Columbus, Ohio. Despite their incentive value,
piece-rate systems are difficult to use because standards for many
types of jobs are difficult and costly to determine. In some
instances, the cost of determining and maintaining the standards
may be greater than the benefits derived. Jobs in which individuals
have limited control over
output or in which high standards of quality are necessary
also may be unsuited to piecework.
Bonuses
Individual employees may receive additional compensation
payments in the form of a bonus, which is a one-time
payment that does not become part of the employee’s base pay.
Generally, bonuses are less costly to the employer than other
pay increases because they do not become part of employees’ base
wages, upon which future percentage increases are figured.
Growing in popularity, individual incentive compensation in
the form of bonuses often is used at the executive levels of
an organization, but bonus usage also is spreading to
lower-level jobs.
Bonuses also can be used to reward employees for contributing
new ideas, developing skills, or obtaining professional
certifications. When the skills or certification requirements are
acquired by an employee, a pay increase or a one-time bonus may
follow. For example, a financial services firm provides the
equivalent of two week’s pay to employees who master job-relevant
computer skills. Another firm gives one week’s pay to members of
the HR staff who obtain their professional certifications such as
PHR, SPHR, CCP, and others.
Firms in the information technology industry pay bonuses for
obtaining special technical skills in order to keep employees from
looking for new jobs elsewhere using their newly acquired skills
and certification.
A bonus recognizes performance by both the employee and the
company. When both types of performance are good, bonuses go up.
When both are bad, bonuses go down. When an employee has done
poorly in a year that was good for the company, most employers base
the employee’s bonus on individual performance. It is not always as
clear what to do when an employee does well but the company does
not. However, a growing number of companies are asking employees to
put a portion of their pay “on the line.” While offering big
incentive bonuses for high performance, they are withholding them
when performance is poor and insisting that employees
share both the risks and rewards of business.
One method of determining an employee’s annual bonus is to
compute it as a percentage of the individual’s base salary. Often,
such programs pay bonuses only if specific individual and
organizational objectives have been achieved. Though technically
this type of bonus is individual, it comes close to being a group
or organizational incentive system. Because it is based on the
profits of the division, management must consider the total
performance of the division and its employees.
Whatever method of determining bonuses is used, legal experts
recommend that bonus plans be described in writing, especially for
key managers. A growing number of lawsuits are being filed by
employees who leave organizations either voluntarily or
involuntarily, demanding payment of bonuses promised to them.
Special Incentive Programs
There are numerous special incentive programs that provide
awards to individuals. These programs can take various forms,
ranging from one-time contests for meeting performance targets to
rewards for performance over time. For instance, safe-driving
awards are given for truck drivers who have no accidents or
violations during a year. Although special programs also can be
developed for groups and for entire organizations, these programs
often focus on rewarding only highperforming individuals.
INCENTIVE PROGRAM AWARDS
Cash merchandise, gift certificates, and travel are the most
frequently used rewards. Cash is still highly valued by many
employees because they have discretion on how to spend it; however,
travel awards, particularly those to popular destinations such as
Disney World, Las Vegas, Hawaii, and international locations,
appeal to many employees. In one study, Goodyear Tire & Rubber
Company conducted an experiment
in which some employees received cash and another set of
employees received merchandise and other non-cash rewards. The
employees receiving the non-cash incentives outperformed those
receiving only cash by 46%. The study concluded that many employees
like the continuing “trophy” value of merchandise rather than the
short-term usage of cash.
RECOGNITION AWARDS
Another type of program recognizes individual employees for
their performance or service. For instance, many organizations in
service industries such as hotels, restaurants, and retailers have
established “employee of the month” and “employee of the year”
awards. In the hotel industry over half of the hotels surveyed have
recognition awards for desk clerks, housekeepers, and other hourly
employees, with the awards being triggered by favorable guest
comment cards.
It is important that recognition awards be given to recognize
specific efforts and activities targeted by the organization as
important. While the criteria for selecting award winners may be
subjectively determined in some situations, formally identified
criteria provide greater objectivity and are more likely to reward
performance, rather than being seen as favoritism. When giving
recognition awards, organizations should use specific examples to
describe clearly how those receiving the awards were
selected.
SERVICE AWARDS
Another common type of reward given to individual employees is
the service award. Although these awards often may be
portrayed as rewarding performance over a number of years, the
reality is that they are determined by length of service, and
performance plays little or no role.
