Incentives: Types of Short-Term & Long-Term Incentives

Incentives: Types of Short-Term & Long-Term IncentivesIncentives are those additions to regular pay to encourage and to recognize improved employee performance.

Incentives generally are of two types;

  1. Short-term Incentives, and
  2. Long-term Incentives.

Short-term Incentives

Short time incentives are those additions to base pay provided to employees within the current operating year. They are also called variable pay as they depending on certain events or performance.

Types of Short-Term Incentives

Short term incentives can take a wide variety of forms; A supplement to paycheck. Separate amounts provided weekly, monthly, quarterly, or annually.

To granted upon the achievement of certain events or results.

1. Premiums and differences

Premiums and differentials are used to reward employees who make contributions beyond the ordinary or normal situations. These are extra compensation for the effort that is normally considered burdensome, distasteful, hazardous, or inconvenient.

A prominent characteristic of work premiums is that they must comply with the Compensation Act (minimum wage, hours of work, etc.). These also depend on the nature of the organization (policy decision) and union acceptance.

Overtime Pay

Pay for the time beyond normal weekly working hours—a useful device for cutting payroll costs. Many jobs require specialized knowledge and skills, and certain employees may be obligated to work overtime.

An employee within the mandatory overtime program can be terminated or punished if s/he refuses to work overtime when asked. If overtime is not excessive, most employees appreciate the opportunity to earn more money.

Organizations that never pay overtime are said to be overstaffed. Overtime rates can vary according to time of the day or the week.

Shift, Weekend and Holiday Work

Most companies that require a second (4.00 pm to midnight) or a third (midnight to 8.00 am) shift pay some form of shift differential.

The third shift usually receives a higher premium than the second shift.

For some employees, the shift arrangement helps meeting other needs of employees (attending college during the day).

The premium rate varies depending on the day the employee is needed to work (double premium on weekends, holidays- compared to normal overtime work).

Reporting, Call-back, Reserve, Cleanup time

Another group of premiums provided by companies to employees for their availability, knowledge, and job skills includes special payments for reporting, call-back, reserve, and cleanup time. A reporting premium guarantees a certain amount of pay to a worker who reports and finds no work available.

An ideal policy of reporting premium:

  • Full day’s pay if work has begun and is stopped without any fault on the part of the employee.
  • Full week’s pay for working a full day on the first working day of the week if no work is available for the rest of the week (equipment, weather condition, electricity supply, natural disaster, etc.).
  • Pay for a minimum of 4 hours if scheduled or notified to report for work, but no work is available.

Employees who have certain skills that could be needed at any hour receive a call-back or call-in premium. In essence, the employee is on reserve and must be available for a work assignment at any time outside normal working hours.

Employees normally receive a call-back premium any time they are on a reserve alert, whether they work or not unimportant.

Reserve or idle time payments provide an employee with a guaranteed amount of pay even when there is no work to perform. The most common reasons for lack of work are machine break-down or a stoppage because of a lack of materials.

The reserve conditions are normally temporary.

Reserve or idle time payments provide an employee with a guaranteed amount of pay even when there is no work to perform.

The most common reasons for lack of work are machine break-down or stoppage because of a lack of materials. The reserve guarantee is usually equal to the normal rate of pay.

Burdensome, Stressful, unpleasant and Hazardous Work

Unpleasant working conditions are those in which the environment of the work activities requires efforts in excessively dirty or filthy conditions.

Also included are conditions where radiation, dust, fumes, or other noxious odors or excessive cold or heat or dampness affecting breathing, vision, hearing, taste, or other conditions of general health.

Further, employees who must work in unsafe areas such as extreme heights or where moving machinery or other physical conditions make the workplace hazardous may receive work premiums.

These premiums vary depending on the degree of unsatisfactory or hazardous conditions involved.

2. Pay for Units Produced

It is one of the oldest incentive programs. Pay is based on some kind of measurable output – called ‘pay for units produced.’

In implementing the ‘pay for units produced,’ the designers (industrial engineers) must study the entire operation and develop the most efficient flow of work, processes, and methods for performing assignments.

While doing so, they give special attention to three “S”s of workplace efficiency – standardize, simplify, and specialize.

Three building blocks provide the foundation for many “pay for units produced” incentive plans:

  1. Establishing the time required for an employee to produce a unit of output.
  2. Determining what should be considered an acceptable level of performance in standard work time.
  3. Establishing an acceptable level of pay for an employee performing an assigned job in the specified period.

3. Individual-based Bonuses and Awards

attendance Bonus, Length of service and seniority rewards, Referral rewards, Patent rewards (intellectual contributions, creative employee’s inventions are resulting in patents).

Suggestion plans (practically every incentive plan recognizes the importance of the suggestion and provides rewards for stimulating employee creativity and innovation and encourages greater employee involvement).

Types of Long-Term Incentives

Deferred compensation programs that link the future economic security of all employees to the economic survival and prosperity of the organization.

Qualified Deferred plan

  • Capital accumulation plan.
  • Other deferred and supplemental retirement income arrangements.
  • Qualified deferred compensation arrangements.
  • Social security (supplementary to retirement income).

Qualified Retirement Plan

Qualified Retirement Plan is of three types: Pension plan, Profit sharing plan, and stock bonus plan.

1. Pension Plan

A pension plan can be defined as a ‘defined benefit plan,’ ‘defined contribution plan,’ ‘cash-balance plan.’

A defined benefit plan includes a formula that defines the benefits an employee is to receive. Average earnings in the highest three years of employment multiplied by 2 percent times the total years’ of service is one example.

A defined contribution plan involves the payment of a specified annual amount to the account of each participant. The amount may be;

  1. the flat dollar amount,
  2. an amount based on a special formula or,
  3. an amount equal to a certain percentage of the participant’s base pay.

A cash-balance plan is much less expensive for the employer than the other plans. The plan looks similar to the defined benefits plan in that it pays a specific benefit at retirement based on years of employment and earnings.

The plan provides a hypothetical account for each employee and requires the employer to contribute a certain amount each year for each employee based on the earnings of the employee.

Five basic issues of the Pension Plan: All pension plans are concerned with the following five basic issues: Standard retirement age, size of benefits, discrimination in plan design, early retirement, vesting (employees’ right to the employer’s contributions and the accrued earnings of these contributions).

2. Profit-sharing Plan

A qualified arrangement also can take the form of a profit-sharing plan. The employer’s contributions to the plan are a percentage of corporate profits.

A lump-sum payment may also be practiced.

Special provisions also are established for plans that allow the participants to elect to receive the employer’s contributions as cash or to have it contributed to a qualified profit-sharing plan.

3. Stock Bonus Plan

Another form of qualified plan-where the employer contributes stock to the plan.

The allocation among the participants depends on the same requirements as a defined benefits plan and a defined profit-sharing plan, although the plan functions like a defined contribution plan.

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