Employees who work under a financial incentive system find that their performance determines their pay in whole or in part.
As a result, incentives reinforce performance on a regular basis. Unlike raises and promotions, the reinforcement is generally quick and frequent—usually with each paycheck. Since the worker sees the results of the desired behavior quickly, that behavior is more likely to continue. Employers benefit because payouts are in proportion to productivity.
If the system motivates employees to expand their output, recruiting expenses for additional employees and capital outlays for new workstations are minimized.
The higher productivity growth rates of the Japanese, for example, may be due to their incentive system that encourages labor to take a direct interest in raising productivity.
Many experts believe that incentives contribute to Japan’s success.
More than one-fourth of an industrial worker’s pay in Japan may arrive as an annual bonus tied to company profits. Some economists think that this form of payment helps explain why Japan’s savings rate is triple compared to that of the United States.
And since companies can adjust labor costs by adjusting their bonuses, layoffs may not be necessary. This may help explain why unemployment levels in Japan seldom rise above 3 percent.
6 non-monetary compensation are;
Profit-sharing
As the name suggests, profit sharing involves the employee receiving a share of the company’s profits.
Sharing profits with employees has been used as a means of incentive compensation. Employees receive a bonus normally based on some percentage (e.g., 10 to 30 percent) of the company’s profit. The employee’s basic pay is unaffected.
Firms use it for many reasons;
The main reasons are to build a group incentive for increased productivity and better employee relations, to institute a flexible reward structure that reflects a company’s actual economic position, to enhance employees’ security and identification with the company, to attract and retain workers more efficiently, and to educate individuals about the factors that underlie business success.
This plan will not work when there are no profits to divide.
Stock Ownership Plans
Employee stock ownership plans (ESOPs) have become popular in business firms in the USA and Japan.
ESOPs enable employees to become owners or part owners of a company. Managers and workers see themselves as one group, and the result is that everyone is highly committed and motivated.
Employees tend to be most satisfied with stock ownership when the company establishes its ESOP for employee-centered rather than strategic reasons.
Generally, ESOPs are established for almost everyone who loves the concept of employee ownership as a kind of people’s capitalism. It brings management and workers as partners. Generally, ESOPs are established for any of the following reasons:
A firm borrows money from a bank using its stock as collateral, places the stock in an employee stock ownership trust, and distributes the stock at no cost to employees as the loan is repaid.
- It acts as an additional employee benefit.
- Workers have a lot to say about their areas of expertise as part-owners. They come up with ways to save money and improve productivity.
However, the sharing also can be a disadvantage because employees may feel forced to join, thus placing their financial future at a greater risk.
Both their wages and financial benefits depend on the performance of the organization. ESOPs are not insured; if a company goes bankrupt, its stock may be worthless.
Gain Sharing
It is a technique that compensates workers based on improvements in the company’s productivity.
Gainsharing is a bonus incentive system designed to improve productivity through employee involvement.
According to a predetermined formula, the gains from “working smarter” are shared between the employer and the employees.
It includes;
- a financial measurement and feedback system to monitor company performance and distribute gains in the form of bonuses when appropriate, and
- a focused involvement system to eliminate barriers to improved company performance.
Gainsharing most definitely is not profit sharing, although there are some similarities. Profit-sharing is generally tied to the company’s overall performance, whereas gainsharing focuses on the company’s most vital performance metrics.
Payments come out of increased revenue or reduction in costs. Profit-sharing typically runs on a quarterly or annual cycle, whereas gainsharing generally cycles every month.
Gainsharing works best when company performance levels can be easily quantified. Employee involvement significantly enhances the effectiveness of incentive pay.
When used simultaneously, productivity gains from combining these techniques can exceed gains achieved separately. Gains must be verifiable and clearly stated at the outset.
Tyler and Fisher (1997) identify the following reasons for the failure of the gainsharing plan:
- Gainsharing does not work well in piecework operations.
- Some firms are uncomfortable about bringing unions into business planning.
- Some managers may feel they are giving up their prerogatives.
None of all incentive plans will work well, except in a climate of trustworthy labor-management relations and sound human resources management practices. These issues are discussed next.
Gainsharing VS Profit-sharing
Many people confuse profit sharing and gainsharing and view them as the same. Employees have an opportunity to earn a bonus under both approaches, but that is where the similarity ends.
There are always exceptions, but the following general outline the major differences.
| Subject | Gainsharing | Profit-Sharing |
|---|---|---|
| Purpose | To drive the performance of an organization by promoting awareness, alignment, teamwork, communication, and involvement. | To share the financial success of the total organization and encourage employee identity with company success. |
| Application | The plan commonly applies to a single facility, site, or stand-alone organization. | The plan typically applies organization-wide; companies with multiple sites measure organization-wide profitability rather than the performance of a single site. |
| Measurement | Payout is based on operational measures (productivity, quality, spending, service), which improve the “line of sight” regarding what employees do and how they are compensated. | Payout is based on a broad financial measure of the organization’s profitability. |
| Funding | Gains and resulting payouts are self-funded based on the savings generated by improved performance. | Payouts are funded through company profits. |
|
Payment Target | Payouts are made only when performance has improved over a historical standard or target. | Payouts are typically made when there are profits; performance doesn’t necessarily have to show improvement. |
| Employee Eligibility | Typically, all employees at a site are eligible for plan payments. | Some employee groups may be excluded, such as hourly or union employees. |
| Payout Frequency | The payout is often monthly or quarterly. Many plans have a year-end reserve fund to account for deficit periods. | The payout is typically annual. |
| Form of Payment | Payment is cash rather than deferred compensation. Many organizations pay via a separate check to increase visibility. | Historically, profit plans were primarily deferred compensation plans; the organization used profit sharing as a pension plan. Today we see many more cash plans. |
| Method of Distribution | Typically, employees receive the same % payout or cents per hour bonus. | The bonus may be a larger % of compensation for higher-level employees. The % bonus may be less for lower-level employees. |
| Plan Design & Development | Employees often are involved in the design and implementation process. | There is no employee involvement in the design process. |
| Communication | Supporting employee involvement and communication is an integral element of gainsharing and helps drive improvement initiatives. | Since there is little linkage between “what employees do” and the “bonus,” there is an absence of accompanying employee involvement initiatives. |
| Pay for Performance Plan versus Entitlement | Gains are generated only by improved performance over a predetermined base level of performance. Therefore, gainsharing is viewed as a pay-for-performance initiative. | Profit-sharing is often viewed as an entitlement or employee benefit. |
| Impact on Behaviors | Gainsharing reinforces behaviors that promote improved performance—used to drive cultural and organizational change. | Little impact on behaviors since employees have difficulty linking “what they do” and their “bonus.” Many variables outside the typical employee’s control determine profitability and the bonus amount. |
| Impact on Attitudes | It heightens employee awareness, helps develop the feeling of self-worth, and builds a sense of ownership and identity. | Influences the sense of employee identity in the organization, particularly for smaller organizations. |
Pay-for-performance (PFP)
Pay-for-performance (PFP) plan is a method of compensation where workers are paid based on productivity. It is a system of employee payment that links compensations to measure work quality or goals.
PFP is money paid relating to how well one works. Employees would be secured knowing that their performance is evaluated objectively according to the standard of their work instead of the whims of a supervisor.
Union leader prefers a seniority-based pay system.
Low-performing senior employees would object to having their income cut to match their performance level, while a high-performing new employee might prefer the new arrangement.
An effective pay for performance has its rewards for both employers and employees.
Many organizations conduct annual performance appraisals. These appraisals – when properly administered – are based on performance standards.
An employer wants an employee to accomplish standards to meet the company’s expectations.
For a PFP system to be effective, employers must communicate their expectations and conduct performance appraisals according to performance standards.
Too much subjectivity is one of the disadvantages of a PFP system because it results in inconsistent evaluations of job performance and, ultimately, an ineffective PFP system and dissatisfied employees.
The cost of implementing pay-for-performance policies can be high because the process involves the acquisition of information technology machines, software maintenance, and data collection.
However, to be successful, there must be reasonable, achievable, and measurable goals that are potentially achievable by any employee.
Achievements must be quantifiable, so a comprehensive system must be implemented to monitor and assess whether or not employees have met designated targets.
Communication and transparency are essential; everyone must know and understand the criteria.
Training and education facilities should be in place to improve the performance of weaker employees and enable ambitious employees to widen their knowledge and skills and hit targets.
Additionally, implementations must not become too cumbersome.
Pay for Skills
Skill-based pay is an approach to compensation where the wage rate is based on the qualifications of the individual doing the job rather than on the job itself.
It is typically accomplished through skill classes that determine pay levels for jobs. Skill-based pay is an alternative to job-based pay.
Skill-based pay is introduced to encourage employees to acquire a variety of skills. Few workers are willing to acquire the necessary skills without proper incentive systems.
Employees will receive a pay increase for each new skill that they master.
In such a learning environment, the more workers learn, the more they earn. Under such a system, workers are paid not based on the job they currently are doing but rather on the number of jobs they can do or their depth of knowledge.
It is not easy to introduce a skilled-based pay system. It is difficult to measure skills for managerial jobs.
However, fair assessment and compensation are essential to developing workers with various intellectual skills. It is of much importance to develop and introduce accurate performance appraisal systems.
Several studies have investigated the use and effectiveness of skilled-based pay. As mentioned earlier, an employee with various skills can easily handle any changes.
Advocates of skill-based pay say that it can reduce staffing requirements, increase flexibility (because a single employee may have the skills to perform various jobs), decrease overall labor costs and increase job satisfaction.
Downsizing requires more generalists and fewer specialists. Mastering several jobs will increase understanding and broaden perspectives.
It facilitates communication across the organization because people better understand other’s jobs. It lessens the dysfunctional protection of territory behavior.
Such a program also motivates flat-line employees who have little opportunity for promotions. Multiskilling can be the key to developing a competitive edge and fighting global competition.
What are the downsides of skilled-based pay? Skills can become obsolete.
When this happens, what should managers do? Managers can cut employee pay or continue to pay for skills that are no longer relevant.
There is also the problem created by paying people to acquire skills for which there may be no immediate need.
Tosi offers the following suggestions to make a skilled-based pay system a success :
- A supportive HRM philosophy strengthens all employment activities. Such a philosophy is characterized by mutual trust and the conviction those employees have the ability and motivation to perform well.
- HRM programs such as profit sharing, participative management, empowerment, and job enrichment complement the skilled-based pay system.
- Job rotation and job assignments may broaden employee skills.
- There are opportunities to learn new skills.
- Workers value teamwork and the opportunity to participate—the employees involved in developing and implementing ideas related to productivity.
Sharing through Royalty Payments
Labor seeks to gain a greater share of the industry’s earnings by royalty demands.
These consist of payments, usually to a union organization of employees, based on a levy for each output unit or each hour worked.
Thus collected funds are to be used for various purposes, for example, to aid the unemployed, supplement payments to those injured on the job, and support various other welfare activities.