Compensation Study Set 5

Business

Quiz 10 :
Pay-For-Performance Plans

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Quiz 10 :
Pay-For-Performance Plans

The various pay-for-performance plans are designed and offered by organizations to their employees starting from management level to lower-level. This includes incentive plans, variable pay plans, success sharing, compensation at risk, earning at risk and few more. But the basic concept of every pay plan is to help the company to boost their productivity, to minimize the cost and to incorporate reward system for encouraging employees for better performance. The merit pay concept is not hugely accepted by most of the organizations, but this system is still in process. Variable pay such as individual incentive pay and team incentive pay is offered by maximum number of organizations. This variable pay system initially was applicable to management category for determining their compensation, but gradually the organizations applied this to lower-level employees as well for the same purpose. The growing competitive foreign market forced the organization to decrease the costs and to increase their productivity. A well-planned variable pay method helps the company to boost the productivity by encouraging better performance and to minimize the cost. Again, in today's business, employees have to adjust will the fast moving technologies, new work related situations and associations. Therefore, a well-made variable pay provides the organizations to incorporate reward system for encouraging employees to adjust with every situations quickly and to deliver their best. Therefore, before taking any decision about the competitive base pay, the management of the organizations needs to gather information about the pay structure including base pay and incentive pay at major competitors. The variable pay is mainly categorized into two parts. First, the individual incentive plans that have a conventional standard with respect to which the performance and efficiency of employees are compared for determining the level of the incentive pay. In case of individual incentive plan this standard is paralleled with the performance of individual employee, therefore various other complex plan are developed. The second one is team incentive pay. When the total group or department of an organization is performing together, a new incentive plan that is group or team incentive plans are developed. The main structure is same as individual incentive plans where a standard is created and the performance of employees are compared with that standard for determining the level of incentive pay. But the difference is that, in this case, the performance of a group is considered here. When productivity is the core thing for any organization, it is significant to choose between individual incentive plans and team incentive plans for improving the overall performance.

Strong incentives against performance sometimes give rise to unethical behavior. To reduce this onset of unethical behavior, the organization must ensure • Increased degree of supervision to ensure fair distribution of incentives. • Cross check of performance should be done. For example, if we consider the instance mentioned in this case, where the teachers manipulate the answers of the students to show their own performance, the paper of one teacher should be checked by the other to cross check performance. • Reward for reporting unethical behavior should be in place. The reward should also be based on the authenticity of the information. If the information is authentic, reward should be given and if found wrong punitive measure should be taken. This will eliminate the occurrence of unethical behavior as well as false report regarding this also. • If someone is found to practice unethical means in order to gain incentive, the organization should be in a position to take strict punitive measure against that person. This will ensure morality and transparency in the incentive policy. Powerful incentive systems based on performance motivate employees to perform better. Every employee strives hard to achieve highest performance in order to receive reward and thereby the overall performance of the organization improves. But there may foster unethical practices to gain incentives. But eliminating incentive system to remove the unethical practice is not the solution as doing so will demotivate the employees. Therefore, to design a powerful incentive system to motivate employees and eliminating the unethical practices, an organization must ensure higher degree of supervision and high punitive measures.

Among the group incentive plan, in case of gain-sharing plan, employees share in the gains. Gain-sharing focuses at the cost part of the income ledger and recognizes saving over which staffs have more control and in profit-sharing plans, employees share some of their profit. But in reality profit sharing plans do not exist now as this is often not possible for the management to achieve that level of profit, from which they compensate their employees. The basic concept behind these plans is that the employees will try to perform better in order to increase their gains and profits. Earning-at-risk plans: Earning-at risk incentive plans cannot be categorized as a new type of plan, even it is evident that any incentive plan could be earning-at risk plans. These incentive plans can be divided into two parts. The first one is success-sharing plans, where the basic salary of employees is constant but there is a scope for them to receive a variable pay annually if the organizations get success for that year. If it is not, then the employees will only receive the constant basic salary, there is no reduction in that part. On the other hand, in a risk sharing plan, the basic salary is decreased by a fixed amount with respect to the level that would be received in success-sharing plan. Therefore, in risk-sharing plans, a portion of risk in doing business has been shifted from the organization to the employees. The earing-at-risk plans attract employees by its positive impact on the company and individual employees and it provides a huge turnover as well. But the satisfaction level of both the parties in case of general payment and procedure used to set this compensation decreases.