Quiz 13: Recognizing Employee Contributions With Pay
Profit sharing is also one of the types of incentive pay in which pay is derived from the organization profit on a percentage basis. For instance: Management announces that 30 percent of the company profit is distributed to all employees. These payments do not roll into employee's base salary. The formula's used to calculate the profit sharing bonus is included in the employee contracts. In this case, company owner explained the profit sharing incentive program to all the 17 workers in order to improve the efficiency of the work to meet the increased production costs. Workers were informed that 15 percent of the company's profit would be divided among all workers and additional 15 percent of the profit is also divided if the month's target is met. Though workers were initially not enthusiastic, business owner was making continuous communications with workers to push them towards goals. As a result, company earned strong profits in the first year of this profit - sharing program. The evidence that suggests that profit sharing was successful is as follows: • The revenue earned for the first year of the profit sharing program is more than 43 percent over the previous years. • Among all the four quarters of the first year, company reported strong profits for the three quarters. As a result, each worker received bonus of $3122.
Incentive pay is an additional pay provided along with wages and salaries based on the particular behaviors or outcomes demonstrated by employees. It is provided in order to motivate the employees to achieve the best possible results. There are many ways incentives are rewarded such as merit based pay, stock options, non-discretionary incentives and discretionary incentives. According to the survey results, it is identified that merit based pay is most followed by employers to attract and retain the high performing employees. Merit pay is a system that increases pay based on the performance appraisal ratings. The advantage of this system is that it makes reward more valuable. If the merit pay is provided for all kinds of performers (i.e. high, medium, low), then it makes reward less valuable for high performers. In such case, simply increasing the base pay equality for all workers does not make incentive pay effective for high performers. It requires additional strategy to make incentive pay effective. As a part of the strategy, merit pay must be provided to only high performers who do something exceptional in their job. In addition, objective measures to evaluate the performance must be designed in connection to business outcome. These changes can make incentive pay effective for high performers as it gives an opportunity to earn more than average pay and also they believe that excellence is rewarded.
Incentive pay is an additional pay provided along with wages and salaries based on the particular behaviors or outcomes demonstrated by employees. Performance bonuses are one of the incentive forms that are rewarded for the employee performance. Generally, bonus is not linked to the base pay. Bonuses can be either one time reward, performance reward that must be earned on each performance period (i.e. monthly, quarterly or annually) etc. Bonuses can be linked to either objective or subjective measures of performance. In this case, business owner has set up a bonus program in which individual performance is evaluated. The result of this program was not successful because rewards offered for individual success was always not related to the business outcome. This made business owner to change the individual bonus program to group bonus program. He also explained all the employees that how their actions can impact companies' profits. Initially, when JP set up the original bonus program, he wanted to ensure that all well performed employees to receive the bonus. The major problem with this program is that the objective measures designed to evaluate the individual performance was failed to align with business outcomes. Even employees failed to understand how their individual performance directly or indirectly impacts the business success. As a result, employee performance excellence failed to contribute to business success.
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