INDIVIDUAL INCENTIVES

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.

1. 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.

2. 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.

3. 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.