Traditional employee incentive programs
Historically, incentive plans have been used primarily in larger companies, particularly manufacturing companies. These traditional incentive programs are ingrained in many companies and are often considered part of the company’s basic compensation structure.
Probably the four most used large company “Incentive Programs” are:
or piece work
o Profit sharing
o Bonus Positions
o Subjective Bonuses.
Let’s take a closer look at each of these traditional programs:
piecework
How does the program work
“Piecework” schedules are often found in manufacturing settings. They are used to compensate and reward (or punish) the volume production of individuals and departments. Production above this base is rewarded, while production below the base may be penalized. There is almost certainly also a penalty or reward associated with quality.
Pros and cons
Piece work is an enduring part of modern manufacturing and improves production. However, if management is not cautious, the employee base will be quick to “game” the system. In many factories, piecework rates are based on a “standard” production level. It was (and is) common practice for employees to REDUCE their production during the time management is calculating the standard.
Also, as production grows, so do quality and safety issues. Finally, as the workforce becomes more skilled and reaches higher levels of production, it is common for management to increase the levels required for the reward. This creates resentment as the workforce feels that the “carrot” is continually moving out of their grasp despite their best performance.
profit sharing
How does the program work
Profit sharing is one of the most common corporate programs…and one of the least effective motivators. A typical profit-sharing plan identifies a pool of money that is distributed to employees, based on the company’s financial performance.
Pros and cons
Most profit-sharing programs are an effective means of “sharing the corporate wealth,” but they have little or no effect on employee performance. In the eyes of many employees, there is little correlation between the employee’s duties and company profits. As a result, profit-sharing money is seen as a welcome “gift” from a generous employer or, more often, as an entitlement, like a salary, that is expected each year.
bonus stance
How does it work
Position bonus is simple… Department head gets a nice bonus… Your boss gets a better bonus… Your boss’s boss gets a really good bonus. These incentive rewards are almost entirely job title or position based.
Pros and cons
This program is very easy to administer… and very difficult to justify. Rewards have little to do with performance or even profitability. AND YES, this is the Incentive Program that has driven so many consumers crazy when the executives who led America’s businesses to failure walked away RICH!
subjective bonuses
How does it work
This type of program is usually based on a bonus pool of money that is made available to a mid-level manager or higher. Then, the manager distributes the incentives to the employees according to his personal criteria.
Pros and cons
Again, this program is simple to administer but often self-defeating and difficult to defend. Rewards can be distributed based on performance or they can be distributed based on something else… like how much the manager likes an employee. Several years ago, a department manager in a national company distributed 10% of the bonus fund to his employees, 30% to his attractive young secretary, and gave the remaining 60% to himself… his employees were not happy.
In short, traditional incentive plans are probably not appropriate for many smaller businesses. However, with a little work and a little creativity, you can create an incentive program for your small business that really works…
Part III of this series addresses the three categories of a good Employee Incentive Plan.