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Performance Based Scheme (How to implement incentive plan? (Make the plan…
Performance Based Scheme
Definition
Compensates employees based on how well the employee performs the job
Can also be called as incentive plan
Why implement performance based scheme?
To improve employee productivity
High performers will tend to receive more salary/rewards than below-average performers
Below-average performers will be discouraged and will either ‘buck up’ or leave the organisation
Requirements of a successful performance based scheme
Employee must be able to see the clear connection between the incentive and job performance
Incentive plan must seem to be fair to employee by having objective quality or quantity standards
Productivity/quality standards are challenging but achievable
to make sure that employees understand that the incentive payment is a reward earned through effort instead of entitlement
Payout formulas are simple and understandable
Who to administer the incentive plans?
Managers
to be willing to grant incentives based on differences in individual, group or organisational performance
Who need to come out with the incentive plans?
Human Resource Department
to ensure that the annual salary budget is large enough to reward and reinforce outstanding performances
Types of Performance Based Scheme
Individual-Based Incentive Plan
Lump-Sum Merit Pay
Employees receive a single lump-sum increase at the time of their review & not added to their base salary.
Piecework Plan
Straight Piecework Plan
Differential piece rate plan
Merit Pay
A sum of money will be added to employee’s base salary if he/she shows merit which is solely based on the employee’s deserving performance
Executive Compensation Plan
Short-term incentives or bonuses
Long-term incentives plan or stock plans
Commission Plan
Amount that represents a percentage of sales price
Team-Based Incentive Plan
Discretionary Incentive
Merit-Based Incentive
Goal-based Incentive
Gain Sharing
Improshare
Rucker Plan
Scalon Plan
Company-Wide Incentive Plan
Profit Sharing
Employee Stock Ownership Plan
Advantages of Performance Based Scheme
Group
Tend to foster, teamwork & often encourage peers to serve as counsellors and coaches for new members.
Individual
Work best with clear performance objective & independent task
Company
Financial flexibility for the organisations, increased employee commitment & tax advantages
Disadvantages of Performance Based Scheme
Group
Peer pressure exerted in such a situation can be so great that the affected individual will either conform to the group’s standards or leave the group. The individual workers’ pay may not be proportionate to their own effort and this will demotivate the employees that have work hard.
Company
Employees may be at considerable risk
Individual
Create dysfunctional competition, encourage employees to cut corners, employees will become enemy with each other, individuals can create inflated perceptions of their own work while deflating the work of others and the work environment may become characteristized by reduced interaction and communication between employees.
How to implement incentive plan?
Make the plan easy for employees to understand
Make sure effort and rewards are directly related
Set effective standards
Link the incentive with the company strategies
View the standard as a contract with the employees
Ask
Get employees’ support for the plan
Use good measurement system
Adopt a commitment-oriented approach
Emphasize long-term as well as short-term success