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Performance-based compensation (How to develop and implement the…
Performance-based compensation
Defintion
A financial reward system for employees where some or all of their monetary compensation is related to how their performance is assessed relative to stated criteria.
Purpose
Improve employee productivity
Organisation is able to increase its output with minimum resources used and thus making a good returns.
Serves as a morale booster in the company as it helps to maintain employees’ satisfaction in their jobs
Organisation is able to increase its output with minimum resources used and thus making a good returns.
Types of Performance-Based Compensation Schemes
Individual-based incentive plan
Piecework Plan
Commission
Merit
Team-based (group) incentive plan
Gain sharing plans
Types of Plans
Rucker Plans
Improshare Plans
Salon Plans
Components
Employee Involvement Systems
Bonus
Leadership Philosophy
Team-based or small-group incentive plans
Project teams
Parallel teams or task forces
Work (process) teams
Company-wide incentive plan
Employee Stock Option Plans
Profit Sharing
Deferred Plan
Combination Plan
Current Plan
Advantages & Disadvantages of Each Incentive Plan
Individual-based incentive plan
Advantages
Provide relationship between pay and performance
Promote an equitable distribution of compensation within companies
Disadvantages
May encourage undesirable workplace behaviour
Promote inflexibility
Company-wide incentive plan
Disadvantages
Requires a participative management style
Paid on the basis of group performance rather than individual merit
Applies best to and a work environment that requires teamwork and collaboration rather than individual entrepreneurship
Requires that management openly shares information related to performance measures
Advantages
Promotes morale, pride and more positive attitudes towards the organisation
Enhances the level of involvement, teamwork and cooperation
Rewards only performance improvement.
Team-based (group) incentive plan
Disadvantages
The free rider leads to feelings of inequity among those who contribute the most. Over time, they will likely leave.
Employee turnover because of the free-rider effect
Discomfort with group incentive plans is likely to be heightened where incentive compensation represents the lion’s share of core compensation.
Group members uncomfortable that other members’ performance influences their compensation level.
Advantages
Companies can easily develop performance measures for group incentive plans than they can for individual incentive plans
Greater group cohesion
How to develop and implement the Compensation Plans
Conduct a job analysis of all positions
Evaluate jobs
Develop a compensation philosophy
Determine grades
Designate an individual to oversee designing the compensation program
Establish grade pricing and salary range
Determine an appropriate salary structure
Obtain top executives’ approval of the basic salary program
Develop a salary administration policy
Communicate the final program to employees and managers
Monitor the program