Differences between traditional pay systems and incentive pay systems

Traditional Pay System

Employees in traditional pay plans are compensated based on a fixed hourly rate or annual
salary. In order to control payroll costs and link pay to performance, some companies use
incentive pay programmes that replace all or a portion of base pay.
Employees are compensated using traditional pay systems based on their hourly rate or
annual salary. Seniority and performance are among the factors that influence pay increases.
The traditional pay model assigns a grade level to jobs based on the education and experience
needed to complete various tasks.
Pay is Static: in traditional pay system pay is based on predetermined employee salary
Across the board rewards: High performers are rewarded the same as poor performers
Exception Based Management: Managers sometimes handle exceptions rather than
reinforcing changes when there are no steps in place. This stifles creativity and discretionary
effort.
Incentive Pay System
Instead of being paid for the number of hours worked, incentive pay is a financial reward for
success. The theory is that the possibility of financial reward would inspire the employee to
meet such performance or financial goals. While financial incentives are the most common
form of incentive compensation, employers may also include non-monetary incentives, also
known as casual incentives. This may include items such as presents or dinners that have
already been paid for by the employer. It may also entail allowing employees to purchase
stock in a company.
It attempts to strengthen the performance – reward relationship
It tends to motivate employees
It is designed to relate pay directly to performance or productivity
When a company set up incentive pay system, it should make sure it is well-thought-out so
that it is both motivational and rewarding. There is a possibility that such a scheme would be
divisive and demoralizing without adequate clarity and careful consideration.
Examples of incentive pay may include different types of incentive pay, cash, shares or
other incentives like allowances and health benefits etc., and you need to decide what will
work best for your business. Compensation incentives may include items such as raises,
bonuses, profit sharing, signing bonus, and stock options
How does traditional pay system differ from incentive pay system?
In most cases, traditional pay consists of an annual salary or an hourly wage. Increased on a
regular basis based on seniority or merit. Incentive compensation is used by businesses to
compensate individual employees, teams of employees, or whole companies for their success.
Employees in traditional wage systems are compensated based on a set hourly rate or annual
salary. In order to control payroll costs and connect compensation to success, some
businesses use incentive pay systems that substitute all or a portion of base pay.