DR. FILEMON C.

AGUILAR MEMORIAL COLLEGE

College of Business Administration
Golden Gate Subdivision, Talon 3, Las Piñas City

Course Code and Title : BACR 1 Human Resource Management

Lesson Number : Module 8

Topic: Incentive Compensation

Introduction:

Everything has a price. For instance, business persons engage in business hoping that they
will make some profits, Bankers, politicians, and entrepreneurs produce goods or services thinking
that they will be compensated for their efforts.

Compensation is an important aspect of human resource management. As such, it becomes

necessary to define it as well as other terms related to it.

Learning Objectives:

At the end of this lesson, you should be able to:

1. Provide the types of incentives.

2. Explain the concept of incentive compensation.

3. Valuing the designing and implementing incentive pay.

Lesson presentation:

Why introduce incentive compensation?

Organizations introduce incentive compensation plans for essentially four reasons.

• To promote employee identification with the organization’s objectives.
• To encourage individual, team or business unit performance.
• To control fixed compensation costs.
• To increase remuneration competitiveness.
Regardless of its reasons for adopting an incentive -based pay system, an organization will
expect to see improvements in performance.

What are INCENTIVES?

Incentives are rewards given to employees for performing beyond the standard requirements.

The main purpose of incentive is to tie employees’ rewards closely to their achievements. This
tie is done by providing more compensation for better performance. Individual will generally strive for
additional rewards by higher production and their performance depends upon higher efforts. Some
people may prefer some extra time off rather than more money.

An incentive provides additional compensation for those employees who perform well. It
attempts to tie additional compensation as directly as possible to employee productivity.

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TYPES of INCENTIVES

Incentive compensation may be classified in three general types. They are as follows:

1. Individual incentive plan

2. Group incentive plan
3. Organizational incentive plan

Individual Incentive Plan

- are those designed to motivate the individual employees to perform beyond standard
requirements. The reason for such type of plan is to reward the top performers.

****Individual incentive plans may be classified into the following:

a.) Piece-rate system - this type of incentive plan pays individual employees based on the number of
units produced by each. It may be either be straight or differential.

b.) Commissions – a commission is a form of incentive usually paid to sales employees. It is based on
percentage of sales in units or pesos.

c.) Bonuses - is an extra payment given to employees for good performance.

d.) Merit pay - this is an individual pay increases based on the rated performance of individual
employees in a previous time period.

Group Incentive Plan

- are those designed to reward work teams, project members or department. Instead of
individual output, the emphasis of group incentive is on group output.

Organizational Incentive Plans

- are rewards designed to cover all employees in an organization. It consist of gain sharing,
profit sharing, and employee stock ownership.

a.) Gain sharing plans – these are company-wide group incentive plans that provide additional pay to
employees based o group performance. These incentives do not become part of the employee’s base
salary.

b.) Profit-sharing plans - are those that reward employees using the profits of the enterprise as
basis.

Profit-sharing plans may be distinguished according to how they are distributed :

 Deferred plans – where the individual’s shares in the profits are distributed at retirement.

 Distribution plans - where the individual’s shares in the profits are distributed after profits are
declared.

 Combination plans - where part of the shares in the profits are distributed at retirement and the
remainder as soon as the profits are declared.

c.) Employee Stock Ownership plan – some organizations offer company stocks as an incentive to
employees for good performance . Stocks not only represent ownership in the company but also a
hance to share in the profits, or in the income generated by the appreciation of the stocks value.

Reinforcement:

1. Review the topic we discussed from week 1 to week 8 and prepare for your midterm examination

Reference:

https://www.economicsdiscussion.net/human-resource-management/incentives-meaning-importance-
types-classification-and-plans/32238
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