Rewards, Incentives and Pay for Performance

Systems

a)Pay for Performance Systems

b)Types of Rewards

c)Types of Incentives Plan

What if there were no rewards at work?
Discuss
 Pay for Performance Systems

A pay for performance plan is a programme in which the employees’s pay is dependent
upon the job performance.
Companies use pay for performance plans for a variety of reasons
1. Powerful motivator
2. Employees support the concept
3. Helps to attract and retain.

There are four pay for performance approaches

4. Merit pay
5. Variable pay
6. Skill based pay
7. Competency based pay.
 Pay for Performance Systems

1. Merit pay: Merit pay refers to a performance-related pay which provides base pay
increment for employees who hit the target or perform their jobs effectively, according to
measurable criteria over a predetermined period of time.

2. The three components of merit pay are

i. Individual incentive: based on individual performance
ii. Team Incentive
iii. Organization wide Incentive
 Pay for Performance Systems

i. Individual incentive
The payout `is based on individual `employees performance and there performance is
evaluated based on set standards
Eg: bonus awards.
The advantage of individual incentive is repeated performance
The disadvantage includes single mindedness

ii Team incentives where the payout is based on the teams level of performance. The
performance is evaluated on the bases of a set standard.
This plan fosters team cohesiveness while the disadvantage is that non performance may get
incentives based on team performance.
 Pay for Performance Systems

iii. Organization wide Incentives: where the payment is based on the performance of the
plant, division, or organization.
2. Variable pay
Variable pay is employee compensation that changes. It is often used to recognize and reward
employee contribution toward company productivity, profitability, teamwork, safety, quality,
or some other metric deemed important by senior leaders. This performance-based payment
is common in the sales field where pay is limited only by the salesperson's ability to close
deals.
Variable pay is an expected employee benefit to excite and retain employees. They want the
opportunity to earn variable compensation to bolster their base salary. And, today's
employees are also looking for more than just a base salary and benefits package when they
decide to come on board and work for an employer.
 Pay for Performance Systems

3. Skill based pay

Skill-based pay refers to a pay system in which pay increases are linked to the number or
depth of skills an employee acquires and applies and it is a means of developing broader and
deeper skills among the workforce. Such increases are in addition to, and not in lieu of,
general pay  increases employees may receive.
 Pay for Performance Systems

3. Skill based pay

Skill-based pay refers to a pay system in which pay increases are linked to the number or
depth of skills an employee acquires and applies and it is a means of developing broader and
deeper skills among the workforce. Such increases are in addition to, and not in lieu of,
general pay  increases employees may receive.

4.Competency based pay

Reward employees based on the skills, knowledge and experience they apply in the
workplace rather than their job title or position. This approach is designed to motivate
employees to become aspirational, build on their existing skills and apply these in their job.
 Pay for Performance Systems

Advantages of performance compensation systems

1. Boosts motivation and productivity
2. Align the work of the employee with the success of the company
3. Performance compensation methods will help you focus your employees’ attention on the
company’s priorities
4. Help attract and retain talent

Disadvantages of Pay for Performance

5. The rivalry between employees and lack of cooperation
6. Difficulties to measure performance objectively
 Types of Rewards

Intrinsic versus Extrinsic Rewards

 Intrinsic rewards are the personal satisfaction one gets from the job itself.

 These are self- initiated rewards, such as having pride in one’s work, having a feeling of
accomplishment, or being part of a work team.

 Job enrichment can offer intrinsic rewards to employees by making work seem more
meaningful.

 Extrinsic rewards, on the other hand, external to the job and come from an outside source,
mainly management.
 Types of Rewards

Intrinsic versus Extrinsic Rewards

 Intrinsic Rewards  Extrinsic Rewards
 The employees on being engaged in
 These are directly being provided by the
certain activities or tasks internally
organization for performing certain jobs.
feel these.
 These are thoroughly intangible.  These are directly tangible.
 These are usually under the control of
 The firm directly controls these rewards.
the individuals receiving the same.
 Achievements, feeling of
accomplishment, informal recognition,  Formal recognition, fringe benefits,
job satisfaction, personal growth, incentives, pay, promotion, etc. are
status, etc. are examples of these examples of these rewards.
rewards.
 Types of Rewards

Financial versus Non-financial Rewards

Financial incentives can be provided on an individual or group basis and satisfy the monetary
and future security needs of individuals. The most commonly used financial incentives are:
(a) Pay and Allowances
Salary is the basic incentive for every employee to work efficiently for an organization. Salary
includes basic pay, dearness allowance, house rent allowance, and similar other allowances.
(b) Bonus
It is a sum of money offered to an employee over and above the salary or wages as a reward for
his good performance.
 (c)Profit-Sharing
Sometimes the employees are given a share in the profits of the organization. This motivates
them to perform efficiently and give their best to increase the profits of the organization.
 Types of Rewards

Financial versus Non-financial Rewards

(d) Retirement Benefits
Retirement benefits like gratuity, pension, provident fund, leave encashment, etc.
provide financial security to the employees post their retirement. 

Non-Financial Incentives
Apart from the monetary and future security needs, an individual also has psychological, 
social and emotional needs. Satisfying these needs also plays an important role in their 
motivation. Non-financial incentives focus mainly on the fulfillment of these needs and thus
cannot be measured in terms of money.
 Types of Rewards

Non-financial Rewards
(a) Status
With reference to an organization, status refers to the position in the hierarchy of the
organizational chart. The level of authority, responsibility, recognition, salary, perks, etc.
determine the status of an employee in the organization.
(b) Organizational Climate
Organizational climate refers to the environmental characteristics of an organization that are
perceived by its employees about the organization and have a major influence on their
behavior. Some of the factors that influence the organizational climate of an enterprise are
organizational structure, individual responsibility, rewards, risk and risk-taking, warmth and
support and tolerance and conflict. When the organizational climate is positive employees tend
to be more motivated.
 Types of Rewards

(c) Career Advancement Opportunity

It is very important for an organization to have an appropriate skill development program and
a sound promotion policy for its employees which works as a booster for them to perform well
and get promoted.

(d) Job Enrichment

It refers to the designing of jobs in such a way that it involves a higher level of knowledge and
skill, a variety of work content, more autonomy and responsibility of employees, meaningful
work experience and more opportunities of growth. When the job is interesting, it itself serves
as a source of motivation.
 Types of Rewards

(e)  Employee Recognition Programmes

Recognition means acknowledgment and appreciation of work done by employees. Recognition
in the organization boosts their self-esteem and they feel motivated. For example, declaring the
best performer of the week or month, displaying their names on the notice board and giving
them rewards, fall under the Employee recognition program.
 c) Types of Incentives Plan

Three Types
1) Plans for blue collar employees
2) Plans for white Collar employees
3) Plans for managerial employees
 c) Types of Incentives Plan

Three Types
1) Plans for blue collar employees
Short term incentive schemes for blue color
a) Rate of extra incentives is in proportion to the extra output.
b) Rate of extra incentives is proportionately lower than the increase in output
c) Rate of extra incentives is proportionately higher than the increase in output
 c) Types of Incentives Plan

Short-term Incentive Schemes for Blue Collar Employees

1. Halsey Premium plan
2. Halsey – Weir Premium Plan
3. Rowan Premium Plan
4. The 100 percent Premium plan
5. Gantt Bonus Plan:

Long term Organization-wide Incentive Schemes

6. Profit Sharing
7. The Scanlon Plan
8. Gain Sharing
9. Employees Stock ownership Plans
 c) Types of Incentives Plan

Incentive Plan for White Collar Employees

1. Straight Salary Method
2. Straight Commission Method
3. Combination Method of salary and Commission basis
4. Salary plus Commission

Incentives for Executives

 c) Types of Incentives Plan

Short-term Incentive Schemes for Blue Collar Employees

1. Halsey Premium plan
a) minimum wages are guaranteed to every worker.
b) A standard time is fixed for the workers. If the workers finish the work before standard
time they are given bonus. But no penalty if they fails to do that.
c) Total wages (W) =T*R+ 50% of (S-T)*R
d) Standard time(S) =15 hours
e) Time taken (T) = 10 hours
f) Rate of wages(R) =rs 10 per hour
g) Bonus (P) = wages of 50% of time saved
h) Than wages= 10*10+50 %*( 15-10)*10 = rs 125
 c) Types of Incentives Plan

Short-term Incentive Schemes for Blue Collar Employees

2 Halsey – Weir Premium Plan
The characteristics of the plans are:
(a) In the Halsey (and Halsey-Weir) premium plan Worker is paid at an hourly rate for the time for which he
has worked.
(b) A standard time is decided and if a worker completes a job before the time fixed, he is paid a bonus for
the time saved, as well the wages for the actual time spent via him on the job.
(c) The amount of bonus is 50% of the time saved in case of Halsey Plan and 30% in case of Halsey-Weir Plan
and is permitted at similar hourly rate at which he is paid for actual time worked.
So, his total emoluments are the aggregate of certain hourly wages for actual time worked in addition the
amount of bonus. It can be expressed through way of a formula:
Total Earnings = T × R + (S - T) × R × 50% (or 30%)
Where
T means Time Taken
R means Hourly Rate
S means standard Time
So, total earnings are = Time taken × Hourly rate plus Time saved × Rate × 50% (or 30%)
 c) Types of Incentives Plan

3. Rowan Premium Plan:

• The workers, who complete their work within standard time, are paid the wages at standard
rate.
• The workers, who complete their work in less time than the standard, are paid wages at the
standard rate plus some bonus. This bonus is calculated in proportion of time saved.

• Under this system the bonus is calculated as under:

• Bonus = Saved time/Standard time × Actual time taken × Rate per hour.
Example:
Standard time = 10 hours,
Actual time = 8 hours
Rate of wages = Re. 1 per hour.
• Solution:
Wages for 8 hours = 8 × 1= Rs.8
Bonus = 2/10 × 8 × 1 = Rs.1.60
So, total wages for 8 hours = 8 = 1.60 = Rs.9.60
 c) Types of Incentives Plan

4. The 100 percent Premium plan

• The workers, who complete their work within standard time, are paid the wages at standard
rate.
• The workers, who complete their work in less time than the standard, are paid wages at the
standard rate plus some bonus. This bonus is calculated in proportion of time saved.

• Under this system the bonus is calculated as under:

• Bonus = Saved time/Standard time × Actual time taken × Rate per hour.
Example:
Standard time = 10 hours,
Actual time = 8 hours
Rate of wages = Re. 1 per hour.
• Solution:
Wages for 8 hours = 8 × 1= Rs.8
Bonus = 2/10 × 8 × 1 = Rs.1.60
So, total wages for 8 hours = 8 = 1.60 = Rs.9.60
 c) Types of Incentives Plan

5. Gantt Bonus Plan:

• Under this system, the minimum amount of wages to be paid to the workers is determined.
The workers, who complete their works within standard or before standard time, are paid a
bonus of 25% of their wages.
• The rate of bonus may be 33-⅓% also. The workers, who complete their work in more than
standard time, are also paid the wages determined earlier.
• Example:
• Standard work = 20 units
• Standard time = 8 hours
• Rate of bonus = 33-1/3%
• Rate of wages = 50% Paise per hour
• Solution:
• If a worker produces 20 units in 8 hours, his wages will be Rs. 4.00 and he will also get a
bonus at the rate of 33-1/3%, which will be Rs. 1.33. Thus, his wages will be Rs. 5.33. On
the other hand, if he produces less than 20 Units in 8 hours, he will get Rs. 4.00 as his
wages. In this case he will not get any bonus.
 c) Types of Incentives Plan

 Long term organization wide incentive schemes- Profit sharing:

Profit sharing is a scheme whereby employers undertake to pay a particular potion of
net profits to their employees on compliance with certain service conditions and
qualification.
 The purpose of introducing profits sharing schemes has been mainly to strengthen the
loyalty of employees to the firm by offering them an annual bonus (over and above
normal wages) provided they are on the service roles of the firm for definite period.
 The share of profit of the worker may be given in cash or in the form of shares in the
company. 
 These shares are called bonus shares.
 In India, the share of the worker is governed by the Payment of Bonus act.
 c) Types of Incentives Plan

 Long term organization wide incentive schemes- Scanlon Plan

 is cost-saving, gain-sharing, productivity-incentive plan in which any saving (agreed

upon standard labour cost per unit of output subtracted from actual labour cost per
unit of output) is shared equally between the workers and the organization.
 This plan requires a formal employee participation along with frequent performance
reviews and employee reporting.
 Procedure
 a) Employees provide suggestions to the department level committee
 b) The suggestions seek to identify ways to improve productivity
 c) The department level committees then transfer the suggestions to a screening
committee
 d) The screening committee includes members of the workforce and the management
 c) Types of Incentives Plan

 Long term organization wide incentive schemes- Scanlon Plan

 c) The department level committees then transfer the suggestions to a screening

committee
 d) The screening committee includes members of the workforce and the management
 e) The screening committee reviews the suggestions and designs measures to improve
performance
 f) The screening committee periodically reviews performance and computes the amount
of bonus to be paid to workmen as their share of performance improvements.