• Concept Of Incentives

•Goals of incentives
• Incentives are compensation that
rewards an employee for performance
beyond normal expectations
• An incentives are rewards that motivates
an individual to perform more than the
given standard
•Motivation
• Incentives are variable rewards granted
according to variations in the
•Retention
achievement of specific result. (Milton L.
Rock) 
• This is the method of rewarding
•Cost Savings
employees on the basis of their outputs.
•Goal achievement
 Incentive systems • Group incentive systems
• Reward is link to the combined performance
Individual incentives of a group of employee.
• Piecework
• Commission • Piecework system: Used for group of
• Bonus production workers. 
• Commission System: Used for group of sales
• Group Incentives person.
► Piecework, Commission, Bonus, Production • Bonus Plan: Used for group of managerial &
  professional employee and also for
• Organizational Incentives. production workers.
- Productivity gain sharing • Production system: If a group of workers
- Profit sharing exceed predetermined levels of production
- Suggestion plan
output, they receive incentives.
- Employee share ownership
 Organizational incentive systems
Reward is link to the overall
performance of organization.
The goal is to direct the efforts of all
employees towards improving
organizational goals. All employees
shares the reward.
• Gainsharing
Production Gainsharing
Cost Reduction Gainsharing
Employee share Ownership
Profit Sharing
Profit sharing system: Employees share some portion of
organizational profit.
 
Suggestion system: Employees are rewarded for
providing useful ideas for improving organizational
effectiveness. Suggestions can be for reducing cost
improving quality & productivity, increasing safety etc.
Employee share ownership system: Organizations
allows employee. to buy shares at stated price which
generally below market price.
Productivity gainsharing plans it allows all employees to
share in overall labor or production costs saving
through bonus payments.
 7 ITEMSTO
CONSIDER IN
DESIGNING
AN INCENTIVE PAY PLAN
DESIGNING AN
INCENTIVE PAY PLAN
• An incentive pay plan is a ‘bonus’ pay over and above
their hourly wage that an associate can attain if they
meet certain pre-set requirements or criteria.
• Incentive pay can be productivity based, quality based,
safety based, etc.
• While an incentive pay plan can be beneficial, there are
7 considerations that need to be understood beforehand
if the pay plan is going to be successful:
COLLECTING KEY PERFORMANCE
DATA
• Many companies do not collect and report employee performance
today. This is the first step.
• Research what it will take to put in place accurate collection of data in
departments within the fulfillment center (e.g. picking, packing,
receiving, replenishment, returns, etc.).

• This will need to include payroll costs. Adoption of engineered labor

standards will make the productivity reporting and incentive pay plan
more accurate.
COLLECTING KEY PERFORMANCE
DATA
• Take for example order pick batches. Single line order batches are fast
to pick; whereas multi-line batches are slower and more complex.

• Multi-line orders may require the best pickers.

• An engineered labor standard for picking takes this into account

these differences where simple units per hour picked does not.
PROCESS IMPROVEMENT REQUIRED
• In the process of evaluating the benefits of incentive pay for a specific
function, will it only work if you improve the process first?

• Trying to build sophistication on top of poor processes and systems

may not be fruitful or advisable.
CRITERIA FOR BONUS PAY
• Incentive pay plans need to have well thought out criteria. Incentive
pay plans need to have criteria or requirements on which to measure
an associate so that the pay is objective and not subjective.
• The criteria chosen needs to be challenging but it also needs to be
achievable.
• One of the worst things that can occur is when the criteria is not fair
to the business or the associate.
• This will either cause the company to pay out more for savings than
they are receiving, or on the flip side, the associate will lose focus and
motivation if they know it is impossible to reach the set criteria.
PAY FOR INCREASED PERFORMANCE
• Know how much money the associate is truly saving your business.
• When determining how much incentive you would like to award your
associates for accomplishing a set requirement(s), it is imperative to
know how much the associate is truly saving you by hitting those
criteria.
• Once you have determined how much money is being saved, do not
exceed the breakeven point of your savings (obviously).
INCENTIVES TO TEAM OR GROUP
PERFORMANCE
• If a portion of the incentive pay plan is tied to criteria achieved by a
group or team, you may need to do some creative solutions and
coaching so that there aren’t adverse effects.

• How will you structure incentives when a team has to accept

inexperienced people or under-performing associates? Additionally,
how does an individual that outperforms the team get compensated?
WHERE CAN YOU GET THE MOST
BENEFIT?
• In many operations, the largest payroll expense is in picking, packing
and shipping customer orders. That would be our vote to investigate
how much additional productivity can be gained with incentive pay.
Start in one function with high performance employees first.
DON’T MAKE THE PLAN TOO
COMPLICATED
• If it is difficult for an associate to understand how they are getting
paid an incentive; or a supervisor has trouble explaining the plan, you
probably have made the plan too difficult. Remember, you are trying
to get more achievement out of the employees. If they feel they are
being gamed; or if it can’t be a “win/win” for both sides, chances are
the plan will fail.
• Exciting times are ahead as we look to improve productivity in
customer contact and fulfillment centers. Incentive pay plans should
be one of the strategies you investigate and adopt to keep reducing
your costs.
• Without more productivity, increased wage rates will invariably
reduce profits.
Managing
Incentive
Compensation
Programs
 • Determining the technology needed to implement
the program, especially the metrics technology.
• Applying the metrics methods on a continuous
basis.
• Adapting as appropriate to unforeseen
FIVE MAIN circumstances.
TASKS • Communicating with employees and management
concerning the program.
• Applying the data received to determine whether
changes to the incentive compensation program
are warranted midstream or at the established
endpoint
CHALLENGES
DEALING WITH BOOMS, BUSTS AND
DISASTERS
DEALING WITH BOOMS, BUSTS AND DISASTERS

• Economic uncertainty can wreak havoc on incentive compensation

programs
• A recession can make incentive compensation goals so unrealistic that
the incentive to outperform is lost.
• Alternatively, a boom can make incentive compensation goals so
easily attainable that the incentive to outperform is lost. On the other
hand, using variable pay effectively can be a useful countermeasure to
pay freezes.
• See The Pandemic Alters Pay (www.shrm.org/hr-today/news/all-
things-work/pages/the-pandemic-alters-pay.aspx).
 • Employers must consider several legal issues
when designing and managing incentive
compensation programs and must be ever
mindful of eligibility rules that violate
employment laws, including civil rights and
LEGAL occupational safety rules.
ISSUES
• For the most part, the legal issues depend on
the following:
 • The type of incentive (money based, stock
based or prize based).
• The status of the employee as exempt or
nonexempt under the Fair Labor Standards
Act.
LEGAL • Whether the incentive plan falls under the
ISSUES … Employee Retirement Income Security Act
(ERISA) as a defined contribution or defined
benefit pension or welfare benefit plan.
• Whether changes to a plan will be made
before the anticipated expiration.
 • Is the reward taxable to the employee? If so, at
Depending on the what tax rate? See Are bonuses taxable?
• Is the reward deductible to the employer?
foregoing legal • Is the employer required to withhold for employee-
breakdown, owed taxes?

several practical • Is the reward to be included as part of the

employee's regular pay for purposes of calculating
questions may overtime? See How to Calculate

arise: • Bonuses into a Regular Rate of Pay for Overtime

Purposes (www.shrm.org/ResourcesAndTools/tools-
and-samples/howtoguides/Pages/
bonusesintoregrate.aspx).
Depending on
the foregoing • What kind of reporting and disclosures are
mandated to the employee regarding the
legal plan?
breakdown, • What kind of communications are mandated
several to the Internal Revenue Service (IRS)
regarding the plan?
practical • What kind of communications are mandated
questions may to public shareholders regarding the plan?
arise:
Depending on the foregoing legal
breakdown, several practical
questions may arise:

• Must an employer pay out a bonus to a

terminating or already terminated
employee?

• Can we postpone employee's pay

increases or bonuses for the amount of
time an employee Is out on FMLA leave?
• (www.shrm.org/ResourcesAndTools/tools-
and-samples/hr-qa/Pages/
fmlaandbonuses.aspx)
PROGRAM
MONITORIN
G
Periodic performance reviews (individual, team or organizational)
coupled with incentive payouts are the strategic core of incentive
compensation programs.

The incentive plan was

Many incentive Employee input was not
The performance goals too aggressive and
compensation programs sought, so no one
were unclear or encouraged the wrong
fail for the following understood what actually
unrealistic. behavior from employees
reasons: motivates workers.
to meet targets.

The plan failed to state

performance goals that The performance The performance
are within the target standards were changed standards were not
employees' scope of midstream. objective.
influence.
METRICS
• Of course, organizations that offer incentives must be able to measure employee
performance to determine who is deserving of an award. But they must also be able to
assess whether the incentives are having the desired effect on corporate performance.
• If the incentives are not working, there is no point in continuing them.
• Put another way, an employer may be working with the assumption that if it puts more
widgets on the market, it will make more money, so it might provide an incentive to
employees to produce more widgets.
• But if no one wants to buy the widgets, there is no point in paying workers to step up
production.
• See Employers Adjust Pay and Incentives Amid Economic TurmoiL
 TECHNOLOGY

• So-called enterprise incentive management technology helps organizations analyze, track and pay
bonuses, commissions and other types of variable compensation.
• The software collects data from various systems to provide management with a comprehensive
picture of payout versus performance.
• Many compensation management software programs now incorporate incentive compensation
into their analysis and reporting capabilities.
• According to a WorldatWork and Deloitte Consulting LLP report, 50 percent of employers use an
enterprise system to administer short-term incentive plans, and the most prevalent tool used is a
spreadsheet application.
 In some instances, incentive compensation
programs have produced a significant pay gap
between persons in the program and persons
outside the program, particularly in global
organizations where competition for the most
qualified, internationally capable employees is
GLOBAL fierce.

ISSUES According to WorldatWork's 2016 Compensation

Programs and Practices Survey, 82 percent of
organizations with multinational operations have a
compensation philosophy that is the same across
the company with 53 percent designing pay
programs at the corporate level and 47 percent
allowing for limited adaptation at the local level