III. Pay for Individual Performance
1. Organizations may reward individual performance with incentives such as piecework rates, standard hour plans, merit pay, individual bonuses, and sales commissions. Figure 12.2, Types of Pay for Individual Performance, examines these alternative types of pay.
A. Piecework Rates
1. Some organizations pay production workers a piecework rate. This is a wage based on the amount the employee produces. This rate is often paid in addition to the employees’ base pay.
2. A straight piecework plan is where the employer pays the same rate per piece no matter how much the worker produces.
3. A variation on straight piecework is differential piece rates – also called rising and falling differentials – in which the piece rate depends on the amount produced.
4. An advantage of piece rates is the direct link between how much work the employee does and the amount the employee earns. This type of pay is easy to understand and seems fair to many people, if they think the production standard is reasonable.
5. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. It may not be helpful in an organization with complex jobs, employee empowerment, and team-based problem solving. Figure 12.3, How Incentives Sometimes “Work”, provides a humorous look at how incentive plans may or may not work.
B. Standard Hour Plans
1. A standard hour plan is an incentive plan that pays workers extra for work done in less than a preset “standard time.”
2. In terms of pros and cons, standard hour plans are much like piecework plans. These plans encourage employees to work as fast as they can, but not necessarily care about quality or customer service. They only succeed if employees want the extra money more than they want to work at a pace that feels comfortable.
C. Merit Pay
1. Merit pay is a system of linking pay increases to ratings on performance appraisals. It is most common for white-collar employees.
2. To make merit increases consistent so they will be seen as fair, many merit pay programs use a merit increase grid, such as what is demonstrated in Table 12.1.
3. Organizations establish and revise merit increase grids in light of changing economic conditions.
4. An advantage of merit pay is that it makes the reward more valuable by relating it to economic conditions. A drawback is that conditions can shrink the available range of increases.
5. During recent years, budgets for merit pay increases were about 3 to 5 percent of pay.
6. Another advantage of merit pay is that it provides a method for rewarding performance in all of the dimensions measured in the organization’s performance management system.
7. A drawback of merit pay, from the employer’s standpoint, is that it can quickly become expensive. Also, it can make assumptions that may be misleading.
D. Performance Bonuses
1. Performance bonuses reward individual performance, but bonuses are not rolled into base pay. The employee must re-earn them during each performance period.
2. In some cases, the bonus is a one-time reward. Bonuses may also be linked to objective performance measures rather than subjective ratings.
3. Bonuses for individual performance can be highly effective and give the organization great flexibility in deciding what kinds of behavior to reward. Adding to this flexibility, organizations also motivate employees with one-time bonuses such as retention bonuses, which are one-time incentives paid in exchange for remaining with the company.
E. Sales Commission
1. Commissions are pay calculated as a percentage of sales.
2. At most organizations today, commission range from 5 to 20 percent of sales.
3. Some salespeople earn a commission in addition to base salary while others earn only commissions – a pay arrangement called straight commission plan. This is common among insurance and real estate agents and car salespeople.
4. Other salespeople earn no commission at all, but a straight salary. This frees the salesperson to focus on developing customer goodwill. Paying most or all of a salesperson’s compensation in the form of commissions encourages the salesperson to focus on closing sales. In this way, differences in salespeople’s compensation directly influence how they spend their time, how they treat customers, and how much the organization sells.
5. The nature of salespeople’s compensation also affects the kinds of people who will want to take and keep sales jobs with the organization.