Definition
Incentive Wage Plan: An incentive wage plan is a compensation program that ties pay directly to performance. Under this arrangement, wages increase as productivity rises above a predetermined standard. This plan is designed to motivate employees to produce more and work more efficiently.
Incentive wage plans can be categorized into two main types:
Individual Incentive Wage Plans: These are based on the performance of the individual employee. If an individual surpasses the set productivity standard, their wages will increase proportionally.
Group Incentive Wage Plans: These are based on the performance of a work group. The increased productivity of the group leads to wage increases for all members, distributed according to each member’s contribution or a pre-established formula.
Examples
Piece-rate System: An employee is paid a fixed rate for each unit produced or action performed. For example, a factory worker may earn $5 for each assembled widget, with pay rising as more widgets are produced.
Sales Commission: A salesperson earns a base salary plus a commission for every sale made. If sales exceed a specific target, the commission rate may increase.
Gainsharing Programs: A manufacturing plant sets a productivity target. If the entire plant meets or exceeds the target, employees receive a bonus proportional to the productivity gains.
Frequently Asked Questions
What is the primary purpose of an incentive wage plan?
The primary purpose of an incentive wage plan is to motivate and reward employees for achieving higher levels of performance and productivity.
Are incentive wage plans only for manual or production-based jobs?
No, incentive wage plans can be tailored for various roles, including administrative, sales, and service positions, wherever performance can be objectively measured.
How are productivity standards set?
Productivity standards are typically established based on historical data, industry standards, or time and motion studies.
Can an incentive wage plan cause unhealthy competition among employees?
It can, which is why many companies use group incentive plans to promote teamwork and collective achievement over individual competition.
What happens if employees underperform under an incentive wage plan?
Employees receive their base wage, but may not receive additional incentive pay unless they meet or exceed the productivity standards.
Related Terms
Incentive Pay: A broader term referring to any pay system designed to reward and motivate employees for performance, including bonuses, commissions, and profit-sharing plans.
Performance-Based Compensation: Compensation tied to individual or group performance metrics, aiming to align employees’ interests with company goals.
Productivity: The measure of efficiency of production, often quantified as output per unit of input.
Bonus: Additional compensation given to employees as a reward for achieving targets or exceptional performance.
Online References
Suggested Books for Further Studies
“Compensation” by George T. Milkovich, Jerry M. Newman, and Barry Gerhart. This comprehensive guide covers various compensation strategies, including incentive wage plans.
“Strategic Compensation: A Human Resource Management Approach” by Joseph J. Martocchio. This book provides an in-depth look at different compensation systems designed to align with business strategy.
“Total Rewards: Compensate and Engage” by WorldatWork. This text explores various reward systems, including financial incentives and their impacts on employee motivation.