Incentive wage plan definition
/What is an Incentive Wage Plan?
An incentive wage plan offers an increased level of compensation when employee performance exceeds a threshold level. These plans are intended to incentivize employees to become more efficient and effective in completing their designated tasks. A plan could involve either an increase in output or a reduction in expenses. The best incentive wage plans are designed to benefit both the employer and the employee in equal measure.
Advantages of an Incentive Wage Plan
An incentive plan can be quite effective for improving company performance, but only if incentives are set at a level that employees consider to be achievable. When this is not the case, employees will likely ignore them and continue with their normal activities without making any changes.
Examples of Incentive Wage Plans
Here are several types of incentive wage plans:
Piece-rate plan. Under this approach, employees are paid a fixed rate for each unit of work they complete. This is common in manufacturing or assembly lines where output can be easily quantified. For example, a factory worker earns $0.50 for each product assembled. If she assembles 500 products in a day, she earns $250.
Standard hour plan. Under this approach, employees are paid based on the time it usually takes to complete a task. If they complete the work faster than the standard time, they still receive the pay for the standard hours, effectively rewarding faster work. For example, a mechanic is allotted 4 hours to complete a repair job and paid $100 for those 4 hours, even if they finish in 3 hours. They are still paid the full $100, motivating efficient work.
Commission-based plan. Under this approach, employees earn a percentage of the sales they make. This encourages them to sell more to increase their earnings. For example, a sales representative earns a 5% commission on each sale. If they sell $20,000 worth of products, they receive $1,000 in commission.
Profit-sharing plan. Under this approach, employees receive a share of the company's profits, often distributed annually. This can help employees feel more connected to the company's success. For example, a company distributes 10% of its annual profits among employees. If the company makes $2 million in profit, $200,000 is distributed among eligible employees.
Gainsharing plan. Under this approach, employees receive bonuses based on the overall productivity and efficiency gains within their department or team, not just individual performance. For example, if a team improves its productivity by 15% compared to the previous quarter, all team members receive a bonus, which could be a fixed amount or a percentage of their salary.
Bonus plans. Under this approach, bonuses can be given based on various criteria, such as individual performance, meeting project deadlines, or achieving company-wide goals. Bonuses can be annual, quarterly, or based on project completion. For example, an employee receives a $1,000 annual bonus for meeting their performance goals. Alternatively, a project team might receive a $5,000 bonus for completing a project ahead of schedule.
Each of these incentive plans serves different business needs and employee roles, and many companies use a combination of them to create a balanced incentive structure.