INCENTIVE PAY PLANS
chapter discusses the various types of incentive pay plans
available, including profit sharing, gainsharing, piecework and
standard hour plans.
basic ideas of variable pay have been around for years under different labels.
One of these labels was discussed earlier, that of pay for performance.
The focus of this idea is on performance, however measured. A second and much
older concept is that of the incentive pay plan. The focus in this case
is on the motivational content, that of obtaining more effort from the employee.
A third term used is that of payment for results. This is defined as: "a
payment system under which money rewards vary with measured changes in
performance according to predetermined rules."1
This type of compensation program makes the basic assumption that employees are
interested in money and are willing to put forth more effort for more money.
These concepts are very different from the traditional compensation plan based
upon payment for the job. In the traditional program, the employee who desires
more compensation or the supervisor who wishes to pay his/her employee more has
to somehow re-describe the job to be at a higher level in order to be worth
more. Incentive pay plans allow the employee to earn more for improvement in
the measures of results without having to change jobs or get them re-classified.
All is not wonderful with this concept, because the possibility of gain is tied
to the possibility of loss. In incentive pay plans some proportion of the
employee's pay is put at risk. If things go well he/she will make more money,
but if things go poorly, the employee's pay suffers. Not all people find this
prospect comfortable. For instance, people who are inner-directed and feel
they control their world find incentive pay attractive. But those who are outer-directed and feel that the world controls them are not motivated by this
type of compensation plan.
THE RISE OF
Why has industry so embraced the idea of incentive pay? There are a number of
reasons. The first is an economic one. As noted in Chapter 3, Economic Theories
of Benefit and Compensation Administration, wages are sticky on the downside.
When the company faces hard times it is hard or impossible to lower the wages of
current employees. In this way wages become a fixed cost. The only way the
employer has to lower this cost is to lay off workers. For the past twenty years
this has been a way of life for American business. Incentive pay can soften this
necessity to lay off large numbers of workers by lowering the wage bill for all
workers to some degree.
A second reason is contained in the payment for results or performance
concept. If the company relates pay to the desired outcome then this will
increase the probability of obtaining that outcome. This may be through the
employee working smarter, faster, or longer. As companies have laid off
employees they have had to become leaner and more efficient. Getting more
accomplished with fewer people makes the promise of incentive pay very
attractive to companies today.
Third, as union influence has declined and the ideas of participative management
has spread, there is a significant desire to tie the employee into not only
doing better on their job but being interested in how well the total
organization is doing, including contributing to the overall company success.
Some incentive pay plans focus mainly on trying to get the employee to join with
management to create a successful company.
DO INCENTIVE PAY
Incentive pay plans can elicit strong feelings. Opponents variously claim that
performance is a function of the organization of work and management practices
rather than employee effort; they say that incentives do not work and cause more
problems than they solve.2 Many
proponents of incentive pay plans believe that a fair day's work is not normally
attainable without some proportion of pay being at risk because time based
workers produce only about 50 to 60 percent of the output of incentive pay
workers.3 Although they admit that
some incentive pay plans malfunction, they insist that this is usually due to
poor installation and maintenance rather than shortcomings of the concept of
To understand why incentive pay plans are so controversial, let's examine
incentives and their use before turning to the characteristics of incentive pay
plans. We will discuss incentive contributions, compare them with two motivation
models, look at the results of incentive pay plans, and assess the prevalence of
The wage system discussed in this book up to now essentially pays people for the
time they contribute. If we assume that the job is the major determinant of the
wage, then it is a person's occupancy of that job for which the organization
pays. Performance and/or any other factor may also enter into the equation, but
the time spent on the job is the primary consideration. To some degree, then, an
organization wishing to attain increased performance has a choice of using a
pay-for-performance system (see chapter 17) or some other form of incentive pay.
Both may reward performance, but the incentive pay plans discussed in this
chapter do so more directly. In addition, the effects of payment by results and
payment by time on the organization's cost structure are different. Payment by
results leads to variable labor costs, since these attach directly to output.
Payment by time makes labor costs fixed, since they are the same in any period,
regardless of output.
Our model of the
employment exchange specifies that it is contributions that lead to rewards; the
question is the units in which performance is determined. Payment on the basis
of time allows for a large number of unspecified contributions to be included.
Payment for output requires that contributions produce measurable results before
they are recognized as contributions.
In practice, however, incentive pay plans often turns out to be payment for one
contribution - effort; other contributions required by the organization are
often ignored. The measure of distribution does not have to be either output or
time. The two can more reasonably be viewed as the two ends of a continuum on
which various wage systems can be placed. At the time extreme is a system of
automatic rate adjustment. At the other end is a piece-rate system, which pays a
set amount for each unit produced. Other systems would fall at various places in
between. This continuum is illustrated in Figure 1.
A Continuum of Time and Output Systems
organization should fall along this scale is a matter of a large number of
Determining Pay Plans
The work itself is a major determinant of whether to pay for time or output. The
work characteristics to consider include (1) measurability of output; (2) the
relationship between effort and output; (3) the degree of standardization; (4)
requirements for quality as well as quantity; and (5) competitive conditions,
which make it imperative that unit labor costs be definitely known and fixed
General expectations are also very important. Community attitudes and the
expectations of employees, both as individuals and as expressed through their
union, affect attempts to install an incentive pay plan and certainly its
chances of success.
Technological considerations may, of course, enter into the decision. To the
degree that machines set the pace for the work, the employee loses control over
determining the number of units that will be produced. The ability to change
output through increased effort is critical in incentive pay plans. Also,
incentive pay plans are more likely to be successful in industries with a stable
technology than in those undergoing continual technological change.
The decision to pay for output instead of time is partially based upon the
rational factors just discussed and is partially a matter of faith. If an
organization is convinced that incentives are the way to go, then a way will be
found to apply incentives to the work. The varieties of incentive pay plans and
the kinds of contributions are so numerous that desire is more important than a
precise fit of job and incentive standards.
Plans and the Motivation Models
Since organizations believe that incentive pay plans motivate performance, the
evidence should be reviewed. Research shows that this belief has a foundation:
incentive pay plans can increase performance above that attained in a fixed pay
plan. But as noted above, the result is not always higher performance. In fact,
numerous studies have shown that incentive pay plans can also result in
restriction of output and cause employee-relations problems. Also, it has been
shown that the different kinds of incentive pay plans produce different results.
Thus it seems useful to examine incentive pay plans in terms of the
performance-motivation and membership models outlined in Chapter 4.
Performance-Motivation Model. According to this model, for an compensation
plan to motivate performance, employees must (1) believe that good performance
will lead to more pay, (2) want more pay, (3) not believe that good performance
will leads to negative consequences, (4) see that other desired rewards besides
pay result from good performance, and (5) believe that their efforts do lead to
improved performance. Although the model specifies that the relationship among
these variables is multiplicative (anything multiplied by a zero yields a zero),
the first variable is clearly the most important.
plans do foster the belief that good performance leads to more pay. But some
plans do this better than others. Specifically, plans that relate the
individual's pay to his or her output do better than plans applied to groups or
other larger units. And plans based on objective standards and measurements
create a stronger belief in the performance-pay relationship than plans based on
less objective standards. With plans involving less objective standards, the
belief is based in part on the employee's confidence that the measurements do
reflect his or her performance.
Since people do attach different values to pay, the second condition, desiring
more pay, is variable. If employees do want more pay and nothing about the plan
serves to reduce its importance to them, this part of the model is met. If,
however, an incentive pay plan is applied to employees who don't want more pay
or who don't want pay based on performance, it is not.
The belief that negative consequences will result from good performance is quite
possible under incentive pay plans. It has been shown that employees can believe
that rates will be cut if they produce too much and that social rejection by
peers, working themselves out of a job, or even getting fired if they fail to
meet the standard can be anticipated. Thus, in some plans it is quite possible
that the perceived negative consequences could offset the perceived positive
consequences.4 A major negative
consequence is the competitiveness inspired by incentive pay plans. Where
cooperation, not competition, is required, an incentive pay plan can lead to
many dysfunctional behaviors.
The belief that
other desired rewards result from good performance is more likely to appear
where the competitive nature of the plan is minimized.5
In some plans, good performance is likely to result in social acceptance,
esteem, respect, and feelings of achievement. If a person feels that he or she
benefits from another's good performance and it becomes the norm of the group to
perform well, then the possibilities of good performance are increased.
Employee perceptions that the contributions they believe they are contributing
to the organization are in fact those being rewarded may be the weakest link in
incentive pay plans.6 If employees
feel that the performance measured is affected by so many things beyond their
control that their efforts have little effect, this belief in the
contribution-reward connection will be weak. If employees feel that the
performance measure does not reflect a number of contributions that they make
and that they feel the organization needs, the belief is likewise weak. If the
incentive plan is based on such a limited conception of employee contributions
that employees believe that it reflects neither the contributions they make nor
those that the organization really requires, not only will the incentive pay
plan not work, it may weaken membership motivation because of resentment.
Model. If incentive pay plans work by creating or confirming beliefs, they
can also affect the beliefs and perceptions that form the basis of membership
motivation. If the incentive pay plan signals employees that more of the rewards
they want are available in this employment exchange in return for the
contributions they want to make, their commitment to the exchange is likely to
increase. If, however, the plan signals that: additional money is the only
reward available for increased performance and they don't want more money; other
rewards they value will be reduced by good performance; only those contributions
resulting in the measured performance result in more rewards but they do not
want to provide more of those contributions; or the contributions they wish to
increase are not going to result in higher rewards, then their commitment to the
employment exchange may be significantly depressed. In fact, the employee may
seek an employment exchange that meshes more closely with their
Thus attempts to improve performance motivation may weaken membership
motivation. This is an example of the dilemmas faced by organizations in
compensation administration. Fortunately, it is usually possible to treat
different employee groups differently in matters of pay.
Incentive Pay Plans
Most reports of experience with incentive pay plans suggest that wage incentives
result in greater output per hour worked, lower unit costs, and higher employee
earnings. Typically, these reports come from company experience with incentive
pay plans and do not attempt to determine the source of change or to compare
results of incentive workers with those of a control group. When incentive pay
plans are installed, many changes are made in the conditions of work, and if no
effort is made to determine the effects of each, the changes observed may be due
to something other than the incentive pay plan. It is quite possible, for
example, that the results obtained are attributable to changed management
practices employed as a prerequisite to installation of an incentive pay plan.
incentive pay plan results often cite employee earnings increases of 10 to 70
percent and cost decreases of 25 to 65 percent. Although this implies that the
observed results are attributable to the incentive pay plan, no attempt was made
to determine whether the source of improvement was better management, increased
employee effort, or other changes accompanying installation. Evidence that not
all the improvement results from the incentive pay plan is available from the
experience of a five-plant company. Two plants had incentive plans and three
measured daywork (production standards but no wage incentive). The most and
least efficient plants, their performance separated by a wide margin, were the
two incentive plants.7
Two authors have reviewed incentive plan results in detail. Lawler
conservatively estimates that individual incentive plans result in a
productivity increase of 10 to 20 percent.8
Locke and associates examined experiments that compared the effects of
individual incentive plans with those of time-based pay plans. The average
increase in performance was 30 percent, with a range of 3 to 49 percent.9
Under an incentive pay, increased productivity should result in higher wages for
employees. This indeed seems to be the case. In one study of manufacturing
organizations, the earnings of those workers under incentive plans were
significantly higher than those paid by time plans.10
To be effective an incentive pay plan needs to fit the circumstances of the
organization. The great variety of incentive pay plans that are possible can be
classified by a number of variables, specifically the level of aggregation, the
performance definition, and the reward determination method. This section
examines these variables, and the following section will look into the necessary
considerations in designing an incentive pay.
The level of aggregation defines the unit for which performance or output will
be determined. In turn this defines the unit that will receive the
organization's reward. Three levels of aggregation are usually defined - the
individual, the group, and the organization.
Incentive Pay Plans. This is the most popular form of incentive pay plan. In
this type of plan each person's output or performance is measured and the
rewards the person receives are based upon this measurement. Clearly this is the
type of incentive pay plan most likely to establish a clear performance-reward
relationship in the mind of the employee. The purpose of the plan is to increase
the pace of work or the effort the individual is willing to contribute in order
to receive higher rewards. The classic example of this type of plan is a
piecework system, wherein the employee is paid a set amount for each unit of
production.11 The organization
expects to receive more output than it would if the employee were paid under a
time-based system. In addition, the organization can easily track the labor cost
associated with each unit of output.
One assumption of these plans is that the employee is an independent operator,
that he or she alone can carry out all the activities required to achieve the
performance measure. In this way performance is a function of the employee's
effort. The performance standard must be clearly defined and measurable if such
a plan is to be useful. Also, the job must be relatively stable: the output
required from the job should be consistent, and the inputs to the job should
arrive in such a way that the employee can work continuously.
Incentive Pay Plans. Where it is impossible to relate output to an
individual employee's efforts it may be possible to relate it to the efforts of
the work group. If, in addition, cooperation is required to produce the desired
output, then a group incentive plan may be the best alternative.
Interdependence of work, then, is a major reason for choosing a group plan
over an individual one. A group incentive plan can reward things that are very
different from what an individual plan rewards, in particular: cooperation,
teamwork, and coordination of activities. Where these are highly valued, a group
plan is most appropriate. As organizations become more complex and the
production process more continuous, group incentive pay plans can be expected to
become more popular.
Group plans are also useful where performance standards and measures cannot be
defined objectively. In a group setting, variations tend to average out, so no
one gets as hurt by random variation or lack of continuity. Almost any
individual plan can be adapted to a group setting. Thus the focus in group plans
is still higher level of effort.
The primary disadvantage of the group plan is that it weakens the relationship
between the individual's effort and performance. Where there is likely to be
wide variation in the efforts of group members, a group incentive may lead to
more intragroup conflict than cooperation. In group plans it is also more
difficult to monitor performance standards and measures. Finally, group norms
play an expanded role, both positive and negative, in group plans. They are
stronger and more controlling on the individual. Where the group norms are
congruent with management's goals, this is a plus; but where the two differ, it
can harm the chances of success of the incentive plan.
Organization-Wide Incentive Pay Plans. Organization-wide plans are expanding
under the name of gainsharing.12
These types of plans are both old and new. The Scanlon Plan is one of the oldest
incentive pay plans in continuous use in organizations, yet new plans are
Organization-wide plans differ significantly from individual plans by rewarding
different things. As indicated, most individual and group plans attempt to
increase effort. Most organization-wide plans, however, reward an increase in
organization-wide outcomes that directly affect the cost and/or profit
picture of the organization. Usually these plans reward increases in
productivity of the plant or organization as measured by reduction of
organizational costs, in comparison with some measured normal cost. Or they
may reward increased output with the same or fewer inputs.
A major feature of organization-wide incentive pay plans is a change in the
relationship between management on the one hand and employees on the other.
Rather than the traditional adversarial relationship between the two, most
organization-wide plans require a high degree of cooperation. This is because
both groups must focus on the desired cost savings and listen to the other
party. All this requires a degree of trust that is hard to achieve in American
labor relations. Failures of the Scanlon Plan have been attributed most often to
the inability of management to take employee input seriously.14
Profit sharing is another popular organization-wide program that is often
classified as a gainsharing plan. This type of plan can be made much more simple
than a cost-savings plan. Nor does it require the revolution in
employee-management relationships that cost-savings plans do. With profit
sharing, management hopes to change employee attitudes toward the organization
without a concomitant change in managerial attitudes toward the employee. The
idea behind profit sharing is to instill in the employee a sense of partnership
with the organization. But most plans go beyond this and use profit sharing as a
way to keep valuable employees and to encourage thrift in employees.
Clearly the relationship between effort and performance becomes very tenuous in
any organization-wide incentive plan. Even if the performance (profit or cost
savings) and the reward (an amount of the profit or savings based on salary) are
clear, their connection with what the employee does every day is not clear. In
fact, most organization-wide plans fit the membership model better than they do
the performance-motivation model.
This enhanced membership motivation appears to be the greatest strength of
profit sharing. The profit sharing objective of instilling a sense of
partnership is met to the extent that employees want to continue their
membership and to make the additional contributions that enhanced membership
implies. Improved performance may result not because employees see a
performance-reward relationship but because they want to broaden and deepen the
employment exchange by increasing their contributions in return for more
intrinsic and perhaps extrinsic rewards.
The definition of performance is probably the most important step in
establishing any incentive plan. It tells the employee what output or behavior
the organization considers important enough to reward - that is, to spend its
money on. The point is that the employee's attention is directed to
accomplishing a particular objective or group of objectives at the expense of
others that might also be accomplished on the job. So the definition of
performance should be complete, or the organization will not obtain the outcomes
it needs from its employees. This section will examine the range of factors that
is often used as the definition of performance in incentive pay plans.
most common definition of performance, and in many ways the best, is the
intended output of the job. In some situations this can be made an explicitly
measurable item, such as the number of electronic assemblies produced. In many
jobs in organizations, however, it is hard either to define exactly the output
desired or to measure that output. An incentive pay is not well suited to these
The most common incentive plan that uses an output measure is piecework.15 In this plan, a set reward value is attached to each unit of output; the
employee's pay is that value times the number of units produced. This plan
clearly connects performance and reward and allows the employee to know at all
times exactly how much reward he or she is receiving. Since the piecework system
emphasizes quantity, quality can be a problem unless it is also built into the
determination of units produced.
Straight piecework can intimidate employees because it places them under
considerable pressure to produce, which they may have difficulty doing
consistently. Also, since failure to meet the standard may cause the employee to
earn below the minimum wage, most piecework plans establish a minimum standard
for a set wage and pay a premium for units produced above that minimum.
Employees who regularly do not make the standard are reviewed to see if they are
alternative to output is time required to complete a task. Amount of production
and amount of time are two variables that are always considered together in
individual incentive plans. In piecework the amount of production is the measure
put before the employee and time is used to determine the value of the output.
In time-based rates, the expected production is stated as a function of the time
taken to produce that output, so the output is expressed as a function of time
and not money.
The most common form of a time rate individual incentive is the standard-hour
plan.16 As in piecework, the employee
is paid according to output. However, in the standard hour plan a standard time
is allowed to complete a job and the employee is paid a set amount for the job
if completed within that time. For instance, an auto mechanic may be assigned to
tune an automobile, a task for which the standard time is two hours. If the
mechanic completes the task in an hour and a half, he or she is paid for two
hours. If the job takes two and a half hours, the mechanic is paid for that
time. Continually failing to make the standard time would result in examination
of either the time standard or the employee.
Another form of time rate is measured daywork.17 Under this plan, formal production standards are determined for the job, and
employee performance is judged relative to those standards. Evaluation is done
at least quarterly, and the employee's pay rate may be adjusted according to how
well he or she has performed in comparison with the standard. This plan looks
very much like the pay-for-performance system discussed in Chapter 17. The real
differences are in the measured daywork formality of production standards and
shorter period of performance review. However, with the measured daywork plan,
pay rates may go down as well as up. Measured daywork is advantageous where
there are numerous non-standardized conditions in the work that make judgment of
performance more important. Sometimes measured daywork utilizes the time
standards but does not include the incentive feature.
and the standard hour plan also lend themselves to the use of bonuses. A bonus
is a one-time payment to the employee that is not built into his or her pay
rate. The basis of the bonus may be any performance desired by the organization,
and the payment schedule can be designed like that of the standard hour or
measured daywork. But a bonus system can be used in much broader circumstances.
An advantage to a bonus is that it may be a reward for any behavior or outcome
deemed important to the organization; it does not have to cover all relevant
parts of the job. An example of this is a series of programs designed to reduce
absenteeism in organizations through the use of behavior-modification
Performance Dimensions. Any incentive pay plan is designed to focus the
employee on particular desired outcomes or activities. The effect of this is
that any job dimensions not included in the definition of performance are not
likely to be performed. Thus, it is important to include all important job
dimensions in performance definition. A single dimension, such as units produced
in a piecework plan, is appealing in terms of simplicity and clear
performance-reward connections but is often dysfunctional when it comes to
genuine productivity. The clearest example of this is the problem of quality in
a piecework plan. If the number of units is the only performance standard, the
employee is encouraged to turn out a lot of units, but the units will likely be
Many incentive pay plans, then, employ multiple performance definitions, and the
question becomes how to combine them. The simplest way, if possible, is to use a
composite score. The values of the various performance variables are added
together. This in turn leads to the question of the weight each variable is
accorded. This process is much like the use of a number of compensable factors
in job evaluation (see Chapter 14). A second method is the multiple-hurdle
approach, in which a minimum level must be reached on each performance dimension
before any incentive is paid. A third approach is a series of mini-incentive pay
plans, one for each performance dimension.
This approach, broader than the use of output and time standards, rewards
outcomes that are direct measures of the success of the organization as opposed
to the success of the individual employee. As we have noted, gainsharing plans
are more appropriate to organization-wide incentive pay plans. The purpose of
gainsharing is to tie the employee to the performance measures by which top
management is judged and by which society defines a successful organization.
Although clear performance-reward connections can be made in these
circumstances, it is difficult to make a performance-effort connection.
A number of different performance measures can be used in gainsharing, but all
share a common dimension: a baseline standard must be established to determine
where the organization is at the present time. The value of improvements in
future measures of performance are then shared with the employees. One set of
performance definitions rewards reductions in costs or improvements in
The most popular gainsharing plan is the Scanlon Plan.19 In this plan employees are paid a bonus if costs remain below pre-established
standards. The standards have been set by studies of past cost averages. Ways to
reduce costs are developed by a series of committees throughout the organization
and a plant-wide screening committee that reviews and implements changes.
Although Scanlon developed this plan in 1937, these committees look much like
pay out profit shares at regular intervals as earned. Deferred plans put the
profits to be distributed in the hands of a trustee, and distribution is delayed
until some event occurs. This type of plan is ordinarily tied into a retirement
plan. Combination plans distribute part of the profit share as earned and defer
distribution of the balance.
The Scanlon Plan is not the only organization-wide plan, but it is the best
known. Others that have been successful in the United States include the Rucker
Share-of-Production, Kaiser, and Nunn-Bush plans. A more recent plan is
Improshare, of which more than 100 had been adopted as of the early 1980s.20 Although these plans differ in details, all rely on a definition of productivity
improvements wholly measured by some time period and pay bonuses for savings.
Further, most depend upon labor-management cooperation that represents a change
in the relationship between management and labor.
A further attempt to tie employees to the economic success of the organization
is to grant them a share of the profits of the organization. Obviously, this
type of incentive is useful only in a for-profit organization. Profit sharing
has not always been carefully delineated. The Council of Profit Sharing
Industries categorizes plans for cost-savings sharing as profit sharing,
although they pay off whether or not the organization makes a profit.
Increased production has been cited as one of the goals of profit sharing, and
reported results include increased efficiency and lower costs. Many early
reports of profit sharing results attributed large increases in production to
the plan.21 More recent reports find
profit sharing companies more successful financially than non-profit sharing
companies but are more careful in attributing the difference to profit sharing.22 Profit sharing is popular for organizations, from both a practical standpoint
and a philosophical one. Management often feels that having the employee focus
on profits is useful and will lead to higher organizational profits. In recent
years, the Employee Retirement Income Security Act (ERISA), variations in
profits, and the advent of employee thrift plans have blunted the growth of
profit sharing plans.
plans are typically differentiated on the basis of when profit shares are
distributed. Cash plans (known also as current-distribution plans) pay out
profit shares at regular intervals. Deferred plans put the profits to be
distributed in the hands of a trustee, and distribution is delayed until some
event occurs. This type of plan is most often tied into a retirement system.
Combination plans distribute a part of the current profits and defer the rest.
Profit sharing plans vary widely in provisions concerning organization
contributions, employee allocation, eligibility requirements, payout provisions,
and other administrative details. Two-thirds of the plans define the
contribution of the organization by a formula; in the balance the board of
directors determines the amount. Most formulas specify a straight percentage of
before-tax profit, after reservations for stockholders and reserves. The amounts
allocated to employees or their accounts are usually based on their compensation
but may also be influenced by their length of service, contributions,
performance, or responsibility. In most plans all full-time employees are
eligible immediately or after a short waiting period, but a substantial minority
of plans exclude union employees or are limited to specific employee groups.
Payout provisions are usually determined by plan designation (cash, deferred, or
combination), but deferred and combination plans are increasingly incorporating
vesting provisions and payout under a wide variety of circumstances.
Our discussion of
profit sharing suggests that it does not closely fit the performance-motivation
model. Profits are influenced by so many variables that it is very difficult for
an individual to feel that his or her contributions have organization-wide
results. Thus, it is difficult for employees to believe that their profit share
is related to their performance. It may be possible for small organizations with
cash plans and continuous communication efforts to maintain their employees'
belief in the performance-reward relationship, but such a belief is vulnerable
to any reduction in profits that occurs while the employee is maintaining his or
her performance level. Larger organizations with cash plans are less likely to
be able to foster this belief in the first place and may be even more vulnerable
to changing circumstances. Deferred plans involve the additional hurdle of
payment that is delayed, often for years. Under such plans employee belief in
the performance-reward relationship may be impossible, even in small
On the other hand, profit sharing may closely fit the membership-motivation
model even in large organizations, at least for certain groups of employees. Two
things serve to increase both the numerator and the denominator of the
membership-motivation model : (1) the promise to provide additional economic
rewards when profits of the organization permit it, and (2) the implied
acceptance of all employee contributions that will advance the profit goal. In
this way employees may enlarge their commitment to the organization.
A major assumption of the performance-motivation model is that the person must
desire the reward being offered. Since money is considered the most desired
reward, it is far and away the most important reward offered in incentive pay
plans. The assumption behind any incentive pay plan is the high value of money
to the employee. Although there are few employees who would claim that money is
unimportant, the degree to which money is important to people varies with their
circumstances. So incentive pay plans are likely to be of major importance to
only some employees. Two aspects of money need to be considered by the
administrator of an incentive pay plan - when and how much of it is granted.
have seen that the reward may be granted anywhere from immediately after the
accomplishment to many years later. From a motivational standpoint, the closer
the reward is to the desired performance the stronger the motivational value.
This is because the person can more easily attribute the reward to a particular
performance. Incentive pay plans vary greatly in their timing of the reward.
Those such as piecework make the connection every payday. Others, such as bonus
plans, may grant the reward quarterly or semiannually. Under deferred plans, it
may be years before the person receives any value.
Amount. The reward must be perceived as worth the additional effort. An
incentive pay that requires considerable effort for a small amount of extra
money will probably not lead to extra effort. Where the incentive pay plan is an
adjunct to the regular wage, the amount possible to receive under the plan must
be a large enough percentage of base pay to entice the person to put forth extra
effort. Again, the amount or percentage that will be perceived as significant
varies with the person.23
Non-Financial Rewards. Not all incentive pay plans focus on money as the
reward. Time can be a significant reward to many people. Incentive pay
plans can provide time off the job as well as more pay. To many people in our
society, defining what needs to be done and then letting the person complete it
in whatever time is comfortable provides not only free time but a sense of
freedom as well.
Some incentive pay plans avoid any involvement with the pay system by developing
contests in which employees receive prizes of value to them. These prizes
can range from merchandise to vacation trips. Of course the prize must be
something the recipient desires. Otherwise there is no incentive to perform.
Incentives such as this can also be dysfunctional if the reward is for something
that is peripheral to the job. The focus on the contest may remove attention
from the basic purpose of the job.
In the previous section, we discussed the two basic parts of an incentive pay
the performance definition and the reward. In this section we discuss how these
two are put together into an operating plan. Specifically, the jobs to be
included, relating performance to reward, and the administration and control of
incentive pay plans are examined.
Jobs to Be
Not all people or all jobs should be placed under an incentive pay. Jobs in
particular vary in appropriateness for incentive pay plans. Further, the variety
of incentive pay plans and the variation in effectiveness of those in operation
suggest that there are conditions under which a particular plan is applicable
and conditions that make for the success or failure of incentive pay plans in
Job Conditions. The kind of work being performed is a major variable in
choosing which incentive plan, if any, is the most applicable.24 A plan suited to highly repetitive, standardized, short-cycle manual operations
is unlikely to fit less structured work. Highly variable, non-standardized work
may make incentives unworkable.
The major job variables that need to be examined in determining the
applicability of incentives are (1) standardization of the job, (2)
repetitiveness of the operations, (3) rate of change in operations, methods, and
materials, (4) control of the work pace, and (5) measurability of job outcomes.
If these variables are placed at the ends of a scale as in figure 2, then the
more each is true for the job, the more individual incentive pay plans that
focus on job outcomes, such as piecework or standard-hour plans, are
appropriate. If these conditions are not met and variability is introduced,
group- or organization-wide plans are more appropriate. These types of plans can
smooth out the variations that occur in jobs that fall between the two extremes,
illustrated in figure 2.
Applicability of Incentive Pay Plans to Work Conditions
At the other end
of the scale are jobs that are largely inappropriate for the use of incentives
because of their lack of standardization and repetitiveness, frequent changes in
methods, lack of worker control, and difficulty in measurement.
Most organizations have jobs that fall into all of these categories. Thus an
organization desiring to place all or most employees on incentives may find that
a plant-wide plan is most feasible. Some organizations, because of the value of
incentives, choose to invest a great deal of time in developing an individual
incentive plan in a variable situation, but most choose to install a number of
different plans, each geared to a limited segment of the organization, or an
Work often requires workers to cooperate rather than compete with one another
and with other organization units. Such requirements, which are becoming the
norm in complex organizations, argue against individual incentive pay plans and
in favor of group and organization-wide plans. Obtaining cooperation among
interdependent workers and among organization units is difficult under the best
conditions and logically impossible when the reward system encourages
Conditions. The size of the organization may affect the chances of
success of incentive pay plans. A large organization can typically make the
administrative commitment required to support an individual plan. Plant-wide
plans apparently require fairly small organizations in order to be successful.
Thus large organizations would seem to be limited to individual or small-group
incentive pay plans or to none at all, and small organizations with limited
staff expertise would seem to be limited to plant-wide plans.
Also involved is the proportion of total costs represented by labor costs.
If labor costs are a high proportion of total costs, placing labor costs on a
variable-cost basis is worth considerable effort. But if labor costs are a small
proportion of total costs, incentive pay plans will appear less attractive to
Management attitudes constitute a major variable in the success of incentive pay
plans. Unless management is committed to maintaining the relationship between
performance and pay and backs this commitment with the necessary administrative
expenditures and organization of work, an individual incentive plan can fail or
become obsolete very quickly. Management attitudes will depend in part on the
nature of competition in the industry and on business conditions, but the real
variable is the trust management has in employees to guide and direct their own
activities. This is true of both individual and organization-wide incentive pay
Relationships with employees, formal or informal, also determine the kind of
incentive pay plan, if any, that is feasible. A hostile relationship argues
against any incentive pay plan, because it will create an atmosphere of
controversy. A formal, arms-length relationship suggests limiting incentive
coverage to situations where sufficient objectivity can be achieved to preclude
disagreement. If, however, the relationship is characterized by mutual respect
and trust, incentive pay plans dictated by technical conditions may be employed.
For example, a gainsharing plan based on imperfect measurement may be employed
if the work requires it.
Plan Applicability. There is a tendency to think of incentive pay plans as
being applicable primarily to direct production jobs, while pay-for-performance
plans are the appropriate method for other employees. This tendency applies
primarily to individual and small-group incentives rather than to plant-wide or
organization-wide plans, which ordinarily cover all employees.
The fact is, however, that individual and small-group incentive pay plans are
applied to almost all varieties of work. What is required is a willingness to
engage in the expense and administration required to make the program work. From
this standpoint, there is scarcely any job that someone has not successfully
measured, and applied a reasonably successful incentive pay plan to.
The premise for this reasoning may be simply stated. All tasks, jobs, or
functions must have a purpose. Better performance of this purpose is worth money
to the organization. Devising a yardstick to measure this improved performance
will therefore permit rewarding the individual or group who achieves it.
The general approach in all these applications of incentive pay systems has
been: (1) identifying measurable work as a yardstick of performance, (2) setting
standards on the basis of this yardstick, (3) measuring performance against
these standards, and (4) providing extra pay for performance above standard. It
has been found in all of these applications that certain aspects of work results
can be measured.
The widely varied applications of incentive pay plans prove that with diligence
and ingenuity it is possible to find and measure aspects of work. But it may be
useful to remember that the kind of behavior measured is the kind of behavior
that people exhibit.25 Thus,
organizations must be certain that incentive pay plans are based on measures of
output that they require rather than merely on those that can be measured. If
what is measured is related only peripherally to organization goals and if what
is not measured remains undone and neglected by employees, the incentive pay
plan impedes attainment of organization goals.
Performance to Reward
The central imperative in an incentive pay is that the person being paid
understands that a particular outcome or behavior, when compared successfully
with the performance standard, will lead to a specified reward. In this section
we will cover the development of this relationship.
In order to develop this relationship, the performance standard must be clearly
stated and the ratio between it and the reward delineated.
Performance Standards. An incentive pay must contain a clear performance
standard. As we have seen, a number of definitions of performance are used in
incentive pay plans. These include the output of the job, the time taken to
complete a task, the efficiency with which the job or organization operates, and
the profit derived from the operation of the organization.
Setting performance standards in terms of outputs would seem the easiest, since
it taps the purpose of the job. But in many jobs, it is difficult or impossible
to quantify the output. Further, output can be defined in terms of the number of
units, the quality of those units, and/or the time taken to complete the units.
The most common way of determining a performance standard for production jobs is
to conduct a time and motion study. This technique estimates the time normally
required to produce a unit. In turn, a study of the job in operation in which
the exact motions required to perform the task and the time required to do so is
made. Thus, each activity or element that goes into producing the unit of
production is timed and a total time is developed under which a normal worker
working at a normal pace would complete a unit of production.26 The equitable relationship between the unit of production and pay can then be
arrived at by finding the market rate for the job or through bargaining. The
focus of a time and motion study can be either the output or the time taken to
complete the task. Thus both piecework and standard-hour incentive pay plans
tend to use this technique.
jobs can also be paid under an incentive pay based upon outputs. Sales jobs are
a case in point: the salesperson is paid on the basis of sales volume.
Regardless of the job, the major requirement of setting performance standards is
to define the value of a unit of production or performance. In order to do this,
there must be some idea of a normal output and an equitable wage for achieving
Incentive pay plans focusing on efficiency or cost reduction involve defining a
standard or normal cost and then rewarding employees on a schedule that is
achieved at less than this standard cost. The cost definition varies with the
plan. In a Scanlon Plan the typical cost standard is labor costs as a percentage
of sales. The Rucker Plan uses value added by manufacture for each dollar of
payroll costs measured by the difference between sales income from goods
produced and the costs of materials, supplies, and services consumed in
production. In Improshare, the focus is on the hours saved in producing a given
output. Production standards are developed from past production records.
Profits are a clear-cut measure, but as a performance standard in a profit
sharing plan they require two decisions. The first is to set the percentage of
the profits that will go into the profit sharing plan in each time period
allocated. This percentage can be fixed, such as 10 percent, or established anew
for each period by management decision. The second decision is the proportion of
the total allocation that each person receives (distribution). This is
ordinarily done by calculating an employee's base pay as a percentage of total
payroll and giving the employee that percentage of the total profit sharing
Earnings. Incentive pay plans can range from being the basis for all of the
employee's pay to being an insignificant percentage of it. In a straight
piecework plan, the employee is paid for the number of units produced. There is
no guarantee of how much the employee will make in a time period; that is up to
the employee. A keypunch operator who is paid a certain amount for each 100
cards would be an example. At the other extreme might be a profit sharing plan
that provides no additional money, beyond base pay, to the employees in a year
in which the organization does not make a profit. Clearly, in these two cases,
the importance of the incentive pay plan to the employee and its motivational
effect is very different.
Both of these situations are likely to be unacceptable to the employee, but for
different reasons. The straight incentive plan makes the employee feel insecure.
In the second case there is supposed to be an incentive, but none is forthcoming
or it is so small that it means nothing. The employee feels cheated. The lessons
from this are that some guarantees should be built into the incentive plan on
the one hand, and the incentive plan should be a significant proportion of the
employee's total pay on the other.
Rather than a straight incentive plan, most plans contain a guaranteed base pay.
This is usually the market rate or some proportion of the job's market rate.
This guarantee is associated with an output standard that matches the guaranteed
rate. The incentive plan then really operates only if the employee exceeds the
performance standard; for all time periods in which he or she does not "meet
standard," the pay is the base guaranteed pay. In this way employees are
protected from circumstances beyond their control that limit production in a
particular period. If an employee continually fails to meet standard, management
must decide whether the standard is incorrect or whether the employee is not
capable of performing the job.
As we have seen, for a reward to be of value to a person, it must be perceived
as significant enough to expend effort on. Ordinarily, an incentive that yields
a small proportion of the employee's earnings or a plan in which the probability
of attaining the reward is low does not energize the employee to expend effort.
Thus, it is unlikely that the organization will attain the performance it
desires. One exception may be bonus plans that reward a very specific behavior
that is an out-of-the-ordinary outcome of the job.
Performance-Reward Ratio. Basic to the performance-reward connection is the
ratio of reward to performance. This ratio can take a number of forms. The most
common is the straight-proportional ratio. This is the type used in piecework
and standard-hour plans. It provides a one-for-one proportion between
performance and reward. A second possibility is the geared ratio. In this case
the ratio of reward to performance units varies at different levels of
production. The proportional change may be less or more than the proportional
change in output. These three possibilities are illustrated in Figure 3. Note
that this illustration assumes that there is a base rate of production and
reward after which the incentive pay system takes hold.
by Results, International Labour Office, Geneva, 1984, p. 11.)
examples do not exhaust the types of performance-reward ratio. Three more, based
on the geared ratio, are illustrated in Figure 4.
Three geared ratios
by Results, International Labour Office, Geneva, 1984, p. 12.)
In a progressive
ratio the reward increases with higher production. This type of system is most
likely to be useful where higher levels of production become increasingly
difficult to achieve. A regressive ratio is the opposite: higher levels of
production lead to less proportionate reward. This may be appropriate where
higher levels require help of others in the organization to achieve them. The
final ratio is not really a ratio but a fixed amount if a standard is exceeded.
This arrangement is often found in a fixed bonus system.
Positive-Reinforcement Plans. To some degree all incentive pay plans are
based upon the principles of behavior modification. Some organizations, however,
have developed incentive pay plans that specifically use these principles. Emery
Air Freight was one of the first to develop such a plan. Its procedure was as
- Define the performance variables of importance and conduct an audit to see how well the organization is doing.
- Establish specific goals for each employee, using employee input.
- Have each employee keep records on how he or she is doing.
- Praise positive results and ignore substandard work.27
companies have developed this kind of plan.28
A major use of these programs has been to reduce absenteeism.29
Although praise is the basic ingredient in many positive-reinforcement plans,
there is increasing pressure to include money in them.
Careful attention to incentive pay policies and procedures is a necessary
prerequisite for the installation and successful operation of any incentive pay
plan. Wide participation in the development of these policies and procedures,
including union-management negotiation, also increases the possibilities of
success. A careful statement of policy goes far toward preventing situations in
which rewards are offered for results not desired by either the organization or
employees. Participation in policy making helps ensure both the commitment of
resources and energy required by management, as well as the favorable attitudes
of employees and the union.
Support. Incentive pay plans require expert staff support for proper
operation, especially a heavy commitment of resources to industrial engineering.
Unless the industrial engineers can carry out the standardization and
measurement work as well as plan maintenance, the incentive pay plan will
quickly become obsolete.
There is also likely to be pressure to expand incentive pay coverage to other
workers in order to bring their earnings up to the level of those of incentive
pay plan workers. Ensuring that such expansion is economically justified
requires expert administrative support and upper-management decision making
based upon the value of incentive pay plans and not upon other organizational
Incentive pay plans require good supervision. This requirement may mean
selecting more capable supervisors. But it certainly means training supervisors
to understand the workings of incentive pay and, equally important, showing
supervisors that incentive pay is an important means of obtaining the quality,
cost, and output objectives that are their responsibility and the basis of their
rewards. Unless supervisors acquire the necessary skills and a strong interest
in making the plan work, the incentive pay plan will quickly deteriorate.
The role of the supervisor changes when an incentive pay plan is installed. The
control function is lessened since the incentive pay plan builds in a control
mechanism. On the other hand, the supervisor must ensure that the production
process runs smoothly, with a minimum of down time, so that the employees may
produce according to the plan. Supervisors spend more time in liaison and
training and less in directing their workers.
Perceptions. Employees must accept the incentive pay plan as fair if it is
to work. Obtaining this belief requires a continuing communications effort.
Emphasizing the prospects for steady employment and allaying other fears of
employees is necessary to obtain their belief in the fairness of the plan.
Employees must accept the conditions of the plan. Further, the conditions should
not be changed except under agreed-on circumstances. Employee fear of rate
cutting is the force behind restricted output and employee distrust of incentive
pay plans. Accepted standards require capable administrative staff and
supervisors who are not only technically competent but able to secure employee
approval of standards and the standard-setting process. Successful incentive pay
plans emphasize measurement rather than negotiation in the setting of standards.
Obviously, acceptance of measurements requires confidence in management's
fairness and good labor relations.
Keeping the incentive pay plan simple and understandable to employees is
essential. All procedures should be as simple as possible. Complicated earnings
formulas should usually be avoided. Employee trust requires that employees
understand how the plan works and affects their pay.
of Performance Standards. As indicated, performance standards lie at the
heart of any incentive pay plan. How these standards are set goes a long way
toward achieving their acceptance. Participation is one way to aid in
acceptance. There needs to be an established process for contesting standards.
The solutions must be acceptable to employees and the organization.
Developing acceptable original standards is not as difficult as obtaining
acceptance of changes in standards. Because of employees' fear of rate cutting
and job loss, any change in standards is likely to be resisted, no matter how
justified. But changes in materials, methods, and equipment require changes in
standards if the incentive pay plan is not to become uneconomical for the
organization. Still, any changes in standards should be a last resort and should
be carefully explained to employees.
Failure to meet
or exceed standards. This should be carefully investigated, and the reasons
found and corrected. The failure may be due to poor standardization of materials
and equipment, in which case employees have the right to request a revision of
the standard. Or it may be due to inadequate training or failure to follow the
prescribed methods. Each of these cases calls not for a revision of the standard
but for better supervision and training. Paying the worker "average earnings" if
he or she fails to reach standard rather than finding and correcting the reason
for the failure, weakens incentive pay plans.
As indicated, most incentive pay plans contain a base rate that guarantee the
employee a base salary regardless of his or her production. The relationship
among base rates should be determined by job evaluation and market rates, just
as with any other job in the organization.
Pay Relationships. Pay relationships between jobs become more important when
there is an incentive pay plan in the organization. If earnings of low-skilled
employees on incentive pay exceeds those of high-skilled employees not on
incentive pay, a perception of inequity is created that will lead to pressure
for increases in wages for those not under the incentive pay plan, whether or
not there is any basis for these increases. Under individual and small-group
incentive pay plans, continually monitoring pay relationships involves an
additional commitment of resources.
As we have noted, extra earnings under the plan must be sufficient to provide
incentive for extra effort. With reasonable effort most workers should be able
to attain some incentive earnings. The average worker on incentive pay is
usually expected to earn a 25-30 percent bonus. Individual workers are expected
to vary around the normal bonus rate. Theoretically, of course, there is no
ceiling on earnings. Establishing one would, in essence, cut rates and reduce
the plan's incentive value for high producers.
Plan Maintenance and Audit. More incentive pay plans fail because of
inadequate maintenance than for any other reason. There is a constant tendency
for incentive pay plans to erode.30
Although changing the plan has its hazards, as just indicated, ignoring the
constant changes that occur in the organization is most likely to lead to a
situation where the standards are too loose and the incentive pay plan is
costing too much and not providing the incentive for extra effort.
Many organizations with successful incentive pay plans audit all phases of their
incentive pay plan operation at regular intervals of one year or less. Standards
are audited by analyzing an operation selected at random, almost as if an
original standard were being developed: materials, methods, operator
proficiency, and equipment are checked and compared with the existing standard.
The timekeeping and reporting systems are also audited, as are earnings
relationships among individuals and groups. The latter are subjected to
statistical analysis of earnings distributions.
An advantage of the periodic audit is the assurance that high earnings are not
used as a signal to revise standards but that every standard is periodically
audited and revised up or down as prevailing circumstances dictate. Union
officials, recognizing the desirability of a consistent rate structure and the
elimination of inequities, find the approach logical. Employees are less likely
to resent changes wrought by an agreed-on system.
Although there is a great deal of evidence that incentive pay plans can improve
employee performance, there is also much evidence that they have dysfunctional
consequences. If this were not true, incentive pay plans would undoubtedly be
more popular than they are. The problems of incentive pay plans fall into two
categories...practicality and perception.
With incentive pay plans there are many things that might be possible to do but
not worth doing because they cost too much, either directly or indirectly. There
is a tremendous amount of evidence, for example, that incentive pay plans,
especially individual ones, result in restriction of output. Such studies show
that this phenomenon is widespread and results in productivity considerably
below worker capability.31
The reason for restriction of output has been shown to be worker beliefs that
additional productivity will lead to a rate cut or to employees working
themselves out of a job.32 These
beliefs presumably result in group pressures to restrict output.
It has also been shown that the competition created by individual incentive pay
plans can cause serious problems if the work calls for cooperative effort.
People can be expected to exhibit behavior that is rewarded, and cooperative
behavior is not rewarded or recognized under an individual incentive pay plan.
In fact, it has been suggested that incentive pay plans cause employee
resentment because they reward only effort, although employees know that many
other contributions are required by the organization.
A problem implied above is the high administrative costs of an incentive pay
plan. Although there is no question that determining standards, measuring
output, and maintaining the plan are more costly than administering a
pay-for-time-worked plan, there are no studies that accurately show the costs of
installing and operating an incentive pay plan. Studies cited earlier concerning
cost reductions under incentive pay suggests that productivity increases often
offset the additional costs.
Another problem of
incentive pay plans, noted earlier, is the tendency for internal wage and salary
relationships to be distorted, such that lower-skilled incentive-based workers
may earn more than high-skilled workers not under the plan. Interestingly, this
problem as well as inter-group conflict has been credited with the move toward
expanding incentive pay plans at the plant and organizational levels. Although
the studies to date have not proved that these broader plans avoid these
problems, there is evidence that they can encourage cooperation and offer
suggestions (not proof) that output restriction is less likely. The numerous
changes that accompany the installation of a company-wide plan make determining
the source of results especially difficult. At any rate, there is no reliable
evidence comparing the relative effectiveness of individual, group, and
The performance-motivation model is a perceptual model: it states that people
will behave in a given way provided they perceive certain things. This section
will reexamine this model to see what problems of perception incentive pay plans
The Importance of Pay. Incentive pay plans rely on pay as being an
important reward for the employee. This is undoubtedly true. But pay is not the
only reward that is important to employees. There are many non-financial rewards
that employees need and desire in their work relationship. Incentive pay plans
not only ignore most of these other rewards but often thwart their satisfaction.
The discussion on restriction of output and its causes is a good example. The
reasons that incentive pay plans have problems of this kind is that they prevent
employees from satisfying their social needs. Where desires for different
rewards come into conflict, the motivational strength of the plan is diminished.
Performance-Reward Connection. As we have seen, the most important aspect of
incentive pay plan design is the determination of the performance standards and
the ratio of rewards to those standards. This is easy to say and hard to do.
Performance is hard to define for all jobs. It is even harder to define all the
performance variables and relate them to the rewards. What occurs is a dilemma.
In order to include all the variables and make the connections, the plan becomes
complex. This in turn violates the simplicity principle and increases the
probability that the employee will not understand the plan.
Establishing performance standards is a continual problem. To the degree that it
is done by management for the employee, its acceptance by the employee depends
upon the faith that the employee has in management. The constant fear of the
employee, as we have noted, is of rate cutting. Thus any change in the standards
whether justified or not, will be viewed with suspicion. Again, incentive pay
plans require trust between management and labor, something that is not common
in our society. Even where there is trust, the process of setting standards is
judgmental, suggesting that there is always the possibility of error. It is
therefore wise to have a formal appeal system, whether there is a union or not.
Further, employees see the definition of performance by management in some cases
as breaking down the skill requirements of the job and thereby making the job
less intrinsically appealing.
Although the connection between performance and reward is clear in the short
run, it may not be so in the long term. As we have seen, the employee may
perceive that to produce above the standard is to work oneself out of a job.
This becomes a further reason to restrict output and to encourage others to do
likewise. A further concern of employees may be that the proportion of the gain
made under the incentive pay plan goes mostly to the organization and not to the
Performance-Effort Connection. The final part of the performance-motivation
model is the connection between performance and effort. The purpose of incentive
pay plans is to increase the effort of employees and thereby their output.
Obviously, this assumes that the employee's effort makes a difference in the
output, but this is not always true, at least not in a proportion that allows
the performance-effort connection to operate.
Employees have concerns about attempts to increase effort. They may feel that
management is trying to get more than a fair day's work for a fair day's pay.
Or they may feel that incentive pay plans are excuses for a speedup by
management. At the extreme, the pressure for more effort may lead to stress and
In order to have high earnings, the employee under an incentive pay plan must
put out a consistently high level of effort. This may not be a natural pace for
people. Most of us are able to work faster at certain times of the day than at
others, so a constant high level of effort is almost impossible to maintain.
Employees who cannot keep up are going to feel a great deal of frustration and
concern for their continued employment.
Furthermore, base rates in incentive pay plans that are established through
industrial engineering assume that all people have the same ability to achieve
the standard or higher. This is not true. Thus there are some employees for whom
the performance-effort connection is low because they are easily able to meet
the standard, and others for whom the connection is low because they must put
forth too much effort to meet it. But it is impossible to have different
standards, since that would be perceived as unfair.
All of these perceptual concerns by employees serve to lower the contingencies
required for the performance-motivation model to operate and therefore reduce
the effectiveness of an incentive pay plan. Management and the compensation
staff need to recognize the possible presence of these concerns and deal openly
with them through communication programs with the employees.
After a considerable period of decline in their usage in the United States, new
interest is being shown in developing incentive pay plans for a wide range of
jobs, many of which were considered inappropriate jobs for incentive pay plans
in the past. However, with the need to focus on productivity and the known
positive results of incentive pay plans, many new ideas are being tried. The use
of incentive pay plans comes the closest to using the performance-motivation
model in the design of the compensation plan.
There are three essential elements to incentive pay plans. First, the unit of
the incentive pay plan, called the level of aggregation, is determined.
Incentive pay plans are ordinarily categorized into individual, group, or
organization-wide (organizational). Each of these levels defines the level at
which output or productivity is defined and the group that receives the rewards.
Second, and most important, a performance standard is set. In individual and
group plans the standard is usually some statement of output or time or both. In
organizational plans, standards of performance are based on reductions in cost,
improvements in overall productivity, increased profits, or a combination of all
three factors. Third, rewards are offered. The rewards are usually money, but
time can also be a potent reward. Money needs to be in significant quantity and
received in a timely fashion, so the connection is clear.
incentive pay plans requires making a further set of decisions. The first of
these is the jobs to be included. This is important because some jobs are not
amenable to incentive pay plans. The second set of decisions has to do with
organizational conditions such as size of organization, labor costs, and
managerial attitudes. Determining the applicability of incentive pay is a third
decision. In general, in the past, applicability has been too narrowly defined.
Another decision has to do with the manner in which performance and reward are
connected. This requires a clear definition of performance, a ratio between
performance and reward, and determination of the proportion of total pay
controlled by the incentive pay plan. Finally, incentive pay plans require
well-devised administration and constant surveillance for optimum operation.
Incentive pay plans are not always popular because they have problems that may
make them not worth their advantages. The assumption that workers operate only
on an economic level is not supported when one sees the restriction of output
that often occurs in incentive pay plans. Incentive pay plans also require
considerable administrative costs, take control away from supervisors, and
require a supportive climate within management. Further, the inability to define
performance in a way that is complete and acceptable often has doomed incentive
pay plans. Changing the conditions of the plan once established is very
difficult, as it is often seen as taking away things from the employee. Finally,
incentive pay plans for one group in the organization may be perceived as
inequitable by other groups in the organization.
||International Labour Office, Payment by Results
(Geneva, 1984). This publication is a major source in the development
of this chapter. It is recommended for anyone interested in incentive
||See, for example, AFL-CIO, "Decline of Wage Incentives," Collective Bargaining Report, November 1960; and R. Marriott, Incentive Payment System, 3rd ed. (London; Staples Press, 1968), p. 259.
||H. K. von Kass, Making Wage Incentives Work (New York; American Management Assn., 1971), p. 11.
||W. F. Whyte, "Skinnerian Theory in Organizations," Psychology Today, April 1972, pp. 67-68.
||H. Meyer, "The Pay for Performance Dilemma," Organizational Dynamics, Winter 1975, pp. 22-38.
||S. H. Slichter, J. J. Healy, and E. R. Livernash, The Impact of Collective Bargaining on Management (Washington, D.C.: Brookings Institution, 1960), p. 49.
||E. E. Lawler, Pay and Organizational Effectiveness: A Psychological View (New York: McGraw-Hill, 1971), p. 124.
A. Locke, D. B. Feran, V. M. McCaleb, K. N. Shaw, and A. T. Denny, "The
Relative Effectiveness of Four Methods of Motivating Employee
Performance," in Changes in Working Life, ed. K. D. Duncan, M, M. Greenberg, and D. Wallace, (New York: John Wiley, 1980), pp. 363-388.
||L. E. Badenhoop and A. N. Jarrel, "Wages and Related Practices in the Machine Industries," Monthly Labor Review, August 1956, p. 912.
||P. Schwinger, Wage Incentive Systems (New York: Halstead, 1975).
|| See B. E. Graham-Moore and T. L. Ross, Productivity Gainsharing (Englewood Cliffs, N.J.: Prentice-Hall, 1983).
||See F. G. Lesicur, The Scanlon Plan: A Frontier in Labor--Management Cooperation (New York: John Wiley, 1958).
||R. A. Ruh, R. L. Wallace, and C. F. Frost, "Management Attitudes and the Scallion Plan," Industrial Relations, 12:1973, pp. 282-88.
||T. H. Patten, Pay: Employee Compensation and Incentive Plans (New York: Free Press, 1977).
||A. Shaw, "Measured Daywork: One Step toward a Salaried Workforce," in Payment Systems, ed. T. Lupton (Harmondsworth, England: Penguin, 1972), pp. 143-65.
||L. M. Schmitz and H. G. Heneman III, "Do Positive Reinforcement Programs Reduce Employee Absenteeism?" Personnel Administrator, September 1980, pp. 87-93.
||B. E. Moore and T. L. Ross, The Scanlon Way to Improve Productivity (New York: Wiley Interscience, 1978).
||Graham-Moore and Ross, Productivity Gainsharing.
||Sharing Profits with Employees, Studies in Personnel Policy no. 162 (New York: National Industrial Conference Board, 1957).
||B. L. Metzger and J. A. Colletti, Does Profit Sharing Pay? (Evanston, Ill.: Profit Sharing Research Foundation, 1971).
||L. A. Krefting, "Differences in Orientation Toward Pay Increases," Industrial Relations, 19: 1977, pp. 81-87.
||H. K. von Kaas, Making Wage Incentives Work (New York: American Management Assn., 1971).
||Krefting, op. cit.
||See, for example, S. Konz, Work Design (Columbus, Ohio: Grid Publishing, 1979).
||W. C. Hamner and E. P. Hamner, "Behavior Modification on the Bottom Line," Organizational Dynamics, Spring 1976, pp. 8-9.
||Schmitz and Heneman, "Positive Reinforcement Programs."
||International Labour Office, Payment by Results.
are many illustrations of this problem in management literature. See,
for example, O. Collins, M. Dalton, and D. Roy, "Restrictions of Output
and Social Cleavage in Industry," Applied Anthropology, Summer 1946, pp. 1-14; M. Dalton, "The Industrial Rate Buster: A Characterization," Applied Anthropology, Winter 1948, pp. 5-18; D. Roy, "Quota Restriction and Gold Bricking in a Machine Shop," American Journal of Sociology, March 1952, pp. 427-42; and W. F. Whyte, ed. Money and Motivation (New York: Harper, 1955).
||D. J. Hickson, "Motives of People Who Restrict Their Output," Occupational Psychology, July 1961, p. 110-21.