Creating a Variable Pay Plan

SHORT-TERM INCENTIVE PLANS

There are a variety of programs that may be used for short-term incentive plans. We will now examine the following types:

• Individual performance-based incentive plans
• Team or small group incentive plans
• Large group incentive plans
• Gain-sharing incentive plans
• Profit-sharing plans

Individual Performance-based Incentive Plans

Individual performance-based incentive plans recognize and reward individual employees for achievements in their jobs.

Output-Based Plans

The most common definition of performance, and in many ways the best, is the intended output of the job. In some situations, this can be an explicitly measurable item (such as the number of components assembled). In many jobs, however, it’s hard either to define the output desired or to measure that output. In these cases, an incentive plan may not be a good idea.

Piecework

The piecework plan is the most common output-based incentive plan. In it, a set reward value is attached to each unit of output; the employee's pay is that value times the number of units produced.

Piecework, or work paid for according to the amount produced rather than the hours worked, came from work at home professions during the Renaissance. Later, during the Industrial Revolution, much of this work was performed within a factory. While the term continues to be used for incentive plans based on individual units of output, a modernized plan will provide a minimum base pay level and pay a premium for units produced above that minimum to ensure a minimum standard. Employees who regularly do not make the standard may be reviewed to determine if they are properly placed.

Advantage. This plan clearly connects performance to reward.

Disadvantages. Since the piecework plan emphasizes quantity, quality may be a problem unless it is used as a measurement for output in addition to number of units produced. Straight piecework can intimidate employees because it places them under considerable pressure to produce results.