The pay performance methods can be divided into three major types: individual group and a combination of the two.
For individuals, pay for performance can take the form of merit pay, incentives and bonuses. At the group level, profit sharing, gain sharing and stock ownership are the most prevalent.
Types of Compensation
Individual Level: It includes the following items:
- Base pay: most compensation programs use some form of base pay, which is the basic cash received for the work performed, adjusted for the individual’s skill, education, experience, or some other attribute. The base pay may be either hourly (paid by the hour) or salaried (paid weekly, biweekly, monthly, or yearly)
- Merit pay: Perhaps the most familiar form of pay for performance plan is merit pay, which rewards work behaviors that have already occurred, Frequently, merit raises’ are based on the level of the individuals performance in the past year relative to some standard of performance. Merit can be given either as an increase to the base salary or as a lump sum payment. A primary issue in merit pay for performance systems is whether pay truly is based on performance. Many researchers believe that the majority of merit pay systems simply do not work. Merit pay does not increase productivity because the difference in merit pay between the outstanding and poor performers is so small that the pay increase ends up being no incentive at all.
- Incentives: Incentives differ from merit pay in that they are future oriented; they are used to induce desired behavior. Their time orientation may be short term, long term or a combination. They also may be tied to individual and/or group performance. Most individual incentive plans are of two types: 1) the straight piecework plan, which pays a constant amount for each unit that is produced and 2) the standard hour plan, which ties pay to a standard amount of time that it tasks to perform a service or complete a task. Group plans are similar to individual plans in that pay is tied to performance, but a major goal is to increase – cooperative efforts and coordinate activities. Essentially, incentives are based on an increase in profits or a decrease in costs, relative to a “base year”. The size of the group may range from work items to the entire organization, with unit-wide and organization-wide plans growing in popularity.
- Skill – based pay: A form of incentive-based pay wherein employees are paid for the skills they possess, not just the skills performed.
- Stay bonuses: A variety of cash bonuses and other inducements that firms offer to keep valued workers on the payroll during corporate reorganizations or close downs.
For group level pay performance can take the form of the following ones:
- Gain-sharing plans: Gain-sharing plans involve a participative management approach.
- Profit-sharing plans: Profit sharing ties employees bonus pay to the success of the company by focusing on profits. Profit-sharing plans generally reward employees only when a certain profit level is reached. These profits typically are distributed either in cash, deferred until a future time (retirement, severance, or disability), or paid in a combination of the two methods
- Commissions: Commission plans are typically developed for sales employees. They may be either straight commission plans, which pay the employee a percentage of sales that are made or a combination of salary and commission (and/or bonus). The percentages vary by industry, product, and nature of the sales job.
- Stock Ownership Plan: Stock ownership generally is a form of long term incentive that traditionally has been available only for middle to top level management.
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