Incentive Pay as a Way of Compensating Employees - Research Paper Example

?Definition of the Topic Incentive pay is a way of compensating employees other than wages and salaries and is linked to the employee’s performances.Employers reward their employees for attaining organizational goals and work objectives (Martocchio 82). Generally, incentives are given in form of cash. However, some employers decide to pay their employees in forms of products or a family vacation. Compensation can be distributed as extrinsic or intrinsic rewards. Intrinsic compensation is constructive reinforcement that can reflect an employee’s state of mind while performing their given tasks and duties (Joseph). According to the Vision Link advisory group, intrinsic rewards also allow employees to obtain a certain level of autonomy, provides opportunities for mastery in which employees may feel and see their progress, and it can establish purpose in their work so that they can feel that they are doing something good not only for themselves but also for the company. On the other hand, extrinsic compensation may include monetary and nonmonetary rewards. Examples of extrinsic compensation can be discretionary benefits such as paid time off and protection programs (Martocchio 86). Generally, “Incentive pay may come in the form of bonuses, profit sharing, or commission” (Business Dictionary). It is a monetary reward given to employees based on individual or group performances. This type of pay can reflect the way employees continue to pursue positive results in the workplace. In addition, incentive plans can inspire loyalty, commitment, and hard work. This type of plan will allow for recognition of outstanding workers and at the same time keeping track of the organizational goals (“Employee Incentive”). A company can decide on how they will design their incentive pay plans and on what criteria depending on what industry and type of the company. The most common types of incentive pay plans are individual incentive plans, group incentive plans, and companywide incentives. In many occasions, “Individual incentive plans reward employees for meeting such work-related performance standards as quality, productivity, customer satisfaction, safety, or attendance” (Martocchio 85). Organizations use individual incentive plans to motivate their employees by granting them the opportunity to receive additional income. These additional incomes can be given in forms of bonuses or commission (Joseph). There are different types of individual incentives the most common are piecework plans, management incentive plans, behavioral encouragement plans, and referral plans (Joseph). Piecework plans reward their employees for increases in productivity. It consists of the quantity and the quality of work produced. This criterion is based upon the supervisor’ or managers’ interpretation on the performance of the employee. Piecework plans can be used in industrial and production settings (Joseph). In contrast, management incentive plans involve several intricate objectives. This type of incentive only allows managers to receive their award when they reach objectives depending on sales, profit, production, or other criteria in the company (Martocchio 86). In addition, many companies may compensate their employees for referrals. Some companies use referrals to motivate their workers to recruit new employees into the company the employee will then be rewarded after the new employees has been in the company for a certain period (Joseph). Lastly there are behavioral encouragement plans where employees are given cash for specific behavioral accomplishments. In addition to individual incentive plans, some companies choose to compensate or reward their employees as a group, in other words, based on collective performance. Group incentive plans are measured depending on customer satisfaction, labor cost savings, material cost savings, reduction in accidents, and services cost savings (Joseph). It is said that “well designed group incentive plans ultimately reinforce teamwork, cultivate loyalty to the company, and increase productivity” (Martocchio 89). Group incentive plans emphasizes on team arrangements and problem solving, it also encourages and ensures team collaboration (Rao). There are two main types of group incentives, team based incentive plans and gain sharing plans. In both incentive plans, employees are rewarded as a team after achieving a specific goal. Many organizations identify these programs based on a specific type of team. There are work process teams, project teams and parallel teams. Although rewards are generated by the outcomes of teamwork, the incentive payments are distributed individually (Martocchio 89). In addition to these group incentive plans companies may also use The Scanlon and the Rucker plans. In the Scanlon plan, employees are encouraged and get involved in company activities. It emphasizes teamwork, and allows employees to obtain self-control. Employees receive monetary rewards according to productivity improvement and teamwork. Furthermore, like the Scanlon plan, the Rucker plan also encourages teamwork however, the main difference is that this type of plan use a value added formula to measure productivity (Martocchio 92). Lastly, some companies may use companywide incentive plans, which are measured by company profits, cost containment, market share, and sales revenue (Martocchio 84). Companies use two types of incentive plans, which include profit sharing and employee stock option. They use these incentives to allow employees to earn additional income depending on company profits. In addition, employees are also given the opportunity to buy shares of the company’s stock. With this type of incentive plan all employees are given the opportunity to participate and they are rewarded based on their success of the company as a whole (Rao). Incentive pay plans are relevant to the wage and salary administration because it can help reduce labor costs. Instead of increasing employees’ base pay which will be more costly, they use an incentive which is only a onetime payment based on the productivity of the company. It will also present concrete information on how employees are contributing in the productivity of the company. Employees will be compensated fairly depending on their effort and contribution to the company. When implementing a well-designed incentive program, it will be important to recognize outstanding performers and will help measure any additional income given to an employee based on their hard work and achievements. Application of Topic Incentive pay programs are mostly used to motivate employees in achieving specific goals. These goals are set to improve productivity and increase relationship between supervisors and staff members. Many companies are now implementing incentive plans because it is very beneficial to both the company and employee. Incentives may be a one shot deal and can sometimes be less costly. In addition, companies can encourage employee performances by linking compensation to accomplishments. Boeing Co. has a program called Employee/Retiree Incentive plan. This program provides monetary bonuses for about 1 and 20 days of additional pay to employees who are eligible on condition that the company achieves annual goals and profit (“Employee/Retiree”). In 2001, about 114,000 nonexecutive employees were allowed to participate in achieving economic profit targets in 2000. Even though there are many employees that are eligible for this incentive “Targets are very demanding and [are tracked] with our goal to provide total shareholder returns within the top quartile of S&P 500 company” (“Employee/Retiree”). When the company achieves “the annual operating plan target for the economic profit,” employees will be awarded with two weeks of extra pay. If the company goes beyond its objectives, they will earn up to four weeks of extra pay. However, if the minimum target is not met there will be no payments given to any employee (“Employee/Retiree). With this incentive, the company’s objective is to see high performance within their employees. Employees must be actively engaged in the company’s growth and economic profit. According to Boeing, this incentive plan is for employees to commit to their jobs and to think and see the company as belonging to them. The main objective of this incentive plan is to share its financial success with its employees, to motivate and reward employees annually based on the overall company achievements (“Employees/Retiree”). Another company who also uses incentive programs in their company is Delta. In 2007, Delta airline proposed to the incoming CEO Richard H. Anderson a base salary $600,000 a year however, if the company prospers and meets its potential goals he will earn millions of dollars in incentives (Tharpe 62-63). Tharpe states that the Delta package will pay him about 150 percent of his base pay, a total of about $900,000 if he meets or exceeds the goals of the Delta’s business plan. If he is able to reach the target, it can also boost profit sharing for other employees. Anderson’s incentive will be based on the outcomes of the company’s stock. He will receive about $11 million and 20 percent of the stock option. In 2007, Delta got back from bankruptcy and therefore, Anderson’s job was to maintain the company’s profitability (Tharpe 62-63). All types of incentives have their pros and cons. The incentives provided by companies will motivate employees for meeting performance objectives, improve quality and customer satisfaction, and can reduce costs. In addition, employees see a relationship between their pay and performance and strive for the best. These incentives will reward their employees based on the overall company performance. On the other hand, incentive programs have their drawbacks. For instance, if there is an economic crisis the company may not meet its financial goals no matter how hard employees perform their duties. Additionally, some of the goals that are implemented by some companies are unreachable. In the Delta case study the level of risk is very high and the CEO is responsible for accepting the compensation package. Regulations, Ethics and Social Responsibility When a company introduces an incentive pay program to its employees, they must ensure that the incentive will be fair and will comply with United States laws. Companies should not discriminate when hiring or with any terms of employment. When implementing any incentives to the company, employers must make sure to comply with employment laws such as the equal pay Act, age discrimination Act, Title VII among others. In addition, when compensating employees all U.S discrimination laws must be applied to any type of incentive program. It is against the law to establish incentive programs that will discriminate anyone based on their religion, gender, age, disability national origin or any other attribute. Incentive pay is any income other than base pay. Federal laws allow incentive pay programs although any additional income must be taxed. However, with these programs there are restrictions in certain situations such as early retirement bonuses by government agencies (McGann). Furthermore, “the Dodd Frank Wall Street reform and consumer protection Act charged federal regulators with prescribing regulations or guidelines on incentive-based compensation practices at covered financial institutions” (Buck consultants). This regulation is enforced to prevent excessive compensations and behaviors that can impact the “safety and soundness of other institutions” (Buck consultants). This law was created when managers would take risky gambles expecting more pay in the end. This regulation applies to agencies that provide incentive-based compensation to executive officers, employees, or directors. Institutions that have assets of over $ 1 billion or more must report incentive-based compensation arrangements. The intent of this regulation is to prevent companies who provide excessive compensation or encourage inappropriate risks that can result in investment loss for shareholders (Buck consultants). In addition, it is said that this type of program serves as an incentive for performance and will allow employees to receive cash equity or property as rewards. This regulation only applies to those organizations with a certain amount of total assets, for example big banks like National banks and federal branches (Buck consultants). There are many ethical aspects regarding incentive pay programs that managers and employers should be aware. According to Murphy codes of conducts, helplines, and training are essential elements, which companies should consider when implementing incentive programs. He states that “compliance and ethics input in developing and accessing all incentives and reward systems rewards and recognition for those employees and managers who show compliance and ethics leadership” (Murphy). Some ethical issues may be that incentives may be too subjective. Incentives should be measured based on specific objections (Murphy). There should also be open communication so that there will be no misunderstandings regarding incentive standards. Ethics must be implemented to demonstrate compliance with the company. To maintain an ethical work environment when implementing incentives employees must abide by the code of conduct, and act ethically in business decisions (Murphy). If a company has social responsibility as a priority, they would ensure to comply with U.S laws and regulations as well as implementing Ethical codes. One way can be by completely training employees and maintaining an open communication. Recommendations to management Conducting an affective incentive plan can develop progress in the individual employee’s view. Further, it promotes positive attitude as well as the development of the company as a whole (“Employee Incentive”). I have learned that managers and supervisors can use different types of incentives with the company depending on the department or unit by also keeping in mind what are the purposes of the incentive. There are different types of incentives used by companies depending on the industry or company being managed. It is important to determine whether focus is long-term or short-term. More importantly, using different incentive plans allows the employer or supervisor to respond to the employee’s needs and will allow for implementation of an overall effective incentive program. In addition, managers must be very mindful when implementing pay programs to their company. I would recommend managers and supervisors to set relevant and reachable goals. Incentive programs are mainly used to compensate employees based on their individual or group performances. Many employees prefer cash awards and therefore, when using any type of incentive the manager should look into what would be the employee’s preferences when it comes to their incentive awards. I also suggest for companies to comply with labor laws and draw on appropriate ethical codes. Managers should use these incentives to motivate and encourage outstanding performances. Employees must be able to connect their job performances and their rewards. Therefore, I believe that these rewards should be tied to employee’s wants and needs. To measure performances, managers should conduct performance appraisals to differentiate between the best and poorest performers. When implanting these aspects to incentive programs employees will show interest and outstanding performances and will improve company productivity. Managers should not create incentive plans that will result in inappropriate risks. They should not discriminate against any employee. Any incentive provided to employees performing the same tasks should not discriminate against their race, sex, color, or national origin. It must not discriminate against any employee. Results of Recommendations If my company implemented these recommendations, the incentive pay programs are used to motivate and encourage employees to achieve specific goals. They will see appreciation from their managers and supervisors. These goals are set to improve productivity and increase teamwork between supervisors and staff members. Evaluating employees would also be essential to see where the employee stands in the company and determine whether the person deserves any addition income. Complying with labor laws and regulations should be vital to the company, as well as maintaining an effective ethical code will prevent unwanted lawsuits or employee disappointment. These incentive plans will increase productivity and company profits as well as having a good reputation in attaining social responsibility. Employees will work hard to achieve their goals and be aware that the company appreciates and values all of its employees. When employees have high performance and are attaining to their responsibilities there will be greater customer satisfaction because they are served with quality products and services. Concluding Statement This topic is essential to managers, employees, and companies because with this program, these people will be compensated based on their outstanding performances. Using effective incentive pay programs is a stepping-stone to accomplishing organizational objectives and goal. Employers must acknowledge that their employees are one of the most important resources of a company. Employees who are satisfied with their job and personal accomplishments within the company will demonstrate loyalty and outstanding performance. On the other hand, managers and employers who value their employees and use these incentive programs will see better outcomes than those companies who do. Employees with motivation will increase company productivity and achievements. Employers also use these programs to reduce costs and motivate employees’ productivity. I believe that applying incentive programs to any type of company will result in outstanding outcomes for the company and employees. Works Cited Miller, Tom. “Do Incentive Plans Really Work” Vladvisors. Web 04 April 2012. “Federal Regulators Propose Rules on Incentive-Based Compensation Arrangements.” Buck consultants (2011) Vol.34 No.37 p1-8 Joseph, Chris. “Types of Individual Incentive Plans” Ehow. Web 09 April 2012. Martocchio, Joseph. Strategic Compensation. University of Illinois at urbana-Champaign. 6th ed. 2011. Print. McGann, Chris. “Federal Labor Laws for Incentive Pay” Ehow. Web 09 April 2012. Murphy, Joe, CCEP. “Building Incentives In Your Compliance & Ethics Program” Society of corporate compliance & ethics white paper (2009): p1-12. Print. Tharpe, Jim. “CEO’s fortunes tied to Delta’s: Incentive pay worth millions” Atlanta journal constitution (2007):61-67. Print. “Employee Incentive Plans” Foxlawn. Web 04 April 2012 “Employee/Retiree Incentive plan (EIP)” Boeing. Web 04 April 2012. “Incentive Pay” Businessdictionary. Web 04 April 2012. Read More