Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate performance measure. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. For complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well. Also, unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer satisfaction if it interferes with the day's output.
2. Standard Hour Plans
Another quantity-oriented incentive for production workers is the standard hour plan, an incentive plan that pays workers extra for work done in less than a preset "standard time." The organization determines a standard time to complete a task, such as tuning up a car engine. If the mechanic completes the work in less than the standard time, the mechanic receives an amount of pay equal to the wage for the full standard time. Suppose the standard time for tuning up an engine is two hours. If the mechanic finishes a tune-up in 1 1/2 hours, the mechanic earns two hours' worth of pay in 1 1/2 hours. Working that fast over the course of a week could add significantly to the mechanic's pay.
Payment according to standard our plan is mostly seen in areas where there is daily labour intensive. Daily labour will be paid according to the hours he has worked. Standard our plan for payment of wages is being used in the field of construction, agriculture sector and in the areas where more manual labour is required.
In terms of their pros and cons, standard hour plans are much like piecework plans. They encourage employees to work as fast as they can, but not necessarily to care about quality or customer service. Also, they only succeed if employees want the extra money more than they want to work at a pace that feels comfortable.
3. Merit Pay
Merit pay refers to the process of determining employee compensation (base salary or bonuses), in part, on the basis of how well each employee performs at work. The principle is simple, at least in theory. It makes sense to reward more productive employees for their increased contributions to the organization, in the interests in fairness, but also with an eye to trying to retain the best employees in a company.
Almost all organizations have established some program of merit pay—a system of linking pay increases to ratings on performance appraisals. (described the content and use of performance appraisals.) Merit pay is most common for management and professional employees.
A drawback of merit pay, from the employer's standpoint, is that it can quickly become expensive. Managers at a majority of organizations rate most employees' performance in the top two categories (out of four or five). Therefore, the majority of employees are eligible for the biggest merit increases, and their pay rises rapidly. This cost is one reason that some organizations have established guidelines about the percentage of employees that may receive the top rating.
Another drawback of merit pay is that it makes assumptions that may be misleading. Rewarding employees for superior performance ratings assumes that those ratings depend on employees' ability and motivation. But performance may actually depend on forces outside the employee's control, such as managers' rating biases, the level of cooperation from co-workers, or the degree to which the organization gives employees the authority, training, and resources they need. Under these conditions, employees will likely conclude that the merit pay system is unfair. The HR How-To box suggests ways to set up a merit pay system so that is maximizes the advantages of this type of pay while minimizing the drawbacks.
Advantages of Merit Pay
These are reasons why you might want to consider merit pay.
Allows the employer to differentiate pay given to high performers.
Merit pay helps an employer differentiate between the performance of high and low performing employees and reward the performance of the higher performers.
Merit pay, unlike profit sharing or similar bonus pay schemes, allows an employer to differentiate between the performance of the company as a whole and the performance of an individual. While many merit pay programs also provide an overall reward that is distributed to all employees, to promote such values as team work, a portion of the available compensation is reserved for strong performers.
Merit pay also provides a vehicle for an employer to recognize individual performance on a one time basis. This is useful for rewarding employees who may have participated in a one-time project such as implementing a new HRIS or opening up a new sales territory.
4. Performance Bonuses
Like merit pay, performance bonuses reward individual performance, but bonuses are not rolled into base pay. The employee must re-earn them during each performance period. In some cases, the bonus is a one-time reward. Bonuses may also be linked to objective performance measures rather than subjective ratings. Bonuses for individual performance can be extremely effective and give the organization great flexibility in deciding what kinds of behaviour to reward.