Types of incentive pay plans:

Incentive pay means “pay for performance”. Incentive pay plans can help to motivate employees
by encouraging them to increase performance, and it rewards exceptional workers and increases
the chances they will stay with the company and improve retention rates. Incentive pay plans can
be broadly classified into three categories:

Individual
incentive plan

Types
Group incengive
plan

Companywide plan

 Individual incentive plans:

Reward systems tied to the performance of individual employees are known as individual incentive
plans .These plans reward employees whose work is performed independently. According to
individual incentive plans employees will be rewarded for meeting work related performance
standards. Mangers should chose factors that are within the individual employees control when
they create individual performance standards. Employees must know about the standards and
higher performer will receive higher incentive than the poor performers
Types of IIP:
Four types of plans-

• Piecework plans
• Management incentive plans
• Behavioral encouragement
Types plans
• Referral plans
  Piecework plans:
Under a piecework plan, an employee is paid a certain amount of money per unit produced. Two
types of piece work plans have been identified.
First, where performance standards only include objective criteria. In this type of
piecework plan employees will be rewarded based on their individual hourly production against
objective criteria. Units produced represent objective criterion.
Second, where performance standard includes both objective and subjective criteria.
Overall quality is subjective criterion that is based on supervisor’ interpretations and judgements.

 Management incentive plans:

Under management incentive plans, bonuses are given to managers when they meet or exceed
objectives based on sales, profit, production or other measures for their division, department or
unit. Example: Management by objectives

 Behavioral encouragement plans:

Under behavioral encouragement plans, employees receive payments for specific behavioral
accomplishments such as good attendance and safety records. For example, company usually
award monetary bonuses to employee who have exemplary attendance records for a specific period

 Referral plans:
Under referral plans employee may receive monetary bonuses for referring new customers and
recruiting successful job applicants.

Earn bonuses means

Successful Hired referrals remain employed
Employee beyond designed period
referrals
for

Advantages of IIP:
There are three key advantages of IIP-
First, raise productivity. That means it promotes the relationship between performance
and pay.
Second, it promotes an equitable distribution of compensation within companies. That
means employees earn depends on their performance.
 Third, it is compatible with individualistic culture. That means individual employees are
recognized for their individual contribution.

Disadvantages of IIP:
Three potential problems related with IIP-
First, it promotes inflexibility. Because supervisors determine individual performance level.
Workers under this plan dependent on supervisors for setting work goals.
Second, merit pay is an example of IIP, with this system supervisors develop and maintain
comprehensive performance measures to properly grant incentive awards. These performance
measurement arise leads to problem to determine equitable incentive awards, when new methods
are used to measure performance. These new methods act as a resistance for employees.
Third, it may encourage undesirable workplace behavior when these plans reward only one
or subject of dimensions that constitute employees’ total job performance.

 Group incentive plans:

Group incentive plan means reward employees for their collective performance, rather than for
each employee individual performance. It is most effective when all group members have impact
on achieving goal and individual performance might not be equal.

Well-
designed GIP

Reinforce Cultivate loyalty Increase

team work to company productivity