Incentive Compensation

Compensation programs that relate pay to productivity.

Individual Incentive Plans

A specific form of performance-based pay is an individual incentive plan called piecework.

In such a plan, employees are paid for each unit produced.

Team-Based Compensation Plans

Team performance consists of individual efforts.

Therefore, individual employees should be recognized and rewarded for their contributions.

However, if the team is to function effectively, a reward based on the overall team performance should be provided as well.

Companywide Plans

Companywide plans offer a feasible alternative to the incentive plans previously discussed.

They may be based on the organization’s productivity, cost savings, or profitability.

Profit-Sharing

A compensation plan that results in the distribution of a predetermined percentage of the firm’s profits to employees.

There are several variations, but the three basic forms are current, deferred, and combination.

Current plans provide payment to employees in cash or stock as soon as profits have been determined.

Deferred plans involve placing company contributions in an irrevocable trust to be credited to the account of individual employees. The funds are normally invested in securities and become available to the employee (or his/her survivors) at retirement, termination or death.

Combination plans permit employees to receive payment of part of their share of profits on a current basis, whereas payment of part of their share is deferred.

Profit sharing tends to tie employees to the economic success of the firm.

Employee Stock Option Plan (ESOP)

A defined-contribution plan in which a firm contributes stock shares to a trust.

Gain Sharing Plans that are designed to bind employees to the firm’s performance by providing an incentive payment based on improved company performance.

The first gain sharing plan was developed by Joseph Scanlon during the Great Depression and it continues to be a successful approach to group incentive, especially in smaller firms.

Scanlon Plan

Provides a financial reward to employees for savings in labor costs that result from their suggestions.