Week 2 D2

4.1 EXPLORING INCENTIVE PAY

4-1 Explore the incentive pay approach.

Incentive pay (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss212) or variable pay (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss462) rewards employees for partially or completely attaining a predetermined work objective. Incentive or variable pay is defined as compensation, other than base wages or salaries that fluctuate according to employees’ attainment of some standard, such as a preestablished formula, individual or group goals, or company earnings.

Effective incentive pay systems are based on three assumptions:

Individual employees and work teams differ in how much they contribute to the company, both in what they do as well as in how well they do it.

The company’s overall performance depends to a large degree on the performance of individuals and groups within the company.

To attract, retain, and motivate high performers and to be fair to all employees, a company needs to reward employees on the basis of their relative performance.

Much like seniority and merit pay approaches, incentive pay augments employees’ base pay, but incentive pay appears as a one-time payment. Employees usually receive a combination of recurring base pay and incentive pay, with base pay representing the greater portion of core compensation. More employees are presently eligible for incentive pay than ever before, as companies seek to control costs and motivate personnel continually to strive for exemplary performance. Companies increasingly recognize the importance of applying incentive pay programs to various kinds of employees as well, including production workers, technical employees, and service workers.

Some companies use incentive pay extensively. Lincoln Electric Company, a manufacturer of welding machines and motors, is renowned for its use of incentive pay plans. At Lincoln Electric, production employees receive recurring base pay as well as incentive pay. The company determines incentive pay awards according to five performance criteria: quality, output, dependability, cooperation, and ideas. The company has awarded incentive payments every year since 1934, through prosperous and poor economic times. In 2014, the average profit sharing payment per employee was $33,984.

Coupled with average base pay, total core compensation for Lincoln employees was $82,903. Over the past 10 years, Lincoln’s profit-sharing payments averaged approximately 40 percent of annual salary.

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4.1 Exploring Incentive Pay

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Similarly, Southwest Airlines has distributed profit-sharing payments to employees every year for the past 40 years. In 2014, Southwest announced that it would share $228 million in profits.

Companies generally institute incentive pay programs to control payroll costs or to motivate employee productivity. Companies can control costs by replacing annual merit or seniority increases or fixed salaries with incentive plans that award pay raises only when the company enjoys an offsetting rise in productivity, profits, or some other measure of business success. Well-developed incentive programs base pay on performance, so employees control their own compensation levels. Companies can choose incentives to further business objectives. For example, the management of H. Lee Moffitt Cancer Center and Research Institute at the University of South Florida continually strives to improve patient care as well as control costs. Moffitt’s incentives are usually tied to net income or operating surplus, quality of care measures, patient satisfaction scores, and operating efficiencies.

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