Incentive Plans Definition


The first incentive plans were created to increase the productivity of individual employees and, in turn, the company. The assumption was that in doing so, a company’s cost per unit of production would fall.

By implementing incentive programs, a company benefits in other ways as well. The incentives give employees a personal stake in achieving a higher productivity rate or other company goal. Consequently, incentive plans may contribute to the employee’s discipline, his attention to work, his improved attendance record and punctuality. Incentivized employees may demonstrate more ingenuity in completing assigned tasks. Also, the mutual cooperation of employees may improve in that the efficient completion of one employee’s goals is dependent on the completion of the work of other employees.

Today, different forms of employee rewards that are based on performance are termed incentive plans. The plans are classified in terms of the groups of employees to which the incentive plan pertains, such as a sales incentive plan, or the performance measure employed, such as productivity or profit plans.

Wage Incentives

The intent of wage incentives is to attract exceptional employees by offering performance-based financial rewards. Ideally, such incentives instill a sense of ownership in a company, which may increase the employee's motivation to do a good job, thus improving her performance and productivity. Wage incentives may also improve employee retention and reduce the time and cost of supervising employees.

Profit-Sharing Plan

The profit-sharing plan distributes a share of a company’s annual profits to each employee on an equal basis -- a percentage of any eligible employee’s base pay. Employers implement such a plan to attract and retain talented employees. The plan grants an employer the flexibility to determine if a distribution will occur in a particular year and, if so, the allotted amounts depending on the company’s revenue.

Team-Based Plan

A company implements a team-based plan to positively influence a group’s behavior. It’s hoped the incentive leads to improved teamwork, which will enable the team to achieve its assigned goal. For example, a team might receive a cash award for work they performed that reduced production costs by a certain dollar amount or increased sales revenue by a certain percentage. Team-based incentive plans are typically offered to sales, customer service and production teams.

Individual Employee Plan

Individual employee plans are a common incentive in the sales field. For example, a travel agent, real estate agent or private school administrator who sells a product or service can benefit financially from the individual plans assuming he achieves an assigned goal. In this case, an employee’s salary might consist of 50 percent base pay and 50 percent variable pay. The variable pay is the incentive -- the commission the employee earns -- which is typically equal to a percentage of the sales revenues he generates. Consequently, the variable portion can be much greater than the base pay.

Combination Plan

A company might combine different incentive plan types to accomplish different goals. For example, all qualifying employees might receive an annual corporate profit share, but only some employees might receive a bonus if they win a departmental contest. The contest might encourage customer service representatives to achieve the highest customer service ratings given by customers, or it might serve as an incentive for a salesperson to achieve a sales volume goal to receive a financial reward.

Project Ad Hoc Bonuses

An employee might receive a project bonus if she achieves a particular project goal. An incentive might be payments to each team member equal to a portion of the employee’s yearly salary on the condition that the project is completed on time and on budget, and if interim goals are achieved. These bonuses boost staff morale, which can decline due to project requirements and deadlines.

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