Economic Incentive Systems 433h5w

ECONOMIC INCENTIVE SYSTEMS

PURPOSE OF ECONOMIC INCENTIVE SYSTEM 

Performance Management 

Employee performance can be improved through: A Streamlined organizational culture  Better Technology  New Arrangements of working schedule  High involvement of employees  Better motivation of employees 

ECONOMIC INCENTIVE SYSTEM The basic idea of such systems is to induce a high level of individual, group, or organizational performance by making an employee’s pay contingent on one or more of those dimensions. Additional objectives include facilitating recruitment and retention of good employees, stimulating desirable role behaviors such as creativity, encouraging the development of valued skills, and satisfying employee needs.

INCENTIVE CRITERIA 1.

2. 3. 4. 5.

6.

Employee output Company profit Cost Savings Units shipped Level of customer service Ratio of labor cost to total sales

Evaluation of performance may be individual or collective, and the payment may be immediate or delayed

INCENTIVES LINKING PAY WITH PERFORMANCE Incentive Measure

Example

Amount of Output

Piece rate ; sales commission

Quality of Output

Piece rate only for pieces meeting the standard ; commission only for sales that are without bad debts

Success in reaching goals

Bonus for selling an established number of items during a predetermined time span

Amount of profit

Profit sharing

Cost Efficiency

Gain sharing

Employee Skills

Skill-Based pay

ADVANTAGES AND DISADVANTAGES OF INCENTIVES LINKING WITH PAY Advantages

Disadvantages

Strengthen instrumentality beliefs

Cost (to both employer and employee)

Create perceptions of equity

System complexity

Reinforce desirable behaviors

Declining or variable pay

Provide objective basis for reward

Union resistance; Delay in receipt; Rigidity of system; Narrowness of performance

TYPES OF INCENTIVE SYSTEMS

WAGE INCENTIVES More Pay for More Production.  A form of Merit Pay The main reason for use of wage incentives is to increase productivity while decreasing the labor cost per unit of production. Workers under normal condition without wage incentives have the capacity to produce more, and wage incentives are one way to release that potential. 

HOW TO SUCCEED USING WAGE INCENTIVE Wage incentive needs to be simple enough for employees to have a strong belief that reward will follow performance.  Needs to be established and understood by the employees: 

   

Objectives Eligibility requirements Performance criteria Payment Systems

ADVANTAGES Employees receive satisfaction from a job well done, which fulfills their achievement drive.  Their self-image may improve  They may even feel they are making contribution to society  May encourage cooperation between workers 

DIFFICULTIES The basic human difficulties to wage incentives of this type is that disruptions in the social system may lead to feelings of inequity and dissatisfaction. 1. 2. 3. 4. 5.

Normally require establishment of performance standards. (Rate Setting) May make the supervisor’s job more complex Involves loose rates May cause disharmony between incentive workers and hourly workers May result in output restriction

PROFIT SHARING Is a system that distributes to employees some portion of the profits of business . It may be in of bonuses (Immediately) or Trust in the form of employee-owned shares (deferred).  Recognizes mutual interests  Tends to work better for fast-growing, profitable organization  Works better when general economic conditions are favorable 

PANCAKE AS

Employee’s become interested in the economic success of their employer when they see that their own rewards are affected by it.

THE PROFIT OF THE COMPANY

DIFFICULTIES Even those situations where profit sharing seems appropriate, some general disadvantages exist: 1.

2. 3. 4.

Profits are not directly related to an employee’s effort on the job. Employees must wait for their reward Since profit are somewhat predictable, total worker income may vary from year to year. Some union leaders have historically been suspicious of profit sharing.

GAIN SHARING Also known as “Production Sharing”  Establishes a historical base period of organizational performance  Measure improvements  Shares gains with employees on some formula basis 

EXAMPLES OF PERFORMANCE FACTORS MEASURED Inventory Levels  Labor hours per unit of production  Usage of materials and supplies  Quality of finished goods 

BEHAVIORAL BASIS Gain sharing plans use several fundamental ideas from organizational behavior and are much more than pas systems.  They encourage employee suggestions  Provide an incentive for coordination and teamwork  Promote improved communication  Union management often improved  Attitude toward technological change improved

CONTINGENCY FACTORS The success of gain sharing is contingent upon a number of key factors such as: Moderately small size of the unit  Sufficient operating history allow creation of standards  Existence of controllable cost areas  Relative stability of the business 

SKILL-BASED PAY Also called “Knowledge–Based” or “Multi– Skill” pay  Employee are paid for the range, depth, and types of skills in which they demonstrate capabilities. 

ADVANTAGES Provide strong motivation for employees to develop their work related skills  Reinforce an employee’s sense of self esteem  Provide the organization with a highly flexible workforce  Boredom reduced, at least temporarily  Pay satisfaction should be relatively high for two reasons: 

1. 2.

Employee’s hourly rate received is often higher Workers should perceive the system as equitable both in the sense of their cost and rewards

DISADVANTAGES Most employees will voluntarily learn higher –level jobs  A substantial investment in employee training must be made  Not all employees like skill-based pay  Some employees will qualify themselves for the skill areas that they will be unlikely to use 

SKILL – BASED PAY WORKS BEST WHEN: The organizational culture of the firm is generally ive and trusting  The system should be understood by the employees  They must have realistic expectations about their prospects for higher pay levels  It must be possible for them to learn new skills  There must be some limits on which skills they can qualify for 