Different types of Incentive Schemes for
individuals and teams
INCENTIVES
These are measures to stimulate human effort; people are encouraged to give out their best by
inducing them on to greater and more productive efforts
Incentives could be broadly classified into (i) Individual, and (ii) Group Schemes.
Under the individual scheme each employee is rewarded based on his performance, while the
group incentive plan compensates a number of workers for their combined output. An individual
plan can be applied wherever the individual effort can be measured, and normally one worker is
responsible for the completion of an operation or a task.
Individual incentives are used by companies as a means to motivate employees by providing
them the opportunity to earn additional income. Incentives often take the form of cash, but they
can also be paid in the form of a product or a family vacation. In some cases, incentives can
make up the bulk of an employee's income, such as a salesperson who is compensated on a
commission basis.
TYPES OF INCENTIVE SCHEMES FOR INDIVIDUALS :
1. Bonuses- Bonuses are typically made to employees who reach specific performance
levels. Salespeople may be paid bonuses for attaining sales goals. Accountants can
receive bonuses for reducing expenses to a certain level. In some cases, the employee
may not know the amount of bonus she will receive until it is actually awarded.
2. Commissions-Commissions may be used as a form of incentive for salespeople. Those
who work on commission typically receive income based on a percentage of the revenue
that they generate, with no limitations placed on potential earnings. As a result,
individuals who are highly motivated by money may relish working on commission since
income is strictly tied to their productivity.
3. Profit-Sharing Plans - As the name implies, profit-sharing plans are when a company
shares a portion of its profits with the employees, which may motivate them to increase
productivity and limit waste. Profit-sharing usually occurs on an annual basis and may be
in the form of company stock or a contribution to a retirement plan. A profit-sharing plan
may also be offered as part of a recruiting package to attract new employees.
4. Piecework -Piecework plans are similar to commission plans in that they reward
employees for high productivity. They may be used in an industrial setting, such as in a
warehouse where workers receive an increased hourly wage based on the amount of
freight they move. Piecework can also be used in a production setting, where employees
receive additional income in accordance with the number of goods they can produce by
the end of a shift.
5. Referrals -Referrals are used to motivate employees to recruit new workers into a
company. The employee may receive a fixed amount of money once the new employee
has achieved a specified length of tenure, such as 90 days. In a sales setting, a salesperson
may receive a percentage based on the amount of commission that his recruit earns.
6. Discretionary / semi-discretionary cash bonuses -Discretionary cash bonuses are
provided to employees at the discretion of senior management. Bonuses are typically
based on the achievement of personal KPIs.
7. Discretionary / semi-discretionary non-cash rewards -Discretionary non-cash rewards
are provided to employees at the discretion of senior management. As per cash rewards,
non-cash rewards are also typically based on the achievement of personal KPIs. Non-cash
rewards can include restaurant, travel or entertainment vouchers or gift cards to
department or specialty stores.
8. Additional leave benefits -Additional leave benefits can be implemented in a number of
different ways. Employees can be rewarded for strong performance in the form of extra
annual leave, for example 5 weeks instead of 4 per year. Alternatively, employees can be
given the opportunity to take days off to volunteer to a charity of their choice.
Advantages of Individual Plans:
1. Substantial impact that raises productivity, lowers production costs, and increases earnings of
workers.
2. Less direct supervision required to maintain reasonable levels of output than under payment by
time.
3. In most cases, systems of payment by results, is accompanied by improved organizational and
work measurement, enable labor cost to be estimated more accurately than under payment by
time. This helps costing and budgetary control.
Disadvantages of Individual Plans:
1. Greater conflict may emerge between employees seeking to maximum output and managers
concerned about deteriorating quality levels.
2. Reduced willingness of employees to suggest new production methods for feat of subsequent
increases in production standards.
3. Increased turnover among new employees discouraged by the unwillingness of experienced
workers to cooperate in on-the-job training.
4. Elevated levels of mistrust between workers and management.
5. Increased complaints that equipment is poorly maintained, hindering employee’s efforts to earn
large incentives.
INCENTIVES SCHEMES FOR GROUPS/TEAMS
In team incentives schemes, a standard is established against which team performance is
compared to determine the magnitude of the incentive pay.
Range of Performance Measures for different types of corporate objectives:
Customer - Focused Measures
Time to Market Measures
 On-time delivery
 Cycle time
 New product introduction
Financially- Focused Measures
Value Creation
 Revenue growth
 Resource yields
 Profit Margins
 Economic value added
Customer Satisfaction Measures
 Market Share
 Customer Satisfaction
 Customer growth and retention
 Account penetration
Shareholder Returns
 Return on invested capital
 Return on sales/earnings
 Earnings per share
 Growth in profitability
Capability –Focused Measures
Human Resource Capabilities
 Employee satisfaction
 Turnover rates
 Total recruitment costs
 Rate of progress on developmental
plans
 Promotability index
 Staffing mix/head count ratio
Internal Process- Focused Measures
Resource Utilization
 Budget to actual expenses
 Cost-allocation ratios
 Reliability/rework
 Accuracy/error rates
 Safety rules
Other Asset Capabilities
 Patents/copyrights
 Distribution systems
 Technological capabilities
Change effectiveness
 Program implementation
 Teamwork effectiveness
 Service/quality index
TYPES OF TEAM INCENTIVE PLANS:
1. GAIN - SHARING PLANSIn gain sharing plans, team incentives are tied to organizational outcomes (e.g.,
organizational profit, organizational productivity, customer satisfaction. and so on).
 Gainsharing systems distribute incentives as a function of non-financial
organizational outcomes, such as improvements in quality, productivity, and
customer satisfaction

Gain sharing looks at cost components of the income ledger and identifies savings
over which employees have more impact (e.g. reduced scrap, lower labor costs,
reduced utility costs).
Designed to capitalize on untapped knowledge of employees.

TYPES OF GAIN SHARING PLANS–
Input factor or numerator is always a labor cost variable
Denominator is some output measure such as net sales or value added
1. Scanlon Plan –
It is designed to lower labor costs without lowering the level of a firm’s activity.
Incentives are derived as a function of the ratio between labor costs and sales value of
production (SVOP) .SVOP includes sales revenue and the value of goods in inventory.
Formula used: Scanlon plan = Payroll costs/Net sales
2. Rucker PlanIn Rucker plan, a ratio is calculated that expresses the value of production required for
each required dollar of total wage bill.
Formula used: Rucker plan = Labor costs/Value added
3. Improshare (Improved productivity through sharing)It is a gain sharing plan which is easy to administer and communicate. A standard is
developed that identifies the expected hours required to produce an acceptable level of
output.
Formula used: Improshare= Actual hours worked/Total standard value hours
Two major components for implementation of Scanlon and Rucker plan are:
 Productivity norm
 Effective worker committee
Difference between individual and Scanlon and Rucker Plan
Individual Plan
Scanlon and Rucker Plan
Primary focus is on wage incentives to More focus is on organization
motivate higher performance
behavior variables i.e. group unity
Advantages –




Clear performance –rewards links
Productivity and quality improvements
Fosters teamwork ,cooperation
Employees knowledge of business increases
Disadvantages:




Can be administratively complicated
Unintended effects
Management must “open the books”
Payouts can occur if company’s financial performance is poor
2. PROFIT –SHARING PLAN –
In profit sharing plan, the focus is on the measures that matters most to the most people: a
predetermined index of profitability. When payoffs are linked to such measures,
employees spend more time learning about financial measures and the business factors
that influence them.
What is it?
 Award based on organizational profitability
 Shares a percentage of profits.
 Usually an annual payout
 Can be cash or deferred
Advantages –


Simple ,easily understood
Low administrative costs
Disadvantages


Profit influence by many factors beyond employee control
May be viewed as an entitlement
Limited motivational impact
3. EARNINGS-AT-RISK PLANS –
In success sharing plans, employee base wages are constant and variable pay adds on
during successful years. If the company does well, you receive a predetermined amount
of variable pay. If the company does poorly, you simply forego any variable pay and
there is no reduction in variable pay.
In risk-sharing plan, base pay is reduced by some amount relative to the level that
would be offered in success-sharing plan.
At risk plans shift part of the risk of doing business from the company to the employee.
The company hedges against the devastating efforts of a bad year by mortgaging part of
the profits that would have accrued during a good year.
4. BALANCED SCORECARD Awards that combine financial and operating measures for organization, business
unit and individual performance
 Award pool based on achieving performance targets
 Multiple performance measures may include:
1. Nonfinancial – quality, improvement ,productivity gains, customer service
improvements
2. Financial- EPS, ROE, ROA ,Revenue
Advantages:
 Communicates organizational priorities
Disadvantages –


Complex
Reduced payout if financial targets not met
Advantages and Disadvantages of Group Incentive plan:
Advantages:
 Positive impact on organization and individual performance of about 5-10% per
year
 Easier to develop performance measures than it is for individual plans
 Signals that cooperation ,both within and across groups, is a desired behavior
 Teamwork meets with enthusiastic support from employees
 May increase participation of employees in decision making process.
Disadvantages:



Line of sight may be lessened ,i.e. employees may find it more difficult to see how
their individual performance affects their incentive payouts
May lead to increased turnover among top individual performers who are
discouraged
Increases compensation risk to employees because of lower income stability.
How to make choice between Individual and Group incentive plan
Characteristic
Performance Management
Organizational adaptability
When to choose individual
plan
Task accomplishment not
dependent on performance of
others
Performance standards are
stable. Production methods
and labor mix are relatively
constant
Organizational
Commitment
Commitment strongest to
individual’ profession or
superior
Union status
Nonunion; unions promote
equal treatment
When to choose Group plan
Individual contributions to
output cannot be assessed
Performance standards
change to meet environmental
pressures. Production
methods and labor mix must
adapt to meet changing
pressures
High commitment to
organization built upon sound
communication of
organizational objectives and
performance standards
Union or nonunion ;unions
less opposed to plans that
foster cohesiveness of
bargaining unit and which
distribute rewards evenly
across groups