Presented by:Tanvi MarooMBA(HR)lV

INDIVIDUAL AND GROUP INCENTIVE PLANS

INCENTIVE

An incentive program is a formal scheme used to promote or encourage specific actions or behaviour by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees and in sales to attract and retain customers. Scientific literature also refers to this concept as pay for performance.

Incentive Programs

• Differ bypayment methodfrequency of payoutways of measuring performancechoice of which employees are covered

• Fitting program to situation depends onorganizational structuremanagement styletype of work

Types of Plans

• Merit Pay• Individual Incentives• Profit Sharing• Ownership• Gain sharing• Group Incentives• Alternative Reward Systems

Conditions for Effective Incentive Plans

• Plan is clearly communicated.• Plan is understood by employees and

management.• Bonuses are easy to calculate.• Employees participate in administrating the plan.• Employees believe they are being treated fairly.• Employees believe they can trust the company

and that they have security.• Bonuses are awarded as soon as possible after

the desired performance.

CATEGORY

1. Remunerative incentives

2. financial incentives

3. Moral incentives

4. Coercive incentives

5. Natural Incentives

Categories

1. Remunerative incentives : are said to exist where an agent can expect some form of material reward - especially money - in exchange for acting in a particular way.

2. Financial incentives: are said to exist where an agent can expect some form of material reward - especially money - in exchange for acting in a particular way.

3. Moral incentives: are said to exist where a particular choice is widely regarded as the right thing to do or as particularly admirable or where the failure to act in a certain way is condemned as indecent. A person acting on a moral incentive can expect a sense of self-esteem and approval or even admiration from his community; a person acting against a moral incentive can expect a sense of guilt from the community.

Categories

4. Coercive incentives: are said to exist where a person can expect that the failure to act in a particular way will result in physical force being used against them (or their loved ones) by others in the community - for example, by inflicting pain in punishment or destroying their possessions.

5. Natural Incentives: such as curiosity, mental or physical exercise, admiration, fear, anger, pain, joy, or the pursuit of truth, the control over things in the world or people or oneself.

ADVATAGES OF INCENTIVE PROGRAMME

• Increase in volume of output - Output of the firm increases as the workers are motivated to increase their efficiency to get more wages.

• Reduction of cost of production per unit - Cost of production per unit of output declines due to decrease in labour cost and overheads per unit.

• Reduction of labour turnover - Workers is rewarded properly for their efficiency which results in reduction of labour turnover.

• Reduction of idle time - Since the payment of wages is linked with efficiency, the idle time costs are reduced to the minimum.

• Benefit to consumers - Reduction of cost of production per unit is passed on to the consumers by reducing the selling price.

DISADVANTAGES OF INCENTIVE PROGRAMME

• Difficulty to fix standard time - Fixation of standard time for implementation of incentive plans poses difficulty, particularly if the workers slow down deliberately while under observation to get set a higher standard time.

• More supervision required - As the workers want to speed up the work to get more wages, more supervision is necessary to avoid decline in the quality of work and wastage of raw materials.

• Union opposition - Labour unions may oppose the incentive plan because it weakens them and creates jealousies and greed among workers. This may lead to strikes and lock-outs.

INDIVIDUAL INCENTIVE PLAN

Bonus, merit pay, pay for knowledge, and

other such goal based compensation programs aimed at linking pay with performance.

INDIVIDUAL INCENTIVE PLAN

• Reward individual performance

• Payments are NOT rolled into base pay

• Performance is usually measured as a physical output rather than subjective ratings

Individual Incentive Pans Since each direct labour employee who is

motivated by money is theoretically in "business for him/her self" there should be a strong inducement for high performance. A piece work operator could care less about a fellow operator’s performance. The relative productivity of each individual can be readily determined. Likewise, actual time spent on specific jobs is also easily determined and standards set. Individual incentives work best on singularity of product and long runs. They lose their effectiveness and are usually costly to maintain in a high style, fast in-process turnover.

Types of Individual Incentive Plans

• Piecework plans• Standard hour plans

• Management incentive plans

• Referral plans

• Bonus Pay

• Profit sharing

• Stock incentives

• Retirement incentives

• Vacation incentives

• Prizes

Piecework Plan Piecework is a type of incentive program where

by the employee is paid based on each unit of output. Employees are paid a certain rate per unit times the number of units produced. This is a system that works for only a limited number of jobs such as assembly line or agricultural. Piecework incentive programs are declining in popularity due to the fact that it does not always lead to higher productivity. It is also difficult to measure a persons benefit based solely on the units they can produce in a given period of time.

Piecework Plan

• A system of pay based on the number of items processed by each individual worker in a unit of time, such as items per hour or items per day.

• Piecework is the oldest individual incentive plan and is still the most widely used. Here, you pay the worker a sum (called piece rate) for each unit he or she produces. Thus, if an individual gets $0.40 for each e-mail sales lead he finds for the firm, he would make $40 for bringing in 100 a day and $80 for 200.

Standard hour plan A plan by which worker is paid a basic hourly

rate but is paid an extra percentage of his or her rate for production exceeding the standard per hour or per day Similar to piecework payment but based on a percent premium.

Advantages And Disadvantages Of Piecework Plans And Standard Hour

Plans

Advantages

Understandableappear equitable in

principle powerful incentives Employees

concentrate on output

Disadvantages

workers on piecework may resist

plans may promote rigidity

Less willing to concern themselves

Management incentive plans

Management incentive plans can also be difficult to create. While it is the duty of managers to work to maximize shareholder wealth by working for what is in the best interest of the company, not all managers act on behalf of the company at all times. Including stock options in management or executive incentive plans are often used because they “appear to reduce excessive aversions to risk by giving managers incentives to increase firm risk instead of avoiding it”

Advantages Of Management incentive plans

• Managers can become wealthy not by the merits of their performance, but by merely being in the right place at the right time. This is because “payoff from the option includes the firm’s stock price increases due to industry and general market trends”.

• Stock options might not actually serve as an incentive. This happens when “stock price declines after executive stock options are issued with the result of the options being way out of the money”.

• Managers are often allowed to exercise their options any time and “When managers exercise their options and sell their shares, the pay-performance incentive is gone. This forces the firm to issue more options or find other means to entice their managers to take risk”.

• Dilution of stock ownership can occur when managers exercise their rights.

Disadvantages Of Management incentive plans

• To ensure managers are paid based on their own performance, not the movement of the market, the exercise price of the stock options can be adjusted for market.

• Companies may also choose to restrict the exercise timing of stock options.

Bonus Pay In order for a bonus pay plan to work, you need

to set goals that employees believe can be reached. Before creating a bonus pay incentive program, run metrics on the department to which you are looking to give the incentive.

Profit SharingA profit sharing incentive plan can encompass

many aspects of the company for the entire year. Make employees aware of the factors that affect profit, such as sales revenue, employee productivity and conservation of resources to lower overhead costs. When the year is over, determine a percentage of the profit that can be paid to the employees as a reward for helping the company achieve a profit.

Stock Incentives You can offer shares in the company as

incentives, as opposed to paying out an immediate cash reward. Make sure you discuss your stock incentive plan with the stock regulatory bodies to keep your plan in line with the law.

Referral plans

To provide an incentive to encourage current members to reach out to their personal and professional networks and provide qualified referrals to the Branford Chamber.To encourage the members to remain connected to these referrals, mentor those they referred and, providing a framework to retain the new members.

Retirement Incentive

Rather than paying an incentive directly to the employee, you can offer to add it to the employee's 401(k) retirement account instead. According to the Internal Revenue Service, a company that sponsors a 401(k) program can claim the cost of doing that as a deduction on its federal taxes. The employee gets the added benefit of tax-free dollars in her retirement account, beyond what the employee contributes and what the company matches.

Vacation Incentive

Unscheduled employee time off can sometimes be a problem for employers. To help reduce the use of sick days and personal days, offer an additional vacation day for each quarter in which the employee does not call in to work.

Prizes Vacations and prizes are often good

incentives, because you can work with your vendors to help pay for those incentives.

For example, if one of your vendors is a

television manufacturer, you can discuss the possibility of offering one of its television sets as a sales incentive.

Individual Incentive Plan Advantages

• Helps relate pay to performance

• Promotes equitable distribution of compensation

• Helps retain best performers• Compatible with individualistic culture

Disadvantages Of Individual Incentive Plan

• Conflicts may emerge between employees managers

• Introduction of new technology may be resisted by employees

• Reduced willingness of employees to suggest new production methods

• Increased complaints of poor maintenance, hindering employee efforts to earn larger incentives

Disadvantages Of Individual Incentive Plan

• Increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on-the-job training.

• Elevated levels of mistrust between workers and management

Group Incentive Plan

Group incentives attempt to empower people and tend to have a levelling effect on labour's performance. Rather than restrict production, the group pressures the superior producer to handle more job assignments. Group pressures may likewise have an upward levelling effect upon the operator who would be satisfied with relatively low individual earnings. Therefore, average group output often is higher than average individual output.

Group Incentive Plans

• Rewards employees for their collective performance.

• Use has increased in industry

Types

Two types:

1. Team - based or small group2. Gain sharing

Team Based Or Small Group Plan

• Focus = smaller work groups• While gain sharing typically measures

physical output, group incentives tend to measure performance in terms of a broader array such as– cost savings– successful completion of product design– meeting deadlines

• Drawback: competition among teams

Gain Sharing Plan• sharing productivity gains with employees

• differs from profit sharing in that instead of using an organization-level performance measure (profits) plans measure group or plant performance

• better for motivation

• goes beyond money -- participation in problem solving = key

Advantages Of Group Incentive Plan

• An incentive program can play a significant role in motivating staff to achieve organizational goals.

• Encourage cooperation within a team.• Cultivate managerial skills within a team.• Group incentive plans are useful when there are

no clearly defined individual goals.• Promoting Teamwork• Consistency

Disadvantages Of Group Incentive Plan

• competition between groups can be unhealthy

• Perceived Unfairness

• Cost

Disadvantages Of Group Incentive Plan

• Many varieties of teams

• “Level problem”

• Complexity

• Control

• Communication