INCENTIVE

Companies offer incentive plans to encourage employees to work harder. Incentive pay is a reward for employees or employee groups whose extra effort on the job results in higher production levels. For instance, incentive pay might be given to a sales department that exceeds its monthly sales goals. In addition to helping motivate employees, many companies believe that incentives improve recruiting and retaining high-quality workers, boost morale, and send a positive message about management's performance expectations.

Incentive schemes can be found at all levels of a company, from the shop floor to the boardroom. To be effective, an incentive plan must be clearly defined and the terms for payment understood and agreed upon by the employer and employees. There are several types of incentive schemes, which provide different ways to determine if an employee should receive incentive pay. The type of program will also affect how an employee's job performance will be measured. For example, factory workers might have their job performance rated according to their contribution to a team or the quality of the product they produce. On the other hand an executive's job performance might be based on company profit or cash flow. The outcome of these performance measures will determine whether an employee qualifies for incentive pay.

Incentives may be monetary or nonmonetary and may include cash or vest an employee in a profitsharing plan. In some ways incentive pay is similar to an employee bonus program because compensation in both plans is based on exceptional job performance and paid in addition to an employee's basic salary. Bonuses, however, are usually given to employees only once a year, while incentive payment is made immediately after an employee becomes eligible for it.

Incentive programs are an outgrowth of the piece-rate system. The piece-rate system bases payment on the number of units that workers produce. The system began in the sixteenth century with the disintegration of the craft guilds. At that time, merchants hired people to work from their homes; home-based workers were then paid based on piecework. This piecework system was replaced by the rise of the Industrial Revolution in the late 1700s, which took production out of the home and into the factory. The use of incentives for factory work did not come about until the end of the 1800s, when scientific management theorists said that financial rewards could improve worker performance.