Types of Incentive Plans

Types of Incentive Plans

Incentives are variable rewards granted to employees as per the variations in their performance. To succeed, an organization must attract and retain productive employees. Therefore, a business establishes competitive incentive plans to accomplish these objectives. Incentives are provided beside wages and salaries so that the level of motivation and job satisfaction can be enhanced. Incentive payments are quite substantial and paid regularly as wages and salaries.

Incentive plans for low-level employees include those at the bottom of the organization’s hierarchy, such as staff and first-line supervisors. For example, a computer programmer might receive a bonus for developing an exceptional cost-control application. Middle-management incentive plans include workgroup managers. For example, an information technology manager might receive a bonus for his group completing all projects on schedule and under budget. Upper-management plans apply to company executives, such as a controller receiving company stock options for maintaining an exceptional cash flow during a recession.

Profit Sharing

Profit sharing plans are normally company-wide and available to full-time employees. It is available to full-time employees. The organization provides funds/bonuses based on a percentage of the amount of profit before tax. The company provides a pool of funds based on a percentage of its annual pre-tax profit. An employee receives a portion of this pool. For example, you receive an amount according to your wages or base salary. Unfortunately, profit sharing might reward poor-performing individuals. Therefore, a plan must create an environment that is a win-win situation for the employee and the company.

The employee receives a portion of this fund. For example, an employee receives a salary. This might be directed to a retirement program. Unfortunately, this method gives the poor performing employees an advantage.

Project Bonus

This is awarded to a team or an individual. The organization divides the reward among its team members according to the base salary of every employee. A company divides a team award among the team members, according to their wages or base salary.

However, a team award might reward a poor-performing member. This is demoralizing to the team’s high-performing members. Therefore, a company might give individual awards to team members based on each member’s performance. The organization might also reward a poor performing employee. This is a disadvantage for other employees as well as the team.

Stock Options

Stock options are normally available to upper management. A company might offer stock options to an executive for remaining with the company. This option is normally with the upper management. An organization might offer employee stock options to an executive employee for retaining that particular executive. He has the opportunity within a specific period to purchase company stock at a set price regardless of the current market stock price. The employee has the option to purchase company stock at a fixed price without considering the current market price of that company. Therefore, this encourages him to behave in such a way that potentially increases the company’s stock value.

Sales Commission

During a bad economy, it might be difficult to recruit salespeople willing to work based strictly on sales commissions. When the company is not performing well, it is difficult to recruit sales employee who will be ready to work strictly on sales commission. To tackle this, the organization might offer base salary plus sales commission.

Therefore, a business might offer a base salary plus commission. This provides the salesperson a level of security during a downturn in the economy. The salesperson would definitely receive a base salary which will remain fixed and he/she will receive the commission on every sale done. In addition, it provides the incentive for the salesperson to earn a higher income.


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