Incentive schemes for individuals
- Individual payment schemes include payment by results, piecework and bonuses, work measurement (including measured day work) and appraisal and performance related pay
- Other individual types of scheme include market-based pay, which links pay to what is available outside the organisation, and competency/skills based pay, which offers the opportunity for higher reward based on the acquisition and utilisation of additional skills and competencies.
Many sectors of employment use pay systems that contain direct links to individual performance and results. On an individual basis this may be via:
- payment by results (PBR) eg bonus, piecework, commission
- work-measured schemes and pre-determined motion time systems
- measured day work (MDW)
- appraisal/performance related pay
- market-based pay
- competency and skills based pay.
Individual payment by results (PBR)
The aim of any PBR scheme is to provide a direct link between pay and output: the more effectively the worker works, the higher their pay. This direct relationship means that incentives are stronger than in other schemes. However, traditional bonus, piecework and work-measured schemes have declined in recent years, as many employers have moved to all-round performance rather than simple results/output based pay. Many bonus schemes incorporate quality measurements or customer service indicators in the assessment to avoid the likelihood of workers cutting corners or compromising safe working methods in order to increase output.
Earnings may fluctuate through no fault of the individual. Supervisors and managers may fail in their responsibilities towards workers by inconsiderate allocation of work or using the incentive scheme to control output. Targets may not be accurate enough resulting in the perception of easy or difficult jobs. Material shortages or delays can affect production. Individual skills are not rewarded and indeed the most skilled may be put onto more difficult and potentially less rewarding work.
In instances where workers regulate their own output to satisfy their individual needs production can be affected and forward planning made more difficult.
Piecework, bonus schemes and homeworkers
Piecework is the simplest method of PBR - workers are paid at a specific rate for each 'piece' of output. This means the system is straightforward to operate and understand, although open to the disadvantages that quality and safety may be compromised to achieve a higher output. Pieceworkers must be paid at least the national minimum wage and there are special rules for working this out(4).
Other individual PBR schemes include incentive bonus schemes where for instance an additional payment is paid when volume of output exceeds the established threshold, or where there is an increase in sales which exceeds given targets. Variable bonuses can also be paid in relation to performances achieved against pre-determined standards so that the higher the performance achieved, the greater the level of bonus generated.
Homeworkers must also be paid at least the national minimum wage, with employers being able to demonstrate that they have worked out rates paid to homeworkers to ensure compliance.
Work measured schemes
Work measurement is often used to determine target performances and provides the basis for many PBR schemes for shop-floor workers. In these systems, a 'standard time' or 'standard output level' is set by rate-fixers, or by work study, for particular tasks. Work study calculates a basic time for a task by using laid down methods, observing workers performing the operation and taking into account their rate of working.
Incentive payments are then linked to performance or to the output achieved relative to the standard, or to the time saved in performing the task. British Standard Institution (BSI) formulas are frequently used to calculate the incentive payment and examples of these are in the Appendix: Examples of some commonly used schemes.
As the setting of standard times usually includes an assessment of how the individual being studied is performing, which can have a significant impact on bonus earnings, such judgements often result in disputes. Organisations using this system often train trade union representatives in the technique to promote understanding of the way judgements are made.
An alternative is to use 'pre-determined motion time systems (PMTS)'. In these systems a synthetic time for a job is built up from a database of standard times for each basic physical movement. A common form of this system is Methods Time Measurement (MTM). Allowances for relaxation and contingencies are then added to the basic time to form the standard time for the task. Such systems are arguably less open to dispute than work-measured schemes as long as the synthetic times upon which the standards are based are acceptable to the workers and their representatives.
When the organisation is considering the relationship of performance to reward there will generally be a starting point from which additional pay is attracted - performance at or below the starting point attracts no additional payment, but performance above the starting point attracts additional payment at a proportion of the basic wage or bonus calculator. Most schemes are 'straight proportional', which allow the reward to rise in direct proportion to the rise in performance. Examples of proportional incentive schemes are in the Appendix: Examples of some commonly used schemes.
Schemes should include provisions covering the effects of downtime or other non-productive time on pay. Schemes should be controlled fairly and regularly reviewed to ensure there is no degeneration of work-measured standards. The operation of the scheme should be audited regularly. Arrangements need to be in place to accommodate changes in product, material, specifications and methods - remeasurement of the job may be necessary.
Work-measured schemes may be appropriate in organisations that work on short-cycle repetitive work, where changes in methods are infrequent, where shop-floor hold ups or downtime are rare and where management should be capable of successfully managing the scheme to increase productivity. Procedures should be in place to deal with any grievances or issues that might arise. Even the simplest systems require a set of rules or guidelines to ensure fairness and equal earning opportunity for equal effort.
Measured day work
Measured day work (MDW) is a hybrid between individual PBR and a basic wage rate scheme. Pay is fixed and does not fluctuate in the short term providing that the agreed level of performance is maintained. MDW systems require performance standards to be set through some form of work measurement and undergo revisions as necessary. Motivation comes from good supervision, goal setting and fair monitoring of the worker's performance.
MDW is difficult and costly to set up and maintain. It requires total commitment of management, workers and trade unions. There must be effective work measurement and efficient planning, control and inventory control systems. The pay structure is often developed by job evaluation and with full worker consultation.
A version of MDW is 'stepped' MDW. Under this scheme the worker agrees to maintain one of a series of performance levels and different levels of pay apply to each one. Movement between levels is possible, usually after a sustained change in performance.
MDW is now relatively rare. It suits organisations where a high, steady, predictable level of performance is sought, rather than highest possible individual performance. MDW may be worth considering where stability of earnings is important, or where the manufacturing cycle is lengthy.
Appraisal/performance related pay
Appraisal/performance related pay is generally used to link progression through a pay band to an assessment of an individual's work performance during a particular reference period, often a year. Alternatively, the reward may be an additional sum of money paid in the form of a bonus.
Assessments usually relate to an individual's achievements against agreed objectives relating to output and quality of work but may also include an element of evaluation of personal characteristics, such as adaptability, initiative and so on(5).
Advantages of appraisal-related pay:
- it may provide a 'felt fair' system of rewarding people according to their contribution
- higher performance within the organisation may result
- it provides a tangible means of recognising achievements
- people understand the performance imperatives of the organisation
- the link between extra pay and extra performance is clear.
- appraisal-related pay can prove difficult because measurements of individual performance may be broad and lack objectivity and may be inconsistent
- as noted, such schemes also usually involve only an annual assessment and payout, which may weaken any incentive effect
- many appraisal-related or performance pay schemes pay quite small sums in terms of performance pay progression or annual 'bonus'. While any such scheme may encourage workers to focus on organisational objectives, they are unlikely to provide a great deal of individual motivation and may even demotivate.
Linking pay to appraisal can also have the disadvantage of turning the appraisal into a backward looking event where assessments are made and where workers may become defensive, as opposed to using the appraisal to look forward and agree new objectives, discuss development and any training needs. Where pay is at stake the individual may be less receptive to work counselling and may seek to negotiate softer objectives at the outset.
If a worker rated 'less than satisfactory' receives no increase at all under an appraisal pay scheme their motivation and morale may be adversely affected. It is important therefore to focus appraisals on the assessment of performance, the identification of training needs and the setting of objectives, not on any dependent pay.
Any organisation that chooses appraisal related pay should have good industrial relations and good communications systems in place. It is also important that the finance necessary to operate the scheme is available. Appraisal related pay is most successfully introduced when it is linked to an existing appraisal scheme that is working well, rather than a simultaneous introduction of appraisal and appraisal-related pay.
It is important to monitor the appraisals, to pick up any drift from the overall distribution of ratings and to check the fairness, equity and consistency of the ratings.
Recent surveys have shown that individual performance related pay schemes maintain popularity, particularly for senior managers in the private sector. They have also been introduced in the public sector, and lower level jobs in both sectors.
Managers need to be trained to operate individual performance related pay schemes and should be aware that team-working may be adversely affected - such schemes may prove divisive as workers seek their own performance improvements without consideration of any effect on the work-team and perhaps withhold help and information from co-workers.
Individual performance related pay needs to be carefully considered in the light of any organisational move towards teamwork and worker involvement. Such schemes also tend to lack the transparency sought by workers to properly understand how their pay is decided.
Market-based pay links salary levels, and progression through the scales, to those available in the market. It is often used in conjunction with a performance pay matrix, which allows faster progression from the bottom of the scale to the market rate, which will be the mid-point. Progression then slows, regardless of the performance of the worker, as they are deemed to be earning above the market rate for their job. It is rarely used as a scheme in isolation, but may be part of a reward strategy incorporating several performance elements.
Competency and skills-based pay
Competency and skills-based pay schemes have increased in popularity in recent years. A direct link is created between the acquisition, improvement and effective use of skills and competencies and the individual's pay.
Competency and skills-based schemes measure inputs, ie what the individual is bringing to the job, unlike traditional performance based schemes which measure outputs.
Competency may be generally defined as the ability of an individual to apply knowledge and skills and the behaviours necessary to perform the job well.
Competency based systems have become more wide-spread because many organisations already use competencies in recruitment and in performance appraisal for non-pay purposes, such as development and training. It goes along with the increasing tendency for pay to be linked to the abilities of the individual rather than a single set rate for the job.
Competency based pay is often used in conjunction with an existing individual performance related pay scheme and will reward on the basis of not only what the individual has done, but how they have achieved their targets. Examples of competencies may include leadership skill, or team-working ability. Competency-related pay fits well with an overall organisational philosophy of continuous improvement.
Difficulties may arise in defining the competencies valued by the organisation. There are differences between behaviours that are in-built and those that can be developed. Problems may also arise because of the complex nature of what is being measured and the relevance of the results to the organisation. Judgements about people's behaviour may be less than objective.
Competency assessment rests on several factors - identifying the correct competencies, choosing the right form of assessment and crucially, training the assessors to make accurate, objective judgements.
Skills-based pay also rests on workers gaining new and improved skills - often in a manufacturing environment. Reward is given for skills that can be used in other jobs in the same job band, encouraging multi-skilling and increased flexibility. Workers may also be allowed to develop the skills of a higher job band. Skills may be based on National Vocational Qualifications or internal evaluation and accreditation.
Both competency-based and skills-based pay have similar advantages and disadvantages:
- increased skill and flexibility in the workforce
- reduction in traditional demarcations
- increased efficiency
- tangible benefits for workers in return for changes in working practice.
- payroll costs will increase as workers gain higher rewards for increased skills
- increased training costs (time and expenses)
- employers may be paying for skills/competencies rarely used
- queuing for training - if people cannot be released, then there might be resentment and questions of fairness
- can de-motivate once workers reach a ceiling of their training opportunities or there are no higher grade positions available when they have completed their training
- highly trained workers will be more marketable and may be 'poached' or tempted to leave.