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Economic Incentive System

Reported by: Jenno Ray Senal

Purposes and types:


Economic Incentive System

A system that varies an employees pay in proportion to some criterion of individual, group or organizational performance.

It focuses to overall nature, purpose and behavior implications Programs selected are: Wage incentives Profit sharing and gain sharing Skill based pay systems

Complete Pay Program A comprehensive reward system that uses different basis of pay to accomplish various objectives

The incentive foundation includes: Base Pay & skill based pay motivate employees to progress to jobs of higher skills and responsibilities Performance Reward incentive to improve performance on the job Profit Sharing motivates workers toward teamwork to improve an organizations performance

Incentives Linking Pay with Performance


The most popular measure is for the amount of output to determine pay as illustrated by a sales commission or a piece rate. Piece rate provides a simple direct connection between performance and reward.

Objective: Link a portion of the workers pay to some measure of employee or organizational performance. Advantages Strengthen instrumentality beliefs Create perceptions of equity Reinforce desirable behaviors Provide objective basis for rewards Disadvantages Cost (both employer and employee) System complexity Declining of variable pay Union resistance Delay in receipt Rigidity of system Narrowness of performance

A. WAGE INCENTIVES
Pay for performance Main reason: They increase productivity while decreasing labor cost per unit of production

When incentive systems operate successfully they provide psychological as well as economic rewards

Difficulties: Disruptions in the social system may lead to feelings of inequity and dissatisfaction. This leads to many difficulties: 1. 2. 3. 4. 5. Rate Setting Makes the supervisors job more complex. Loose Rates Cause disharmony between workers. Output restriction

B. PROFIT SHARING
A system that distributes to employees some portion of the profits of business. Profit sharing recognizes mutual interests. Therefore, greater institutional teamwork tends to develop.

Difficulties:

1. Indirect relationship Profits are not directly related 2. Delay Employees must wait for their reward 3. Lack of Predictability Total worker income may vary from year to year. 4. Union Skepticism Union leaders have been suspicious of Profit Sharing

C. GAIN SHARING or product sharing


Policy of giving employees a substantial proportion of the cost savings produced when their jobs are improved.
The idea is to pinpoint areas that are controllable by employees and give them an incentive for identifying and implementing ideas that will result in cost savings.

Behavioral Basis: Encourage employee suggestions, provides an incentive for coordination and teamwork, promote improved communication.

Workers are aware that greater efficiency leads to larger bonuses.


Contingency Factors: The success of gain sharing is contingent under a number of key factors.

D. SKILL BASED PAY


Knowledge based pay or multiskill pay Rewards individuals for what they know how to do

Starts at a flat hourly rate and receive increases for either developing skills or learning how to perform other jobs
Substantial amounts of training must be made available for the system to work

Advantages:
1. Provide strong motivation for employees to develop their work related skills; 2. Reinforce an employees sense of selfesteem; 3. Provide the organization with a highly flexible workforce that can fill in when someone is absent.

Pay satisfaction should be relatively high due to:


1st Employee hour rate is often higher than that would be paid for resulting they feel temporarily overpaid;

2nd Workers perceive the system as equitable both in the sense of their costs and rewards

Disadvantages:
1. Hourly pay rate will be greater than normal;
2. A substantial investment in employee training must be made; 3. Places pressure on them to move up the skill ladder; 4. Employees will qualify themselves for skill areas that they will be unlikely to use.