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Looking into the incentive pay scheme

A firm is a business company or partnership established by one or more individuals which they can be called the owners of the firm. A firm can be quoted on the stock exchange and issue out their share to the public to subscribe and they become shareholders in the firm.

Incentive pay scheme can be defined as a device set up to motivate workers in a firm or organisation to produce a greater portion of the companies output for a particular percentage of return on the company's profit. Incentives are certain reward given out for the attainment of a certain goal by employees.

Incentives pay scheme have undergone major changes in recent decades and have been found important in the day to day running of a business reason been that the level of performance of workers tend to increase when they are motivated by given compensation for every extra effort put into production by the workers.

Objectives of incentive pay scheme.

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An incentive pay scheme should be designed to achieve specific goals and objectives. The target aimed at by the management of the firm must be "SMART" (specific, measurable, achievable, realistic, and time-limited). Clearly, the success or failure of management will depend in large part of their ability to provide adequate incentives of the right type for all industry.

The objective should be set towards achieving a business result which it was set up for which can include hitting a particular set sales target for a particular time for a new product or improvement in customer's service. The incentive pay scheme must have a time lag to ensure easy regulation.

According to Russell M. Currie, he specified that there are 3 main purposes which may be achieved through financial incentive scheme which includes;

The improvement of the average rate of working and effectiveness of employees.

The improvement of methods of working.

The improvement of co-operation and sense of common interest.

The stated objectives can be divided into 2 groups which are the material factors and human factors.

As we know that conflicting opinions may exist in the process of implementing incentive scheme in firms and this are done by workers who are far from seeing the firm being successful in the achievement of their set objective through the implementation of the incentive pay scheme. It is quite possible for an incentive scheme to be technically perfect but yet still fail to produce the desired result.

As we know that in designing incentive scheme, money alone will never ensure confidence between employees and management. Therefore, it is important to give priority consideration to how a good atmosphere between the employees and the management can be established.

The improvement in the relationship between all levels in the firm has a long way in the achievement and improvement of any firm. However, when there is an improved human relation in the firm there is possibility for improved production. It is however important to recognise the values of employees as human person because it is from an innate sense of his human value that there arises self-esteem.

In attaining the benefits for setting an incentive scheme, management must always have in mind that they have the responsibility to cater for all the demands bound up in the human personality of the employees. In most cases, when employees are aware that they are responsible part of the firms and are respected by the management they will respond by doing their utmost to achieve the firms objectives.

In order for an incentive to be successful, it is necessary that all incentive schemes are sound, well maintained and completely understood be the employees whom they apply to and the management that made them.

Good and effective communication is also a vital objective in incentive pay scheme. That is, the reason for the introduction of the scheme and its likely pattern of development are fully discussed with everyone concern, both the employees and the management. The system of good communication should always extend beyond the actual period of investigation and the ultimate introduction of the incentive pay scheme. It is of great important that when there is going to be a change no matter how minimal it will be, proper communication should be passed to concerned people of the reason for the change, the fact related to them and how they are intended to be implemented should be freely discussed.

Principles of incentive scheme

In designing an incentive pay scheme, we have to consider some basic principles which are based on work measurement and also to show how the principles are incorporated into the design of schemes in order to arrive at the desire effects.

Incentives are means of rewarding employees or groups of employees through increased benefit which can be in financial or non-financial rewards which are directly related to each employee's contribution to production as a whole. Since it may be difficult to determine the level of work done to incentive payment, it is therefore important that a good and sound incentive pay scheme to be put in place to enable management to determine the right relationship between actual work done and reward.

Setting up incentive scheme in firms

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In development of incentive schemes, management of organisation should always put into considerations that increasing workers pay and other financial benefit are not the only way to improve an employee's performance level.

According to Richard B & Dwight B "As expected, a proper incentive scheme may help in the increase a firms rate of return and stock price, as well as the income of the affected workers." Incentives will continue to grow in important business as the economy becomes more competitive. It can affect the business in both the positive and negative way, when structure properly, it can ensure that managers, workers, and consumers prosper.

Employees also look forward to some other form of reward which can also be added to the financial benefits given to them which can include job working condition, training on the job, job satisfaction, job security and other important factors. In setting an incentive scheme, the following steps can be used to achieve the goals of setting the scheme up;

Identify the goals (objectives) of the scheme.

Incentive scheme must not be designed because every other firm are designing one. The goal of the scheme can be defined by the management which must be a worthwhile one. Everyone needs to know the goals behind the incentive and the benefit to be gotten from achieving these goals. The scheme should be goal specific pointing out areas which are to be focused on be it improvement in products, customers satisfaction, conflict reduction in the firm and other related aspect of the firm.

Consulting with employees in the firm

After goal definite schemes have been developed by the management of a firm, it should be communicated to other parties in the firm which includes there workers and union to hear their views on the scheme since they are the one to be used in the achievement of the scheme.

Employees of the firm must be given a view to express their concern and acceptance of the scheme. Employees should also be asked what incentive they think will motivate them in attainment of efficient performance. These help in determining the acceptance of the incentive by the employees.

Relating scheme to the remuneration system of the firm

The scheme should also define the form of incentives to be given to both management and employees of the firm, be it in financial reward or non-financial reward. Financial reward could be as a percentage increase in their salary or paid separately and non-financial reward can be inform of shares thereby increasing the numbers of shares of the management and employees of the firm. When rewards are in non-financial benefit like shares, employees who need the monetary benefit can always sell the bonus shares given to them.

Decide on performance measure for staffs.

When designing the incentive scheme for the firm, a measure should also be introduced on how the performance of workers can be measured to ensure fair play among employees. A particular target on performance can be set or the quality of the product can be used when the firm does not uses machinery in the producing process because a set quality has been set in the machine. In designing the means of performance measure, this will help to reduce the problem of free rider in the firm.

Run a pilot test.

The firm should always try and run a pilot test when designing a new scheme to help them know how acceptable the scheme is to the workers. This helps to know if any adjustment is needed in the scheme before making it formal.

The pilot test must not be directed to particular sector of the firms like the workers alone; it should be tested in all the different sector or department of the firm.

Regular review of the scheme

An incentive scheme that is to add to the firms development should always be reviewed o ensure compliance has time goes on.

Incentive scheme which are just not monitored overtime and reviewed may end up not given the firm the actual objective for developing the scheme. When the incentive schemes are been reviewed on a regular basis be it every 6 months, this will assist the firm to know how well the workers are aiding to the achievement of the scheme.

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Where the scheme tends to be deviating from the set objective, it should be amended. All this should be observed when setting up an incentive scheme for a firm or an organisation.

Types of incentive pay schemes.

Cash (financial) incentive pay scheme

This is one of the most popular form of incentive pay scheme been used in organisation to encourage employees work at optimum level. Under the cash incentives, given of commission to employees to increase sales can be of great value. This commission are usually set at a flat rate and it depends on how productive the employees are. This commission should be given over a particular time to motivate employees to work more for more commission.

For production employees, the work piece rate will be very useful which involves paying for the work been done by each employee and this can motivate individual performance. In production, a particular standard must be set for productions which are not done by the machine to guide employees in working to get a particular amount of commission but at the same time for the product to be of standard quality. If standards are not set for employees, they can always produce product at a very low standard in order for them earn more commission.

Bonus cans also a good form of cash incentive. It can be offered to an individual or groups in the firm. Bonuses are usually given out of the gains made from production. Group bonus most times lead to free rider problem because since an employee knows he will be given a bonus whether he works or not, then there will be problem.

Shares (non-financial) incentive scheme

Using of shares as an incentive pay scheme is more complicated than using of cash. Most often, when shares are given to employees it makes them work as if they are owners of the firm rather than working as an ordinary staff. It also encourages long term commitment in firms by employees.

Share option can also be used as a form of incentive to employees which can be easily transformed to cash if they which buy selling the option at the market when the prices are up to enable them make a profit when they exercise their options. Options to be given to employees should have a time limit to enable them make use of the option at their digression before the time lapses.

Other forms of incentives

Apart from the cash and shares incentive used in firms, we also have other forms of incentives used to compensate workers to enable them perform at an optimum level.

A firm can give employees incentive by sending them on all paid expenses training to assist them in gaining more experience and this can help them improve their performance. Given of awards to performing employees and promotion motivates them to perform at an efficient level. Giving of holidays, gifts and the provision of official car to employees will enable them work in an efficient way for the firm.

Benefits of incentive scheme to employees.

Incentive pay scheme encourage employees to work at their optimum level of performance. The benefit of incentive pay scheme can be analysed from both the part of the firm and the employees.

In respect to the firm, an effective system of incentive can be of advantage to the firm in the following ways;

Boosting productivity

Retaining existing staffs

Persuade staffs to join your business.

Increasing staffs motivation, morale and loyalty.

Linking individual and staff performance

Focus employees on achieving targets

Building team work among employees

In respect of the employees of the firm, an effective system of incentive can be of benefit in the following ways;

Enhancing the quality of working life

Rewarding staff effort

Adding values to employment contracts

Advantages and disadvantages of incentive pay schemes

Incentive pay scheme can be of advantages and disadvantages to firms. The following are the advantages and disadvantages under the different incentive schemes;



When employees are given incentives inform of finance, they tend to work towards hitting the firm's target.

Employees are aware of the value placed on their achievement which enables them to work at their optimum level.

It can be a way of improving on employee's poor performance.

Financial incentives can motivate employees to work overtime since they are aware of the benefit attached to it.


Financial rewards given to employees are sometimes small compare to their level of performance.

Employees can easily get demoralised if the financial incentives are not actually earned.

There may be variation in the incentive given to different employees which can cause rivalry among employees.



This can help to recognise employee's priorities and lifestyles.

It can encourage attachment of employees to the business.

When employees are given incentives based on non-financial basis, it build in them a sense of belonging which makes them work efficiently for the business since they are also connected to the growth of the business by the share and other non-financial benefit that are been given to them.

Providing benefits like free medical care, free transportation and some other social benefits can encourage employees perform at their best.


Social benefits given to employees for free can be taken for granted.

This type of incentive may be seen as inappropriate by employees.

Employees can always do away with the non-financial incentive given to them buy trading them for cash which shares is a good example and this is done, they have no link with the company again and they can always reduce their level of performance.



This incentive can be focused to an individual who aids achievements of goals.

Each individual can always determine how much he/she will be paid more since it is an incentive based on individual performance which can implies extra output with extra pay and this motivate employees to work hard.

It helps in relating individual pay to their performance.

It promotes equitable distribution of compensation. Compensation of each employee can be easily determined since they all have different task to perform.

This type of incentive pay scheme help to determine each employees performance and thereby retaining the best performer in the organisation.


Individuals can be divisive

The earnings gotten from the incentive are not constant since their level of performance can always change.

The focus on individual income may reduce the intrinsic motivation of staff's members.

It is difficult to distinguish properly between the individual and group performance.

Individual incentives may be faulty in the sense that the incentive given to different employees may be different may be as a result of their hierarchy in the organisation thereby influencing merit pay according to levels.



Group incentive can be a way of encouraging team working within the organisation.

Working in group can help and assist in the correction of individual under-performance. Each member tries to educate one another so that they can be working at par and have a good working environment.

Team goals can be easily and clearly integrated into organisation goals.

All members in a group are usually compensated together for their collective work done.

It encourages team work and co-operation among teams.

Helps in developing self-management within the teams in an organisation.

It enhances flexibility of working and encourages multi-skilling.


Group incentive can undervalue individual skills since there will be no clear way to identify who exactly contributed more to the success of a job.

Group incentive may encourage bullying of under-performers among the group.

In group incentive scheme, inter-team competition may become dysfunctional.

It may take time for team to become well defined and work together effectively.

Individuals may feel their personal self-worth is diminishing for working in a team.

The process of introducing a new member into a group can be problematic if team perceive that there could be a reduction in their earnings as a result of introducing an unskilled member to the group.

Group incentive can reduce flexibility because individuals in high performance team will be reluctant to move to another lower performing team in the organisation.

Reasons for failure of incentive pay scheme

Incentive pay scheme in firms are introduced in the firm to improve the firms production as a result of good benefit and welfare services given to the employees to increase their moral when working.

In some cases, this reason for the introduction of the incentive scheme are not accomplished or do not work properly due to some reasons which were not properly taken care of by the management of the firm. The reasons for the failure must be taken important by the firm and looked into for future design of similar incentive scheme. Reasons for this failure could be as a result of the following;

When there is a deviation between the effects produced by the incentive and the firm's strategic goals.

Not taking the workers inside the firm along with the incentive rather that getting different people to do all the work.

When firms make use of purely arithmetical system to distribute incentive on important work in the firm in which quality is important. Since the quality of a product can't be apportioned to different employees, there may be a problem in paying different incentives to different employees.

When the incentive to be given to a nature of job in the firm is not standardize, this can cause problem among employees which can lead to competition.

When the firm fails to incorporate the objectives, culture and the history of the firm into the scheme, this can lead to the failure of the scheme.

Incentives scheme introduced in some firms are inflexible and not equipped to with external contingencies when they arise.

Given different employees in the same incentive group different incentive can also cause some draw back to the firm since the output produced by the group can't be divisible and difficult to identify each employees output.

Some firm's managements set incentives which will be to their own advantages instead of for the firm as a whole.

There are always problems of free riders in firms when incentives design is to be accomplished by groups.

It is probability true that when there is a form of conflict arising from an incentive pay scheme, it is most likely to be traced back to the failure of some failure in the human relations aspect at the period when the scheme was formulated and installed. In setting a good atmosphere for an incentive pay scheme, no precise formula is required to achieve the aim of the scheme.


Introduction of incentive scheme in firms has been a great advantage to them in achieving set targets and goals. When incentives are introduced to the employees of a particular firm and they are well informed about the incentives, it makes them put extra effort while offering the services because they all know the benefit of putting extra effort while working.

Financial incentives has been a major inducement for workers in firms to work more and more because they believe is an incentive they earn as they work and can by at their disposal at anytime.

Incentive scheme can be of sound implementation in a firm when the objectives of for which they are implemented are followed. Incentive pay scheme with good relations within the firm, proper management responsibility, good communication and co-operation have every likely-hood to be successful in any firm because this forms the major bed rock in which sound incentive pay scheme should be set.

If there heard never been any form of compensation for work done then surely incentive pay scheme would have not been implemented in firms and would have fallen rapidly. The compensating factor is that they work, increase productivity, fulfil their objectives in spite of the problems associated with the scheme.

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