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Organizations use incentive plans to motivate their workforce and keep them committed to bring efficiency and effectiveness in their assigned tasks. It is far more important for companies to attract and retain skilled and productive people. Competitive incentive plans are of critical importance in this regard. There are number of incentive plans that companies can use to motivate, attract and retain employees. Annual bonus, spot rewards, individual initiatives, long term incentives and merit pay are some popular types of incentives (Aquila, 2007) used by companies to keep their employees motivated and reward their efforts. When employees are motivated, they devote their potential efforts to bring efficiency and productivity in their work which in turn prove to be use full for company.
Annual bonus is a popular type of incentive plans used by companies in common. As its name implies, annual bonus is given to employees at the end of the years. It is an additional payment received by employee on the top of his regular salary. Amount of bonus is different in different countries. Management personnel decide about amount of bonus and who will get what. Annual bonus as an incentive plan has some advantaged and disadvantages (Aquila, 2007).
Incentive and Motivation:
Annual bonus is a source of motivation for employees and can be used as an incentive especially in fields where employees receive salaries to meet some specific targets. In this case, a special target is set out for each employee and specifies a cash bonus for employee who will achieve that goal. Annual bonuses can be used to motivate sales team into obtaining more sales for a quarter, month and or year.
Bonus payments do not have to be awarded on a holiday, at the end of the year as an incentive. This type of incentive plan can be used as a source of appreciation for hard-work of employees. The employee can be awarded in a specified amount of time in the year. Receiving bonus payment will create a sense of appreciation in employee that he is being appreciated for his hard work and it will motivate him continue to improve his performance and keep working hard to get further rewards.
Regularly using and incentive of annual bonus promotes a culture of performance at company. A performance culture makes alignment between productivity, cost revenue and performance. In a performance culture, top performers are rewarded with differentiating rewards whereas average or below average performers are awarded according to their performance.
Some of disadvantages of annual bonus incentive plan include the following.
Adds to Cost for Company:
Using annual cash bonus as reward for employee performance, adds to total costs for company. It is a costly scheme that company use to motivate its employees. Before deciding finally to use annual bonus for reward of employees, company must calculate the total associated costs for this incentive plan. It must calculate that whether it can afford yearly bonuses, holiday bonuses or use of reward and incentive bonuses and for how many employees. In order to reduce the costs, instead to cash bonus, company can use gift cards or similar gifts as reward to employees for their achievements.
Annual bonus, when received by employees in form of cash, becomes part of their total income. And in case of higher income, employees have to pay more taxes as the bonus amount is also included in their total income. Relatively small bonuses do not affect the employeeâ€™s adjusted gross income.
Issues of Fairness and Jealousy:
As companies pay bonuses in different ways, such incentives for performance, meeting goals, end of the year or performance bonuses, so employees may not be receiving the same amount. In case if an employee is receiving bonus on regular basis due to his consistently improving performance (Ichniowski et al., 1996), other employees may get jealous of the good fortune of employees. Some employees may feel that rewards and bonuses are not being delivered fairly by company. In these cases, it brings negative results rather than positive ones.
Pay for Performance Incentives:
As name suggests, these rewards are based on performance of employee in terms of productivity or any other relevant criteria defined by the company (Mark, 2006). Many companies, fully or partially tie wages of employees with their performance. Implementation of pay for performance policies in business brings advantages and disadvantages for company and employees.
When company is using pay for performance rewards regular basis, gradually the need for supervision of employees decreases. Employees show commitment and initiatives as they know that their pay is directly related to their performance. So in this way, company can run its operations with fewer supervisors which save the total salaries cost for company.
Increase in Retention:
Increased employee retention is another advantage of pay for performance incentives. Higher achievers and employees with good performance level have high morale as they have sense of fair reward by company for their performance. An employee is not likely to leave a job where he earns extra income.
Less Employee Input:
Pay for performance policies can cause employees to feel reluctant in giving managers their input for changes. Even good ideas are held at the side of employees not shared because they feel that it may cause reduction in their earnings (Mark, 2006). Many companies depend and value the input from employees to make decisions regarding companies and in such situation, company will lose valuable input that can lead to better decision making.