Incentive Pay

2. Using Cash

Cash is always popular with employees. It is the most widely used form of incentive payment. But it has some disadvantages, too.

2.1 Incentives to increase sales almost always take the form of commission.

• Commission is generally set as a flat percentage of sales. It is self-limiting. If the goods are not sold, the payment is not made.
• The rate of commission depends on the selling price and the degree of effort involved in making the sale. It could range from five per cent, where the item sells readily, to 30 per cent or more where the effort required is substantial.
• High-performing sales people may be able to earn huge amounts under this system.
• Guard against sales people cutting corners to clinch sales.
• Time the payments to ensure that staff can always see another big payout coming.
• Very high earnings may cause resentment if the sales depend on a team effort.
• It is difficult to curb an over-generous commission agreement later, without upsetting and demoralising the sales team.

2.2 For production employees, an element of piece work pay is the equivalent.

• Payment is directly related to production. If nothing is produced, nothing is paid.
• Pressure to produce and earn more may lead to a decline in standards. Link quality standards to the production targets.

2.3 One-off improvements in non-sales areas - for example, production or support - can be encouraged with bonuses.

• Bonuses can be offered on either a team or an individual basis.
• Unless there is a clear-cut benefit to the company, the bonus is just another cost.
• Bonuses are often paid out of 'gainsharing' cost savings. With gainsharing, any gains made from cost reductions - for example, a cut in hours worked for the same level of production - are shared with employees.
• Audit improvements in productivity carefully. Things may not be as they seem.
• With team bonuses, make sure that all team members are contributing. One freeloading individual can demoralise the whole team.

2.4 Continuous improvement can be encouraged by instituting a system of performance-related pay.

• You must set demanding but realistic goals for each employee or team.
• Provide feedback on progress towards these goals at intervals during the year.
• Determine the pay increases by the progress made.
• Use objective measurements, or you risk accusations of favouritism.