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Compensation System Management: Incentive Pay Concept

Establishing a sensitive and appropriate compensation system is crucial for any workplace. Lack of fair and equitable appraisal and payment will lead to a number of issues, among which there will be employee shortage and turnover. Experienced and high performing workers will be likely to leave their jobs first. To avoid these problems, the managers of workplaces are to establish an equitable compensation system.

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Normally, there are three main ways of professional appraisal of the workers; they are performance-based, seniority-based, and merit-based payment systems. In theory, merit pay systems are supposed to create a number of stimuli for the employees to improve their performance and work harder to earn monetary rewards for their professional achievements. At the same time, not many companies can actually provide proof that their merit-based systems work (Heneman and Werner 248).

One of the main limitations of merit pay is that it creates conflicts between the employees because the evaluation of achievements in most cases is rather arbitrary. Besides, such a system is likely to quickly discourage low and average performing workers and cause higher employee turnover. Seniority-based pay is designed to make the experienced workers keep their jobs because they raise assigned depending on the tenure of the employees.

This pay system increases employee loyalty and serves to convince high performing and valuable workers in the organization. Performance-based pay is assigned in accordance with the quality of the employees’ work. It maintains higher motivation in the workplace, making everyone try harder and pursue bonuses that are given based on the results of each worker.

It is important that the organization leaders carefully explain the systems of raise assignation, which is easy in the case of seniority pay and can be very confusing with performance pay.

The concept of incentive pay stands for the kind of monetary reward for the employees that are assigned based on the quality of their performance and professional achievements. Incentive pay is a way of the organizational leaders to enhance the performance of their workers using compensation as a tool. Incentive pay may come in the form of bonuses or commissions. This concept usually comes in contrast with traditional pay, which is fixed and remains unchanged.

Traditional pay is established based on the costs of living of the employees and is distributed evenly between the workers. Incentive pay is different because it varies from a performer to a performer and is used not only to motivate the workers and improve their results but also to communicate values throughout the organization. Traditional pay can be viewed as less stressful as it does not create a competition among the employees. Yet, apathetic workplace attitudes and lack of motivation are the likely outcomes of traditional pay.

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At the same time, incentive pay is what turns an organization into a community. Incentive pay also stimulates high performing employees and attracts talented workers into the organization (Vikas par. 4). Incentive pay may be used to engage the employees in collaboration; in this case, group incentives are employed (Jenkins par. 4).

To decide which kind of incentives, group or individual, the organization should employ, the managers are to determine which kind of work is dominant and preferable in their business process. If teamwork is what is required for the business to gain better profits, then group incentives are to be applied.

Works Cited

Heneman, Robert L. and Jon M. Werner. Merit Pay: Linking Pay to Performance in a Changing World. Charlotte: IAP, 2005. Print.

Jenkins, Carolyn. Individual vs. team-based rewards: Which one should you choose? 2014. Web.

Vikas, Vij. Pros and Cons of Merit Pay. 2011. Web

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StudyCorgi. (2020, May 3). Compensation System Management: Incentive Pay Concept. Retrieved from https://studycorgi.com/compensation-system-management-incentive-pay-concept/

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