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Comparing Base Pay and Incentive Pay Essay

According to John Keel (2007), base pay can be defined as the fixed compensation paid to an employee for a specific task, job or responsibility. Base pay is determined during the hiring period. It changes with change in job, promotion, demotion or in case of lateral transfer. On the other hand, incentive pay is a scheme developed to encourage employees to produce more since payment is based on individual production.

It is lump sum bonuses paid annually and based on individual performances or set goals. It includes schemes each with different costs e.g. financial and non financial schemes, individual and group schemes, short-term and long term schemes and others. It is used to improve performance e.g. commissions, bonuses, e.t.c.

According to Wilson (2003), Incentive pay is a pay given for specified performance results but not based on the time worked. It is a scale of payment based on individuals work. The more the worker works or the more the worker produces, the higher the payment one will get in term of bonus. It is a motivation scheme which keeps the worker working so that one can earn more value. Incentive pay can be based on piece-rate pay on the work done or

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hourly based pay. The more practiced method of incentive pay is the lump sum bonus paid annually to workers and based on individual performance.

Advantages and disadvantages of base payment:

This payment package is fixed and remains the same for a longer period of time. This has no incentive of boosting the morale of the working staff and some may perform their work as a mater of routine duties. However workers are assured of a pay at the end of the month regardless of whether they achieved their goals or not.

Employees don’t strain to meet targets or achieve high value for bonuses. This is disadvantageous to both the company and the employees since the company will have less production per employee, while it is disadvantageous to the employee in that they are not challenged.

It reduces cost of administration since it doesn’t have extra cost of book keeping or supervisory work when employees are on overtime duties. The salary cost of the company is predetermined and hence less accounting works.

Advantages and disadvantages of incentive pay schemes:

Financial:

It has an advantage in that it focuses on hitting a certain target. This means that workers are motivated to achieve high standards since this correlates with their pay package. Achievement is assigned a value hence the higher the achievement, the higher the value. It has a disadvantaging that some of the rewards are actually very small compared to the value determining them.

It can simply demoralize workers if the they under-achieve as compared to their fellow workers. It may have a serious financial implication if not well supervised since employees may turn to quantity production in order to achieve high bonus and neglect about the quality of work. Low quality work may have serious effects on company sales. It has extra financial cost since it calls for careful record keeping.

Non-financial:

The incentive pay can recognize the employee priorities and lifestyle. Those employees with a high lifestyle will always strive for high value recognition. Those in the management will often take home big bonuses which translate to their lifestyle. However on the other hand, this can be taken for granted by the employee who do not achieve it and some will feel demoralized. It can encourage attachment to the business.

For most employees who work on incentive packages, they become very interested in the business in order to understand it more and hence achieve more value. It creates a driving force where the employees understand that their excellence in the field is of vital importance if they have to break through to another level of an incentive package. This has a disadvantage in that it may be inappropriate and create unhealthy competition among the employees in the same company dealing in the same line of duties or goods.

Individual:

According to Susan Malanowski (2007), it has an advantage in that it creates an individual who is focused on achievement. Everybody strives to maximize their output to earn a high bonus. This can however be divisive to the employees who try to compete on individual bases especially on a task that is not organized or are individual based. On the same individual, extra pay and extra out put are closely linked. This means that an individual will receive extra bonus depending on the amount of work that they have done or the scores that they earn depending on the incentive model. This may have a negative effect on the individual when their earnings fluctuate from time to time depending on the kind of duty they are handling.

Group:

It promotes team work especially when designed on chain tasks, which are accomplished by more than one individual. The group can also improve individual performance especially when one is in a task that they are not so familiar with. However, those who under contributes in the group may be bullied and under-perform.

References

Keel, J. (2007). Total Compensation Package: Base pay. Retrieved from, http://www.hr.state.tx.us/Compensation/basepay.html on 26th November 2007

Malanowski, S. (2007). Innovation Incentives: How Companies Foster Innovation. Wilson Group Papers, 2007

Wilson, T. (2003). Innovative Reward Systems for the Changing Workplace. McGraw-Hill Publishing Company, New York.

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