Performance Incentive Plans

When we talk about a car’s performance we are not referring to its power output (which is really a latent input factor). We are referring to the time it takes to get between two points. The same principle applies to an employee of a firm too. Human performance is not potential, but productive output beneficial to that company’s goals.

Just as a skilful driver may win a race involving several identical cars, so too may a competent manager influence an employee’s performance through incentives. Sometimes incentives are intangible, like being part of an inner circle, or basking in the reflected glory of success. More likely these inducements are monetary, either in the form of cash, or in the form of shares.

            When remuneration becomes involved the possibilities of misunderstandings and employee resentment surface. To avoid this, the parties normally contract to individual performance rewards linked to specific targets. These are called Performance Incentive Plans

            A fundamental tension exists between paying fixed rates, paying off salary           scales, paying incentives only, and applying a combination of two or three of these. From a union perspective, a bonus scheme diminishes the impact of collective bargaining. From a management perspective, the ability to influence individual remuneration directly is a powerful tool.

            Over time three distinct genres of performance plans have evolved. Each has their own advantages, but their own disadvantages too.

o    Overall Performance Bonuses are incentive schemes in terms of which employees receive a share of an awarded sum. Though portions could theoretically be equal, in practice they are pro-rated to the value of individual fixed remuneration packages. If performance plans like these have any long-term effect on the general workforce this has, in my opinion yet to be proved.

o    Individual Performance Bonuses are based on direct contributions against agreed goals (for example the number of the leads a salesperson converts to orders). These are incredibly powerful motivators for driven people and have led to exceptionally high incomes that may even exceed those of C.E.O.’s However they may sometimes result in lower quality down the line where un-incentivised staff perform less enthusiastically.

o    Team Performance Bonuses are perhaps the better compromise between these two extremes. To continue the example, the salesperson, their clerk and the dispatcher could chase a target together and share the bonus, albeit in proportion to their salaries.