Employees are traditionally compensated on are traditionally compensated on a fixed rate basis - whether they are on an annual salary or paid by the hour. And yet this arrangement is not always the most optimal when it comes to optimizing labor costs while also maximizing productivity and overall performance.
Many workers tend to lose motivation when there is no clear connection to their job performance, especially when their pay will largely remain the same.
Even worse, tensions may rise if a top performer discovers a coworker doing half the amount of work when they both get paid the same.
Since the late 1900's, companies have used incentives of different kinds to improve employee performance. Organizations using some form of performance incentives can attract top talent to their operation, while increasing wages in line with revenue growth.
What are Performance Incentives?
Workers are generally offered an agreed upon base pay and given additional compensation after a specific level of performance is achieved. These incentives tie reward systems directly with individual (or team) performance on a task or overall objective.
Types of Performance Incentives
With a Piece Rate, employees are paid solely based on a unit of output. Piece rate was prevalent years ago in industries like farming and textiles, and in today’s world, piece rate pay is often used for freelancers and independent contractors. However, for employers, piece rate pay is risky as employees on a piece rate system are not exempt from Fair Labor Standards Act (FLSA).
Anyone in Sales knows that commission is one of the more commonly used performance incentives today. Employees working on commission are generally rewarded with a percentage of the sales volume or profit they are able to generate during a specific period of time, in addition to a set base pay. Usually this type of incentive is reserved for Sales and other White-Collar type jobs.
Profit sharing can be a great way to engage your employees and reward individuals for the overall success of your company. Under this system, a percentage of company profits are shared with all employees within the firm. These programs can breed motivation, and create loyalty by recognizing employees and their commitment to the brand over the previous fiscal year or quarter. However, there are downsides to Profit Sharing. Because the timing of the payout is usually done quarterly or annually, it can be difficult for an employee to make the connection between their effort and the payout in profit sharing. And if the company has a down year – through no fault of the employee – profit sharing can be de-motivating.
Insource believes a well-constructed performance pay program considers all of the factors that are critical to performance: safety, time, attendance, quality, and productivity. We also advocate paying incentives weekly based on performance, and clearly communicating those goals with employees throughout the work week. Additional incentives can be introduced for special projects or peak season.
The Pros & Cons of Performance Incentives
With all the positive affects performance incentives can bring to your employees and leadership team, few companies have incentive pay plans in place. Some common challenges companies see in implementing incentive pay plans include:
- Measurement and management of data
- Administrative complexity, especially with temporary labor
- System limitations on variable pay (Payroll)
- Morale issues / consistency between departments
- Risk of poor design and communication
- Maintaining the standards as processes change
Overall, performance incentives are an ingenious, yet underutilized way for organizations to offset the impact of rising wages while attracting and retaining top talent. Additionally, employees remain motivated to perform and deliver tangible results, as they are incentivized to do so.
Need Help Optimizing Labor Costs?
At Insource, we make it our mission to provide manufacturing and distribution operations executives with custom labor solutions to optimize cost while also maximizing overall performance. Combine that with our decades of experience in performance incentives, logistics, operations, and supply chain and we can ensure businesses like yours achieve optimal levels of performance over the long term by leveraging the Insource team within your operation. We also develop and manage the systems required to successfully track and document the program for our associates, leading to a decrease in turnover, improved quality and safety, and a more motivated, productive, and satisfied workforce.
Insource is a national provider of performance-based labor solutions for manufacturing & distribution. Our proven approach reduces labor costs while improving productivity and quality. People. Process. Results.
To learn more about how we could help you, visit www.insourceperforms.com