In an effort to increase the productivity of its employees, a manufacturing company is considering adopting an incentive pay program. List and discuss the five factors the HR professionals should consider in the adoption of an incentive program

What will be an ideal response?

Answer: The first factor to consider is whether the plan should be based on group or individual employee performance. Clearly, this is dependent on the structure of the company. If the nature of work performed is interdependent, for example, then group incentives would be appropriate.

A second factor is the level of risk employees would be willing to accept in their overall compensation package. The level of risk increases as incentive pay becomes a greater part of total core compensation. The level of risk is also dependent on the amount of control employees may have toward the attainment of the desired performance goal.

A third factor is whether incentive pay should replace or complement traditional pay. Some companies may choose to award incentive pay in addition to an employee's base pay and fringe compensation. Other companies may opt to reduce base pay by placing the reduced portion at risk in an incentive plan.

A fourth factor is the criteria by which performance should be judged. Criteria should be quantifiable, accessible, and reflective of a company's competitive strategy. Further, the company may want to consider using more than one performance measure, particularly if it is relevant. A weighting scheme could be used to reflect the relative importance of each performance criterion. As with the level of risk, the criteria chosen should be under the control of the employee.

A fifth factor is the time horizon of goals. Typically, incentives for lower-level employees tend to be based on short-term goals that are within the control of such employees. Longer-term incentives are used for professionals because of the length of time it takes for performance to be adequately measured.