Several incentive plans are particularly suited for use with individual employees.
A system of pay based on the number of items processed by each individual worker in a unit of time, such as items per hour or items per day.
Piecework is the oldest individual incentive plan and is still the most widely used. Here, you pay the worker a sum (called piece rate) for each unit he or she produces. Thus, if Tom the Web surfer gets $0.40 for each e-mail sales lead he finds for the firm, he would make $40 for bringing in 100 a day and $80 for 200.
In a perfect world, developing a workable piece rate plan requires industrial engineering (that’s how Frederick Taylor got his start). The crucial issue is the production standard and industrial engineers usually set this in terms of a standard number of e-mail leads per hour or a standard number of minutes per e-mail lead. In Tom’s case a job evaluation indicated that his web surfing job was %8 an hour. The industrial engineer determined that 20 good leads per hour was the standard production rate. Therefore the piece rate (for each lead) was $8 divided by 20 or $0.40 per sales lead. Of course we need to ensure that Tom makes at least the minimum wage, so we’d probably pay him $5.85 per hour – the minimum wage in July 2007 – whether or not be brought in 15 leads, and then pay him $0.40 per lead for each over 15. In practice most employers set the piece rates more informally.
An incentive plan in which a person is paid a sum for each item he or she makes or sells, with strict proportionality between results and rewards.
Piecework generally implies straight piecework which entails a strict proportionality between results and rewards regardless of output. However, some piecework plans allow for sharing productivity gains between employer and worker such that the worker receives extra income for some above normal production. So it Tom starts bringing in 30 leads per hour instead of the standard 20 his piece rate for leads above 25 might bump to $.45 each.
Standard hour plan
A plan by which worker is paid a basic hourly rate but is paid an extra percentage of his or her rate for production exceeding the standard per hour or per day Similar to piecework payment but based on a percent premium
The standard hour plan is like the piece rate plan, with one difference. Instead of getting a rate per piece the worker gets a premium equal to the percent by which his or her performance exceeds the standard. So if Tom’s standard is 160 leads per day (and thus $64 per day) and he brings in 20 leads, he’d get an extra 25% (40/160) or $ 80 total for the day. Some firms find that expressing the incentive in percentages reduces the workers tendency to link their production standard to pay (thus making the standard easier to change) It also eliminates the need to re-compute piece rates whenever hourly wage rates are changed.
Pros and cons
Piecework plans have pros and cons. They are understandable appear equitable in principle, and can be powerful incentives, since rewards are proportionate to performance. However, workers on piecework may resist attempts to revise production standards, even if the change is justified. Indeed, these plans may promote rigidity. Employees concentrate on output and are less willing to concern themselves with meeting quality standards or switching from job to job (since doing so could reduce their productivity). Attempts to introduce new technology or processes may trigger resistance, for much the same reasons.