Piece Rate Pay: Piece wages have been popular for more than a century as a means of compensating production workers. In piece pay plans workers are paid a fixed sum for each unit of production completed. When an employee gets no base salary and is paid for what he or she produces, this is a pure piece rate plan. People who work in ballparks selling peanuts and soda pop frequency are paid this way. If they sell only 40 bags, their take is only $40. The harder they work and the more peanuts they sell, the more they earn. Many organizations use a modified piece rate plan in which employees earn a base hourly wage plus a piece rate differential. So a medical transcriber might be paid $7 an hour plus 20 cents per page. Such modified plans provide a floor under an employee’s earnings while still offering a productivity incentive.
Merit Based Pay: Merit based pay plans also for individual performance. However, unlike piece rate plans, which pay based on objective output, merit based pay plans are based on performance appraisal ratings. A main advantage of merit pay plans is that they allow employers to differentiate pay based on performance, so that those people though to be high performers are given bigger raises. The plans can be motivating because if they are designed correctly, individuals perceive a strong relationship between their performance and the rewards they receive. The evidence supports the importance of this linkage.
Moreover, unlike organizational based compensation such as profit sharing and gain sharing plans, merit pay plans pay for individual’s control. Thus, most individuals desire control over their pay, employees tend to like merit pay plans. Finally, merit pay plans allow organizations to compensate for external factors that may have reduced objective performance measures due to no fault of the employee (such as, sales being down nationwide).
Most large organizations have merit pay plans, especially for salaried employees. IBM’s merit pay plan, for example, provides increases to employees, base salary based on their annual performance evaluations. Since the 1990s, when the economy stumbled badly, an increasing number of Japanese companies have abandoned seniority based pay in favor of merit based pay. Koichi Yanashita of Takeda Chemical Industries, commented ‘The merit based salary system is an important means to achieve goals set by the company’s top management, not just a way to change wages’.
Despite the intuitive appeal of pay for performance, merit pay plans have several limitations. One of them is that, such plans are based on an annual performance appraisal. Thus, the merit pay is as valid or invalid as the performance ratings on which it is based. Another limitations of merit pay is that sometimes the pay raise pool fluctuates based in economic conditions on other factors that have little to do with an individual employee’s performance. A colleague at a top university who performed very well in teaching and research was given a pay raise of $300 in one year. Why? Because the pay raise pool was very small. Yet that is hardly pay-for-performance.
Finally, unions typically resist merit pay plans. The vast majority of primary and secondary school teachers are paid on seniority rater than performance. Recently, California Governor Arnold Schwarzenegger proposed that teacher pay be tied to merit, not tenure and proposed that teacher employment be tied to performance, not to just showing up. This proposal drew a swift reaction. Some representatives of teacher’s union commented it as a crazy idea just to have another blast at teachers.
Bonuses: Annual in the tens of millions of dollars are not uncommon in US corporations. Apple Computer’s CEO Steve Jobs, for example, received a $ 90 million bonus in 2002 for his success in reenergizing the company.
Profit Sharing Plans are organization-wide program that distribute compensation based on some established format designed around a company’s profitability.
Gain sharing: A variable pay program that has gotten a great deal of attention in recent year is gain sharing. This is a formula based group incentive plan where the employees as a group share a portion of profits of the company based on the formula.