Every different type of incentive plan has both benefits and drawbacks. An annual performance bonus is very infrequent, once yearly, and therefore difficult to link together with performance. This type of incentive plan also tends to cause to employees to focus on what makes them look good, sometimes at the expense of what may be best for the company’s bottom line.
Incentive plans that employ a profit sharing component work well in that they tend to emphasize that what is best for the company is also best for the employee. When company profits increase and more money is available for bonuses, the employees get larger bonuses. However, during lean times, bonuses can be quite small. For small companies, this large fluctuation in compensation can become a problem. There is also a problem with this approach in that there is sometimes a long delay between the time when the effort that earns the profit occurs and the time when the bonus is paid.
Some incentive plans are best avoided, as they tend to be counter productive. A salary at risk plan is such a scheme. In this incentive plan, the employee is given a minimum base salary and can only earn the full salary if certain performance objectives are met. Incentive plans of this type tend to cause employees to become discouraged, particularly if the performance objectives seem out of reach. This approach feels like a punishment to the employee, an approach known as negative reinforcement. Studies have shown that positive reinforcement of desired behaviour is much more effective than a negative approach.
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Different types of incentive plans can be in place at the same company at the same time. This approach allows the company to take advantage of the benefits of the various incentive plans while minimizing their disadvantages. Incentive plans that use merchandise prizes, for instance, can be very closely linked to a specific activity, while an incentive plan that uses long term objectives can also be in place to help keep all of the employees motivated and focused over the entire year.
Using different types of incentive plans within the same company allows the company to respond and motivate employees who may be very different. Some employees focus on long term goals, while other employees only focus on short term goals. Employees’ needs tend to be different also, some desiring more vacation time while others prefer more money. Using different incentive plans allows the employer to respond to these unique needs and implement a more effective overall plan.