Organizational Incentive Plans

Organization wide incentive plans involve cooperation among employees, management and union in order to achieve broader objectives such as organization wide reduction in manpower, materials and supply cost, strengthening of loyalty to the organization, harmonious industrial relations, and deceased turnover and absenteeism. The group wide incentive plans are as follows:

Gain Sharing Plan: Gain sharing and a number of variants based on gain sharing concepts, such as goal setting and customized group-based incentives, have become increasingly popular for their ability to increase productivity, reduce costs, enhance morale, improve quality and complement new forms of organization design. Gain sharing plans were developed to take advantage of the “hidden knowledge” of employees. According to agency theory, organization incur costs because employees withhold information that could be used to improve organization performance, and incentive plans encourage employees to share this knowledge that can result in benefits to organizations. Gain sharing can also positively impact organization performance by reducing supervision costs as peer monitoring is more efficient than supervisor’s monitoring because peers have access to more and better information about work-related issues.

Under this plan, all employees are paid an agreed upon bonus irrespective of differences in individual efficiency or output. The standard or measure of efficiency is determined and bonus at the agreed rate is granted once the results are over the standard performance. When people work together, especially in formal teams, they share more fully than when they work alone. Employees often make poor decisions because they have incomplete information and with team working the flow of information increases thereby improving organizational performance. Thus, information sharing leads to involvement and participation, which improve individual performance and then group outcomes.

The following factors are necessary for success of gain sharing programs:

  • Management commitment.
  • Strong need to change or a strong commitment to continuous improvement.
  • Management acceptance and encouragement of employee input.
  • High levels of cooperation and interaction.
  • Employment security.
  • Information sharing on productivity and costs.
  • Goal setting.
  • Commitment of all involved parties to the process of change and improvement.
  • Agreement on a performance standard and calculation that is understandable, seen as fair and closely related to managerial objectives.


Kaiser Plan: Under this plan, a committee comprising of representatives of the management, employees and public is constituted to eliminate the treats of strikes by stockholders and the public, providing job and income securities to the employees in the fact of technological innovations and gradually eliminating wage inequalities in direct wage incentive system. The plan is characterized by guaranteed employment to employees against technological unemployment, sharing the gains resulting from cost reduction in view of enhanced efficiency between the organization and employees, increase in compensation and fringe benefits at least equivalent to bargained ones in the rest of the industry and a scheme for gradually eliminating direct incentives.

Cafeteria Plan: Plan is a system under which each employee has some choice as to the form and timing of all or a portion of his total compensation. It is like choose your own reward plan. Each human beings unique in his own ways and hence the motivational value of different incentives plans has varying degrees of relevance on each employee. Under this plan, employees’ can choose the most suitable plan being available from a pool of such plans, which may go up to 1800 individual compensation plans. However, such large number of plans can cause confusion an difficulty in administration.

Incentive programs based on group performance are often problematic for a number of reason as follows:

  • The failure of the individual to contribute fully to group effort has little impact on that individuals earning if other employees do not shirk.
  • The rational instrumental employee will minimize own effort, while encouraging the other employees to minimize theirs.

Profit sharing Plan:  Increased production, increased efficiency and lower costs are the main goals of profit sharing plan. It is beneficial for organizations as with employee’s focus on profit, organization’s profitability will increase. Profit sharing plans are based on two premises:

  • The promise to provide additional economic reward when profits of the organization permit it.
  • The implied acceptance of all employee contributions that will advance the profit goal. In this way, employees may enlarge their commitment to the organization. Profit sharing plans are typically differentiated on the basis of when profit shares at regular intervals. Deferred plans put the profits to be distributed in the hands of a trustee, and distribution Is delayed until some event occurs. This type of plan is most often tied into a retirement system.





























HR-Professionals 12 Compensation 12


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