Group Incentive Schemes: Definition; Applicability; Characteristics; Types; Examples; Advantages And Disadvantages

1.1 Definition

Performance/output-based method is an approach of rewarding employees pegged on their output levels. Under this classification, the approach is divided in to two main categories, namely;

a) Individual Incentive schemes

b) Group Incentive Schemes

This article focuses on the group-based kind of performance incentives only

Group Incentive Scheme

Definition-1: Group incentive schemes are employees’ programs for rewarding them due to the fact that they have exceeded a certain set organizational performance.

OR

Definition 2: Group incentive scheme is an awarding scheme program that compensate a group of employees some payment for performing better than expected.

The reward may assume diverse forms such as lump-sum cash payments, time-off rewards or non-cash rewards such as recognition items to groups or employees who meet set performance targets. Group incentive schemes are distinguished from other organizational plans due to the following characteristics.

1.1.1 Applicability of Group Incentive Scheme

Under which circumstances does group incentive plans become more suitable than individual incentive plans?

The circumstances under which group incentive plans are more suitable is where;

1. When it is not clear on how to assess the individual employee contribution towards the performance goal arrived at.
2. When a job or task is being undertaken by a group of employees. Such that the end results are as a result of joint efforts.
3. Each task is structured in a manner that the skills of each individual worker is the same among equals.

1.1.2 Characteristics of Group Incentive Schemes

1. Measurable Performance

These incentives are built on reliable, accepted measures of performance. The final goal of the organization in question that should be met should be well articulated and measurable either in quantitative or qualitative manner.

2. Definite completion timeframe

The group’s set target should be within a limited period of time so that the matter of concern is objective. Therefore, there must be a clear communication with employees about the set deadlines when they are expected meet their goals.

3. Payment limits or boundaries

The scheme is characterized by well-defined payment thresholds. Such that all parties have agreed on the time of starting the program and when it ends and at what point in time is the performance qualifying for the payment.

4. Payout structure

Group incentive plans are characterized by well set pay plan with zero cases of pay complexities. The guideline on how payment of the group efforts will be done is well outlined in the agreement document.

5. Group incentives are majorly pegged on the time duration taken by the group to accomplish the assignment.
6. Group incentive payment may take the two extreme aspects of either cash pay or non-cash pay which may assume the form of rewarding such as pleasure trips, times off and luxury items.

Types Of Group Schemes

Some of the commonly used methods or plans of rewarding a group of workers are;

2.1 Priest Man’s Scheme

2.1.1 Definition

Priest Man’s Scheme is a group incentive which was established by Priestman of Hull in 1917 and it entails the setting of the overall expected (standard) performance level for the whole organization. Such that if the group of the targeted employee outperform the set threshold, a pay is done to them. Otherwise, failure to hit this set standard performance, the employees just receive the minimum pay only.

EXAMPLE

The set standard output is 2,000,000 mushroom cakes per week. If the employees concerned with this production produces 2,600,000. Then the pay for the extra units, i.e., 600,000 mushroom cakes will be paid for as per the group incentive agreement/plan. Say 20% pay above the normal pay will be paid as bonus.

So, if the normal pay is $0.75, then the total pay will be the normal amount of (i.e.,2,000,000*$0.75) = $1,500,000 plus 20%*(600,000*$0.75) = $1,500,90,000

2.1.2 Advantages of Priest Man’s Scheme

1. Foster team spirit amongst employees

   The approach of inventive of this nature promotes the idea of working as a team and not in isolation as a result overall productivity of the organization is increased.

2. Minimizing of resistance at the work place

   The fact that the workers are pulling together, each one of them values the efforts of his/her workmate and this reduces cases of resistance which may slow down output. Which in turn may endanger the profitability of the business

3. Low chances of workers’ strike. It is in rare cases that there will be work stoppages due to workers going on strike. This is because there is teamwork. As a result, the performance of the whole organization improves.
4. Low chances or probability of employee high turnover

   Now that this approach is an appropriate approach of motivating the employees, it reduces the cases of high labor turnovers. As a result, there is continuous assurance that production will be rest assured. The good thing about the continuous production is that there is again no cases of lost market share.

2.1.3 Disadvantages of Priest Man’s Scheme

1. No chances of motivating the individual workers who seem to be more skilled or experienced as compared to the others. You see the plan paints all the employees with the same brush. This is demotivating to such employees.
2. More cash out flow from the business

Assuming that this plan is not there, it means no extra cost would be incurred or paid by the organization which adversely affects the firm’s profitability

2.2 Rucker Plan/Or Cost Saving Plan

2.2.1 Definition

Rucker Plan/Or Cost Saving Plan is a plan which focuses on the only directly concerned employees as far as that specific output is concerned. But then the program can also be extended to the whole population of the organization’s employees.

The proponent of Rucker group incentive scheme was Allan W. Rucker who named the model after his name. He was an Economist by profession. In his supposition, the point was that bonus should be pegged on the historic correlation between the aggregate earnings of the employees’ and the monetary value of the corresponding physical output realized.

So, the focus of this plan is on the value addition associated to a certain group of employees along different stages of production. The bonus is computed based on the comparison of labor costs and sales value minus cost of goods sold.

2.2.2 Advantages of Rucker Plan/Or Cost Saving Plan

1. Suitable for decision making by the production manager

   The plan focuses on the value addition other than the total production of the organization. The good thing about this approach, is that the management is in a position to assess whether the bonus is economical for it entails comparison of the marginal revenue gotten vis a vis cost of bonus to see if it is economical or not.

2. Improvement on quality of work produced.

   The plan enhances the overall quality of work done because the human resource is very keen on the additional value as a result of allowing the certain employees to be subjected to a certain plan.

3. Less cases of employee high rate of turnover

   This is the case because the plan motivates a group of employees at ago.

2.2.3 Disadvantages of Rucker Plan/Or Cost Saving Plan

1. The plan ignores the conceptualization stage which may not portray immediate output

   The plan only focuses on the end output but does not consider paying bonus to those who come up with the idea.

2. Complexity leading to few employees understanding how the plan works.

   The plan is complicated for it involves many factors to be factored in for the employees are many as compared to a case of individual cases. This makes an average employee not understand the logic behind the plan.

3. Demand-supply mismatch scenario

   Sometimes when there is much or over production, does not guarantee over demand of the product. If this be the case, then the problem of selling the products at lows prices is high and this lowers the profitability of the firm.

2.3 Scanlon Incentive Scheme

2.3.1 Definition

Scanlon plan is based more on the departmental level employees where committees are formed to work towards reduction of costs. The cost saving aspect is measured by comparing the sales value of production with that of the employee costs.

This plan was established in 1930’s and it focuses on paying bonus to the employees when they end up achieving the cost-saving objective of the production process.

Scanlon group incentive scheme is commonly used in service industry where by the customer is given pre-eminence over and above the other issues.

NOTES:

Note that;

One, both employees and managers are allowed to participate in this scheme by providing the firm with their cost-saving suggestions. Further, when production efficiency improves as evident by reduction in costs the employees are then rewarded.

Two, the theory behind the Scanlon plan is that there must be existence of good management leadership, trust and respect especially in honoring the employees’ specific ideas on how to reduce costs.

2.3.2 Advantages of Scanlon Plan

1. Improved management-employee relationship.

Since the plan caters for allowing both the employees and the management to fully participate in the contributing cost reduction ideas, the relationship is exalted.

2. Improved production efficiency

The increased level of production efficiency due to reduced cost of production enhances the profitability of the firm.

3. Creation of sense of belonging for the employees

Since the scheme allows for both employees and management to participate equally in idea generation, the employees feel appreciated by their seniors and this is too much motivating.

2.3.3 Disadvantages of Scanlon Plan

1. Scanlon incentive scheme does not encourage payment of the whole amount of bonus the employees hence discouraging to some extent.

   The way this scheme is set, is such that a certain percentage say 15% of the whole amount of bonus is set aside to form a reserve.

2. Complex to understand

   The logic followed for this scheme to work is not simple.

2.4 Gainsharing Incentive Plan

2.4.1 Definition

Gainsharing incentive plan is also referred to as profit sharing plan and it entails sharing of the profit generated by the business such that as the owners of the company are sharing profits by the virtue that they have contributed the capital, the employees are also rewarded for contributing labor force.

2.4.2 Advantages of Gainsharing Incentive Plan

1. Improve the employee loyalty

The plan promotes the level of the employees being obedient to the management for they know that at the end of each year, there is a bonus.

2. Co-ownership of the company shares.

The reward given sometimes can be in cash form or can be even be in form of ordinary shares issued to the employees so as to become part of the company. This promotes assurance of less employee turnover.

3. Improves transparency and accountability of workers.

The workers are forced to be sincere in whatever they do no matter how sensitive it is. For example, if it is a case of medical service provision, then the secrets of the medical facility which sometimes it may pertain the patients is kept at top secrecy.

4. No close supervision of employees

The organization saves the cost hiring supervisors to watch of the work being done. This is because the employees are self-motivated.

5. The firm enjoys the benefit of employing the highly talented employees

Since the scheme advocates that an employee can own shares, this advocacy attracts those employees who value share ownership in a company for future retirement purposes. So, chances are high that the firm will get best employees.

2.4.3 Disadvantages of Gainsharing Incentive Plan

1. Chances of losses to the employees are high.

   When the advocacy of the firm is to issue shares to the employees as a way of compensating them then this may translate to losses especially when the company does not make profits.

2. Concocted profits by the management may disadvantage the employees.

   Sometimes the management may forge the amount of profits made by the company which may end up the employees being unrightly paid their share.

3. More improved relationship between the employees and the management through sharing of free shares may weaken the trade unions.

   The sharing of the company shares to extent ownership to the employees kills the purpose of forming trade unions hence no wage bargaining power amongst employees.