Incentive compensation, also called “payment by result”, is essentially a managerial device for increasing worker’s productivity.
Further, it is a method of sharing gains in productivity with workers by rewarding them financially for their increased rate of output. The payment by results scheme is directly related to an employee’s productivity. There are many variations of incentive wage system.
The simplest method is that of paying a workman by the number of units of a product he produces. The objective of an incentive wage system is one relating wages to output, thereby stimulating greater output at lower costs.
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Incentive systems also help in narrowing the gap between management and workers and bringing them closer together with a commonality of goals and targets. Many authors have defined the term wage incentives. A few definitions are reproduced below:
In the words of Hummel and Nickerson, wage incentives-“refer to all the plans that provide extra pay for extra performance in addition to regular wages for a job”.
According to Scott, wage incentive – “is any formal and announced programme under which the income of an individual, a small group, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity output”.
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According to G.K. Suri, wage incentives are based on the principle that – “an offer of additional money will motivate workers to work harder and more skilfully for a greater part of their working time, which will result in a stepped-up rate of output”.
In the words of the National Commission on Labour, “Wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration for improvements in the present or targeted results”.
From the above definitions, it is clear that the incentive schemes help to increase the commitment of the employee towards the organisation. The incentive wage systems are based on a standard of performance for the job. This standard is based on an average worker’s capacity, without causing him undue strain.
Individual output over and above this is then considered for incentives or premium or bonus. Thus, wage incentive is a system of payment wherein the amount payable to the workmen is linked with their output.