Ask if a company makes incentive payments to its employees, and the response will contain the word “bonus.” Generally a bonus is paid as a share of profit and not linked to any specific act of an employee. Payment of a bonus is profit sharing but it is not an incentive payment.
An incentive payment identifies a specific result and then pays upon that result. For example, a construction foreman completes a job in one day less than expected. That act of productivity generated an extra two thousand dollars for the company. The next pay period after the company receives the two thousand dollars, the foreman receives five hundred dollars with a specific explanation of why the payment has been made. This is an incentive payment. This payment makes it more likely that the foreman will endeavor to complete jobs early.
Note that the incentive payment does not diminish the anticipated profit of the company. It is paid from the productivity increase which notwithstanding the incentive payment also increased profits. It is not paid to the employee until after the company receives the benefit of the productive act (after the company gets paid).
To implement a true incentive payment system, a company must be able to first budget and then quickly evaluate work done and cash received to identify and reward productive behavior. Properly executed, a true incentive payment plan can increase labor productivity.
