Incentive Compensation Plans: Merit Pay, Piece Rates, Commissions, Bonuses & Skills-Based

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Organizational Incentive Programs: Profit Sharing, Gain Sharing, and Employee Stock Ownership

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:25 Merit Pay
  • 0:47 Piecework
  • 1:12 Commissions
  • 1:34 Bonuses
  • 2:18 Skills-Based Pay
  • 2:45 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

An important role of human resource management is to develop a compensation system to encourage productivity. In this lesson, you'll learn about merit pay, piece rate pay, commissions, bonuses and skills-based pay and how they help achieve this goal.

Incentive Compensation Defined

Hanna is a human resource specialist for a large corporation. She specializes in compensation and benefit administration. After reviewing the company's current compensation system, she is recommending that the company add incentive compensation. Incentive compensation is pay given to employees who meet certain performance standards. Let's look at some of her options.

Merit Pay

Marvin is a nurse at a hospital and receives merit pay, which is a raise in base pay based upon performance. Every year, Marvin's performance is assessed, and he is given a raise if he improves his performance during the past year. Of course, a problem with merit pay is that employees receive the increase in base pay even if their performance slips after the raise.


Patty works as a seamstress and receives pay through a piecework plan. Under a piecework plan, an employee is paid a certain amount of money per unit produced. For example, Patty is paid $20 for each suit she completes. If she completes 10 suits in one day, she is paid $200 for the day. Sometimes employees are paid a base pay along with the piecework rate.


Calvin is a real estate agent and is paid on a commission basis. A commission is a method of payment whereby a person is compensated by receiving a percentage of the revenue the employee generates through sales. Calvin is paid straight commission, which means he is paid only commission. Some employees are paid a base salary or wage in addition to a commission on sales.


Ben is an executive who may receive a bonus based upon performance. A bonus is a one-time payment to an employee as a reward for meeting certain performance or productivity goals. In fact, the concept behind a bonus is called pay for performance. This type of pay is variable since the bonus is not a permanent addition to the employee's compensation and may or may not be granted depending on the employee's performance.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account