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

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  • 0:25 Merit Pay
  • 0:47 Piecework
  • 1:12 Commissions
  • 1:34 Bonuses
  • 2:18 Skills-Based Pay
  • 2:45 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
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.

Piecework

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.

Commissions

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.

Bonuses

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.

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