The question of the right incentives for employees is always relevant. If you make a motivational system too complex, people may simply lose interest because they think that nothing depends on their actions anyway. If you set exaggerated targets, no one will strive to exceed them. Conversely, if you set easy plans, the team will get used to meeting them and start demanding extra pay in ‘bad’ months. It is very difficult to get the balance right.
Below you will find material on one of the most convenient and promising incentive programmes for employees — the points system.
What are the different types of work incentive schemes?
Tangible and intangible incentives can be considered as incentive factors.
Intangible incentives, which are not explicitly expressed in monetary terms, are not visible, but they are also important. They are therefore used in combination with the main, i.e. material, factors. This is what is known as the benefits package.
There are tariff, non-tariff and mixed systems of remuneration. Each of these systems has its own subsystems and nuances.
When we talk directly about incentive payments, they are usually divided into:
- Permanent part — this may include not only net salary, but also a number of other payments, such as bonuses for length of service, for qualifications, various regular incentive supplements that are not dependent on any plans and their fulfilment.
- Non-permanent part — in addition to irregular additional payments, this may include bonuses for meeting plans, profit-sharing percentages, various bonuses, commissions and piecework payments — for days or hours worked.
Although, to be fair, piecework pay could be classed as a fixed rate because the rate per hour or day worked is usually fixed. Only the final payment is not fixed, as the amount of time worked may be different for each person. However, there is usually no (or too little) incentive component.
Points-based incentive system and KPI calculation
The main problem for any manager is to find the ideal balance between fixed and variable components of remuneration. At the same time, it is necessary to develop a clear and efficient system for calculating the incentive component.
In modern companies, even in the public sector, it has become popular to use a system based on KPIs or points (point systems).
The two systems are closely related because in both cases management needs to formulate clear evaluation criteria. Usually these should be numerical, but sometimes they can be replaced by less meaningful metrics such as pass/fail status or a rating scale such as excellent, good, fair, fail, etc.
A system based on KPIs can also be successfully combined with a points system. In this case, some of the indicators are calculated as percentages and some as points.
Finally, both components can be used to calculate the appropriate part of the incentive payment.
What exactly can be assessed in points when calculating labour remuneration?
Practically anything. If in the KPI system the focus is on planning the indicator, then in the scoring system a relative evaluation can be applied. For example: done — good, not done — bad. The sum of different cases is calculated and an average score or a score based on weighting coefficients is derived. The latter is relevant if someone decides to fail a more responsible task without losing too many points.
Instead of the average score, the sum of the points can be used as the cumulative total. The higher the number of possible points, the higher the incentive.
Different criteria may be used depending on the requirements of the employee’s position, the functional duties performed by the employee, and the responsibility (importance) of the tasks entrusted to the employee:
- Security of the property entrusted to them.
- Appearance of the employee.
- Full compliance with safety rules and regulations.
- Pool of completed tasks.
- Quality of planning.
- Presence of customer complaints.
- And other aspects.
How the incentive calculation is formalised?
The simplest and most effective way is to fill in a special evaluation sheet for each employee.
This sheet contains the names of the criteria on which the assessment is made (points), the total number of points, and the signatures of the assessor and the assessee.
The incentive part of the payment is calculated directly on the basis of the final scores on the score sheets. Different formulas can be used: based on average scores or sum of scores, with or without weighting factors.
Let’s look at an example of calculating the incentive based on average grades.
Suppose the assessment is done individually every day. The maximum score is 5 (for easier understanding). For all 20 working days, the average score was 4.5.
The average score was calculated as follows: 10 grades of 5 points and 10 grades of 4 points, totalling (10*5+10*4)/20=4.5.
Since the maximum score of 5 (100%) was not achieved, the bonus part will be reduced.
The final coefficient is calculated as the ratio of the received score to the maximum score: 4.5/5=0.9 (or 90%).
Then the amount of the incentive part can be calculated according to the formula: coefficient * the amount of the maximum incentive payment.
For example: 0.9*1000$ = 900$
That is, instead of the maximum 1000$ with an average score of 5.0, the employee will receive 900$ (90% of the maximum possible incentive part).
With sums of points and with different weighting coefficients, the formulas will be noticeably more complicated.
Who and how the company plans its points-based incentive programmes
The final word always rests with the CEO or the company’s collegiate management body.
Top management formulates strategic goals and objectives. Based on these, the heads of specific services and departments formulate evaluation criteria for individual positions.
The HR department should first analyse the labour market for all existing positions in the company to determine the average salary level, so that there is something to base and compare.
If the approximate calculations result in below-market returns, the incentive scheme should be reconsidered.
In future, the calculation system should be reviewed regularly to ensure that it is up to date. It is also important to obtain adequate feedback from those who are interviewed and those who leave the company. This will help to identify gross errors and any reasons for dissatisfaction with the payroll system.
In order not to miss or lose anything in the planning process, it is best for the CEO and the entire top management to use special software: task managers or BPM systems. In this case, all discussions, plans, tasks, assignments, deadlines and other important information will be available in real time.
We recommend the cloud-based project management system Projecto. All your business, workflow, correspondence, office and calendar events will be under complete control.
