Accounting Strategy and Control - Do You Believe That Incentive Pay Is Truly Effort-Inducing; That Is, Drive Employees to Perform at Their Best?

ACCOUNTING STRATEGY AND CONTROL (AC 411)

ESSAY 1: Do you believe that incentive pay is truly effort-inducing; that is, drive employees to perform at their best? Discuss

In recent times, companies are faced with a lot of competition and they need to constantly devise strategies to tackle this competition. They are continuously looking for ways to increase the performance of the company and ways to keep their workers and other employees motivated so that they deliver their best in such a competitive atmosphere. Incentive pay is one such strategy used by companies to perform well. Incentive pay is pay based on specific performance of an employee, which may take the form of gift vouchers, stock option, bonus, profit sharing, commission etc. It is generally used in companies where the performance is measurable. It is compensation that rewards results rather than time spent on a job. It is a method adopted by employers to motivate employees to perform better and continue delivering good results, which directly leads to the success of the company. I believe that structured monetary incentives are truly effort inducing.

Incentive pay motivates employees and maintains high work performance.  Employees find it hard to keep themselves motivated at work. Implementing a good incentive pay program helps to keep the employees engaged and motivated to do well by rewarding them for all the good work they do. For instance, in the Lincoln Electric case employees were paid based on piecework. This would induce the employee to produce as many pieces as possible in order to receive a high compensation. The effort would result in higher productivity for the firm and thereby higher profits. As the employees would get a part of the bonus they would strive to produce output that was dependable, of good quality, and give their ideas and cooperate in order to get a high merit rating on which the bonus sharing was dependent.

Anyone who works in a company would like to be valued and appreciated at work. Incentive pay spreads a feeling among employees that their employer truly values their contribution which will motivate them to work hard and never look elsewhere. Evidence from the Lincoln electric case suggests that the bonus paid depended on the contribution of each employee. It created a reputation that the company really cared about its employees and took notice of, and rewarded them, for their individual efforts.

Incentive pay promotes healthy competition among workers, which in turn induces effort. If only a few employees in a firm receives incentives based on their individual performance it will make all the other employees work harder in a bid to receive the same incentive. Evidence from the Lincoln electric case suggest that “an individual’s share of the bonus pool was determined by a semiannual merit rating which measured individual performance compared to that of other members of the department or work group”.^[1] This would ensure that the employees would compete with each other and produce similarly so that they receive a good merit rating when their performance was compared to that of the other employees in the same work group. If a worker knows that another co-worker is producing a high number of pieces he will put in extra effort to try and achieve the same number of pieces or even more so that his merit rating is high and he receives a good share of the bonus.