Pay is awarded to employees on the basis of the relative value of their contribution to the organization. Merit pay plans are compensation plans that formally base at least some portion of compensation on merit. Employees receive annual salary increases depending on their overall job performance (Richard 1997).

Research studies cited offer evidence that performance-based piecework pay does, in fact, motivate increased performance. The stupendously superlative output of Nucor Steel and Lincoln Electric workers who work on a mixed pay incentive system clearly includes piecework and group profit-sharing bonuses (Richard 1997).
The significant attributes of incentive based reward system includes (Richard 1997):
• One-shot rewards that do not become a permanent part of an employee’s base compensation
• Monetary incentives
o Piece-rate incentive plans that pay a certain amount of money for every unit the employee produces
o Sales commissions are the percentage of an employee’s sales to customers that is paid to an employee as a reward for selling the firm’s products or services
• Non monetary incentives
o Days off, additional paid vacation time
Team and group reward systems
• Gain sharing- Sharing the cost savings that result from productivity improvements.
• Scanlon plan - Similar to gain sharing, but the dispersion of gains is tilted toward the employees and is spread across the organization.
• Profit sharing plans - Provide an organization wide incentive in the form of an annual bonus to all employees based on corporate profits (Richard 1997).

Internal equity refers to comparisons between jobs or skill levels inside the organization, which are compared in terms of their relative contributions to the organization’s goals. Internal equity is established through three reward techniques (White & Druker 2000):

Knowledge on jobs and their requirements is assimilated through job analysis, which is the systematic process of collecting and evaluating information about the tasks, responsibilities and the context of a specific job (White & Druker 2000):
Job analysis consists of two mains stages (White & Druker 2000): data collection,
the application of that data by the preparation of job descriptions, job specifications and job standards.

Job evaluation is a systematic process configured to evaluate the relative worth of jobs within a single work organization. The job evaluation process comprises of four steps: collect data, select compensable factors, evaluate the job (ranking, job-grading, factor comparison, point method), assign pay to the job (White & Druker 2000)

This refers to reward relationships external to the organization – how should an organization position its pay relative to what competitors are paying? There are three options: to be a pay leader, to match the market rate or to lag behind the market rate (White & Druker 2000). The constraints outlining the parameters within which reward choices can be make include those relating to: the labor market, the product/service market – affects external competitiveness, the organization.

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