There are major differences that separate base pay from incentive pay. Some employers may choose to offer compensation as base pay only, while others offer base pay plus incentive pay. This is often the case for professional sales positions for example. Base pay is the rate of monetary compensation given from employer to employee not including overtime or bonuses. Incentive pay, (which for the scope of this paper has been designated lump sum bonuses paid annually) is a monetary gift provided to an employee based on performance. It can be used as a way to entice the employee to continue delivering positive results. (businessdictonary.com)
From the employees perspective base pay offers economic security. They know the amount they will be paid and the expected hours they will work. This makes it easier for employees to budget effectively in their personal lives and provides consistency in income. Base pay allows an organization to budget effectively as well. The organization can forecast labor costs easily. It promotes consistency in pay rates for similar positions throughout an organization which can be seen as a benefit to both employer and employee. Inconsistency in pay rates for equal or similar positions can become a problem when employees discuss pay amount themselves, and a headache for HR and finance offices to keep track of. Base pay is much easier for employers to administer and allows pay progressions to be clearly mapped out. (Towers,2010). Employers who chose to pay only base pay may choose to increase employees pay based on set mile stones, such as after a 90 day trial period ,or longevity within a position.
Incentive pay is an excellent way to increase employee moral by giving monetary incentive and motivation to reach set goals. A company may choose the amount of the lump sum bonus based on position or longevity which can save some money as new employees may receive less than long term employees. It often shows the employee that their hard work is recognized and appreciated. However if the incentive pay is not equal across the board it could spark issues of jealousy and cause some employees to question fairness. Employers will need to determine what measures it will use to determine bonuses and bonus levels. Many chose to do this based on the achievement of specific goals, such as individual or company performance.
Some organizations may use a flat formula to calculate bonuses based on company profits. The company may say if the achieve a set amount of earnings they may pay out a lump sum incentive, which may be a percentage of profits made. When accepting a position that offers the potential for good amounts of bonus employees must recognize the risk that is associated .They may have a really great year and reach all goals to obtain maximum bonus one year, and the next year find themselves or the organization struggling where little or no bonus may be offered. Lump sum bonuses can be costly for employers to facilitate, and employers may need to take a good look at finances to determine if this is something they can afford to do. For employees lump sum bonuses are counted as taxable income and for large sums they may find they see an increase in taxes owed at the end of the year. Works Cited
Compensation Management in a Knowledge-based World; Henderson,2006 Handbook of Employee Relations; Towers,2010