Page 655 - Business Principles and Management

Unit 7

whereas another company may set an employee’s salary at $43,800 per year. In
facts & either case, the employee receives a regular paycheck, often on a semiweekly or
monthly basis, with the payment based on the time worked and the wage or salary
figures rate established for that person or job.
Time plans are easy to administer because pay is based directly on the amount
of time worked. However, time plans do not financially reward employees who
provide extra effort or do outstanding work. Changes in the total compensa-
tion paid by the business can be made by scheduling employees for fewer or
The cost of living is a major more hours and by adjusting wage and salary rates. Employees are neither
factor in determining the real rewarded nor penalized with compensation based on their efforts. The only
value of your total compensa- way to earn more money is to work additional time periods if available. If the
tion. For example, a person hours of work are reduced through no fault of the employee, compensation is
who earns $40,000 in Anchor- reduced as well.
age, Alaska, would need to
earn only $24,000 in Little
Rock, Arkansas, to maintain PERFORMANCE PLANS
the same standard of living. Two types of plans pay employees for the amount of work they produce. A
A $55,000 salary in Raleigh, commission plan pays employees a percentage of the volume of sales for which
North Carolina, is equal to they are responsible. For example, a salesperson may earn a commission of 5 per-
$71,000 in Miami, Florida.
cent on total sales. If the salesperson makes sales worth $10,000 during one week,
he or she would earn $500 that week. The commission system provides a direct
incentive to employees because their efforts directly determine their pay. Also, the
business can control the relationship between compensation and costs because pay
relates directly to the amount of sales. A negative result of the commission plan is
that it encourages the salesperson to concentrate on activities that lead to the
largest commissions. A salesperson may try to sell products a customer doesn’t
need, may concentrate on larger customers while ignoring smaller but important
customers, and may not attend to work that detracts from selling time.
A similar type of performance pay system is the piece-rate plan. The piece-rate
plan pays the employee a fixed rate for each unit produced. An individual em-
ployee’s pay in this case is based directly on the amount of work the employee
produces. For example, if an employee earns 30 cents for each unit and produces
250 units in a day, the employee earns $75 for the day.
Although piece-rate plans were first used in factories to encourage employees
How might receiving a salary to increase production, companies also pay other types of employees on the basis
versus a commission affect the of units of work completed. They may pay billing clerks based on the number of
way a salesperson works with invoices processed, data-entry personnel according to the number of lines of copy
customers? entered, order pickers based on the number of items they pull from inventory
to fill orders, and market researchers based on the number of
phone interviews they complete.
Well-designed pay plans based on productivity usually result
in increased performance, at least in the short run. However,
performance plans can make it difficult for new employees to
earn a reasonable amount because they are inexperienced and
cannot work as efficiently as experienced workers. Performance
PHOTO: © GETTY IMAGES/PHOTODISC. problems.
plans may also encourage experienced employees to find short-
cuts to increase their production, resulting in quality or safety

Performance plans are a bit more difficult to control than
other compensation plans. It is difficult to predict the quantity
of work that one employee or a group of employees can actu-
ally complete when their goal is to increase the amount of pay
they will earn. Production may increase to a much higher level

642 than expected, resulting in more products than can be sold.