Incentive pay plans are the compensation plans which companies usually adopted for raising the motivational level in the employees. Incentive pay plans has been termed as differently like motivational plan or the payment for the results. The basic idea behind this compensation strategy is to acknowledgement of the employees by giving them a valuable amount which causes them to motivate. Organization usually increases the worth of the job rather than increasing level when it goes for the incentive pay plans.

Employees have different perception regarding the incentive pay plans those who believes on their abilities find the incentive pay plans a really working one but the employees who believes that world is driving them find this incentive pay plan as a cause of dissatisfaction to work in that particular organization. There are several advantages and disadvantages are associated with this incentive plan as when the organization is in hard time, the incentive pay plan act as a fixed cost of labor and management find no other path except to lay off the employees which have its own adverse effects. On the other hand if the organization makes it compatible with its goal will definitely help to increase its outcomes. Employees usually believe that incentives have nothing to do with performance it causes more problems than its benefits, such employees believe it is the management which can increase the performance to achieve the objective of the organization rather than incentive based compensation plan.

There can be used different factors which must be kept in consideration when going to determine some compensation plans these factors can be output, the relationship between output and effort , the degree of standardization, requirement of quality over quantity and the competitive conditions. The performance motivation model based on the incentive pay plans required by the employees must believe that good performance will leads to more pay, employees working under incentive pay plans must need to get more pay, and finally the most important one that the employees may not perceive it wrong as mostly employees think that they might get less if they produce more so quantity as well as quality suffer a lot.

There are some of the considerations which must be kept in mind while designing the incentive pay plans. The first and the most important is the level of aggregation which describes that at what level you are going to pay incentive to your employees like individual level, group level or at company level. In individual level, the example is piece work plans in which hourly or per piece payment is being made to the employees. Same at group level gain sharing is one of the examples in which group incentives are given based on the performance which the group has been made. In the same way the plant and organization wide incentive pay plans are such which are based on the profit sharing which increase the confidence in the employees towards the organization in which they are really working for and on the other way it can also used to developing of a sense of ownership of employees towards the organization.

When going for the incentive based pay system the things like job conditions must be kept in consideration usually, the plan is not suitable for the highly repetitive, standardized, short cycled jobs. It is more suitable where the work structure is highly variable, and there must not standardize work so that employees took it as a challenge and work to achieve for the challenge. Beside this, there must be some standardized performance system on which employees have confidence.

It is not like that the incentive based pay system is always good, it has some disadvantages also. Employees may start believing that the increase in production may decrease the reward given to them as it causes rate cut. It may also cause sort of competition in the employees through which organization may get divert to achieve its objectives. Development of performance standard and continuous development required cost as well as time, beside this strong administrative cost involved in it.