What counts as a financial method
Definition
Financial method of motivation: a reward paid to the employee as money, namely a salary, a wage, commission or a share of profit.
- Financial methods work by giving the employee a reason to raise their effort, because the amount they are paid depends on the hours, the output or the sales they deliver.
- The method a business chooses depends on whether the employee's output can be counted, and on the behaviour it wants to encourage.
Common Mistake
- A company car, a staff discount, gym membership or free lunches are fringe benefits, and they count as a non-financial method even though they cost the business money.
- Only money paid to the employee is financial: salary, wage, commission and profit sharing.
Salary and wage
Definition
Salary: a fixed amount of annual pay, divided into equal monthly payments, whatever hours are worked.
Wage: pay based on the hours an employee works or the number of units they produce, usually paid weekly.
- Salary: a salaried employee knows exactly what arrives each month, which gives security and suits office and management roles where output cannot be counted item by item.
- The amount does not change however hard the employee works that month, so a salary on its own rewards staying in the job rather than raising effort.
- Wage: a wage paid at an hourly rate is simple to work out and lets the business match its pay to the hours it actually needs, such as extra weekend shifts.
- Overtime paid above the normal hourly rate persuades staff to work extra hours when demand is high, though it raises the cost of every hour worked.
- A wage can instead be paid for each item produced, known as a piece rate, which raises speed where output is easy to count but tempts staff to rush and let quality slip.
Example
- A production supervisor at Nissan Sunderland is on a salary, because the job is to keep the line running rather than to produce a countable number of items.
- The extra staff brought into a Currys warehouse for the Christmas rush are on an hourly wage, so the cost stops the moment the extra work stops.
Commission
Definition
Commission: a payment to an employee worked out as a percentage of the value of what they sell.
- Because pay rises with every sale, a salesperson has a direct reason to chase leads, follow customers up and work late, which is why commission suits selling roles above all others.
- Income becomes unpredictable in quiet months, and staff may push customers into unsuitable purchases to earn the percentage, which costs the business repeat custom.
Example
- An estate agent paid a percentage of each sale price earns far more from a £400,000 house than a £200,000 one, so the difficult viewing on a Sunday is still worth doing.
- The same agent has an incentive to talk a property up, so the firm has to check that the advice buyers receive stays honest.
Profit sharing
Definition
Profit sharing: a scheme in which employees receive a share of the profit the business makes, on top of their normal pay.
- Profit sharing ties every employee to the success of the whole business, so staff have a reason to care about waste, costs and customers beyond their own tasks, and to help colleagues rather than compete with them.
- It also suits a business that wants long-term loyalty, because the payout only arrives for people still there at the end of the year.
- One employee's daily effort has only a tiny effect on total profit, so the link between working harder and being paid more is weak.
- In a poor year there is nothing to share, so the reward staff have come to expect disappears at the moment morale is already low.
Example
- Employees of the John Lewis Partnership are called partners and receive an annual share of profit, set as a percentage of their pay.
- That percentage falls in weak trading years, which shows profit sharing rewards loyalty but cannot promise a steady amount.
The limits of paying more
- A pay rise removes a complaint about pay, but the effect fades once the higher amount comes to feel normal, and money cannot make a repetitive job interesting, so an employee bored by the work stays bored on higher pay.
- Every financial method raises the wage bill, so the business has to be confident the extra output or extra sales more than cover the extra cost.
Note
Where the real problem is boredom, being ignored or having no prospects, the non-financial methods in the next article fit better than more pay.
Exam technique
- A common instruction is explain one financial method the business could use to motivate its staff, so name the method, say how the payment works, then say what the employee does differently as a result.
- Match the method to the job described: commission for selling, a piece rate where output can be counted, a salary where it cannot.
- The classification mistake to avoid is treating a fringe benefit such as a company car as a financial method.
Self review
- What is the difference between a wage and a salary?
- Which financial method suits a salesperson, and why?
- Give one drawback of paying a piece rate.
- Why can profit sharing fail to change what an employee does day to day?
- Is a staff discount a financial or a non-financial method?
