Team-Based Compensation System

Teams have become a popular way to organize business because they offer companies the flexibility needed to meet the demands of the changing business environment. While many companies have been quick to organize their workforce into teams, they have not been as eager to implement team-based compensation systems. However, if team-based organizations continue to utilize old, individually-oriented pay systems, they will not fully realize the benefit of highly cooperative and motivated work teams.

Team compensation is a way of rewarding performance in team settings. That is, individuals are rewarded based on the performance of the team as opposed to individual performance. There are different kinds of compensation such as a portion of base pay, other financial rewards such as gain-sharing, and non-financial rewards such as movie passes and gift certificates.

Teams are defined as groups of individuals who work together to develop products or deliver services for which they are mutually accountable. Because of this new shift in organizational structure, employees are being. Organizations have been using teams more and more to carry out different functions in the asked to work with others and their collective performance is evaluated. Traditionally, employees have been compensated based on their individual performance, but now they are being evaluated based on how their teams perform. Therefore, it does not seem to make much sense to compensate employees individually based on how their whole team performs. Therefore, organizations are moving toward compensating individuals based on team performance. Team compensation is a way of rewarding performance in team settings. That is, individuals are rewarded based on the performance of the team as opposed to individual performance. Team compensation is often referred to as team-based rewards or team-based pay. People learn to behave in certain ways based on the rewards they receive. Therefore, in order to convey to people that they want them to produce more in teams, reinforcement of behaviors that lead to and sustain team performance is necessary. Individual bonuses work against the team, thus lessening the team spirit.

Some examples of different forms of team-based rewards are: a portion of the individual’s base pay, other financial rewards such as gain-sharing, and non-financial rewards such as recognition and praise. Gain-sharing combines pay for performance and employee involvement; as performance improves, employees share financially in the gain generally monthly or quarterly. In surveys of the Fortune 1000 companies in 1990 and then in 1993, team-based pay has increased its prevalence and usage in organizations from 59% to 70% in three years time.

If companies stress the organizational role of the employee, then the employee will view their incentives as entitlements based upon that membership role. This will de-emphasize the “personal” role where they only think about themselves and not about the organization as a whole. This helps the organization in that it increases the amount of commitment from the employee. Team pay has also been associated with an increased level of motivation. A company needs to be prepared to support organizational changes in order to reward the new behaviors and results produced. This allows them to become capable team members. Therefore, it is recommended that team-based reward systems should be implemented in order to reinforce team behavior.

Various forms of team-based rewards are used in organizations – they fall into three categories: a proportion of their base pay, other financial rewards, and non-financial rewards. 5-10% of the base pay is usually a sufficient amount to reward individuals. Gain-sharing, defined more specifically, is another type of financial reward that shares group improvement in productivity, cost savings, and quality with each employee in the group. Other types of financial rewards are lump-sum awards where individuals receive an amount of money that is independent of their base pay, discretionary bonuses given to teams based on after-the fact judgment of their performance, and profit sharing where the employees share a percentage of the organization’s profit. Finally, non-financial rewards are another alternative. For example, organizations may award teams by recognizing them for exceeding expectations on the job. Additional examples include coffee mugs, T-shirts, plaques, TV, DVD Player, vacation vouchers etc.

Several companies give team bonuses to sales, management, and engineering staff. Their performance criteria are based on customer satisfaction, sales revenue, and market share. It is important to link employee objectives to company goals. The team’s performance is measured against the team revenue target and the market share. The bonus is paid quarterly but not to poor performers.

Strategy and culture, are important first steps in any kind of design process of a team-based compensation plan. Pay sends a loud message to the employees about what is important in an organization. If teamwork is what the company wants to emphasize, then it is important that the pay structure reinforces that behavior. Strategy and culture and competencies (personal attributes and behaviors such as attitudes, motives, and traits that predict longer-term success) all need to be aligned with compensation in order to be effective. Culture is important in the sense that it tells the organization where you are and allows you to assess where it is that you want to be. This process allows the organization to identify missing values, skills, and behavior necessary to make the transition from one to the other.

Team rewards are very difficult to develop and must be custom-tailored to the organization’s configuration. The effectiveness of rewards depends upon the review and evaluation processes. Therefore, it is imperative that organizations set up these programs only when the organization feels that they have a stable design and has assessed which teams should be rewarded.

Credit: Strategic Human Resource Management-MGU KTM

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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