IGCSE BUSINESS STUDIES RESOURCE: FINANCIAL REWARDS

IGCSE Business Studies Resource

TOPIC TWO (3.2): FINANCIAL REWARDS

As we have seen, one of the main reasons people attend work is to earn money – to gain a financial
reward for their time in the work place. Different companies use different methods of financially
rewarding their staff. We are going to look at each method, along with their advantages and
disadvantages.

1. Flat Rates

Flat rates are when the worker gets paid for their amount of time spent in the work place. A set
number of hours are worked, for example, a 37.5 hour working week.

Gross Pay = wage x hours worked

Net pay = Gross Pay – deductions

Deductions can include income tax, national insurance contributions, pension contributions,
student loan repayments and trade union membership fees.

Advantages: Very simple to calculate, easy for the worker to understand.

Disadvantages: The workers may not be hugely motivated as they will earn money based on
their time spent in the workplace and not how productive they are.

2. Time Rates

Time rates work in the same way as flat rates. However, workers can work overtime. Usually,
overtime will be paid at a higher rate, such as time and a half. Advantages and disadvantages are
the same as for flat rates.

3. Piece Rates

Piece rates are where the worker gets paid for how much they produce. For example, if a factory
worker produces 50 chairs, they get paid for 50 pieces.

Advantages: This method incentivises workers to produce as much as possible. Workers who are
lazy will be noticed by the firm.

Disadvantages: Health and safety may be put at risk or quality may suffer if workers are rushing
to produce as much as possible. This method does not work well where output is hard to
measure.

4. Bonus

Bonuses are paid in addition to a wage or salary, usually to motivate workers if they meet a
specified target.

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IGCSE BUSINESS STUDIES RESOURCE: FINANCIAL REWARDS

Advantages: Incentivises workers to reach or excel beyond their target, therefore are
motivational. Businesses only have to pay them if targets are met.

Disadvantages: Difficult to assess if output is not measurable.

5. Commission

Commission is paid for reaching a target. Commonly, we see this is in the sales world. For
example, each time a worker makes a sale they may receive 10% commission which is 10% of
the sales price.

Advantages: Directly relates to sales made. The interests of the firm and the worker are aligned
in the fact that they want high sales.

Disadvantages: Usually, the worker has a very low basic pay, so, if they make a low amount of
sales, their take home pay will be low.

6. Performance-related Pay (PRP)

PRP is used to motivate non-manual workers where output is difficult to measure. PRP is usually
used alongside an appraisal system, where workers meet with their managers to discuss
whether their targets have been met, their progress in the workplace and to set new targets
going forward. If targets have been met or excelled, the worker is then paid a bonus or receives
an increase in salary.

Advantages: Gives a way of assessing individuals where their output cannot be directly
measured. Those who work hard are motivated, as they are rewarded.

Disadvantages: The financial incentive may not be great enough to influence the worker. It can
be inconsistent and managers may favour certain individuals, which can cause conflicts between
workers.

7. Profit Sharing

This method involves giving workers a share of the profit to motivate them. The share of the
profits is in addition to their basic pay.

Advantages: Interests of the firm and workers are aligned – everyone wants to increase profits.
All employees are involved from salespeople to administrators. Shows great appreciation for
workers.

Disadvantages: Profit is determined from many factors, not just worker contribution. If there is a
recession or a competitor enters the market, profit may be low even whilst productivity is high.
Some workers may take a lazy approach, thinking they can sit back and reap the rewards of a
share of profit whilst others do the work.