Productivity bonuses have their roots in the days when manufacturers rewarded hourly workers for speeding up their work pace. For instance, a worker who finished rolling 100 packages of shrink-wrap would earn a productivity bonus because an increase in personal efficacy meant a greater rate of output - and more profit - for the company.

No longer confined to hourly workers, productivity bonuses are now being used throughout the payscale as rewards for performance and efficiency.

In a survey of 783 employees across diverse companies, 20 percent of executives said they are seeing productivity rewards, and 27 percent of managment-level employees said they get similar bonuses. Roughly 29 percent of exempt/professional employees said they receive productivity pay. This compares to the 36 percent of hourly workers who said they receive similar pay bonuses. The survey was published in 2000 by the Society for Human Resource Management and Arthur Andersen Consulting.

Linking efficiency to compensation
Bonuses are still mostly used as recruting and retention tools, but there is a "growing interest in providing incentive pay for production or services," said Jerry Mattern, chairman of the compensation and benefits committee at the Society for Human Resource Management.

Productivity is important to both production- and service-based businesses. As the economy has shifted more heavily toward services, productivity measures evolved to encompass the work of professionals and executives whose work does not result in the production of tangible or measurable goods. But although productivity bonuses can be good for both employers and employees, productivity and efficiency are not the same thing.

In a manufacturing business, where workers are likely to be eligible for overtime, productivity bonuses rewarded those who accomplished more during a regular shift. But today's productivity bonuses sometimes reward workers for putting in more hours, not for accomplishing more in the same amount of time.

Lawyers, doctors find pay tied to productivity
Those in finance, law, medicine, and other white-collar professions are receiving productivity bonuses linked to the rate their services are used as well as the number of hours worked each day, instead of their output.

Some privately held physicians' groups have pay structures fundamentally based on workers' productivity. A doctor may receive productivity pay based on his or her net billings, which is then measured against the group's total adjusted billings. Other physicians' groups use net professional charges to determine productivity pay by deducting the group's expenses from their revenues.

Others consider the specific physician's share, such as the number of clients he or she personally tended, against the group's production. The effect of this pay structure is that a physician may work longer hours at a faster rate, which could cause a decline in the quality of care and the level of service.

In the legal profession, a similar transformation has taken place. Productivity bonuses are common in law firms and often are based on the number of hours an attorney bills. A bonus can add $15,000 to $25,000 to the attorney's salary. Critics say that such incentives can decrease the quality of legal work. In addition, attorneys are trying to reach or exceed their firms' quotas, which has resulted in a decline in hours spent on pro bono cases, according to the Legal Times.

Ted Allen, author of the 2000 Legal Times article, "Who wants to earn $160,000 a Year?" wrote that lawyers are working so many hours that they are not earning much more than babysitters. At Orrick, Herrington & Sutcliffe, an internationally renowned law firm based in San Francisco, the firm's productivity pay program results in attorneys being paid no more than $31 an hour, which includes their bonuses, Allen wrote.

Glowing results for pay-for-performance
But the concept of productivity pay seems to be working at all job levels. The survey found that executives respond positively to such incentives 15 percent more than hourly employees. Managers will respond 13 percent more than hourly employees.

Productivity pay helps the employee and the company perform better, according to the survey. Close to 80 percent of respondents said their companies offer these types of bonuses to link individual goals to business goals, and 63 percent said productivity pay is a reward for superior performance. More than 50 percent of the respondents said incentive pay is used to boost workers' salaries, improve productivity, and retain employees.

Gain-sharing bonuses empower workers
Employers who want to improve overall performance and profits may offer gain-sharing bonuses, a bonus program by which employees or groups of employees are rewarded for determining and implementing ways to save the company money that are consistent with the company’s business objectives. Gain-sharing can include profit-sharing plans, restricted stock plans, or management-by-objective programs, all of which tie personal growth to company growth.

More than 70 percent of the survey respondents said gain-sharing, or aligning individual compensation with organizational performance, is an effective tool for accomplishing corporate objectives. According to the SHRM survey, it is effective for 79 percent of executives, 73 percent of managers, and 60 percent of exempt personnel and professionals. In the survey, 50 percent said gain-sharing also worked for administrative and hourly employees, a slightly smaller number that still shows the effectiveness of rewarding workers for their dedication to improving their jobs and their company.

"There is more productivity to be gained by positively motivating people, than by simple pay-for-performance," said an executive at Sealed Air Corp., a worldwide packaging firm headquartered in New Jersey. He supports the practice of moving some of the decision-making way down into the workforce.

"If a group of workers on line get together to discuss and decide their own solutions to problems, the company will often see a resultant increase in productivity," due to the workers' investment in the larger operations of their company, he said.

- Leslie Tebbe, Salary.com Contributor