Competence -based pay does not reward employees based on their job position but instead on their skills, knowledge and abilities. This system encourages employees to advance their skills and perform more tasks. The main advantages of competence-based pay are increased productivity, greater workforce flexibility , raised loyalty and reduced absenteeism. As staff members improve their knowledge, skills, abilities, and other factors (KSAOs) through training they can perform an increasing array of tasks thereby providing the employer with greater flexibility when deploying tasks. The major disadvantages with the competence-based pay system are that a wage ceiling is normally applied by employers and when an employee has achieved the top wage, they may no longer want to continue training. Employers normally apply a cap as to the amount of compensation that can be earned, despite the number of additional skills learned. The Fair Labor Standards Act (FLSA) prescribes the federally mandated minimum wage payable to employees before taking into account overtime, but state wage laws and wage boards also intervene by doing the same. The minimum wage is meant to prevent employers from exploiting employees and to ensure that they are paid at least a minimum sum as required by the federal or state government or wage board. Incentive plans are becoming increasingly popular with organizations that tie wage payments to performance . Incentive plans are also known as variable pay plans and award the employee a baseline salary which can then be lifted depending on their personal or team contribution to the company. Commonly used incentive plans include piecework, standard hour plan, bonuses and merit pay. A bonus is an additional payment made on top of the standard wage and is determined according to factors such as the company's profitability and the performance of the employee. The bonus is normally paid annually. Piecework describes an incentive plan where the rate of payment is determined by the number of units produced, whereas the standard hour plan determines the incentive rates based on a pre-set time for completing the job. The standard hour plan is best illustrated by the following example. The worker has been given 10 hours to finish a job and the rate is $100 per hour. If the worker completes the task in 5 hours, he or she will still be paid $1000. The merit pay incentive program connects an increase in base pay to the degree of success with which an employee performs their job, whereas the lump-sum merit payment is a one-off incentive payment received at the end of the year. Merit pay is a tool to increase the base pay of high-performing employees. The lump-sum merit payment is not included in the base pay.
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