What is incentive pay?

Incentive pay is compensation tied to output or results, such as piece rates, commissions and production bonuses. For hourly workers, it changes how overtime is calculated, because incentive earnings go into the regular rate.

In shortIncentive pay is any pay structure where part or all of what an employee earns depends on measurable results rather than time alone. Common forms are piece rates (pay for each unit completed), commissions (a percentage of sales), production or quality bonuses, and team or gainsharing payouts. It differs from a one-off incentive offer in that it is built into how the job is paid. For non-exempt employees, overtime is still owed. Under federal rules for pieceworkers, the regular rate is total weekly earnings from piece rates and all other sources, such as production bonuses and pay for waiting time, divided by total hours worked; for hours over 40, the employee is owed an additional half of that regular rate. Bonuses promised in advance for productivity or attendance are likewise included in the regular rate. The worker must also earn at least the minimum wage for all hours worked in the week.

Types of incentive pay

Incentive pay structures
Type How it works Overtime treatment
Piece rate Pay for each unit, such as each box packed Total earnings / hours; plus half-time over 40
Commission Percentage of sales Generally included in the regular rate
Production bonus Bonus for hitting output targets Included if promised in advance
Team payout Shared bonus for a team result Included if promised in advance

Track hours for incentive-paid workers exactly like anyone else. Without hours, you cannot compute the regular rate or check minimum wage.

Piece-rate week: 46 hoursPiece pay$874Waiting time$16OT half-time$58.04$890 / 46 = $19.35; half x 6 h = $58.04
Incentive earnings set the regular rate; overtime adds half of it for each hour over 40.

Worked example: a piece-rate packer’s 46-hour week

Piece earnings $874, hours 46

A produce packer is paid $0.95 for each case packed. In one week she packs 920 cases over 46 hours, earning 920 x $0.95 = $874 in piece pay. She also had 1 hour of paid waiting time when the line broke down, paid at $16, included in the 46 hours.

Her total straight-time earnings are $874 + $16 = $890. Her regular rate is $890 / 46 = about $19.35 an hour, which is above minimum wage. For the 6 hours over 40, she is owed an additional half of the regular rate: 6 x $9.67 = about $58.04.

Her pay for the week is $890 + $58.04 = $948.04. Payroll uses her clock-in and clock-out times to get the 46 hours; without them, the overtime could not be calculated.

Mistakes that are specific to incentive pay

Designing a fair piece rate or commission

A fair incentive rate starts from what a typical employee can produce in an hour of steady work. Time a few experienced and newer employees over several shifts, use the middle figure, and set the rate so an employee working at that pace earns a fair hourly equivalent, comfortably above the minimum wage. Then check the slowest acceptable pace, because pay for every week must still meet the minimum wage for all hours worked.

Write down how waiting time, training time and breakdowns are paid, since those hours count but produce no units. Review the rate when the work changes, such as a new machine or product, because a rate that was fair before can become too easy or impossible.

Second example: a slow week on piece rate

A packer paid $0.95 a case has a week with frequent line stoppages. She works 40 hours and packs 520 cases, earning $494 in piece pay, or about $12.35 an hour.

Her state’s minimum wage is $15, so she must earn at least $600 for the 40 hours. The employer adds $106 to bring her to the minimum for the week and records it as a minimum wage make-up. It also reviews why the line stopped so often, since slow weeks cost both sides.

Show the regular rate on the pay stubFor incentive-paid workers, show the week’s regular rate and the overtime premium on the pay stub. It answers the question workers ask most and makes errors easy to spot.

Questions people ask

What is incentive pay?

Pay tied to output or results, such as piece rates, commissions and production bonuses.

Do piece-rate workers get overtime?

Yes, if non-exempt. The regular rate is total weekly earnings divided by hours worked, and an additional half of that rate is owed for each hour over 40.

Is incentive pay included in the regular rate?

Generally yes. Piece earnings, commissions and bonuses promised in advance are included.

What is the difference between incentive pay and a bonus?

Incentive pay is built into how the job is paid. A bonus may be a one-time payment, and only nondiscretionary bonuses go into the regular rate.

How do you set a piece rate?

Time typical employees at a steady pace, set the rate to give a fair hourly equivalent, and confirm it meets the minimum wage for all hours worked, including slow weeks.

Do incentive-paid workers need to clock in?

Yes. Hours are needed to calculate the regular rate, overtime and minimum wage compliance.

Related on EZTime

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Disclaimer: Treat this guide to incentive pay as general information rather than legal, payroll or tax advice: rules vary by location and change, and every example here is fictional.