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Incentive Plans for Farm Employees

Farm Business Management Update, August 1997

By Jack Dunford of the Department of Agricultural and Applied Economics, Virginia Tech

The way that a farm employee does his or her work affects a farmer's profits. Many farmers have thought about rewarding their good employees, but not as many are actually doing it. Employees should be given as much control as possible over the enterprise which affects their performance rating.

A good incentive payment plan has several characteristics: (1) the payment is above and beyond the normal basic wage and privileges, (2) the employee knows beforehand the extent and limit of the payment, (3) the employee fully understands what must be done to warrant the extra payment, and (4) the payment is based on the performance of the employee, not the performance of the farm.

There are four basic types of incentive plans that can be considered by farm operators or managers of any type of business.

The most common category of incentive plans are based on physical production over and beyond an agreed upon base level, for instance, higher percentage calf crops, increased milk production or higher quality milk, more bushels per acre, etc. These types of plans are easy to understand and payments are easily computed but the primary disadvantage is that production costs may be disregarded in achieving the higher production levels. Another shortcoming of this method is that some unfortunate circumstance over which the employee has no control (drought for instance) may eliminate or greatly reduce the incentive payment.

Another incentive plan approach is to base the extra payment to superior employees on some percentage of net farm income. The major advantages of this method are that costs are considered and more economically efficient production is stimulated. But the plan could be difficult to understand and the farm owner may not want employees to know the total financial situation of the farm business.

Equity accumulation is a third type of incentive plan that is sometimes used to keep a good employee. Under this arrangement the employee is given the opportunity to own and raise a limited number of livestock or a set number of acres of a crop in addition to his regular duties. The employee may use the farm owner's equipment and facilities and do the work on his own time. This plan probably works best in father-son arrangements where the son is given the opportunity to build some assets and learn management skills. A major problem associated with this plan is that a conflict of interest could arise - the employee may be wanting to work on his cattle or crops at the same time when he is needed by his employer.

Length of tenure is another incentive plan that is frequently used. With this plan the employee's pay is increased based on the length of time the employee stays on the job. This incentive plan is easy to understand and requires few records, and the employee knows precisely what to do to receive the payment. In addition, none of the risks of the business is shifted from the farmer to the employee. However, this is not a good plan for the unmotivated employee who is not willing to take on extra responsibility as his experience increases.

There is no perfect incentive plan for a particular farm situation. Every farm business is unique; the owners and employees have different personalities and goals. When an incentive payment plan is being evaluated for a particular farm, all these considerations as well as many others must be investigated. Virginia Cooperative Extension has more information available for farmers interested in pursuing an incentive payment plan for their employees.

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