In many industries today, a wide variety of work and remuneration models are used in parallel in order to remunerate the work performed as individually and transparently as possible.

The form of remuneration is based on the working time model. Here, the monthly salary is calculated from the contractually agreed weekly working hours and the hourly wage - various working time models and supplements allow for a personalized structure to be agreed with the employer.

What is Premium Pay?

Premium pay is a remuneration model that comprises both a fixed basic salary and a performance-related bonus. If fixed performance targets are achieved or exceeded, the bonus is paid to the employee. The basic salary may not be below the statutory minimum wage or the applicable collectively agreed wage.

With this form of performance-related pay, the employment contract clearly specifies the amount of the basic salary and bonus pay. The bonuses are linked to clearly measurable and comprehensible performance parameters for an employee's overtime in order to guarantee a fair and accurate calculation and payment.

The concept of bonus pay is particularly widespread in the production/manufacturing and research and development divisions. Here, the concept of performance-related bonuses is particularly well suited to achieving valuable (intellectual) added value for companies.

Premium and Piecework Wages - Important Differences

At first glance, premium pay is very similar to piecework pay. However, although both are performance-related remuneration models, there are significant differences between them:

Premium Pay combines a basic wage and a bonus, but a piecework wage has no basic wage. Without legal requirements, a piecework wage could therefore theoretically also be 0 euros.
Piecework wages typically only consider the quantity of goods produced, i.e. the number of units produced within a certain period. A premium wage, on the other hand, often explicitly includes qualitative aspects in the calculation.

So if companies want to use performance-based remuneration models and at the same time ensure that quantity and quality are recorded equally fairly, premium pay is often a popular alternative to the piecework wage.

Types of Premium Wage

Bonus pay models can be linked to a wide variety of criteria. The most important common features of these models are the focus on “more” or “better” work performance and clearly measurable benchmarks. It is quite common for companies to use a mix of performance pay - for example with bonuses for quantitative and qualitative performance.

Volume Premium / Quantity Premium

As the name suggests, the quantity premium is linked to the quantity of goods produced or services rendered. If a predefined quantity is exceeded, a premium is paid out. This model is particularly popular in the production of goods if the work cannot be remunerated using a piecework model, i.e. is not “pieceworkable”. This variant of the premium wage is one of the most widespread.

Quality Bonus / Quality Premium

A quality or quality premium is intended to motivate employees to deliver exceptionally high quality. The bonus aims to promote quality standards and minimize errors or defects - in production, for example. In practice, however, the exact increase in quality cannot always be clearly measured, which is why data on the quantity of rejects or complaints are often used as reference values.

Savings Bonus

A savings bonus rewards employees for saving the company money. In practice, this can be the case if, for example, time or energy is saved in production or identical results are achieved with fewer raw materials or materials. If employees manage to save company-critical resources through their work, they are rewarded with a corresponding bonus.

Deadline Bonus

If employees or teams can complete the tasks assigned to them before a planned end date/deadline or complete a project at particularly short notice, they receive a deadline bonus. This bonus is rarely used, as the timely completion of projects cannot usually be precisely attributed to individual employees and is often dependent on external factors.

Idea Bonus / Suggestion Bonus

This bonus model is designed to reward employees for contributing ideas that offer the company profitable added value. In most cases, these are ideas that either improve the efficiency of certain processes or otherwise have a cost-saving effect. In practice, the definition of which idea deserves a bonus varies considerably from company to company.

Example of Premium Pay Calculation

A bonus wage consists of two components - the employee's basic wage and his bonus. In this example, an employee receives a basic wage of 2,500 euros per month. In addition, he is entitled to a quantity bonus.

His employment contract stipulates that he is entitled to a bonus for each additional unit of product X produced more than 500 units per month. In our example, the employee receives a bonus of EUR 2.50 for each additional unit.

Example Premium Pay Calculation

Production per month: 600 units

Surplus / additional output: 100 units

Premium per unit: 2.50 euros

Calculation of the Premium

100 units x 2.50 euros = 250 euros

Total Wage

Basic wage + bonus = total wage

- 2,500 euros + 250 euros = 2,750 euros

As a result, the employee receives a bonus totaling 250 euros at the end of the month due to his additional performance, which means he earns a total of 2,750 euros.

Premium Pay - Advantages of the Model

Such a performance-based remuneration model brings with it a number of advantages that are of interest to both employees and companies.

Financial Motivation

The prospect of receiving an equally foreseeable increase in pay for a clear increase in work is a (strong) incentive for many employees. In turn, the company benefits from this increase in performance.

Increase in Productivity

Depending on the structure of the bonuses and the reference value, a bonus wage can ensure that the quality of the product improves, production is increased overall or the costs per product are reduced in the long term.

Greater Identification

By integrating a bonus system, employees have a clear incentive to identify (more strongly) with the company and to want to contribute to business success.

Low Fluctuation of Top Performers

A bonus salary model is particularly attractive for employees who perform well and want to earn a lot in this way. This model is particularly good at keeping such employees in the company.

Premium Pay - Disadvantages of the Model

On the other hand, wages with a premium component can also create some difficulties and complications in day-to-day business.

Low Basic Wage

When working with a bonus wage, it is usually the case that the respective basic wage is proportionally lower than in companies without this wage model. This can be a financial burden for employees if they do not achieve the respective bonus targets. In the long term, this can also develop into an emotional burden.

Risk of Rivalries

If employees receive different levels of bonuses, this can quickly lead to resentment and rivalry within the company. In the worst-case scenario, this can lead to a negative impact on cooperation and the working atmosphere.

Complex Salary Calculation

If employees are paid different wages depending on their work performance, individual payroll accounting is also required. Depending on the size of the company, this can increase the administrative workload enormously. Powerful payroll software helps to reduce the additional work involved.

Premium Pay: Challenges in Production

Based on the advantages and disadvantages listed above, bonus-based wage models must be used in a very targeted manner to achieve their desired effect. This is particularly true in fields of work such as manufacturing.

On the one hand, both companies and (committed) employees in this area benefit from a performance-based pay model - at least in theory. On the other hand, however, manufacturing processes are becoming increasingly complex in practice, meaning that it is often difficult to measure individual performance accurately and fairly.

The Solution: Suitable Software for Recording

Teamwork, the availability of materials and the status of machines are also important factors that need to be taken into account in order to avoid dissatisfaction or frustration among the workforce. To this end, manufacturing companies in particular rely on MES software to monitor their production processes in detail and track performance.

With the help of such systems, specific data can be recorded precisely, automatically and in real time, even in complex production processes - for example, the quantity of goods produced that can be attributed to an individual employee. This guarantees maximum transparency in recording, as well as precise billing. From resource consumption to individual employee performance, every data point can be easily recorded, processed and later visualized.

If suitable MES solutions are also combined with workforce management software, companies can usually implement remuneration models such as bonus pay in a much more granular and precise manner. The interaction of these systems enables a very flexible design of bonuses, for example based on individual targets and team performance - without compromising the overview. On the contrary: once the processes have been defined, every step from recording working hours to performance evaluation and bonus calculation can be fully automated.

Premium Pay Models: Best Practices for Practice

If companies want to create the possibility of remunerating employees by means of premium pay, they should consider several important points:

Employee Involvement

As popular as performance-based remuneration may be for some employees, other employees may be very skeptical about this model. Ideally, the respective bonus pay model should be developed and implemented in close consultation with employees to address and reduce reservations.

Transparent Criteria

Regardless of where in the work process employees work, it must be clear to them what they must contribute, what bonus payments they can expect from what level of performance and how these develop (progressive / degressive). The more precisely employees know what share they (can) contribute to their bonus, the more motivated they are to deliver this performance.

Regular Review of the Model

Once remuneration models have been introduced, they should be regularly checked to see whether they are still delivering the desired added value. Models that were established a long time ago may even provide false incentives today, resulting in higher quantities being produced, for example, but the quality of the products themselves suffering. Such scenarios should be examined during regular reviews and the corresponding models adapted.

Suitable Software Solutions

The correct recording and calculation of bonus wages is a task that can only really be performed effectively with powerful software solutions. This is all the more true the larger the company in question and whether different bonus models are used. The right payroll software also ensures that the basic wage and bonus per employee are always taxed correctly.