INCENTIVES

Basic Concept

What is incentive? In simple words, incentive is anything that attracts a worker and stimulates him to work. The incentives can be financial and non-financial. Both types of incentives play important role under different conditions. For example, financial incentives are considered to be more valued under the work conditions where wages are at low levels. On the contrary, non-financial incentives are more preferable where wage levels are high and the rate of tax is progressive. However, a review of research evidences indicates that there is a shift in emphasis in the demands of employees and their unions from financial to non-financial benefits.

The term incentive has been defined differently by different authors. We produce here a few of these definitions.

According to the National Commission on Labor, "Wage incentives are extra financial motivation. They are designed to stimulate human effort

by rewarding the person, over and above the time rated remuneration, for improvements in the present or targeted results".

Burak and Smith have defined incentive as, " An incentive scheme is a plan or program to motivate individuals for good performance. An incentive is most frequently built on monetary re-wards (incentive pay or a monetary bonus), but also may include a variety of non-monetary rewards or prizes".

According to Venkata Ratnam and Srivastava, "A wage incentive scheme is a method of payment for work of an acceptable quality produced over and above a specified quantity or standard".

Now we can define incentive as a system of payment under which the amount payable to his output. Such a payment is also called 'payment by results' (PBR). Thus, PBR refers to a method which provides for the "direct linking of workers earnings to a measure of their performance”.

The main features of incentives from the above definitions can be listed as follows:

1 Incentives are based on a standard of performance for the job.

2 Incentives are measurable in monetary terms.

3 Incentives are meant to motivate workers for better and more

performance.

4 Incentives have direct linking to performance.

5 Incentives vary from person to person and from time to time for the

same person.

OBJECTIVES

1. Profitable for both workers and management

2. help to increase the production

3. reduce cost

4. high up morale by rewarding workers in proportion to their output

5. recognize the worker for his good performance

6. improve utilization of equipment, materials and sevvice

7. should furnish a basis for cost control and labour control.

8. reduce labour turnover and absenteeism

9. aim at improve relations between workers and management.

LIMITATIONS

1. There is a possibility of reducing the quality of products since incentives are ususlly based on output.

2. workers paid by results disregard security regulation in order to aceive output. It will increase the danger of accidents

3. some workers may work day and night, it would affect their health.

4. jealousy and conflict may arise among employees, because some employees will earn more .

5. workers may oppose introduction of new machines, methods as they fear that new methods or machines will decrease their earnigs.

6. when production is disrupted due to management fault, the workers will insist to get compensation.

An incentive scheme is usually based on three assumptions:

1. The belief that money is a strong motivator.2. That the relationship between effort and reward can be systematically established. The

relationship so based leaves no doubts in the minds of the concerned employees.

3. The feedback to the employees is immediate and direct.

Classification of IncentivesIncentives are classified as under.

FINANCIAL AND NON FINANCIAL INCENTIVES INDIVIDUAL AND GROUP INCENTIVES

(a) Financial incentivesFinancial incentives include Salary, premium, reward, dividend, bonus, income from

investment. Financial incentives play a very important role in improving the performance of the employees. Cash plays a very important role in fulfilling the needs of the individuals especially of labor class.

(b) Non financial incentives

As the employees have other needs like respect and self centered needs , they can be motivated with the help of following non-financial incentives.

Job satisfaction Job security Respect and recognition Training and other employee improvement programs Housing/medical/educational facilities Opportunities for growth. Suggestion scheme, praise, employee-superiors relationship etc

Individual incentives

Individual incentive are the extra compensation paid to an individual for all production over a specified quantity.

Advantages1. Administration of individual incentives is simple because incentives can be given after the

assessment of individual’s work2. each and everybody gets the return in accordance with work. This makes the person more

dedicated towards the work.3. persons who do the work with less efficiency are not entitled to incentives.

Limitations1. the employees inclination is more on quantity as compared to quality2. rigidity of rates3. this incentive system is inappropriate where delays are frequent and beyond the

individual’s control as well as where the work is automated.4. adverse effect on speeding production upon the health of the employee.5. there is a problem of restriction of output in view of group pressures from the fellow

employees.

Group IncentivesGoup incentives system involve co-operation among employees , management and the union for reduction in labor, material and supply costs, strengthening of employee loyalty to the company.

Advantages1. Reduces absenteeism and production2. reduces conflict and confusion among group members3. group incentives lead to lesser control.

Requirement of good incentive

1. proper climate: this means that the relation between management and employees should be good and free from suspicion

2. co-operation of workers3. worker’s participation: wage incentive scheme should be implemented with the

consultation of workers and union.4. scientific standard: the scheme must be based on scientific management.5. simplicity: the incentive scheme should be simple and everybody must understand it.6. equitable: this means the scheme should give equal opportunity to all.7. flexible: changes may be required due to technological changes, market demand etc

8. less costly and wide coverage. 9. guarantee minimum wages: it will ensure a security to all10. ceiling on earning: the maximum amount of earnings must be fixed. It will help to

maintain quality11. grievance settlement on time12. timely payment of incentive13. follow up: required to rectify the mistakes in incentive scheme.’

WAGE INCENTIVE

We may define wage incentive as a system of payment under which the amount payable to a person is linked with his output. Such payment may be called “payment with result”

“t refers to all plans that provide extra pay for extra performance in addition to regular wages for ajob”- by Hummel & Nickerson,

Types of Wage incentive Schemes

The following different wage incentive plans for Direct workers will be discussed here.

1. straight piece rate2. Halsey Premium plan3. Rowan Premium plan4. Bedaux Point Plan5. Gnat Task & bonus plan6. Emerson efficiency plan7. Taylors differential plan

Individual Incentive (PBR) Schemes

Under this plan, employees are paid on the basis of results. The chief incentive plans included in this category are discussed in seriatim.

Halsey Premium Plan: This plan, originated by F. A. Halsey, an American engineer, is a combination of the time and the piece wage in a modified form. Under this plan, a guaranteed wage based on past experience is determined. If a worker saves time, he gets 50% of wages for time saved (called premium) in addition to normal wages. It is optional for the worker to work on the premium or not. Thus, this plan also provides incentive to efficient workers.

Advantages It is simple to understand. And guarantees time wages to employees The wages of time saved are shared by both employers and workers, so it is helpful in

reducing labor cost It makes distinction between efficient and inefficient workers.and gives increasing

incentive to efficient workersDisadvantages

Quality of the work suffers because workers are in a hurry to save more and more time

to get more and more incentive Workers criticize this method on the ground that the employer gets a share of wages of

time saved.

IllustrationRate per hour = Rs 15/hourTime allowed for job = 20 hoursTime taken = 15 hoursCalculate the total earnings of the worker under the Halsey planS (standard time) = 20 hoursT(time taken) = 15 hoursR(rate) = Rs 15 per hour.Total earnings = TXR+50%(S-T)XR

= 15X15+50/100(20-15)X15= 225+2.5X15

Total wages for 15 hrs = 262.5Find the effective rate of earnings = 262.5/15= Rs17.5

Rowan Premium Plan: This plan was developed by D. Rowan in 1901.

Under this method , the worker is again guaranteed wages at the ordinary rate for time taken by him to complete the job. The difference between Rowan and Halsey Premium plans are in the calculation of bonus.

Under Halsey plan, bonus is fixed percentage of the wages of time saved where as under Rowan plan, bonus is that proportion of the wages of the time taken which the time saved to the standard time allowed.

The bonus is S-T x T x R Sand the total earnings will be calculated as

T x R + S-T x T x R SWhere T= time taken(actual time), S= Standard time (time allowed), R = Rate per hour

Assume R- hourly wage rate=Rs10T- Actual time taken to complete the job = 4 hoursS- Standard time or allowed time = 6 hoursW= 10X4+(6-4 / 6 ) X10X4 = 40 + 13.3 = 53.3

Bedaux plan

Under this plan, every operation or job is expressed in terms of so many standard minutes., which are called ‘Bedeaux points’ or B s ; each B representing I minute.through time and motion

study. Upto 100% performance ie upto standard Bs, the worker is paid time wages without any premium for efficiency. If the actual performance exceeds the standard performance in terms of Bs, then 75% of the wages of the time saved is paid to the worker as bonus and 25% is earned by the foreman.

For example, standard time required for a job is 20 hours ie 1200 Bs in terms of minutes (20x60) where as a worker has taken 16 hours ie 960 Bs instead of 1200 Bs . The worker has saved 240 Bs or 4 hours (4x60). Suppose the time rate is Rs 20/- per hour , the time saved will be equal to Rs 80 ( 4x20) the worker will get 75% of Rs 80/- . So his total earnings will be as follows

Time wages for 16 hours-actual time taken@ Rs 20 per hour = 320Bonus 75% of 4hrs wages (75/100x4x20) = 60Total earnings = 380

Emerson Efficiency Plan: Under this scheme, both standard work and day wage are fixed. Bonus is paid on the basis of worker's efficiency. A worker becomes entitled to get bonus only when his/her efficiency reaches to 67%. The rate of bonus goes on increasing till he achieves 100% efficiency. Above 100% efficiency, bonus will be 20% of the basic rate plus 1% for each 1% increase in efficiency. In this way, at 120% efficiency, a worker receives a bonus of 40% and at 140% efficiency, worker gets 60% of the day wage as bonus.

In this plan , bonus is payable only when efficiency touches 66.7 %of standard laid down. The amount of bonus payable increases progressively with increae in efficiency in such a

manner that at 100% efficiency, the bonus is 20% of hourly rate. For efficiency beyond 100% additional 1% bonus is payable for each 1% Iincrease in efficiency.beyond 100%.

Thus at 110% efficiency bonus payable is 30% and total wages payable are time wages for the actual time taken plus 30% of time wages as bonus.

IllustrationStandard output/day of 8 hrs is 16 units. Actual output of a worker for 8 hrs is 20 units. Rate per

hour is Rs 2.5. calculate wage as per Emmerson’s efficiency planLevel of performance actual output/standard outputx 100

20/16x100=125%bonus payable is 45% as followsAt 100% efficiency 20%of time wagesFor next 25% @1% for each 25%of time wagesTotal bonus 45%Time wages for 8 hours 8x2.5=20Add 45% bonus 45/100x20 9Total wages payable Rs 29/-

Gantt Task and Bonus Plan: This plan is devised by H.L. Gantt. This plan combines time, piece wage and bonus.

First a standard time is fixed for doing a job The actual performance is calculated with standard time and efficiency is determined If a worker takes more time than standard time (his efficiency is below 100%), he is given

wages for the time If a worker takes standard time to perform the task (efficiency is 100%), he is given wages

for standard time and a bonus of 20%of wage earned If a worker takes less than standard time, he is given wages for standard time plus a bonus

of 20% of the wages for the standard time. In other words if the performance is more than 100%, he is given wage plus 20%of piece wages

Advantages1. simple to understand2. ensures guaranteed time wages to the worker who are below average 3. worker tries to become more efficient since increasing rate of bonus is very

satisfying to efficient workers.4. fixed cost per unit decreases with increase in production due to incentive for

efficient workers

Disadvantages1. it divides the workers into two categories, one who earns the bonus and the other who

does not.

ILLUSTRATION

Standard output per day = 1000 unitsGuaranteed payment = Rs 500/= ie 50 Ps/unit

Worker A produces 850 units, so his performace is 85%-he will get Rs 500/- the guaranteed wages

WorkerB’s level of performance is 1000 units. So he will get Rs 500 plus 20% bonus pertaining to standard time ie 20% of 500 ie Rs 100. so Rs 600

Worker C ‘s output is 1100 units, so his level of performance is 110% and therefore he will get 20% piece wages as bonus

Piece wages for 1100 units @ 50 paise = Rs 55020% bonus = rs 110Total = Rs 660

Taylors Differential Piece rate SystemThis system was introduced by Taylor, the father of scientific management

Taylor was of the view that that an inefficient worker had no place in an organization and he should be penalised by paying low piece rate for low production. To encourage the worker to complete the work in standard time , he is given a lower piece rate. Thus if standard production has been fixed at 8 units/day of 8 hours , the higher piece rate for 8 units or beyond may be Re 1/= per unit and lower rate for an output if less than 8 units per day, may be 80 paise

Per unit.Hence Taylor decided to give a large reward to those who would complete the work within or less than the standard time. The system is very harsh to inefficient workers on account of low rate and low output.

ILLUSTRATION

Calculate the earnings of workers A and B under straight piece rate system and Taylor’s differential piece rate systemNorma rate/hour = Rs 1.80Std time/unit = 20 secondsDifferential to be applied = 80% below std and 120% above stdWorker A produces 1300 units per day and worker B produces 15000 units/daySolutionStandard production per 20 seconds =1unitTherefore per minute=60/20=3units, per hour 3x60=180 units, per day of 8 hours will be 180x8=1440 unitsNormal rate/hour= Rs 1.80Normal piece rate 180/180 units = 1 paiseLow piece rate below standard production 1P X80/100=8PaiseHigh piece rate at or above standard = 1PX120/100=1.2 PaiseFOR AUnder straight piece rate system 1300 units@1P – 1300X1/100=Rs 13Under Taylors Differential plan 1300 units@ 0.8P=1300X8/10X1/100= Rs 10.40FOR BUnder Straight piece rate = 1500@IP = 1500X1/100 = Rs 15Under Taylors Differential plan = 1500@1.2=1500X12/10 X 1/100=Rs18

Group Incentive Schemes

The incentive schemes discussed earlier can be applied on a group basis also. Group incentive schemes are appropriate where jobs are interdependent. It is difficult to meaningfully measure individual performance and group pressures affect the performance of the members of the group. The chief group incentive schemes are discussed here.

Profit-sharing: The concept of profit-sharing emerged towards the end of the nineteenth cen-tury. Profit-sharing, as the name itself suggests, is sharing of profit of organization among employees. The basic rationale behind profit-sharing is that the organizational profit is an outcome of the co-operative efforts of various parties, therefore, employees should also share in profits as shareholders share by getting dividend on their investment, i.e. share capital. The very purpose of introducing profit-sharing is to strengthen the loyalty of employees to the organization. Thus, profit-sharing is regarded as a stepping stone to industrial democracy.

Co-partnership: In a way, co-partnership is an improvement over profit-sharing. In this scheme, employees also participate in the equity capital of a company. They can have shares

either on the basis of cash payment or in lieu of other incentives payable in cash like bonus. Thus, under co-partnership scheme, employees become shareholders also by having company shares. Now, employees participate in both —profits and management of the company. The finer points of this scheme are that it recognizes the dignity of labor and also of a partner in the business. This would, in turn, develop a sense of belongingness among the employees and encourage them to contribute their best for the development of the organization.

Scanlon Plan: The Scanlon plan was developed by Joseph N. Scanlon, a Lecturer at the Massachusetts Institute of Technology in USA in 1937. The plan is essentially a suggestion scheme designed to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity.

The plan is characterized by two basic features. First, both employees and managers can participate in the plan by submitting their suggestions for cost-cutting methods. Second, increase in efficiency on account of cost-cutting is shared by the employees of the unit.

The Scanlon plan, wherever adopted, has been successful to encourage a sense of partnership among employees, improved employee-employer management relations, and increased motivation to work.

The criticism labeled against group incentive is that the incentive benefits being similar to all members of the group, the best performers may loose incentive. However, this can be overcome if group incentive scheme generates peer-level pressure for superior performance and also reduces the need for supervision. Stability in group may be a necessary condition to make the group incentive .scheme successful.

As regards the ultimate impact of incentives on organizational performance, the research studies conducted in India report that incentive schemes have a positive impact on productivity, labor cost, and industrial relations. It is concluded that "money" has a "salutary" impact on production.