What is compensation & incentives?

Why Incentives are Important?

What makes an Incentives plan effective?

Basic forms of incentives.

Classification of Incentives Plans

What is compensation & incentives?

The term COMPENSATION mean to give something in return.

Weather in terms of money or product (i.e. goods & services).

From the organization point of view, to give something (generally in

terms of money) for the work we obtain from the employees. Which

includes wages, salaries & incentives.

To attract & retain effective & efficient manpower sound compensation

policy has to be designed.

The term INCENTIVES mean, something which encourages a person

to do something. Or the “extra financial reward/ motivation”.

Incentives is the performance-link reward to improve motivation &

productivity of the employees.

Incentives includes all that provide extra pay for the extra performance

in addition to regular wages for the job.

Why Incentives are Important?

Incentives are considered beneficial to both employers as well as employees

in following ways.

Workers are likely to work at their best when they are offered monetary

rewards for good performance.

Provide opportunity for hard-working & ambitious employees to earn

more.

To improve work-flow, work methods & man – machine relation ship.

To bring employee involvement to make employee innovative.

Incentives are the sound technique of improving productivity.

Help to improve discipline and industrial relation.

The cost of supervision are reduced.

To obtain desired result.

In the absence of mutual trust between management & workers, an

incentives may be viewed as an attempt to improve production/ profit only.

Incentive plan should be installed in consultation with workers & union.

Payment of incentives should be free from bias & established through

scientific/ proper work study.

To implement incentives plane effectively minimum wages should be

guaranteed to every workers.

It should be easy to understand & simple to operate so that employee can

calculate their own earnings.

It should provide equal opportunity to all workers to earn incentives pay.

Plan should not be very costly in operation.

Plan should be flexible to adopt any changes later on.

Payment of incentives should be prompt i.e. as early as possible.

It should be adequate to motivate each employees.

Every plan should be reviewed periodically.

What makes an Incentives plan effective?

The basic from of incentives are as follow.

Bonuses :- is an incentive payment that is given to an employee beyond his

normal standard wages. It is generally given at the end of the year & does

not become part of the basic pay.

The payment of bonus Act 1965 is applicable to every factory or

establishment in which 20 or more person are employed in an accounting

year.

Merit pay :- is a reward based pay on how well an employee done the

assigned job. Higher the performance Greater will be the reward.

The payment is depend on individual employee’s performance.

Commission for sales people :- is paid on the basis of sales made by the

employee, through different plan. Such as

Salary plan :- where new salesman is appointed, is unable to generate new.

Commission plan :- where organization is totally based on sales of their

product.

Combination of both :- is the most frequently used method.

Basic forms of incentives.

Classification of Incentives Plans

Profit sharing

Co-partnership

Gain-sharing

ESOPs

Incentives plans

Output-based

Individual

Time-based

Organization- wide Group

Time-based

Time based incentive plan

– Under time based plan, per hour wage rate is determined &

incentives paid on the bases of time saved.

– Time based incentives plane is divided in four different ways.

– Hasley plan, Rowan plan, Emerson plan, Bedeuax plan.

– This all plan more or less follow same method i.e. (pay bonus on the

basis of timed saved by employee), but with different formula.

Output based incentive plan

– Under output based plan, per piece wage rate is determined &

incentives paid on the bases of output produced. i.e. more output in

standard time OR standard output in less time.

– For output based incentive following 3 method can be used.

– Taylor plan, Merrick plan, Gnatt plan.

Individual

In this plan incentive is given to a worker, who is fast and completes work before

the standard time to complete a job, However, a minimum base-wage is guaranteed to a

worker, who completes the job up to the standard time, fixed for this job.

Example

Let Standard time : S hours

Time taken by worker : T hours

Wage rate : Rs. R per hour

Incentive or premium : Wages for 1 percentage of time

saved at a rate of R per hour

HALSEY PREMIUM PLAN

Wages to be Paid to a Worker (W)

(i) When T > S

W = TR + R (S – T)/100

(ii) When T < S

W = SR

Advantages of Halsey Premium Plan

(i) Simple

(ii) Beneficial to efficient worker

(iii) Causes no harm to new worker, trainee, or slow worker

(iv) Management shares benefits of over-achievement by workers

(v) Minimum base-wage is guaranteed.

Disadvantages of Halsey Premium Plan

(i) Workers get only a percentage of return on their over-achievement (for example:

1% in above example).

(ii) Due to undue importance on over-achievement quality suffers.

(iii) Management gets wrong picture of worker’s ability.

It is quite similar to Halsey plan except that incentive for completing the job

in time lesser than standard time is paid to the worker. The incentive is paid on the

basis of a ration, which is time saved over standard time per unit standard time.

Thus, following notations used in Halsey plan wages to be paid to a worker

(w):

(i) When T > S

W = SR + (S-T)R/S

(ii) When T < S

W = SR

ROWAN PLAN

Implication of term (S-T)/S in Rowan Plan

As time saved (S – T) increased, time taken by the worker (ST) decreases, as

standard time (s) is constant. Thus, as the incentive term increases, the base-wage

term (TR) decreases. Therefore, the cumulative effect would be such that bonus rate

decreases as output keeps on increasing over standard output. This prevents

unnecessary over speeding by a worker, which may be counter-productive to quality

or group behavior.

(i) Checks over-speeding, overstrain by worker.

(ii) Assured minimum base-wage

(iii) Efficiency is rewarded

Advantages of Rowan Plan

(i) Discourages workers to over-achieve.

(ii) Difficulty in ascertaining wages as it requires large data processing

(iii) Sharing of profit for over-achievement may not be liked by

workers.

Disadvantages of Rowan Plan

In this, a minimum time wage is guaranteed. Working condition

and standard output are fixed on the basis of time-study. Bonus scheme is

as follows:

(i) Up to 66.67% to 80% of (SO) : (GW) + 4% of output.

(ii) 66.67% to 90% of (SO) : (GW) + 10% of output.

(iii) 80% to 90% of (SO) : (GW) + 10% of output.

(iv) 90% to 1000% of (SO) : (GW) + 20% of output.

(v) Above 100% of (SO) : (GW) + 20% of (SO) + 10% of output

above (SO).

EMERSON EFFICIENCY PLAN

(i) Guarantees minimum wage till 66.67% of standard output.

(ii) Efficient worker is rewarded handsomely.

Disadvantages of Emerson Efficiency Plan

(i) Disproportionate rate of bonus below standard output

(ii) Chances of over-speeding and compromise of quality

Advantages of Emerson Efficiency Plan

In this plan also, a minimum base-wage is guaranteed. In this plan,

the calculation of wage is based on a term. Bedeux point (B). One B is

defined as a sum of fraction of a minute of effort and a fraction of a

compensation for rest, aggregating to one. Standard time is also expressed

in terms of Bs. A worker, who earns 1 B in one minute or 60 Bs in 1 hour, is

100% efficient. In this, incentive is paid for 75% of number of Bs exceeding

60 B per hour. The wage payment scheme is as follows:

(i) When actual Bs earned by worker (Bw) > Bs for standard time

Wage = RS + [B(W) - B(s)] * 0.75R/60

(ii) When Bs caused by worker (Bw) < Bs for standard time

Wage = RS

BEDEAUX POINT PLAN

Advantages

(i) Minimum base wage is guaranteed

(ii) For time saved as compared to standard time, 75% of the compensation is

given to worker. Rest 25% may be given to his supervisor.

(iii) Bedeaux point may be added up for a worker even if his job requires

different assignments in a day.

In this, a minimum wage is guaranteed. Minimum wage is given to anybody,

who completes the job in standard time. If the job is completed in less time, then

there is a hike in wage-rate. This hike varies between 25% to 50% of the standard

rate.

Example

Standard time = S hour

Actual time = T hour (T < S)

Time rate for wages = Rs. R per hour

Bonus rate = P% of hourly rate

= Rs. (PR) per hour

Thus wage = (RS + PRS) in T hours

= (RS + PRS)/T per hour

GANTT TASK AND BONUS WAGE PLAN

Advantages

(i) Minimum wage in guaranteed

(ii) Suited to efficient workers.

Disadvantage

Emphasis on over speed or high production rate

In this scheme, up to a certain production level, which may be standard output,

a piece rate (say R 1) is given. For anybody, who achieves more than this output,

will get the payment for over achievement at a higher rate.

However, it does not guarantee minimum base wage. Standard output

may be decided by careful time and unction study procedure.

DIFFERENTIAL PIECE RATE SYSTEM (OR

TAYLOR’S PLAN)

(1) Provides incentives to efficient worker

(2) Penalizes inefficient worker

(3) Focuses on high production rate

(4) Simple and easy to implement

(1) Minimum wage is not assured.

(2) No consideration for the machine failure, power failure, etc.

(3) Over emphasis on high production rate

(4) There are chances that quality of work may suffer.

Advantages of Differential Piece Rate System

Disadvantages of Differential Piece Rate System

This is a modification over Taylor’s plan. In this, a minimum base wage is

not guaranteed. A worker’s wage is calculated as follows:

(i) When output (O) is less than 83% of standard output (SO), scheme for

wage (W) is equal to piece rate scheme.

(ii) When 83% of (S) < O < 100% of (SO); W = 110% of piece-rate.

(iii) When O > 100% of (SO); W = 120% of piece rate.

Advantages

Efficient workers are rewarded handsomely.

Disadvantages

(i) Wide gap in slabs of differential wage rate

(ii) Over emphasis in high production rate

MERRICK MULTIPLE PIECE RATE PLAN

Profit sharing

– Profit sharing is an arrangement by which employees receive in

addition to wages, a share is fixed in advance in profit of the

enterprise.

– It is an agreement between employer & his employee.

– According to International Labour Organization, “Profit-sharing is a

method of industrial remuneration under which an employer

undertakes to pay to employee, a share in net profit of the enterprise

in addition to regular wages”

Co-partnership

– Co-partnership is an extension of profit-sharing.

– Under this method worker’s share in company’s profit is paid in the

form of share by which they become entitled to participate in

decision-making process.

Organization- wide – 1

Gain-sharing

– This method aims at increasing productivity & decreasing labour

cost & sharing the result gains wit employee.

– It is based on a mathematical formula which compares a standard

perform with actual performance during given period.

– When actual performance exceed the standard performance, sharing

are shared with employees.

ESOPs (Employee Stock Option Plans)

– This method is originated in the USA in early 90s.

– Under this plan, the eligible employee are allotted company’s share

below the market price.

– The term “stoke option” implies the right of eligible employee to

purchase a certain amount of stoke in future at an agreed price.

– The eligibility criteria may include length of service, contribution to

the department etc…

Organization- wide – 2

Group based or team-based incentives plans reward all team members

equally based on overall performance of the team member.

Under group based incentive plan, individual out put can’t be

measured.

So team performance is evaluated on the basis of time taken rather

than output produced, if team complete their target in well advanced

to standard time the team member are eligible for incentives.

Payment to team members may be made in the form of cash bonus or

in the form of non-cash reward such as pleasure trip, times off or

luxury items.

Team based incentives foster cohesiveness among tem members.

Group

Conditions for Effective Incentives Plans

Plan is clearly communicated

Plan is understood

Rewards are easy to calculate

Employees participate in administering the plan

Employees believe they are being treated fairly

Employees believe they can trust the company and that they have

security

Rewards are awarded as soon as possible after the desired

performance.