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PRM/U5 Topic 8 Incentive Scheme- Individual, Group

Incentive Scheme

HR: Employee motivational program designed to encourage commitment to increasing productivity or in achieving some worthwhile objective such as reducing the number of man-hours lost due to accidents.

Marketing: Customer motivational program designed to encourage them to buy more of the firm’s products. Also called bonus scheme or incentive program.

 (I) Individual Incentive Plan

Reward systems tied to the performance of individual employees are known as individual incentive plans. These plans depend on category of workers for which they are designed. Under this plan mostly a certain pay rate is guaranteed and the rewards represent additional compensation.

Under individual wage incentive plans three categories of personnel’s can be included. They are Production workers or blue dollar workers, white collar workers such as salesman, and managerial personnel’s. All these categories of employees have different needs, they differ in qualification and type of work, and therefore separate plans are designed for them.

Incentive Plans for Production Workers or Blue Collar Workers:

There are three categories of these plans:

(1) Incentive is proportional to extra output.

(2) Incentive is proportionately at lower rate than increase in output.

(3) Incentive is higher proportionately to rate of increase in output.

Under these plans, workers are rewarded individually when their performance exceeds pre determined standard. Individual workers earn a bonus if they work more and produce more. These plans are therefore known as premium plans. These plans are either time based or production based.

A standard time is determined for doing a job. A standard time serves as the basis of giving bonus to the workers if they meet or exceed the standard. The worker is said to be efficient if he completes his job in less than the standard time. In order to reward him for his efficiency, he may be given bonus under an appropriate incentive plan.

Advantages:

Incentive wage plan have following advantages:

(1) The standard output is determined on the basis of time and motion studies by the specialists and the rates of wages are fixed for different jobs on the basis of job evaluation. This stimulates workers to work more.

(2) Increase in output leads to lowering of per unit cost, hence a direct gain to the employer.

(3) Less supervision is required as the workers are motivated to work more. This saves supervisor’s time for supervision. He can utilize this time for other more important work.

(4) No conflict between employees and employers as the needs of both are satisfied because employees are rewarded for their efficient work and employers are happy with the increased output.

Disadvantages:

The wage incentive plan suffers from some of the demerits:

(1) Even though output is increasing the quality is at the receiving end. Employees give more stress on increase in output neglecting the quality. Employees become quantity conscious and not quality conscious.

(2) Employees oppose the introduction of advanced and modern techniques of production because of the fear that they may lose extra payment for extra output produced by them.

(3) There is an increase in cost of record keeper.

(4) Safety precautions are overlooked. May therefore lead to accidents.

(5) Slow workers become jealous of fast workers because comparatively their earnings will be less than their counterparts.

(6) This system increases their earnings. They may therefore put a demand for increased minimum wages.

(7) Management faces difficulties in determining the rate of bonus to be paid. Fewer rates may aggrieve the workers and high rates may reduce their efficiency.

(II) Group Incentive Schemes:

It is observed that under individual incentive plans bonus is paid to the worker on the basis of individual’s performance. This is in the case where the payment of bonus is not affected by the performance of others. But there are certain situations where it is difficult to measure individual contribution. Here the performance each worker is affected by others. Under such situations group incentive bonus schemes are introduced.

Under group incentive plan, bonus is calculated on the collective production of a group of interdependent workers and distributed among members of group on some agreed terms and conditions. As far as possible the bonus so earned is distributed equally among the members of the group.

The basis for distribution is on the following:

(1) Group bonus is distributed equally if all the members of the group possess similar skills.

(2) If the base wage of members is different than bonus may be distributed in proportion to the basic rates.

(3) Bonus may be paid to the members on a specified percentage depending on the basis of skill, experience, basic rate of pay of each individual employee.

Following are the group incentive plans:

(1) Priestman’s Plan:

Under this, the starting point is productivity of the group. Standard output is laid for the group. Minimum wage is assured to a group. The group members are entitled for a bonus if their output exceeds the set standard. The payment of bonus is made in proportion to the excess of actual output over the standard output. This plan encourages the feelings of team spirit among the members of the group. The employees behave as a group and work together to increase output. This scheme does not consider the individual efficiency of worker. Thus the inefficient member of the group also get bonus.

(2) Scanlon Plan:

This plan was devised by Joseph Scanlon in 1937, a trade union leader. Under this plan workers are involved in decision making. They are encouraged to make suggestions regarding cost reduction and increasing productivity.

They are involved in the various screening committees in the plant to find out ways and means to judge the cost reduction suggestions. In this way employees work with their supervisors, managers and other fellow employees on various screening committees.

If the suggestions are successfully implemented, employees get share in the savings. To facilitate workers’ participation, there are departmental committees consisting of representative of workers and management.

Periodical meetings of these committees are held to discuss the problems faced by the workers. They recommend measures to increase production. It promotes healthy labour relations, minimizes supervision, increases efficiency and sense of partnership among workers.

This plan suffers from certain drawbacks such as the inefficient worker gets rewarded because of better performance of the group. It is also true that the suggestions of the employees are not given due consideration by the management.

(3) Profit Sharing:

Under the scheme of profit sharing a certain percentage of profit is distributed at fixed ratio among some categories of employees annually. According to Henry R. Seager, “profit sharing is an agreement freely entered into by which the employees receive a share, fixed in advance, of the profits.”

The decision of sharing of profit to the employees is informed in advance. The basis of profit sharing is decided on the length of service or the number of working days in a year or the wages earned by a worker during a year.

It is direct incentive to a worker. The payment of profit can be made in cash or it can be deposited in the account of provident fund of an employee. The advantage of this scheme is that workers develop common concern for the development and progress of the undertaking.

Profit sharing is of two types:

(a) Current Profit Sharing:

It is the one directly paid to the employee annually or six monthly.

(b) Deferred Profit Sharing:

It is the one which is not paid directly to the employee but credited in his provident fund account or to pension account or sometimes paid in the form of bonus shares.

Merits:

(1) Creation of industrial peace because workers are satisfied as they are getting an additional amount besides their wages.

(3) The bonus is paid only when the amount of profit exceeds the set target. It means bonus is not part of cost of production.

(4) Profit sharing scheme is based on the basic pay of the employees.

(5) Workers have share in profit and not losses incurred by the employer.

(6) It represents a reward for group effort and group efficiency.

(7) It brings about team spirit among the employees. They developed a sense of belonging to the organization, reduces training time.

(8) Profit sharing results into equitable distribution of the profit.

Demerits:

(1) Employees are entitled to bonus when company earns profit. They do not get bonus when company recur losses.

(2) It is not possible for newly established company to pay bonus.

(3) There is no distinction between efficient and inefficient employees of the company while distribution of bonus.

(4) Bonus is paid to the employee once in a year. This does not motivate them for better performance.

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