Remuneration systems and incentives scheme
(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:
(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.
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.
(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.
Following are the time based incentive plans:
Halsey Premium Plan:
This method is invented by Mr. Halsey. Under this payment of time wages to the worker is assured. He is given an option to work on premium. A standard time for standard output is fixed on the basis of past experience. If a worker finishes the work earlier than the prescribed time, he is rewarded by paying him premium or bonus. The premium or bonus is calculated on the basis of time saved in performing a job. The payment of premium is in addition to the time wages for which he is entitled even though time is not saved. This plan is a combination of time and piece wages. A care should be taken that premium rate be moderately fixed.
The following example illustrates this:
Time rate – Re 1.00 per hour
Time allowed – 8 hours
Time taken to complete job – 6 hours
Premium for time saved – 50 percent
The formula for calculation is
Earnings = Time Taken x Time rate + 50 percent of time saved x Time rate
= 6 x 1 + 50/ 100 x 2x 1
So worker’s earning will be Rs. 7/-
(1) It assures time wages to the average workers and offers extra payments to the efficient and hard workers.
(2) It is simple in calculations.
(3) It reduces labour cost due to increased production. Premium is shared by employer.
(1) The standard time for standard work is fixed on the basis of past performance and no new standard are fixed.
(2) It creates dissatisfaction because employer also shares a part of incentive earned by the worker.
(3) The management cannot force the worker to produce more after finishing the standard output.
(4) The standard time may not have been properly fixed.
This system of wage incentive plan was invented by James Rowan of Scotland. It is a modified form of Halsey plan. It is similar to Halsey plan except in the calculation of premium.
The premium is calculated as the ratio of the time saved to the standard time multiplied by the time taken on the job.
It can be illustrated with the help of example given below:
Time rate – Re 1/- per hour
Time allowed – 8 hours
Time taken to complete the job – 6 hours
Formula for calculation is,
Earnings = Time taken x Time rate + Time Saved / Time Allowed x Time Taken c Time Rate
= 6 x 1 + 2/8 x 6 1
So worker’s earnings is Rs. 8.5.
(1) The minimum wages are assured in Rowan plan also.
(2) Employers are also benefitted when the efficient workers get bonus.
(3) The efficient workers get bonus at a diminishing rate if they save more than 50 percent of standard time. This checks them to overstrain themselves and maintain quality.
(1) The worker is discouraged to achieve saving in time more than 50 percent of the standard time.
(2) The calculation of premium is complex and hence cannot be easily understood by the workers.
(3) It is not beneficial for the employees having high efficiency.
Emerson Efficiency Bonus Plan:
Under this plan minimum time wage is guaranteed to the workers. Conditions of work are standardized and a standard output is fixed which is to be completed within a specified period of time. A worker attaining 66.66 percent efficiency gets a minimum b6nus. The percentage of bonus goes up with the increased efficiency up to 20 percent of the guaranteed wages.
(1) The workers minimum wages are assured. If worker is unable to produce 66.66 of the standard output, he is not deprived of his daily wage.
(2) There is enough scope for earning more and more for the efficient workers. The plan is therefore very beneficial to extra ordinary workers.
(1) The drawback of this plan is that it offers bonus to the workers who have efficiency less than 100 percent.
Bedeaux Point Plan:
Like other wage incentive plans the time wage is guaranteed in this plan also. Under this plan the amount of work done by a worker per minute is taken as standard work unit. This is known as Bedeaux point ‘B’. The standard time for a job in the number of Bs allowed completing it. Let a work gets completed in 60 Bs taken as a standard per hour. Now if a worker completes it earlier or earns more than 60 Bs, gets a premium of 75 percent for the number of Bs i.e. time saved. The standard work unit B includes the time of work as well as rest.
The example given below illustrates it:
Hourly wage rate ‘R’ = Re 1/-
Standard time allowed to complete the job ‘St’ = 8 hours. Standard number of points for that job ‘Ns’= 8 x 60 = 480
Actual time taken to complete the job T = 6 hours
Employee Benefits and Incentives
Number of B’s earned Nt = 60 x 6 = 360
The formula is,
So worker’s earning is Rs. 7.5
(1) Minimum wages are guaranteed to the workers even though they fail to complete the job within the standard time.
(2) Since one fourth of wages for time saved goes to the foreman, he is induced to get higher productivity from his workers.
(3) The plan is most suited to the industrial units where worker is expected to perform more than one jobs because under this plan jobs can be reduced to standard unit B.
(1) Calculations under this plan is complex and therefore is difficult for workers to understand.
(2) Foreman is also entitled for one fourth share of bonus which workers do not like. They feel cheated.
Production based incentive plans:
Under these plans, a standard of output is determined on scientific basis. The payment of wages is made on the basis of number of units are produced. Efficient workers are benefitted because they get wages at higher rates. The following are the production based incentive plans.
Taylor’s Differential Piece Rate Plan:
This plan is devised by F.W. Taylor. Under this system day wages are not guaranteed. Taylor believed that the standard of performance can be accurately fixed by means of time and motion studies. After fixing a standard task two different piece rates are prescribed for payment of wages. Low piece rate to less efficient and high piece rate to more efficient workers. A high piece rate is payable to the workers whose performance is equal to or more than the standard prescribed.
A low rate is meant for those who do not achieve the set standard. This system of wage payment rewards efficient workers and penalize the slow workers by paying at low rate. This plan suits to those units where direct expenses are more than the cost of labour. The wage plans proposed by H. L. Gantt and Merrick are improvement over the Taylor’s differential piece rate of wages.
(1) This incentive plan provides more earnings to efficient and penalize less efficient workers. This differential in wage may enthuse less efficient workers to work more.
(2) Total output goes up because every worker wants to improve his efficiency thereby increasing their own earnings and output.
(3) It is simple and easily understood by the workers.
(1) Minimum wages are not assured by this plan.
(2) The penalty for low efficiency is very high for those whose productivity in less than the set standard.
(3) This may promote disunity among workers because of dual standards set for efficient and less efficient workers. This will also lead to jealousy among workers.
Merrick’s Multiple Piece Rate Plan:
Under this plan the workers are paid according to their efficiency in performance of jobs. Three different piece rates are offered to the workers with different efficiencies thus dividing them into three different categories.
The workers having efficiency less than 80 percent of the standard are paid as per basic piece rate prescribed. The workers having efficiency more than 80 percent but less than 100 percent of the standard gets wages at higher rate by 10 percent. The workers having 100 percent efficiency get wages at the highest rate of 20 percent in addition. These systems enable the less efficient lot to improve their efficiency to increase their earning.
It is a liberal plan giving further chance for workers to increase their efficiency and to enhance their earnings. It is a morale booster for hard working and efficient workers.
(1) This plan does not guarantee any minimum wages to the workers.
(2) There is a wide gap between two slabs.
(3) Each worker working below 80 percent of performance gets wages at the same rate. This creates dissatisfaction among comparatively efficient workers.
Gantt Task and Bonus Plan:
This plan is devised by H.L. Gantt, an associate of EW. Taylor. This plan guarantees the wages as per fixed time rates to the workers. Standards for output and time for performance of each job are fixed. If the workers complete the job within standard time or take less time receive wages for the standard time. In addition to this he gets bonus at the rate ranging from 20 to 50 percent of the time allowed.
The specialty of this system of wage payment is that the foreman also receives bonus for every worker under him who receives bonus. So foreman of each department takes special interest to see that every worker under him reach bonus standard.
(1) The minimum wages of workers are guaranteed.
(2) The workers with less ability get minimum wages and with more ability benefit more.
(3) It leads to increase production and lowers costs.
(1) Every worker is assured of wages at the rate of time rate. So less efficient workers also get wages at time rate. It discourages efficient workers.
(2) The workers unions are displeased with the scheme and they make demand for wages at high rate of time wage. These are all short term plans meant for production workers. There is few more incentive plans discussed below.
Halsey – Weir Premium Plan:
It is a modified version of Hasley premium plan introduced by G.J. Weir in England. The modification is in the percentage of incentive or premium on time saved. This percentage is 33.33 while the rest is shared by the employer.
The 100 percent Premium Plan:
Under this plan the task standard are set on the basis of time study and work sampling. The rates are expressed in terms of time rather than money e.g.:- 0.30 hour per piece. Workers are paid according to hourly rate. The plan is similar to straight piece rate plan except for its higher guaranteed hourly rate and the use of task time as a unit of payment instead price per piece. The worker gets the full value of time saved. Incentive Plan for White Collar Workers.
Incentives for Sales Personnel:
Sales – pay plans featuring commissions or bonuses based on the number of items or rupee volume sold can also be considered individual incentive plans. Most of the firms make payment to their sales staff on the basis of salary cum commission.
Many stockbrokers and real estate agents are paid solely on a commission basis. Advantage of commission payment is that they are tied to the revenues of the firm. Employees are motivated towards increasing sales volume. During recession the firm reduces the commission.
The sales staffs are paid in three ways:
(1) Straight Salary method:
According to which they receive monthly salary only. Here there is no linkage of incentive for hard work.
(2) Straight Commission Basis:
Sales personnel receive only commission on sales volume. Here the salesman will sell those items which are of high value.
(3) Combination of Salary and Commission:
Under this scheme sales personnel are paid a fixed salary and commission as an incentive based on sales volume.
Incentives for Managerial and Professional Employees:
Performance bonuses of some kind are the most frequently used incentive plans for management and exempt employees. The rates and other details vary greatly from company to company. Bonuses are allocated on the basis of manager’s contribution at the year end, on the basis of the extent to which the person attains the objectives agreed on at the beginning of the year under M.B.O. scheme, spot bonuses and cash awards are given to the managers and professionals for extra ordinary performance, stock option is yet another incentive given to them.
(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:
(1) Current Profit Sharing:
It is the one directly paid to the employee annually or six monthly.
(2) 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.
(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.
(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.