17-1
EXCEL BOOKS
INCENTIVE
PAYMENTS
• INCENTIVES AND
EMPLOYEE BENEFITS
Characteristics of a wage payment plan
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Simple
Beneficial
Equitable
Guaranteed minimum wage
Balanced
Incentive-oriented
Quality output
Certainty
Cost effective
flexible
Variable Pay Or Pay For Performance
Systems
Here the pay is linked to individual, group or organizational
performance. Employees have to compete and deliver results.
Three types of variable pay are commonly used:
 Individual incentives: they link individual effort to pay
 Group incentives: they link pay to the overall performance of
the
entire group
 Organization-wide incentives: here employees are rewarded
on the basis of the success of the organization over a specified
time period.
Essentials of a sound incentive plan
 Guaranteed minimum wages
 Simple
 Equitable
 Economical
 Flexible
 Supported by workers and unions
 Motivating
 Prompt payment
Compensation Administration
Methods of wage payment
Methods of Remuneration
The Rate System
Flat time High wage
rate
system
Payment by Results
Graduated time
rate
Piece rate
system
Straight piece
work
Differential
piece work
Taylor system
Gantt task
and bonus
systems
Premium bonus
plans
Group bonus
system
Combination of
time and piece
rate
Profit
sharing
Merrick system
Emerson
efficiency
system
Point
schemes
Bedeaux Haynes Manit
system
system
Halsey premium
plan
Rowan
scheme
Priestman’s production bonus
Compensation Administration
Accelerating
premium bonus scheme
Rucker plan
Other incentive
scheme
Scanlon plan
Towne plan
Co-partnership
Methods of Wage Payment
 Time wage system: A worker is paid on the basis of time spent
on
the
work, irrespective of the amount of work done.
 Plus points
 Simple and easy to operate
 Guaranteed wages to workers
 Favoured by trade unions
 Good for precision jobs
 Minus points
 Makes no distinction between efficient and inefficient
workers
 Offers very little to efficient workers
 Requires close supervision so that workers do not waste their time
 No relationship exists between wages and productivity
Methods of Wage Payment
 Piece rate system: A worker is paid at a stipulated rate per piece or unit
of output. This method is suitable where quality of work is not
important,
work is repetitive in nature, there is sufficient
demand for output to
guarantee continuous work and the job is a standardized one
 Plus points
 Encourages efficient workers to produce more
 Workers adopt better ways of getting things done, to earn more
 Idle time is reduced to the minimum
 Workers take every precaution to avoid machine breakdowns.
 Cost of supervision is less
Methods of Wage Payment
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Minus points
 Delays beyond one's control could affect workers earnings
adversely
 Beginners and slow learners are left behind in the race
 The focus on quantity would affect quality
 Workers may stretch themselves to unhealthy levels to earn
more
 Encourages rivalry between workers
Taylor's differential piece rate system: A worker is paid more
finishes the assigned task before the stipulated time.
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if he
Merrick's differential piece rate system: This method uses
threerates; up to 83%of the standard output workers are paid at the
ordinary piece rate; between 83% to 100% at 110% of the ordinary
piece rate and above 100% at 120% of the ordinary
piece rate.
Compensation Administration
Individual Incentive Plans
 Halsey plan: Here the worker gets a guaranteed wages based on the
time,
irrespective of whether the assigned work is completed or not. If the worker is able
to finish the task in less than the standard time, he or she is entitled to get fifty (in
some cases one third) per cent of time
saved at time rate in addition to normal
time wages.
 Rowan plan:
It assures minimum time wages. Bonus is paid on the basis of
time saved. But unlike a fixed percentage , it is calculated thus
Bonus = Time saved/Standard time X Time taken X hourly rate
 Gantt task and bonus plan: Here time wages are guaranteed.
Standard
time for each task is fixed. Workers, who fail to finish the job
within the time
limits, get time wages. A worker who reaches the standard is paid time wage plus
bonus at a fixed percentage (20 per cent)of normal time wages. If a worker
exceeds the standards, he is
paid a high piece rate.
Compensation Administration
Individual Incentive Plans
 Bedeaux plan: In this plan every operation is expressed in terms of standard
minutes called as “B's” representing one minute. A worker gets time wages for 100
% performance; ie, finishing the job exactly as per standards set. If actual
performance exceeds the standard
performance in terms of B's then 75% of
the wages of time saved is paid to worker as bonus and 25% is given to the
foreman.
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Haynes manit plan: It is more or less like the bedeaux plan. Here the
bonus is only 50 per cent as against 75 per cent, being paid to the efficient
worker. Of the remaining 50 per cent, 10% goes to the
foreman and the rest to
management.
 Emerson's efficiency plan: If the worker achieves 67% efficiency, he gets
bonus at a given rate. The rate of bonus increases gradually from
67% to 100%.
Above 100% bonus will be at 20% of the basic rate plus
1% for each increase in
efficiency.
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Accelerate premium bonus plan: Here the premium is paid at varying
rates for increasing efficiency.
Compensation Administration
Bonuses
It is an incentive payment granted to a worker at the end of a particular year,
in addition to one’s normal standard wage.
The Payment of Bonus Act, 1965
Compensation Administration
Merit Pay
Any salary increase awarded to an employee based on his or her
performance is called merit pay. It is like rewarding the best performers
with the largest increases in pay as an appreciative gesture from the
employer. When high achievers are rewarded, they set the benchmarks
for others to follow. But the whole process of recognising merit, measuring
performance, picking up the winners need to be followed objectively.
Compensation Administration
Commissions For Sales People
Compensation plans for sales personnel generally consist of a straight
salary plan, a straight commission plan, or a combination of both.
Evaluation of Incentive Plans
Incentives based on performance would definitely motivate people to give
their best to the organisation. They can improve their standard of living.
Other benefits include; better use of facilities, reduced supervision;
reduced lost time, absenteeism and turnover. There is, of course, the
dark side of the moon and the research evidence in this regard is
somewhat mixed.
Compensation Administration
Reasons for the failure of PFP systems
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Poor perceived connection between performance and pay
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Tendency of workers to speed up everything, leading to accidents, wastage of
resources
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Workers may ignore basic safety precautions in order to produce more
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Workers have inflated ideas about performance levels and when they fail to
receive expected rewards, they blame management
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Jealousies may arise among workers because some are able to earn more
than
others. Unions, not surprisingly, are opposed to PFP systems because these would go
against the spirit of “all for one and one for all”.
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Often, setting acceptable, attainable, objective standards is not easy.
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All said and done, money is simply a hygiene factor and has only limited
spur people to superior performance.
Compensation Administration
potential to
Guidelines for PFP systems
 Develop and implement PFP systems in an atmosphere of mutual trust and
confidence
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Make them easy to understand and implement
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Establish the relationship between effort and reward directly and clearly
 Recognize individual differences and set the targets keeping the
expectations of people in mind.
 Show clearly what is there in the plan for an efficient worker, apart from
the guaranteed wages.
Compensation Administration
Group or Team Based Incentive Plans
Here all team members receive an incentive bonus payment when
production or service standards are met or exceeded. Methods in this
category include Preistman’s production bonus, Rucker plan, Scanlon
plan, Towne plan and Co partnership. Under co partnership, the worker
gets his usual wages, a share in the profits of the company and a share in
the management of the company as well.
Compensation Administration
Compensation practices in India
Companies like Mastek, Godrej and Boyce have tried to link their rewards to team based
performance in recent times quite successfully
Team based rewards: Best practices
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Set quantifiable targets when evaluating team performance for rewards.
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Ensure that top performers in each team earn the highest level of rewards.
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Link team performance closely to the company's profits and overall financial health.
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Avoid subjectivity when assessing both the team and its member's performance.
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Offer uniform non-team based incentives to employees within each grade.
Other companies like Pfizer, Siemens have been linking rewards to shop floor workers based on
the worker ability to meet productivity as well as performance targets. In any case, the emerging
picture is quite clear especially in the post liberalisation era in India. The start that need
entrepreneurial action from its employees will have to offer large doses of cash, goal linked
incentive pay and possibly stock options to link compensation to profits. Mature companies,
whose focus is on managing their earnings per share and protecting market shares, will have to
seek out managerial talent and reward it with flexible tax-friendly compensation packages with
benefits designed to improve the quality of working life.
Compensation Administration
Organization Wide Incentive Plans
These plans reward employees on the basis of the success of the organisation over
a specified time period.
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Profit sharing: Here the organisation agrees to pay a particular portion
net profits (given in cash or in the form of shares) to eligible employees.
of
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Gain sharing: It is based on a mathematical formula that compares a
baseline of performance with actual productivity during a given period.
When productivity exceeds the base line an agreed upon savings is shared
with employees. Unlike profit sharing plans which have deferred payments, gain
sharing plans are current distribution plans. These are based
on
individual
performance and are distributed on a monthly or
quarterly basis.
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Employee stock ownership plan: It provides a mechanism through which
certain eligible employees (based on length of service, contribution
to
the
department etc) may purchase the stock of the company at a reduced rate.
Compensation Administration
Organization Wide Incentive Plans
Plus points
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Empower the employee to participate in the growth of a company as
part owner and get a fair share of the cake.
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Helps the company to retain talented employees and make them
committed to the job and the company
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Better industrial relations,
supervision, are other benefits
Compensation Administration
reduced
employee
turnover,
lesser
Incentive Schemes For Indirect
Workers
Since Indirect workers also play a key role in manufacturing operations,
their contributions need to be recognized and rewarded appropriately. The
list of beneficiaries here would include repairs and maintenance staff,
store staff, material handling staff, office staff etc. Such schemes, however,
must be based on some agreed criteria aimed at improving the overall
efficiency of the organization over a period of time.
Compensation Administration
Fringe Benefits
These are extra benefits provided to employees in addition to the normal
compensation paid in the form of wages or salaries.
Features
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Supplementary forms of compensation
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Paid to all employees
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Indirect compensation, since they are not directly related to performance
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May be statutory or voluntary
Need for fringe benefits
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Employee demands
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Trade union demands
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Employer's preference
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A kind of social security
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To improve industrial relations
Compensation Administration
Types of Fringe Benefits
Types of Fringe Benefits
Payment for Time
not worked
Hours of
work
Paid
holidays
Shift
Holiday
premium
pay
Retrenchment
compensation
Safety
measures
Canteens Consumer Credit Housing
societies societies
Employee
security
Safety and
health
Welfare recreational
facilities
Old age and
retirement
benefits
Paid
vacation
Lay off
compensation
Workmen’s
compensation
Legal aid
Health
benefits
Employee
Welfare
Holiday
counselling organisations homes
Educational Trans- Parties & Miscefacilities
portation picnic llaneous
Provident fund
Pension
Deposit linked insurance
Gratuity
Medical benefits
Compensation Administration