INCENTIVES AND PERFORMANCE-BASED PAY

Subject: Human Resource Management

Prof Meenakshi Malhotra

Prepared by: Ashok Kumar

Nikki Latta

Ravneet Kaur

MBA GEN A

March 15th, 2017

WHAT ARE INCENTIVES?

Incentives are variable awards granted to employees according to variations in their performance. Anything that can attract an employee’s attention and motivate them to work can be called as incentive. An incentive aims at improving the overall performance of an organization.

IMPORTANCE OF INCENTIVE PLANS

Motivational Tool

Promoting Teamwork

Morale Boosters

Higher degree of Service to customers

Cost of supervision is reduced

Desired results

PRE-REQUISITES OF EFFECTIVE INCENTIVE

SYSTEM

The co-operation of workers in the implementation of an incentive scheme is essential . Workers' co-operation may be secured through proper discussion with their representatives. In particular, workers' co-operation is necessary in:I. The methods followed in measuring the results or

output upon which payment is based;II. The methods followed in setting wage rates for

different classes of work; andIII. Appropriate safeguards concerning earnings, job

security and settlement of disputes over piece-work rates and allotted time.

PRE-REQUISITES OF EFFECTIVE INCENTIVE

SYSTEMThe scheme must be based on scientific work measurement. The standards set must be realistic and must motivate workers to put in better performance.

There is greater need for planning. Many incentive schemes, started hurriedly, planned carelessly, and implemented indifferently have failed and have created more problems for the organization than they have tried to solve. 

Indirect workers, such as supervisors, foremen, charge hands, helpers, crane operators and clerical staff should also be covered by incentive schemes.

PRE-REQUISITES OF EFFECTIVE INCENTIVE SYSTEM

The other safeguards are: The incentive scheme should be appropriate to the type

of work carried out and the workers employed. The reward should be clearly and closely linked to the

efforts of the individual or group. Individuals or groups should have a reasonable amount

of control over their efforts and therefore their rewards.

The scheme should operate by means of a well-defined and easily- understood formula.

Provisions should be made for controlling the amounts paid, to en- sure that they are proportionate to effort.

Provisions should be made for amending rates in defined circumstances

TYPES OF INCENTIVE SCHEMES

EARNING VARY IN THE SAME PROPORTION AS OUTPUT

STRAIGHT PIECE-WORK SYSTEM

The Straight Piece-Work System is the simplest incentive method in which the rate per unit of output is fixed, and the earnings of the worker are computed by multiplying his total output by the rate per unit.

 Such as, if the per unit rate is 10 Paise and the total output is 1000 units, then his earnings will be 0.10 x 1000 = Rs 100.

STANDARD HOUR SYSTEM

The Standard Hour System is an incentive scheme in which the standard time in terms of hours is set for the completion of a job. The rate per hour is then determined. Under this method, the worker is paid for a standard time irrespective of whether the job is completed in the standard time or less. This means that the worker is paid the same wages even if the time spent is more than the standard hours unless he/she is guaranteed the time wages.

STANDARD HOUR SYSTEM

Standard time = 8 Hours Rate per hour = Rs 2

Case 1: Time taken = 6 hours Earnings = 8 x 2= Rs 16

Case 2: Time taken = 10 Hours

•Time wages are not guaranteed, then the worker’s earnings will be Rs 16 (8 x2).

•Time wages are guaranteed, then the worker’s earnings will be Rs 20 (10 x 2).

EARNING VARY LESS PROPORTIONATELY THAN OUTPUT

HALSEY PLANUnder Halsey Plan, the standard time for the completion of a job is fixed and the rate per hour is then determined. If the time taken by a worker is more than the standard time, then he shall be paid according to the time rate, i.e. time taken multiplied by the rate per hour. In case, the worker completes the works in less than the standard time, then he/she will be paid according to the actual time, i.e. time-rate plus the bonus calculated at a specified percentage of the saved time. Generally, the bonus percentage varies from 30-70 percent. The usual bonus share paid to the worker is 50% of the time saved multiplied by the rate per hour 

HALSEY PLANStandard Time: 8 hrs Rate per Hour: Rs 2

Case (1): Time Taken = 8 hrs Earnings = 8 x 2 = Rs 16 Case (2): Time Taken = 10 hrs Earnings = 10 x 2 = Rs 20 Case (3): Time Taken= 6 hrsEarnings: Time wages = 6x 2 = Rs 12 Bonus = ½ x 2 x 2 = Rs Rs 2 Thus, in the above example, the worker’s total earnings are Rs 14 (time wages +bonus), if he has completed the work in 6 hrs, less than the standard time.

ROWAN PLAN

Under Rowan Plan, the standard time for the completion of a job and the rate per hour is fixed. If the time taken by the worker is more than the standard time, then he is paid according to the time rate, i.e. time taken multiplied by the rate per hour.

In case, the worker completes the work in less than the standard time; then he is entitled to a bonus along with the time wages.

Bonus = Time Saved/ Standard Time

ROWAN PLANStandard Time = 8 hrs Rate per hour = Rs 2

Case (1): Time Taken = 8 hrs Earnings = 8 x 2 = Rs 16 Case (2): Time Taken = 10 hrs Earnings = 10 x 2 = Rs 20 Case (3): Time taken = 6 hrsEarnings:- Time Wages = 6 x 2 = Rs 12 Bonus = 2/8 X 2 = Rs 1.5Thus, in the above example, the worker completing the work in 6 hrs, less than the standard time, the total earnings will be Rs 13.50 (time wages+bonus).

BARTH VARIABLE SHARING PLAN

Under Barth Variable Sharing Plan, the earnings of the worker are ascertained by taking the square root of the standard hour multiplied by the number of hours actually taken for the completion of the job and then multiplying it by the worker’s rate per hour.

BARTH VARIABLE SHARING PLAN

Standard Time = 8 hrsRate per Hour = Rs 2

Case (1): Time Taken = 10 hrs

= 8.94 X 2 = Rs 17.88Case (2): Time Taken: 8 hrs

= 8 X 2 = Rs 16Case (3): Time Taken: 6 hrs

= 6.92 X 2 = Rs 13.84Thus, the worker will earn Rs 13.84, in case he works for less than standard, hours i.e., 6 hrs.

BEDAUX PLANThe Bedaux Plan is an incentive scheme in which the standard time for the completion of a job is fixed and the rate per hour is defined. Each minute of the standard time is called as point or B, such as in one hour there are 60 Bs.Under Bedaux plan, every job has a standard number of Bs. If the worker completes the job in more than standard hours, then he is paid according to the time-rate, i.e. time taken is multiplied by the hourly rate. In case, the work is completed in hours less than the standard time; then the worker is entitled to the bonus in addition to the hourly rate. A bonus is equal to the 75% of the earned/saved points (in excess of 60 per hour) multiplied by one-sixth of the hourly rate.

BEDAUX PLANStandard Time = 8 hrs Rate per Hour = Re 1

Case (1): Actual Time = 10 hrs Earnings = 10 X 1 = Rs 10 Case (2): Actual Time = 6 hrsEarnings: Time-wages =  6 X 1= Rs 6 Bonus:Standard Bs = 60 X 8 = 480 Actual Bs =60 X 6 = 360 Saved Bs =  120 (480-360)

Thus, total earnings = Rs 6 +1.50 = 7.50

Earnings Differing at Different Levels of Outputs

1.TAYLOR2.MERRICK3.GANTT4.EMERSON

TAYLOR’S DIFFERENTIAL PIECE RATE SYSTEM

There is low rate for output below the standard, and a higher piece-rate for output above the standard with a large bonus of 50% of the time-rate when the standard output is attained.

2 RATES

TAYLOR’S DIFFERENTIAL PIECE RATE SYSTEM

(CONTD.)Standard Output = 100 units Rate per Unit = 10 paise Differentials to be applied: 120 percent of piece-rate at or above the standard 80 percent of piece-rate when below the standard.

Case (i) Output = 120 units, Earnings = 120*(120/100)*0.10= Rs.14.40 Case (ii) Output = 90 units, Earnings = 90*(80/100)*0.10=7.20

MERRICK DIFFERENTIAL PIECE–RATE SYSTEM

It is a modification of earlier system with three instead of two rates.

Std Output = 100 units3 RATESPiece Rate = 10 paise

1. UPTO 83% - BASE PIECE-RATE

2. 83-100% - 110% OF BASE RATE

3. ABOVE 100% - 120% OF BASE PIECE RATE

MERRICK DIFFERENTIAL PIECE–RATE SYSTEM (CONTD.)

Case (i) Output= 80units Efficiency = 80/100*100=80% Earnings: As the efficiency is less than 83%, only base piece-rate applies: 80*.10=8.00

Case (ii) Output = 90 units Efficiency = 90/100*100=90% Earnings: As the efficiency is more than 83% but less than 100%, 110% of the base piece-rate applies: 90*(110/100)*0.10=9.90

Case (ii) Output = 110 units Efficiency = 110/100*100=110% Earnings: As the efficiency exceeds 100%, 120% of the base piece- rate applies: 90*(120/100)*0.10=13.20

GANTT TASK SYSTEM

The worker is guaranteed his /her time-rate for output below the standard. On reaching the std output or task, which is set at a high level, the worker is entitled to a bonus of 20% of time wages.

TIME BASED

3 RATES

GANTT TASK SYSTEM (CONTD.)Rate per hr = Rs 0.50, High piece-rate = Rs 0.10, Std Output = 80 units, Time Taken = 8hrs

Case (i) Output = 70 units. As the output is less than the standard only time wages are paid to the worker. Earnings = 8*.50= Rs 4.00

Case (ii) Output = 80 Units Earnings: As output is equal to the standard, the worker is entitled to time wages plus 20% of time wages as bonus. Time wages = 8*.50=4.00 Bonus = 20/100*4=Rs 0.80 Total Earnings = Rs.4.80

Case (iii) Output earnings= 110 Units. As the output is more than the standard, the worker is entitled to a high piece- rate. 110*.10= Rs.11.00

EMERSON’S PLAN

A standard is set for the job, & efficiency of each worker is determined by dividing the time taken by the std time.

EMERSON’S PLANStd Output in 10 hrs = 100 units, Rate per hr = Rs 1

Case (i) Output in 10 hrs = 50 units Earnings: Efficiency = 50% As efficiency is below 67 % the worker is entitled to time wages only. 10*1=Rs 10.00

Case (ii) Output in 10 hrs = 100 units Earnings: Efficiency = 100% The worker is entitled to time wages plus 20% of time wages as bonus. Time Wages = 10*1 =Rs 10.00 Bonus = 20/100*10 =Rs 2.00 Earnings: = 10 + 2 =Rs12.00

Case (iii) Output in 10 hrs = 130 units Earnings: Efficiency = 130% At the rate of 20% at 100% efficiency & one percent increase for every one percent increase in efficiency, the worker is eligible for 50% of the time wage as bonus. Time Wages = 10*1 =Rs 10.00 Bonus = 50/100*10 =Rs 5.00 Earnings: = 10 + 5 =Rs15.00

GROUP INCENTIVES PLANS 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.

Methods for team based incentives plans are Preistman’s production plan Town plan Co-partnership System

Preistman’s production plan

This committee represents management and worker union set forth the standard of performance in terms of number of units produced.

This set of standards are set in advanced every week and month.

If groups of workers achieve more than the performance level decided initially, bonuses are made payable to those workers.

% Bonus = (Actual Output – Standard Output) / Standard Output

TOWNE PLANS

Under this system, bonus is related to cost reduction usually the labour cost as compared with the predetermined standard.

Its applicable to both supervisors and workers.

Achieving cost saving not only on labour cost but also on overheads is the crux of this type of incentive plan.

CO-PARTNERSHIP PLAN

This system tries eliminate friction between the capital and labour. Under this system, not only does workers share in the profits of undertaking but he also takes part in its control and therefore, shares responsibilities. Few characteristics of this plan are as follows:

• Payment of existing standard wages of labour.• Payment of fixed rate of interest on capital.• Division of the surplus profit between capital and labour in an

agreed proportion.• Sharing in the control of business by the representatives of

labour.

BONUS SCHEME FOR INDIRECT WORKERS

Production cannot be increased by giving incentives to direct workers hence indirect workers are equally important. It is difficult to introduce an incentive scheme for indirect workers because standards cannot be set easily, efficiency is difficult to measure & actual output can’t be determined in relation to set standards. VARIOUS WAYS:Indirect workers can be associated with direct workers for eg: Supervisors, Material Handling Workers etc. & in this case bonus can be linked to output of direct workers .i.e. % of average bonus earned by direct workers. Indirect workers provide some general services, eg: Canteen staff, Cleaners etc. & their bonus can be based on output of department, output of entire organisation, merit rating, job evaluation, % of bonus for direct workers or high time-rates.

CONTINUED.....Sometimes, bonus of indirect workers can be related to total production of dept. of cost centre. In case of higher levels of production, higher rate of bonus are applicable.

POINTS TO BE CONSIDER WHILE INTRODUCING AN INCENTIVE SCHEME:

It should be able to achieve all round efficiency.

It should relate rewards to efforts.

The bonus should be payable at some regular intervals.

It should be introduced for a certain period.

INCENTIVE SCHEMES IN INDIAN INDUSTRIES

Introduced in 1946

Not identical within industries also.

Modifications done as per the suitability.

Still in infancy stage

REFERENCES

Human Resource Management (Text and Cases) by K Aswathappa