HRM - Excel Books - Chapter 17

8/9/2019 HRM - Excel Books - Chapter 17

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INCENTIVES AND

EMPLOYEE BENEFITS

EXCELBOOKS17-1

17Chapter


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ANNOTATED OUTLINE

17-2

INTRODUCTIONA proper system of wage payment is absolutely essential to keep

employees in good humour. Ideally, such a system must have the

following characteristics:

Compensation Administration

Simple

Beneficial

Equitable

Guaranteed minimum wage

Balanced Incentive-oriented

Quality output

Certainty

Cost effective

flexible

Characteristics of a wage payment plan


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Variable Pay Or Pay For PerformanceSystems

Here the pay is linked to individual, group or organisational 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

Organisation-wide incentives: here employees are rewarded on the

basis of the success of the organisation over a specified time period.



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Essentials ofasoundincentive plan


Guaranteed minimum wages

Simple

Equitable

Economical

Flexible

Supported by workers and unions

Motivating

Prompt payment


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Methods of Wage Payment

Methods of wage payment


Methods of Remuneration

The Rate System Payment by Results

Flat time High wage Graduated time Piece rate Premium bonus Group bonus Other incentive

rate system rate system plans system scheme

Combination of

Straight piece Differential time and piece Profit Co-partnership

work piece work rate sharing

Taylor system Merrick system

Gantt task Emerson Point

and bonus efficiency schemessystems system

Bedeaux Haynes Manit

sy stem sys tem

Halsey premium Rowan Accelerating

plan scheme premium bonus scheme

Priestmans production bonus Rucker plan Scanlon p lan Towne plan


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Time wage system: A worker is paid on the basis of time spenton 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 inefficientworkers

Offers very little to efficient workers

Requires close supervision so that workers do not wastetheir time

No relationship exists between wages and productivity


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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

standardised 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



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Taylor's differential piece rate system: A worker is paid more

if he finishes the assigned task before the stipulated time.

Merrick's differential piece rate system: This method usesthreerates; 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.


Minus points

Delays beyond one's control could affect workers earningsadversely

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 earnmore

Encourages rivalry between workers



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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 jobwithin 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.


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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. 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 from67% to 100%. Above 100% bonus will be at 20% of the basic rate plus

1% for each increase in efficiency.

Accelerate premium bonus plan: Here the premium is paid at varying

rates for increasing efficiency.


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Bonuses

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It is an incentive payment granted to a worker at the end of a particular

year, in addition to ones normal standard wage.

The Payment ofBonus Act, 1965The Act defines an employee who is covered by it as one earning Rs 2,500 p.m. (w.e.f.

1.4.93) basic plus dearness allowance and specifies the formula for calculating the allocablesurplus from which bonus is to be distributed. The minimum bonus to be paid has beenraised from 4 per cent to 8.33 per cent (w.e.f. 25.9.75) and is sought to be linked toincreased productivity in recent times. Through collective bargaining, the workers, throughtheir representative union, can negotiate for more than what the Act provides and get thesame ratified by the government, if necessary. In the absence of such a process, the Actmakes it mandatory to pay bonus to employees (who have worked in the unit for not lessthan 30 working days in a year) following a prescribed formula for calculating the availablesurplus. The available surplus is normally the gross profits for that year after deductingdepreciation, development rebate/investment allowance/ development allowance, direct taxand other sums referred to in Sec. 6 The Act applies to every factory or establishment inwhich 20 or more persons are employed in an accounting year. Currently the position is suchthat even if there is a loss, a minimum bonus needs to be paid treating the same as deficit tobe carried forward and set off against profits in subsequent years (Sec. 15). The Act isproposed to be changed since the amount of bonus, the formula for calculating surplus, andthe set off provisions have all been under serious attack from various quarters.


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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 winnersneed to be followed objectively.


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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.


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Reasonsforthefailure of PFP systems

Poor perceived connection between performance and pay

Tendency of workers to speed up everything, leading to accidents, wastage of

resources

Workers may ignore basic safety precautions in order to produce more

Workers have inflated ideas about performance levels and when they fail toreceive expected rewards, they blame management

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.

Often, setting acceptable, attainable, objective standards is not easy.

All said and done, money is simply a hygiene factor and has only limitedpotential to spur people to superior performance.


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Guidelinesfor PFP systems

Develop and implement PFP systems in an atmosphere of

mutual trust and confidence

Make them easy to understand and implement

Establish the relationship between effort and reward directly

and clearly

Recognise 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.


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Group or TeamBased 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 Preistmans 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.


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Compensation practicesin India

Companies like Mastek, Godrej and Boyce have tried to link their rewards to team basedperformance in recent times quite successfully

Team based rewards: Best practices

Set quantifiable targets when evaluating team performance for rewards.

Ensure that top performers in each team earn the highest level of rewards.

Link team performance closely to the company's profits and overall financial health.

Avoid subjectivity when assessing both the team and its member's performance.

Offer uniform non-team based incentives to employees within each grade.

Other companies like Pfizer, Siemens have been linking rewards to shop floor workersbased on the worker ability to meet productivity as well as performance targets. In anycase, 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 largedoses of cash, goal linked incentive pay and possibly stock options to link compensationto profits. Mature companies, whose focus is on managing their earnings per share andprotecting market shares, will have to seek out managerial talent and reward it withflexible tax-friendly compensation packages with benefits designed to improve thequality of working life.


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OrganisationWide Incentive Plans

These plans reward employees on the basis of the success of the

organisation over a specified time period.

Profit sharing: Here the organisation agrees to pay a particular portion

of net profits (given in cash or in the form of shares) to eligible

employees.

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.

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.


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Plus points

Empower the employee to participate in the growth of a company as

part owner and get a fair share of the cake.

Helps the company to retain talented employees and make them

committed to the job and the company Better industrial relations, reduced employee turnover, lesser

supervision, are other benefits

OrganisationWide Incentive Plans


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Incentive Schemes For IndirectWorkers

Since Indirect workers also play a key role in manufacturing

operations, their contributions need to be recognised 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 organisation over a

period of time.


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FringeBenefits

These are extra benefits provided to employees in addition to the

normal compensation paid in the form of wages or salaries.

Features Supplementary forms of compensation

Paid to all employees

Indirect compensation, since they are not directly related to performance

May be statutory or voluntary

Needforfringebenefits

Employee demands Trade union demands

Employer's preference

A kind of social security

To improve industrial relations


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Types of FringeBenefits

pes of rin e enefits

Payment f r Time Empl yee afetyand Welfare recreati nal ldageand

not

orked sec

rity health facilities retirement

enefits

Hours of Paid hift Holiday Paid

work holidays premium pay vacation

Retrenchment

ayoff

compensation compensation

afety Workmens Healthmea sures compensation benefits

anteens

onsume r

redit Housin g Le gal aid Employee Welfare Holid ay E ducational Trans- Parties &

societies societies counselling organ isations homes facilities portation picnic

Provident fund

Deposit linked insurance

Gratuity

Medical benefits

Misce-

llaneous

Pension

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HRM - Excel Books - Chapter 17

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