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Incentive Management

Date post: 18-Nov-2014
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Page 1: Incentive Management
Page 2: Incentive Management

INCENTIVE INCENTIVE MANAGEMENMANAGEMEN

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INCENTIVES

‘Incentive’ may be defined as any reward or benefit given to the employee over and above his wage or salary with a view to motivating him to excel in his work. Incentives include both monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate individual or group performance.

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MERITS OF INCENTIVES

Higher output Greater profits No problem of idle time Supervision does not pose any problem Efficient workers are able to earn more Possible to identify inefficient and dull

workers Rate of labour turnover is bound to be low Reduction in complaints and grievances

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REQUIREMENTS OF A SOUND INCENTIVE PLAN

1) Trust and confidence2) Consensus required3) Assured minimum wage4) No scope for bias or favoritism5) Simple to operate6) Beneficial to both the workers and the

management7) Sound system of evaluation8) Redressing grievances9) Review

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TYPES OF INCENTIVESTypes of Incentives

Financial or Pecuniary Incentives Non-financial Incentives

1. Wages2. Salary3. Premium 4. Bonus

1. Job Security2. Recognition3. Participation4. Pride in Job5. Delegation of Responsibility6. Quick Promotion7. Facilities for Development8. Labour Welfare Amenities

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CATEGORIES OF VARIABLE PAY PLANS

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CONDITIONS FOR SUCCESSFUL GROUP/TEAM INCENTIVES

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Incentive Plans

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INCENTIVE PLANS Piece Rate

Piece rate incentive is given to the employees based on the number of units produced. This plan is practiced in the sectors dealing with manufacturing of products such as engineering – automobile, telecommunication, FMCG, etc.

Commissions

Commission is a variable component of compensation package. It is given on the basis of business generated by the employee. Commission is a pre fixed component say 5% of the total sales done by the employee. It is practiced in the retail, FMCG and other sectors in the marketing and sales segment. 11

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INCENTIVE PLANS

BonusesBonuses are given to employees on a pre established goal or criteria. The organizations set policies regarding the bonuses. Usually bonuses are provided during the festive season.

Merit RaisesMerit raises are given on the basis of predetermined policies. The employees are given raise on the basis of their performance. The performance standards are set by the organizations much in advance.

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INCENTIVE PLANS

Standard Hour PayStandard hour plan provides incentives to employees based on the time saved by them during the job course. Employees’ productivity and quality is evaluated with respect to the set standards.

Maturity CurvesMaturity curve incentive plan considers the experience and performance of an employee for giving out the incentives. It is practiced in all the industries. Experience is always given a weight-age as experienced people can produce better quality results.

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INCENTIVE PLANS Gain Sharing

Gain sharing incentive plans undertake those employees who give outstanding performances and provide for cost saving measures. Organizations believe in sharing the profits with the employees who are responsible for producing those results.

Profit SharingProfit sharing incentive plans are practiced in retail and FMCG sectors. Other sectors too implement the plan based on organizational policies. It refers to giving out the share of profits the organization earned to all the employees. Indirectly all the organizations follow the plan by giving out the dividends. 14

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EMPLOYEE STOCK PLANS Stock Option Plan

A plan that gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time.

Employee Stock Ownership Plan (ESOP)

A plan whereby employees gain significant stock ownership in the organization for which they work.

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ORGANIZATION WIDE INCENTIVE PLANS

Employee Stock Ownership Plan (ESOP)

A firm annually contributes its own stock—or cash (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the employees.

The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock. 16

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EMPLOYEE STOCK OWNERSHIP

PLANS (ESOP)Advantages of

ESOP

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VARIOUS INDIVIDUAL AND GROUP INCENTIVE PLANS

Incentive Plans

Individual Incentive Plans Group Incentive Plans

1. Priestman’s Plan2. Scanlon's Plan

Time- based Plans Output-based Plans

1. Halsey's Plan2. Rowan's Plan3. Emerson's Plan4. Bedeaux's Plan

1. Taylor's Differential PieceRate Plan2. Merrick's Multiple PieceRate Plan3. Gantt's Task Plan

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HALSEY'S PLAN

Bonus = 50% (Time Saved x Time Rate)

Total Earnings = Time Rate x Time Taken + Bonus

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ROWAN'S PLAN

Bonus = % of Time saved/ Standard Time x Time Wage

Total Earnings of the worker = Time

Wage + Bonus

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EMERSON'S EFFICIENCY PLAN

Under Emerson's plan too minimum wage is guaranteed to all workers.

Payment of bonus, however, is related to the efficiency of the workers.

Efficiency is determined by the ratio of time taken to standard time.

Usually, a worker is given bonus only when his level of efficiency, in terms of percentage, is above 66.67%.

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BEDEAUX'S PLAN Under this plan, the standard time and time

taken for each job is reduced to minutes,

Each minute is referred to as "B", i.e., one hour is the same as 60 B's.

The bonus and total earnings of the worker, under the plan, are calculated as follows:

Bonus = 75% (Standard Time - Time Taken) x Time Rate

Total Earnings = Time Wage + Bonus 22

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TAYLOR'S DIFFERENTIAL PIECE RATE PLAN

A lower rate for those workers who are not able to attain the standard output within the standard time; and

A higher rate for those who are in a position to produce the standard output within or less than the standard time.

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MERRICK'S MULTIPLE PIECE RATE PLAN

1) Workers producing less than 83% of the standard output are paid at a basic rate.

2) Workers producing between 83 % and 100% of the standard output will be paid 110% of the basic piece rate.

3) Those producing more than the standard output will be paid at 120% of the basic piece rate.

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GANTT'S TASK PLAN

Its special feature is that it combines time rate, piece rate and bonus.

A worker who is unable to produce the standard output receives only the time wage. He becomes eligible for bonus only when he attains or exceeds the standard output within the standard time.

The rate of bonus varies between 20% to 50% of his wages.

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SCANLON PLAN

Scanlon's philosophy was that if the company would foster and use employee ideas and suggestions and, in turn, reward employees for their constructive efforts, the company would improve profitability and workers would gain through steady employment and increased pay.

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SCANLON PLANThe Production Committee

Formed in each major department and is used to tap into the imagination and ingenuity of the workers.

The Screening CommitteeConsists of top members of the plant

management and workers representatives, usually eight to twelve members.

It reviews the monthly bonus, discusses current production problems, and considers all suggestions for organizational improvement.

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SCANLON PLAN

The Basic Elements of the Scanlon Plan are:The Ratio

Total labor cost / sales value of production.

The Bonus

Depends on the reduction in costs below the preset ratio.

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Benefits of Incentives 29

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WHY VARIABLE PAY PLANS FAIL

Plan incentives are not seen as

desirable

Plan doesn’t reward doing a

good job

Plan doesn’t motivate

Plan rewards teams/groups rather than individuals

Plan doesn’t increase base

pay

Employees’ View of

Variable Pay Plan

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