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The term INCENTIVES mean, something which encourages a person to do something. Or the “extra financial reward/ motivation”. Incentives is the performance-link reward to improve motivation & productivity of the employees. Incentives includes all that provide extra pay for the extra performance in addition to regular wages for the job.
  • 1. What is compensation & incentives? Why Incentives are Important? What makes an Incentives plan effective? Basic forms of incentives. Classification of Incentives Plans
  • 2. What is compensation & incentives?  The term COMPENSATION mean to give something in return. Weather in terms of money or product (i.e. goods & services).  From the organization point of view, to give something (generally in terms of money) for the work we obtain from the employees. Which includes wages, salaries & incentives.  To attract & retain effective & efficient manpower sound compensation policy has to be designed.  The term INCENTIVES mean, something which encourages a person to do something. Or the “extra financial reward/ motivation”.  Incentives is the performance-link reward to improve motivation & productivity of the employees.  Incentives includes all that provide extra pay for the extra performance in addition to regular wages for the job.
  • 3. Why Incentives are Important? Incentives are considered beneficial to both employers as well as employees in following ways.  Workers are likely to work at their best when they are offered monetary rewards for good performance.  Provide opportunity for hard-working & ambitious employees to earn more.  To improve work-flow, work methods & man – machine relation ship.  To bring employee involvement to make employee innovative.  Incentives are the sound technique of improving productivity.  Help to improve discipline and industrial relation.  The cost of supervision are reduced.  To obtain desired result.
  • 4.  In the absence of mutual trust between management & workers, an incentives may be viewed as an attempt to improve production/ profit only.  Incentive plan should be installed in consultation with workers & union.  Payment of incentives should be free from bias & established through scientific/ proper work study.  To implement incentives plane effectively minimum wages should be guaranteed to every workers.  It should be easy to understand & simple to operate so that employee can calculate their own earnings.  It should provide equal opportunity to all workers to earn incentives pay.  Plan should not be very costly in operation.  Plan should be flexible to adopt any changes later on.  Payment of incentives should be prompt i.e. as early as possible.  It should be adequate to motivate each employees.  Every plan should be reviewed periodically. What makes an Incentives plan effective?
  • 5. The basic from of incentives are as follow.  Bonuses :- is an incentive payment that is given to an employee beyond his normal standard wages. It is generally given at the end of the year & does not become part of the basic pay. The payment of bonus Act 1965 is applicable to every factory or establishment in which 20 or more person are employed in an accounting year.  Merit pay :- is a reward based pay on how well an employee done the assigned job. Higher the performance Greater will be the reward. The payment is depend on individual employee’s performance.  Commission for sales people :- is paid on the basis of sales made by the employee, through different plan. Such as Salary plan :- where new salesman is appointed, is unable to generate new. Commission plan :- where organization is totally based on sales of their product. Combination of both :- is the most frequently used method. Basic forms of incentives.
  • 6. Classification of Incentives Plans Profit sharing Co-partnership Gain-sharing ESOPs Incentives plans Output-based Individual Time-based Organization- wide Group Time-based
  • 7.  Time based incentive plan – Under time based plan, per hour wage rate is determined & incentives paid on the bases of time saved. – Time based incentives plane is divided in four different ways. – Hasley plan, Rowan plan, Emerson plan, Bedeuax plan. – This all plan more or less follow same method i.e. (pay bonus on the basis of timed saved by employee), but with different formula.  Output based incentive plan – Under output based plan, per piece wage rate is determined & incentives paid on the bases of output produced. i.e. more output in standard time OR standard output in less time. – For output based incentive following 3 method can be used. – Taylor plan, Merrick plan, Gnatt plan. Individual
  • 8. In this plan incentive is given to a worker, who is fast and completes work before the standard time to complete a job, However, a minimum base-wage is guaranteed to a worker, who completes the job up to the standard time, fixed for this job. Example Let Standard time : S hours Time taken by worker : T hours Wage rate : Rs. R per hour Incentive or premium : Wages for 1 percentage of time saved at a rate of R per hour HALSEY PREMIUM PLAN
  • 9. Wages to be Paid to a Worker (W) (i) When T > S W = TR + R (S – T)/100 (ii) When T < S W = SR
  • 10. Advantages of Halsey Premium Plan (i) Simple (ii) Beneficial to efficient worker (iii) Causes no harm to new worker, trainee, or slow worker (iv) Management shares benefits of over-achievement by workers (v) Minimum base-wage is guaranteed. Disadvantages of Halsey Premium Plan (i) Workers get only a percentage of return on their over-achievement (for example: 1% in above example). (ii) Due to undue importance on over-achievement quality suffers. (iii) Management gets wrong picture of worker’s ability.
  • 11. It is quite similar to Halsey plan except that incentive for completing the job in time lesser than standard time is paid to the worker. The incentive is paid on the basis of a ration, which is time saved over standard time per unit standard time. Thus, following notations used in Halsey plan wages to be paid to a worker (w): (i) When T > S W = SR + (S-T)R/S (ii) When T < S W = SR ROWAN PLAN
  • 12. Implication of term (S-T)/S in Rowan Plan As time saved (S – T) increased, time taken by the worker (ST) decreases, as standard time (s) is constant. Thus, as the incentive term increases, the base-wage term (TR) decreases. Therefore, the cumulative effect would be such that bonus rate decreases as output keeps on increasing over standard output. This prevents unnecessary over speeding by a worker, which may be counter-productive to quality or group behavior.
  • 13. (i) Checks over-speeding, overstrain by worker. (ii) Assured minimum base-wage (iii) Efficiency is rewarded Advantages of Rowan Plan
  • 14. (i) Discourages workers to over-achieve. (ii) Difficulty in ascertaining wages as it requires large data processing (iii) Sharing of profit for over-achievement may not be liked by workers. Disadvantages of Rowan Plan
  • 15. In this, a minimum time wage is guaranteed. Working condition and standard output are fixed on the basis of time-study. Bonus scheme is as follows: (i) Up to 66.67% to 80% of (SO) : (GW) + 4% of output. (ii) 66.67% to 90% of (SO) : (GW) + 10% of output. (iii) 80% to 90% of (SO) : (GW) + 10% of output. (iv) 90% to 1000% of (SO) : (GW) + 20% of output. (v) Above 100% of (SO) : (GW) + 20% of (SO) + 10% of output above (SO). EMERSON EFFICIENCY PLAN
  • 16. (i) Guarantees minimum wage till 66.67% of standard output. (ii) Efficient worker is rewarded handsomely. Disadvantages of Emerson Efficiency Plan (i) Disproportionate rate of bonus below standard output (ii) Chances of over-speeding and compromise of quality Advantages of Emerson Efficiency Plan
  • 17. In this plan also, a minimum base-wage is guaranteed. In this plan, the calculation of wage is based on a term. Bedeux point (B). One B is defined as a sum of fraction of a minute of effort and a fraction of a compensation for rest, aggregating to one. Standard time is also expressed in terms of Bs. A worker, who earns 1 B in one minute or 60 Bs in 1 hour, is 100% efficient. In this, incentive is paid for 75% of number of Bs exceeding 60 B per hour. The wage payment scheme is as follows: (i) When actual Bs earned by worker (Bw) > Bs for standard time Wage = RS + [B(W) - B(s)] * 0.75R/60 (ii) When Bs caused by worker (Bw) < Bs for standard time Wage = RS BEDEAUX POINT PLAN
  • 18. Advantages (i) Minimum base wage is guaranteed (ii) For time saved as compared to standard time, 75% of the compensation is given to worker. Rest 25% may be given to his supervisor. (iii) Bedeaux point may be added up for a worker even if his job requires different assignments in a day.
  • 19. In this, a minimum wage is guaranteed. Minimum wage is given to anybody, who completes the job in standard time. If the job is completed in less time, then there is a hike in wage-rate. This hike varies between 25% to 50% of the standard rate. Example Standard time = S hour Actual time = T hour (T < S) Time rate for wages = Rs. R per hour Bonus rate = P% of hourly rate = Rs. (PR) per hour Thus wage = (RS + PRS) in T hours = (RS + PRS)/T per hour GANTT TASK AND BONUS WAGE PLAN
  • 20. Advantages (i) Minimum wage in guaranteed (ii) Suited to efficient workers. Disadvantage Emphasis on over speed or high production rate
  • 21. In this scheme, up to a certain production level, which may be standard output, a piece rate (say R 1) is given. For anybody, who achieves more than this output, will get the payment for over achievement at a higher rate. However, it does not guarantee minimum base wage. Standard output may be decided by careful time and unction study procedure. DIFFERENTIAL PIECE RATE SYSTEM (OR TAYLOR’S PLAN)
  • 22. (1) Provides incentives to efficient worker (2) Penalizes inefficient worker (3) Focuses on high production rate (4) Simple and easy to implement (1) Minimum wage is not assured. (2) No consideration for the machine failure, power failure, etc. (3) Over emphasis on high production rate (4) There are chances that quality of work may suffer. Advantages of Differential Piece Rate System Disadvantages of Differential Piece Rate System
  • 23. This is a modification over Taylor’s plan. In this, a minimum base wage is not guaranteed. A worker’s wage is calculated as follows: (i) When output (O) is less than 83% of standard output (SO), scheme for wage (W) is equal to piece rate scheme. (ii) When 83% of (S) < O < 100% of (SO); W = 110% of piece-rate. (iii) When O > 100% of (SO); W = 120% of piece rate. Advantages Efficient workers are rewarded handsomely. Disadvantages (i) Wide gap in slabs of differential wage rate (ii) Over emphasis in high production rate MERRICK MULTIPLE PIECE RATE PLAN
  • 24.  Profit sharing – Profit sharing is an arrangement by which employees receive in addition to wages, a share is fixed in advance in profit of the enterprise. – It is an agreement between employer & his employee. – According to International Labour Organization, “Profit-sharing is a method of industrial remuneration under which an employer undertakes to pay to employee, a share in net profit of the enterprise in addition to regular wages”  Co-partnership – Co-partnership is an extension of profit-sharing. – Under this method worker’s share in company’s profit is paid in the form of share by which they become entitled to participate in decision-making process. Organization- wide – 1
  • 25.  Gain-sharing – This method aims at increasing productivity & decreasing labour cost & sharing the result gains wit employee. – It is based on a mathematical formula which compares a standard perform with actual performance during given period. – When actual performance exceed the standard performance, sharing are shared with employees.  ESOPs (Employee Stock Option Plans) – This method is originated in the USA in early 90s. – Under this plan, the eligible employee are allotted company’s share below the market price. – The term “stoke option” implies the right of eligible employee to purchase a certain amount of stoke in future at an agreed price. – The eligibility criteria may include length of service, contribution to the department etc… Organization- wide – 2
  • 26.  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. Group
  • 27. Conditions for Effective Incentives Plans  Plan is clearly communicated  Plan is understood  Rewards are easy to calculate  Employees participate in administering the plan  Employees believe they are being treated fairly  Employees believe they can trust the company and that they have security  Rewards are awarded as soon as possible after the desired performance.
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