INCENTIVE PLAN
Incentive means encouragement or inducement or reward to any person for putting this best efforts to achieve higher level of quality production. Permanent employees, in a well established organization, tend to loose interest in productivity. Their jobs are secured,
so why should they bother for production. The production will decrease on the pretext of lost time due to minor faults in a machine/equipment/tools/materials etc. There may be minor delays due non-co-ordination of feeding of raw materials or in process materials. Once a part of employee's earnings are related to his output, the employee will take initiative to overcome all these minor problems and will try to achieve higher level of performance by putting extra efforts & skill.
Incentive scheme should only be introduced in an organization after careful work study by qualified industrial engineers. Time standards for each & every operation will be set after improving the methods of working, layouts, material handling and tooling etc. If the standards are set on the basis of past production records or estimated timings, the employees will improve their methods of working themselves or at the cost of machines and tools, will start earning phenomenal incentive amounts, which ultimately lead to discontinuation of the scheme.
Incentive will be paid on the good pieces produced and these will be passed by quality control. Excessive rejection will penalize the incentive earnings by some formulated relations.Some of the wage incentive plans are discussed here below for direct operatives
Straight Piece Rate Plan- If the standard time for a particular job/ operation is 1 hour, the production per shift/day of eight hours will be eight pieces. Decide average earnings per day to perform the job requiring particular skill, education & experience. Say it is Rs 100. Now the piece rate for the job will be Rs. 100/8 = Rs 12.5. If a worker has produced 9 pieces, his earning for that day will be 12.5x9=Rs. 112.5. On the other hand, if he has produced only 7 pieces his earning will be 12.5x7=Rs 87.5.
This scheme is very easy to follow. The increase in production is rapid. Minimum wages are not guaranteed, so it is the prime responsibility of management to provide sufficient materials, tools, power, machines & equipment.
Straight Piece Rate with a Guaranteed Base Wage Plan
If the production is less than the targeted production, the worker still gets his minimum guaranteed wage of that day. This system takes care of enforced idleness beyond control of workers. e.g. long hours of power load shedding, m/c breakdown or shortage of materials. The loss time should be minimum of ½ an hour to be booked.
Differential Piece Rate Plan
In this plan, the minimum base wage is not guaranteed. If a worker produces above the out put standard (o.s),he gets incentive at higher piece rate On the other hand, if he produces below the output, he gets incentive at lower pc. rate (Refer to line (A) in Fig-1.
This scheme suggested by F.W. Taylor had the disadvantage that an inferior or fresh worker, who was unable to reach the output standard could earn very little and hardly survive.
Merrick modified the taylor's plan and introduced Merrick Differential piece rate system. This plan assured a minimum wage to the workers and suggested separate differential piece rates. In an increasing order for workers reaching upto 70%, 100%, 120% of the output standards and above (Refer Fig. 2). Due to its complex design, this plan was not popular.
Time Rate Plan
1. Halsey Plan- The minimum wage is guaranteed. The extra bonus is paid on the basis of time saved. It is a 50-50 plan, 50% benefit of the saved time will be given to employee, where as rest 50% will go to management.W=RT + ( S-T) / 2 x R
Where - W= wage
R= Hourly rate say Rs.8
T= Actual time taken to complete the job, Say 3
hours.
S= Allowed time, based on past production
records. Say, 4 hours.
W=8x3+( 4-3)/2 x 8= Rs 28.
Now, the wage rate per hour will be (28/3). Rs 9.67.
See Fig-3.
Rowan Plan
It is an improved plan over Halsey. Instead of 50% of time saved, the ratio of time saved to standard time is allowed as bonus ie.Bonus is paid on (S-T) / S rather
than ½ (S-T) In Rowan Plan W= RT +(S-T) / S R.T. Taking the previous example
W=8x3+ (4-3) /4 x 8x3
=24+6
=Rs. 30
Now, wage rate will be 30/3 =Rs 10 This scheme is useful where output standards (based
on past production) are not very accurate. Workers do not like sharing of their earnings in Halsey as well as Rowan Plan. See Fig. 3.
Gantt Plan: wage is guaranteed. Workers reaching upto output standards, based on scientific time study, will get normal wage rate. Workers, exceeding output standard, are paid at higher wage rate. Gantt Plan is an improvement over the Taylor's differential piece rate
Bedaux Plan
It is a standard minute plan with guaranteed base wage, in which 1 minute is represented by 1 B. It includes working time as well as personal need time ( Rest Allowance). A worker, producing job of 60 B's in an hour, will achieve 100% efficiency. Bonus will be paid at the rate of 75% of B's above 60 B's in an hour.
W=RT +75%(Ns-Nt) /60 x R
Where, W=Wage earnings.
R= Hourly rate, say Rs.8
T=Actual time taken, say 3 hrs.
Ns=Standard B's set for the job, say 240
Nt=No. of B's earned, say 180
Now,W=8x3 + 75%(240-180) / 60 x 8
=24+6
=Rs.30.
Here also, the hourly rate will be 30/3 = Rs.10
Emerson's Efficiency Plan:
It is an improved version of Bedaux Plan, in which a worker starts earning at 67% of his efficiency level. The earnings are 0 to 20% above 67% and upto 100% efficiency level. Above 100% efficiency level, the worker will get 1% increase in incentive for every 1% rise in his efficiency.
Efficiency= (Standard time for the job ) / (Actual time taken to complete the job)
Group Incentive Plan
This scheme is suitable, where performance of an individual employee is difficult to measure as he is working in a group to complete the job. The efficiency of the group will be worked out and the incentive amount will be distributed amongst the employees according to their skill / experience level. The scheme is suitable for employees working over a assembly lines, bridge building, house building and ship building etc.
Incentive Scheme for Indirect Employees Indirect employees like general helpers, material movers, sweepers etc. can be paid incentive based on the over all performance of direct employees of group/ section to whom they are serving. Here the scheme may be 50% or 75% of increase in productivity. Incentive Scheme for Managerial/
Supervisory Staff
This scheme is based on over all productivity of the plant. For the same output, reduction of employees or cut down of overtime will improve the productivity, last 2 to 3 years average level of productivity will form the base for comparing any particular month's productivity. Every 1% rise in productivity over base will entitle 1% of basic earnings of that employee as
incentive.
Inference
Incentive schemes are powerful tools for the management to improve productivity of a plant. However these schemes are under severe criticism if hurriedly implemented without agreement of employees or their representatives. The schemes should be well designed and administered by experienced industrial engineers.
CHAPTER- 2
INCENTIVE WAGE PLANS
Incentive
wage systems are considered to be incentive management systems.
Traditionally, incentive wage plans have been thought of as payment
plans based on the output of the employee, generally considered to be a
factory employee. But incentive wage systems of today go far beyond the
simple single objective of payment for output. Now-a-days incentive wage
systems are so designed that the employee feels satisfied intrinsically
as well as extrinsically.
Incentive
wages relate earnings to productivity and may use premiums, bonuses or a
variety of rates to compensate for superior performance (Dale Yoder,
1974). Thus, the incentive plans offer an attraction of extra payment
for efficiency or more production. They are popular all over the world
and are known by different names like variable pay, pay for performance,
contingent pay, merit pay etc.
Objectives Of Wage Incentive Plans
The
objectives of incentive wage systems have been made clear by
McGregor(1960) when he defines them as “a formal method providing an
opportunity for every member of the organization to contribute his brain
and ingenuity as well as his physical efforts to the improvement of
organizational effectiveness… It is the means by which rich
opportunities are provided to every member of the organization to
satisfy his higher level needs through efforts directed towards the
objectives of the enterprise.”
Benefits Of Incentive Compensation
Incentive
compensation, also called ‘payment by result’, is essentially a
managerial device for increasing workers’ productivity. Simultaneously,
it is a method of sharing gains in productivity with workers by
rewarding them financially for their increased productivity. The
advantage of incentive plans are as under:
(i) Alignment
between Organization’s Objectives and Employees’ Objectives. The
employee tries to increase productivity which is also the aim of the
organization.
(ii) Wage
Get Related to Output. Differences in employees’ ability, motivation
and output are automatically recognized and rewarded accordingly. This
understanding by the employees tends to reduce the friction, jealousy,
and resentment in the work group.
(iii) Unit
Labor Costs are reduced. Incentive wage plans result in reduction of
per unit labor, both direct and indirect, costs as the efficiency is
emphasized on.
(iv) Need for Less Supervision. Employees need lesser supervision as the employees are disciplined and responsible.
(v) Good
Human Relations. There are good human relations in the firm as the
workers are satisfied with higher earnings and management with increased
productivity.
Limitations Of Incentives Compensation
Except
employee’s attitudes, all other limitations of incentive wage systems
centre around situations involving the firm. These limitations are
briefly discussed below:
(i) Lack
of Receptive Attitude on the Part of the Management and the Employees:
The proper functioning of the system required existence of mutual trust
between labors and management. If workers think that high, unattainable
targets have been fixed, and/or management thinks that workers are not
putting in their best efforts, the system is going to fail.
(ii) Lack
of proper Management Practices: For incentives wages to be equitable,
working condition must be as nearly standard, uniform, and dependable as
possible. They should be available to all employees. Management must
make sure that enough work will be provided to workers so that maximum
wages can be earned by them. As most of these sound management practices
are absent, wage incentive systems also become less beneficial.
(iii) Leads
to Inequities in the Wage Structure: All the jobs in an organization
can be divided into two types manual jobs and physical jobs. Performance
of physical jobs is not that easily identifiable so they are paid
according to straight time basis. Many times, incentive pay systems
result in situations where hardworking but low skilled employees working
on incentive pay jobs earn more than the more skilled employees working
on jobs for which payment is made according to straight time wages.
These pay inequities can destroy social relationships, build resentment
and animosity among employees.
Types Of Incentive Plans
Following Exhibit shows an overall view of systems of wage payment and incentive plans.
Systems of Wage Payment and Incentive
A
good incentive plan should encourage the workers to work hard and
produce more than the standard production set for them. There are many
wage incentive plans which reward the workers for their better
performance. The standard output is determined on the basis of time and
motion studies by the specialists and the rates of wages are fixed for
different jobs on the basis of job evaluation. Broadly speaking, the
various wage incentive plans can classified into two groups:
(a) Individual incentive Plans,
(b) Group Incentive Plans as shown in the following table:
Individual Incentive Plans
Under
this, earnings are directly related to the performance of the
individual employee. Individual incentives may be based on time or
output. In time based plans, a standard time is determined and incentive
is paid if any employee completes the job in less than standard time.
In output based plans, a standard of output is determined and an
employee producing more than standard output is given incentive. Output
linked incentives can lead to:
(i) earnings varying in proportion to output; or;
(ii) earnings varying less proportionately to output; or;
(iii) earnings varying more proportionately to output; or;
(iv) earnings varying in different proportions at different levels of output.
Different incentive plans that reward efficiency are discussed here under.
The Straight Piece Work System. Worker is paid at a specified rate per unit of output.
The
standard Hour System. A standard time is worked out to complete a job
and in case an individual completes the job before time, he earns wages
for the time saved.
Halsey Premium Plan
This
incentive plan was devised by P.A. Halsey This system is a simple
combination of time-speed basis of payment. Under this plan, a minimum
time wage is guaranteed to every worker. A standard time is fixed for
the completion of a job. If a worker performs his job in less than the
standard time, he is rewarded. But there is no penalty for performing
the job in more than the standard time fixed. The slow worker is paid
the time wages and the efficient worker is paid some bonus in addition
to the time wages. The bonus is in proportion to the wage which he could
have earned during the time saved. The working of Halsey Premium Plan
is explained with the help of the following illustration:
Standard time (S) = 10
hours
Rate (R) = Rs. 4
per hour
Time (T) = 6
hours
Rate of Bonus (P) = 50%of time saved
Total Wages = T X R + (S-T) X P X R
= 6 X 4 + (10-6) X ½ X 4
= Rs. 32.00
In the above illustration, the worker gets Rs. 8 extra than he would have earned under the time wage system.
The merits of Halsey plan are as under:
1. Halsey premium plan is very simple to understand. The amount of wages can be calculated very easily.
2. Both the workers and the employer get the benefit of time saved.
3. Halsey
plan gives due importance to the efficient workers by paying them bonus
for the time saved by them in doing a particular job.
4. Minimum
wage is assured to each worker. Every worker gets wages for the time he
has actually devoted at the fixed rate irrespective of his output.
Halsey plan suffers from the following limitations:
1. workers
may not like the sharing of the benefit of their efficiency with the
employers. Under this plan, the worker get wages for 50% of the time
saved only.
2. There
may be deterioration in the quality of work because the worker may just
rush through not caring for the quality of the product or the amount of
waste of raw materials.
3. The standard time may not have been properly fixed.
Rowan Bonus Plan
Rowan Plan is a modification of Halsey Plan. It guarantees the minimum
time wages and does not penalize the slow worker. A standard time as
fixed for the completion of a job and the bonus is paid on the basis of
time saved. Bonus is a proportion of the wages earned by the worker for
the time taken by him and the proportion is the ratio of time saved to
standard time. It implies that as the time saved increases, time taken
will be reduced and as such the bonus would increase at a diminishing
rate. This will check over speeding and overcome a major drawback of
Halsey Plan. The working of this plan is explained with the help of the
following illustration :
Standard time(S) = 10 hours
Time taken (T) = 6 hours
Rate ( R) = Rs. 4 per hour
Total wages = T X R X [ T X R X Time saved__ ]
Standard time
= 6 X 4 + ( 6 X 4 X 4/10)
= Rs. 33.60
The advantages of Rowan plan are as follows:
1. As under Halsey plan, the minimum wages are assured in Rowan plan also.
2. Employer are also benefited when the efficient workers get bonus.
3. The
efficient workers get bonus at a diminishing rate if they save more
than 50 percent of the standard time. This checks them to overstrain
themselves and compels them to maintain quality.
The limitations of Rowan plan are as under :
1. Where
time saved is more than 50 percent of standard time, employees get
bonus at a diminishing rate. Thus, a worker is discouraged to achieve
saving in time more than 50 percent of the standard time.
2. Calculation of wages is difficult and the workers may not be able to understand this system .
3. The workers do not like sharing of the benefits of time saved by them.
Emerson Efficiency Plan
Under this plan, a minimum time wage is guaranteed to the workers.
Conditions of work are standardized and standard output is fixed which
is to be completed within a specified period of time .This plan is
similar to Gantt’s Task and Bonus Plan and is an improvement over the
Taylor’s Differential Piece Rate Plan.
Under
this plan, a worker is entitled to bonus if he is able to achieve 66.67
percent or more of the standard. If a worker’s output is less than
66.67 percent of the standard output, he does not get any bonus, but he
gets the minimum time wages. The workers whose output exceeds 66.67
percent of the standard get incentives at a differential piece rate, a
small bonus is paid for increases in efficiency from 66.67 percent
upwards, until at 80 percent efficiency the bonus payable is 4 percent,
at 90 percent efficiency, it is 10 percent and at 100 percent, 1 percent
bonus is given for every additional 1 percent efficiency. For instance,
if the standard output is 25 units and a worker produces 18 units, he
is 90 percent efficient. He will get wages for the day plus 10 percent
bonus. But if he produces 25 units, his efficiency will be 125 percent
and his remuneration will be day’s wages plus 45 percent bonus (20per
cent of 100 per cent and 25 per cent for efficiency above 100 percent.).
The
chief advantage of this plan to the workers is that their minimum wages
for the day are secured. If a worker is unable to produce 66.67 per
cent of the standard output, he is not deprived of his daily wage.
Secondly, there is enough scope for earning more and more for the
efficient workers. The rate of bonus increases at an increasing rate.
This plan is very beneficial to the extraordinary workers. This plan is
criticized by some people because the bonus rates are not uniform. Below
100 per cent efficiency 20 per cent bonus is to be distributed among
the additional 33.33 efficiency. But after 100 per cent efficiency,
bonus rate increases exactly in proportion to increase in efficiency.
Bedeaux Point Plan
Under this plan, the minute is the time unit described as the standard
minute and accounted as Bedeaux point B. In determining the Bs, the time
of operation and the time of rest taken into account. Thus, B may be
defined as a fraction of a minute of effort plus a fraction of
compensation rest always aggregating unity. The standard time for each
job is fixed after undertaking time and motion study and expressed in
terms of Bs. The standard time for a job is the number of Bs allowed to
complete it. Thus, if the standard time required for a job is five
hours, it will be expressed as 300 Bs.
The workers who are not able to or are just able to complete the work
within standard time are paid at the normal time rate. Those who are
able to complete their work earlier are paid bonus equal to the wages
for time saved as indicated by the excess of B point over the actual
time taken.
Generally, the bonus paid to the worker is 75% of the wages for time
saved. The remaining 25% goes to the foreman. The working of the Bedeaux
plan is explained with the help of the following illustration:
Standard time (S) = 300 Bs (5 hours)
Actual time (T) = 240 Bs (4hours)
Rate of wages (R ) = Rs. 6 per hour
60 Bs = 1 hour
Value of time saved = 300-240 x 6
50
= Rs.6.00
Total wages (W) = S x R + 75% of value of time saved
= 5 x 6 + 75 x 6
100
= Rs. 34.50
The merits of Bedeaux plan are as under:
1. In
industrial units where conditions are standardized and where
facilities exists for measuring the task and the output with a fair
degree of accuracy through time and method studies Bedeaux plan can be
useful as a bases for scientific production control particularly for
purpose of estimating, planning and controlling machine capacities and
for determining standard production costs.
2. The
Bedeaux premium plan is mostly used in those units where the
performance by individuals machines or workers has to be constantly
watched and kept under control by comparing the number of B’s actually
produced with the number of B’s standard.
3. Minimum wages are guaranteed to the workers, even if the are not able to complete their job within the standard time.
4. Since 25% of the wages for time saved goes to the foreman, he is motivated to get higher productivity from the workers.
The demerits of this plan are as under:
1.
Much clerical work is involved in maintaining record and in preparing
wages accounts etc. So in this respect, Bedeaux plan is costlier than
many other incentive plans .
2. Though
the earnings of a worker increase as his efficiency rises, the rate of
increment in the earning is less than in a straight piece rate plan.
3. Some employers considers that this plan is not easily intelligible to many workers.
4. Like
all other incentive plan, the success of this plan depends on the
reaction of the workers to the plan. Therefore, before adoption this
plan may need a certain amount of modification.
Taylor’s Differential Piece Rate System
Tailor’s plan is based on piece rate method and does not guarantee a
minimum time wage. Under this plan, standard output per hour or per day
of worker is fixed. There are two piece rates ; one for those who do not
attain the standards fixed and the other for those who attain or exceed
the standard. In the second case, the piece rate is higher. This system
provides an incentive to the efficient worker and at the same time
penalises the inefficient ones. Let us suppose that the standard output
per worker has been fixed at 8 units per day and the rate per unit for
this standard output or above is Rs.6 per unit. The worker producing 7
units will get Rs.37.50 and the one producing 8 units will get Rs.48.
Thus, the first worker is penalised at the rate of Rs.0.50 per unit if
he does not achieve the target output.
The benefits of Taylor’s plan are as follows:
1. The
system not only provides the incentive to efficient workers but also at
the same time penalises the inefficient ones. An efficient worker gets
full piece rate per unit of production and an inefficient worker (i.e.,
whose output is less than standard output) is paid at a lower rate per
unit.
2. There is increase in production because every worker tries to increase his productivity in order to get higher piece rate.
3. It is simple and easy to understand by the workers.
The drawbacks of Taylor’s plan are as follows:
1. Minimum wages are not assured to the workers. So it is vehemently opposed by the Workers.
2. The existence of lower piece rate in Taylor’s plan does not act as incentive force, but is
a sort of punishment to those who produce below the standard output.
3. This plan fails to attract workers who are accustomed to receiving time rate wages or piece rate wages back by guarantied wage.
On
the whole, the scheme is very harsh for those whose productivity is
less than the standard laid down. This plan may bring about disunity
among the workers because it divides them into two groups, viz.,
efficient and inefficient, the inefficient workers may feel jealous of
efficient ones as the letter get wages at higher rates.
Merrick’s Multiple Piece Rate Plan
M. Dwight V. Merrick realized that it is unreasonable and unrealistic
to classify all workers into two categories only, viz., workers of high
efficiency and those who lower efficiency because there are various
degrees of efficiency and there are many workers who actually work in
their effort to produce more and for their own progress. These persons
deserve to be encouraged. Merrick, therefore, introduced three piece
rates and made the lowest piece rate equal to the ordinary piece rate
which became the ‘Basic Piece Rate’. The rates introduced by Merrick are
usually as follow:
________________________________________________________________________ Output ( % of task) Piece Rate wage
1. less than 83% Basic Piece Rate
2. From 83% to 100% 110 % of Basic Piece Rate
3. Over 100% 120% of Basic Piece Rate
To the workers who are potentially high producer, Merrick plan is good
incentive system. It seems reasonable to pay production bonus at 110% of
the basic piece rate to the workers when they reach 83% task because
many workers should be able to reach 83 % task with a little extra
effort. When they do so, they will be encouraged to reach the 100% task
By introducing the basic piece rate for low output, Merrick removed the
punitive wage rate originated by Taylor. In fact, Merrick’s plan is
only a modified form of Taylor’s plan. Like Taylor’s plan, Merrick’s
plan also does not guarantee minimum wages for the workers. Another
drawback of the system is the existence of a wide gap in slabs. As is
obvious from the plan, all workers producing 1% to 82% of the standard
output are considered as sub-standard workers and are paid the same
piece rate.
Gantt’s Task and Bonus Wage Plan-
It
was developed by Henry L. Gantt, a close associate of F.W. Taylor.
Under it, standard time for every task is fixed through time and motion
study. Minimum time wage is guaranteed to all workers. A worker who
fails to complete the task within the standard time receives wages for
actual time spent at the specified rate. Workers who achieve or exceed
the standard get extra bonus varying between 20% to 50% of the hourly
rate for the time allowed for the task. Suppose, the standard time fixed
for the job 8 hours and the time rate is Rs 10 per hour and the rate of
bonus is 25 per cent. A worker who completes the task in 10 hours he
will be paid Rs. 80( 8 * Rs. 10) only. On the other hand, the worker who
completes the task in 6 hours will receive Rs. 100 (Rs. 80 + 25 % of
Rs. 80). Therefore, the actual rate comes out to be Rs.100 / 6 =Rs.
16.67 per hour.
Under
this method, minimum wage is assured to all workers, wages increases
progressively with increase in efficiency, and at the same time
inefficient workers are not penalized severally.
Merits:
· Minimum wages to every worker.
· Incentive for the efficient workers.
· Motivates the employees to increase their efficiency.
Group Incentive Plans
Under
these plans, bonus is calculated for a group of workers and the total
amount is distributed among the group members on one of the following
bases:
· If the group members possess similar skills and abilities, group bonus may be distributed among them on an equal basis; or
· If
the group members have different basic rates of wages, the bonus may be
distributed in proportion to the basic rates as under priestman’s
output bonus plan; or
· Group members may be paid bonus on a specified percentage basis.
Such percentage may be determined on the basis of skill, experience and basis rate of pay of each individual worker.
These methods are suitable in the following situations:
· Where it is not possible to measure the performance of each individual employee:
· Where the workers constituting a group possess similar skills, abilities, experience: and
· Where the finished product is the result of collective efforts of group members.
Priestman’s Plan
Under
this plan productivity of the group as a whole is the starting point.
Standard output is laid down for the group. However, a minimum wage is
assured to each group member. The group members become entitled to the
bonus if their output exceeds the standard. The bonus is paid in
proportion to the excess of actual output over the standard output. For
example, if the actual production is 20 per cent higher than the
standard output, the wages of each group member will rise by 20 per
cent. The additional wage of each member is his bonus.
The
main benefit of Priestman’s Plan is that it brings about a team spirit
among the group members. This scheme can be successful only if the
number of workers in the group is small. However, as no distinction is
made between efficient and inefficient workers, no regard is paid to
efficiency of the individual.
Gain Sharing Plan
Towne
devised this plan. Under this plan, half of the savings in labor cost
as a result of output in excess of the standard is distributed among
workers and foreman and bonus is paid half yearly. The percentage of the
foreman is fixed in advance.
Goal Sharing Plan or Work Team’s Results
Source: David (p. 46)
Source: Rothaermel (p. 20)
Source: Thompson and Martin (p.36)
The model can be applied to many situations and is a valuable tool
when organizational design is at question. The most common uses of the
framework are:
Cost advantage. Porter argued that a company could
achieve superior performance by producing similar quality products or
services but at lower costs. In this case, company sells products at the
same price as competitors but reaps higher profit margins because of
lower production costs. The company that tries to achieve cost advantage
is pursuing cost leadership strategy. Higher profit margins lead to
further price reductions, more investments in process innovation and
ultimately greater value for customers.
