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8/14/2019 Compensation and Incentive Plans
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COMPENSATION:Wage and
Salary Administration
Compensation : It
refers to a wide rangeof financial and non-
financial rewards to
employees for their
services rendered tothe organisation.
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Compensation
Base Compensation : It involves the
basic compensation an employee getsusually as a wage or salary.
Supplementary Compensation: It
involves benefits offered through
several employee services and benefitwhich is linked directly to
performance accomplishments and as
a part of organisational membership.
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Base
Compensation
Supplementary
Compensation
•It denotes payments toworkers in the form of wages
and salaries
•Wages and Salaries are paid in
cash
•Wages and Salaries are paid tocompensate employees for their
services
•Wages and Salaries are
determined by job evaluation,
demand and supply of labour,Org. capacity to pay etc.
•It is over and above wages and salaries
•Fringe benefits are offered in terms of
employee services and benefits like
housing, medical etc.
•Fringe benefits are made to increase the
efficiency of the employees and to retain
them.
•Supplementary compensation is
determined by the history of the
organisation, capacity of the org. to spend
on employees, desire to enhance public
image etc.
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Objectives of compensation
planning• Fairness or Equity
• Attracting capable
employees
• Motivating employees for
better performance
• Retaining employees
• New and desired behaviour
• Comply with legal rules
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Equity and pay rates
• Job evaluation
• Wage and salary surveys
• Group similar jobs into Pay Grades
• Price each Pay Grade- Wage Curves
• Fine tune pay retes and determine WageStructure
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Factors influencing compensation
level• Job needs
• Ability to pay
• Cost of living
• Prevailing wage rates
• Unions• Productivity
• Demand and supply of labour
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Types of wages
• Minimum wage
• Fair wage
• Living wage
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State regulations of wages
• Minimum wages Act 1948
• Payment of wages Act 1936
• Adjudication of wage disputes
• Wage Boards
• Pay Commissions
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Wage and Salary Differentials
Differentials in pay for
various jobs constitutethe core of wage and
salary administration
and structure.
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Types of wage differentials
• Interpersonal differential
• Inter-occupational differential
• Inter-area differential
• Inter-firm differential
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Terminology
• Wages
• Salary
• Wage Rate
• Wage Scale
• Nominal Wages
• Real wages• Fringe Benefits
• Take Home Pay
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Wage and Salary Administration
The control of wage
and salary levels is of
paramount importance,
even though the amount of
control which can be
exerted may vary among
organisations and withinan organisation from time
to time.
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Objectives of Wage and Salary
Administration• Control of costs
• Establishment of fair and equitable
remuneration• Utilisation of wages and salary as an
incentive to greater employee productivity
• Maintenance of a satisfactory public relations
image
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Wage and Salary Policies
Various forms of wages
and salary policies have been developed like:
• Traditional approach
• Formula approach
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Time Wage system
Under this system , the
worker is paid for the
amount of time spent on
the job.The period of timemay be an hour,a day,a
week,a month etc.
Wages = Hours worked xRate per hour
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Time Wage system
Disadvantages:
• Inefficiency• Lack of Motivation
• Increased Supervision
• Increases labour cost per
unit
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Piece Wage System
Under this system,the
output of work is the basis
of wage payment.A
worker is paid according
to the amount of work
completed or the number
of units turned outirrespective of the time
taken.
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Piece Wage System
Advantages:
• Incentive for higher
production
• Fairness
• Costing
• Lesser Supervision
• Reduction in Idle time• Economy
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Piece Wage System
Disadvantages:
• Low quality
• Insecurity to workers• Strained industrial
relations
• Difficulty in rate fixation
• More administrative work• Wastage
• Health Hazard
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• Incentive wages relate earnings to
productivity and may use premiums,
bonuses or a variety of rates to compensatefor superior performance. Also known as
„payment by result‟.
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Kinds of Incentive plans
1)Individual incentive plans
2)Group incentive plans
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Individual Incentive Plan
Individual incentive plan is further divided
into two groups-
A) Time based incentive plans
B) Production based incentive plans
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Incentive wage plans
(Based on time)
1. Halsey plan2. Rowan plan
3. Emerson‟s Efficiency plan
4. Bedeaux Point plan
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a) Halsey Plan
This plan was originated by F.A.Halsey, anAmerican engineer. The main features of this
plan are_
1) Standard time is fixed for each job or operation.
2) A minimum time wage is guaranteed to everyworker.
3) If the job is completed in less then standardtime, a worker is paid a bonus of 50% of timesaved.
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Merits
• This plan is very easy to understand & theamount of wages can be calculated easily.
• It guarantees minimum wage & thus security tothe employees.
• The benefit from time saved is shared equally between the employer & the workman.
• It encourages workers to be efficient becausesuch efficiency is rewarded in cash.
• Saving in time reduces both labour cost &overhead expense.
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Demerits
• Fixation of standard time for various job is
not easy.
• The worker don‟t secure full benefit oftheir efficiency but only to the extent of
50%.
• Workers may do the work in hurry & thequality of production may suffer.
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b) Rowan Plan
This plan was introduced by D.Rowan in
1901. Here, also the bonus is paid on the
basis of time saved. But unlike a fixed percentage in the case of Halsey plan, it
takes into account a proportion as follow:
Time saved/ Time allowed or Standard time
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Merits
• It assures minimum wages to every worker.
• The efficient workers get bonus at
diminishing rate if they save more than 50%of the standard time.
Demerits
• The ordinary worker may find the bonuscalculation a bit difficult.
• It discourages very efficient workers.
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c) Emerson‟s Efficiency Plan
• Emerson suggested guaranteed wage
payment to all workers on time rate basis &
bonus to those who prove to be efficient.• If efficiency of a worker reaches 66.67% he
get bonus.
• At 100% efficiency bonus would be paid at20% of the basic rate plus 1% for each 1%
increase in efficiency.
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Merits
• It gives guarantee to minimum wages to all theworkers.
• There is an incentive for efficient workers in theform of extra payment & the rate of bonus isrelated to efficiency in a rational manner
Demerits• The bonus below 100% efficiency is not
attractive.
• It is not liked by below average workers as theydon‟t get any incentives.
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d) Bedeaux Point Plan
• In this plan, the minutes of the time unit describedas the standard minutes & accounted as Bedeaux
point “B”.
• The standard time is fixed for each job afterundertaking time and motion study and expressedin terms of B.
• The standard time for a job is the numbers of B‟s
allowed to complete it.• The bonus paid to the worker is 75% of the wagesfor time saved.
• The remaining 25% goes to the foreman.
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Merits
• Minimum wages are guaranteed to the workers.
• Since 1/4th of the wages for time saved goes to
the foreman, so he is motivated to get higher productivity from the workers.
Demerits
• Calculation under this plan are complicatedhence workers are not able to understand.
• The workers don‟t like that foreman should their
bonus.
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Production Based Incentive Plans
Under the production based incentive plans,a standard of output is determined on
scientific basis and payment of wages ismade on the basis of number of units produced.
Some important production based incentive plans are:
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Incentive wage plans
(Based on productivity)
• Taylor Differential Piece Rate Plan• Merrick Multiple Piece Rate Plan
• Gantt Task and Bonus Wage Plan
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A) Taylor‟s Differential Piece Rate
system• This plan was suggested by F.W.Taylor.
• In this plan Taylor did not provide
minimum guarantee wages payment eachworkers.
• The lower rate is given to those who are
average or less efficient and give production below the standard workload fixed and
vice-versa.
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Advantages
1) Taylor plan makes distinction between efficient workersinefficient workers.
2) It forces workers to be efficient because there is no
guarantee to minimum wages payment of workers.3) This system of wage payment is popular among efficient
workers as they draw more wages under it.
Disadvantages1) There is no guarantee of minimum wages payment to
workers.
2) It treat worker not as a human being but as a machine.
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B) Merrick‟s Multiple Piece Rate Plan
• This plan offer three grade piece rates ratherthan two given by Taylor.
• The workers who produce less than 83% ofstandard output are paid at a basic pay rate.
• Those workers producing from 83-100% are paid 110%of basic piece rate.
• And the workers producing more than110% are paid 120%of the basic piece rate.
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C) Gantt task and Bonus Plan
• This plan combines time, piece and bonus
systems.
• Standard time for task is fixed.
• If a worker reaches the standard, he will be
paid time wage plus a bonus at fixed
percentage of days wages (20%)• So the actual rate per hour exceeds
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Group or Team based Incentive
Plan• Priestman‟s plan
• Co-partnership
• Scanlon plan
• Towne plan
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Organisation Wide Incentive Plan
• Profit sharing : is a scheme whereby employers undertake
to pay a particular portion of net profits to their
employees on compliance with certain service conditions.
(annual bonus)
• Employees Stock Option plan : originated in U.S in early90s. The eligible employees are alloted company‟s shares
below the market price.
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Fringe Benefits
• Extra benefits provided to employees in
addition to the normal compensation paid
in the form of wage and salary .(extended asa condition of employment but not directly
related to performance)
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Main features
• Supplementary forms of compensation.
• Paid to all employees unlike incentives.
• Usually extended as a condition of
employment.
• May be statutory or voluntary.
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Types of Fringe Benefits
• Payment for time not work
• Employee security
• Safety measures
• Workmen‟s compensation
• Health benefits
• Welfare and recreation facilities
• Old age and retirement benefits
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