INCENTIVE SCHEMES

Contents

Introduction & MDW System – Prerna

Thakur(209) Payment by result – Dhrubajyoti Maitra(192) Group incentives – Shweta Kotnala(120) Company wide incentives – Shruti Negi(60) Behavioral and financial aspects –

Aditya Choudhary(182) Practical Applications – Ankita Dalal(185)

Incentives schemes

• An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. .

• It is an employee motivational program designed to encourage commitment to increase productivity.

Types of incentive schemes

Incentives schemes can be classified into –

A) Individual incentives schemes:- Measured day work system. Payment by results system.

B) Group incentive system.

C) Plant wide /Company wide incentive system.

D) Financial incentives.

Individual incentive schemes

Under this system of individual incentives, all or a portion of an individual pay is tied to their performances.

There is a direct link between individual performance and remuneration.

Measured day work system

Under this system, an employee have to maintain a target level of output in order to secure a stable higher wage rate.

If employee performance falls below target, their wage rate will downgraded.

It suits organizations where a high , steady and predictable level of performance is required rather than highest individual performance.

Advantages

Employees who fulfills specified target level of output will secure higher wage rate.

Employee if not meeting target level for a period 1-First given warning and 2-If again the same is repeated the basic wage rate

is reduced. Two levels of wages:- 1-An agreed higher level of wages for a specific

higher level of consistent performance. 2-Basic wage for lower levels of performance.

Payment by result

It is the continuous relation between money and results.

It gives different results would different wages.

The schemes are modified to accommodate the modern day requirement that the woker are guaranteed a minimum flat wage rate.

Acceptable productivity level

It is the level of output rate or productivity above which the incentive starts.

It is established jointly by management and labour.

It is considered as ‘normal’ or ‘fair’ and can be expected from an unmotivated but other conscientious and fit workers.

Motivated Productivity level

Management is more interested in MPL. It is maintained by day after day without any

harmful effect on the worker. A worker is now ‘financially motivated’ here. It is function of human ability and of

management expectations about an average workers productivity.

MPL is used for establishing the APL(with the concurrence of labour)

Participation Ratio

Depending upon the MPL and APL the participation ratio can be established.

MPL and APL are physiological ans psychological norms employees bargain with management.

The presumed relationship is that MPL is one-third more than APL(MPL=4/3APL).

Tangible and Intangible costs of PBR systems

Management to provide materials, machines and reduce ‘waiting time’.

‘Output at what cost’?[increase material usage, improper usage of machines].

Other expenses[New wage, inventory policies etc].

Arise of wage, deployment changes from section to section.

Cont..

Changes in methods and technology. Management loosing control over the output of

the employees leading to effect on production control.

Difficult integrate between incentive and non-incentive employees.

PBR scheme on fluctuating income for worker[worker may not be there all the time, worker may not be able to work a the same pace all the time].

Measures to Overcome Problems related to the PBR

Protection of Quality.

Protection against Wastage.

Indirect workers and Incentives.

GROUP INCENTIVE SCHEMES

Used to increase social cohesiveness of staff, foster cooperation and team effort

Free-Riding Effect

Group incentives is restored to, where the enhanced earnings of the group are distributed amongst the members in an equitable manner agreed upon earlier.

Cont..

Rewards employees for their collective performance

Use has increased in industry

2 types Team - based or small group Gain sharing

Tend to measure performance in terms of physical output

Commonality of interests and group size

Behavioral theory tells us that some of the needs of human beings are the need for security and a sense of belonging to a group.

It has been observed that many workers limit their own incentive earnings so that they do not face alienation from other workers of their working group.

Cont…

As a group, they are expected to behave like an individual when responding to the increased earnings with increased output performance.

Incentives requires a commanlity of interests within that group.

Appropriate if:

Difficult to identify individual contributionsBranch based activities (Savings

mobilization)MFI wants to set common goalsFree Riding can be mitigated

Merits of the group systems Better sharing and linking-up of work resulting in

increase in productivity.

Better inter checking of quality of product

Supervising, time-keeping and incentive accounting are simplified.

The problem of including indirect workers in an incentive system are also taken care to an extent.

Demerits of group systems

There may be a leveling effect.

Problems in distributing incentives in the group.

least control of the management on the output.

Company Bonus Schemes

Many company likes to retain the principle of motivation by financial incentives.

Ultimate objective is to enhance the over all productivity of the plant or company.

This calls for working in an integrated

manner with cooperation from all the departments of a company.

Cont… This cooperation is to be achieved through the

use of financial incentives.

A suitable measure of productivity established by agreement between the management and the workers.

This is used to distribute the labour cost savings amongst all the workers of the company.

Some of the companywide incentive plans are Scanlon plan Type of gain sharing plan that pays a bonus to employees for incremental

improvements.

The Scanlon plan was developed by Joseph N. Scanlon in the 1930s

A typical Scanlon plan includes an employee suggestion program, a committee system, and a formula-based bonus system.

The simplest formula is: base ratio = HR payroll costs divided by net sales or production value.

A Scanlon organization is characterized by teamwork and employee participation. A bonus is paid when the current ratio is better than that of the base period.

A Scanlon plan focuses attention on the variables over which the organization and its employees have some control.

Rucker Plan a type of gain sharing program that is concerned with the value added by

labor.

The Rucker plan was developed in the 1950s by Allen W. Rucker.

A typical Rucker plan includes a suggestion program, a committee system, and a bonus formula, based on value added.

It assesses the relationship between the value added to goods as they pass

through the manufacturing process, and the total labor costs.

Bonuses are earned when the current ratio is better than the base ratio over a given time period.

Profit Sharing Any procedure by which an employer

pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.

Challenges:Agreement over division of profits between company and employees.

Possibility of no payout due to financial condition of company.

OwnershipStock option

An employee ownership plan that gives employees the opportunity to buy the company’s stock at a previously fixed price.

Employee stock ownership plan (ESOP). An employee ownership plan that provides

employers certain tax and financial advantages when stock is granted to employees.

Merits of company –wide incentive plans Technology and methods changes can

be brought in.

It measures how much the workers feel a part of a company.

Its also measures changes in the productivity and contribution by the labour.

BEHAVIOURAL ASPECT OF INCENCENTIVES

Presumes that every man is capitalist at heart.

But money is often only a “hygiene” factor.

So it deals with only one of the several motivating factors.

FINANCIAL INCENTIVES

Much space for labor-management bargaining.

May perpetuate old technologies and practices.

May be difficult for the employees to comprehend.

Quality of output may become a judgmental issue.

Problems in planning of production .

Halsey Plan Rowan PlanBarth PlanBedaux Plan

Time - Based

Taylor’s Differential Piece RateMerrick Differential Piece RateGantt Task SystemEmerson’s Efficiency plan

Output - Based

EXAMPLES OF INCENTIVE PLANS

Halsey Plan

W = R.T + (P/100) (S-T).R

where W: wage of worker, R  : wage rate, T  : actual time taken to complete job, P  : percentage of profit shared with worker, S  : std. time allowed. The worker is paid a % of time saved over the standard rate per piece.

Standard time is fixed for each job/operation

If the labour completes at standard time or more he is given the standard price.

Rowan Plan

W=R.T + ((S-T)/S).R.T

where W: wage of worker, R  : wage rate, T  : actual time taken to complete job, S  : std. time allowed.

The bonus hours are calculated as the proportion of the time taken which the time saved bears to the standard time allowed

Taylor’s Differential Piece-Rate Standard outputs: 100 UnitsRate per Unit: 10 paiseDifferential to be applied: 120% of piece-rate at or above the standards80% of piece-rate when below the standards

Case 1: Outputs = 120 units Earnings = 120* 120 * 0.10 = Rs 14.40

100

Case 2: Outputs = 90 units Earnings = 90* 80* 0.10 = Rs 7.20

100

Merrick Differential piece-rate

Has 3 categories for payment

20% above Normal rate

Above 100%

10% above Normal rate

Up to 100%

Normal rateUp to 83%

Price rate applicableEfficiency

Conditions for Effective Incentives PlansConditions for Effective Incentives Plans

Plan is clearly communicatedPlan is clearly communicated Plan is understoodPlan is understood Rewards are easy to calculateRewards are easy to calculate Employees participate in administering the planEmployees participate in administering the plan Employees believe they are being treated fairlyEmployees believe they are being treated fairly Employees believe they can trust the company and Employees believe they can trust the company and

that they have securitythat they have security Rewards are awarded as soon as possible after the Rewards are awarded as soon as possible after the

desired performance.desired performance.

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