INCENTIVE PLANS

INCENTIVE

Incentive means “an additional payment to the employees as a means of increasing output “

Incentive plans are applicable to all workers and Incentive rates are payable to the more efficient employee as extra compensation for their performance

BOUNS means payment to workers of the entire benefit accruing from savings, time, quality etc.

PREMIUM is the benefits accruing to the firm as the result of higher output, will be shared equally between the management and workers

CHARACTERISTICS OF INCENTIVE PLANS

Guaranteed minimum wages

Simple and equitable

Economical and flexible

Support (mutual trust)

Motivating

Prompt

TYPES OF INCENTIVE PLANS

Individual Incentives

Group Incentives

Organizational Wide Incentives (profit sharing, stock option etc.)

INDIVIDUAL INCENTIVES - TYPES

Piece Rate Work Plans – Taylo’rs Differential and Merrick’s Differential Piece Rate System

Standard Hour Plans – Halsey Plan, Rowan Plan, Gantt Task & Bonus Plan, Bedeaux Paln, Haynes Manit Plan, Emerson’s Efficiency Plan, Accelerated Premium Bonus Plan

Bonuses

Performance - based Incentives

Lump sum Payments

Commissions – Salary Plan, Commission Plan, Combination Plan

INDIVIDUAL INCENTIVES-PIECE RATE WORK PLANS-TAYLOR’S PIECE RATE SYSTEM

Coined by father of Scientific Management, F.W. Taylor

Two piece work rates – Higher and Lower

Rewarded based on the Standard time or Standard Output

Slow Worker and Fast Worker

INDIVIDUAL INCENTIVES-PIECE RATE WORK PLANS-MERRICK’S DIFFERENTIAL PIECE RATE SYSTEM

Up to 83% of the standard output workers are paid at the ordinary piece of rate

83% to 100% at 110%

Above 100% at 120%

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–HALSEY PLAN

Recognizes the individual efficiency and pays bonus on the basis of time saved

Standard time is set for the job and the worker receives guaranteed wages irrespective of whether he completes the job in time or takes more time

If the job is completed in less than the standard time the worker is paid a bonus of 50% of time saved with his normal wages

Total earnings = Time taken x Hourly Rate + Bonus

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–ROWAN PLAN

Instead of Fixed % of bonus , here bonus is that proportion of the wages of time taken which the time saved bears to the standard time

Bonus = (time saved/standard time) x time taken x Hourly rate

Total Earnings = Time taken x Hourly rate + bonus

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–GANTT TASK & BONUS PLAN

Combines time, Piece and Bonus

Day wages are guaranteed

Standard time and High rate per Piece are determined

If a worker reaches the standard, he will be paid wages + Bonus(20% of normal time wage)

If the worker exceeds the standard time, he is paid higher piece rate

If he cant finish, he is paid on time basis

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–BEDEAUX PLAN

Every operation is expressed in terms of standard minutes called as Bedeaux points or “B’s”, each B’s representing one minute

100% of standard time, no bonus

Exceeding standard time, 75% of the wages of the time saved as bonus and 25% to the foreman

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–HAYNES MAINT PLAN

Instead of B’s here Maint is used

Maint = Man-Minute

Instead of 75%, here 50 % bonus is given and in remaining 50%, 10% to the supervisors and 40% retained back by employers

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–EMERSON’S EFFICIENCY PLAN

Efficiency= 67%, bonus at given rate

Efficiency= 67% to 100%, bonus increases gradually

Efficiency= above 100%, bonus will 20% of basic rate + 1% for each increase in 1% efficiency

INDIVIDUAL INCENTIVES-STANDARD HOUR PLANS–ACCELERATED BONUS PLAN

Also known as sliding scale Bonus plan

Premium is paid at varying rates for increasing efficiency

Suitable for foreman and supervisors and not for machine operators

No formula and each firm can devise its own

BONUSES

A bonus is an incentive payment given to an employee beyond one’s normal standard wage

Given at the end of the year

Not a part of basic pay

PERFORMANCE-BASED INCENTIVES

Merit pay, Payout

Rewarding based on their performance is a powerful motivator

Individuals are goal oriented, financial rewards can shape goals over time

While high achievers are rewarded, they set benchmark for others to follow

Politics plays an important role- seniority, favoritisms etc.

Every supervisor may not be a competent evaluator

LUMP SUM PAYMENTS

Lump sum payment is given at the time of their review

Not added to their base pay

Helps the employee in linking pay and performance

COMMISSIONS FOR SALES PEOPLE

Straight Salary Plan – only salary

Straight Commission Plan - % of the values of the sales

Combinational Plan – Salary + Commission

IMPACTS OF INCENTIVE PLANS

+ve Motivating tool

Produce more and earn more

Better utilization of equipment

Reduced supervision

Reduced scrap

Reduced lost time & absenteeism

High Turnover

-ve May sacrifice quality

Rush up – accidents

May Increase wastage

Unrealistic expectations

Frustrations

Jealousies may arise

Difficult to set standards

May oppose management

TEAM OR GROUP BASED INCENTIVE PLANS

All team members are rewarded based on the overall performance of the team

May be cash or non cash rewards

Rather than thinking as an individual and makes to think as team

Conflicts occurs when all do not contribute equally(free riders)

E.g. Godrej, Mastek and Boyce

Inter group competition may take place

TEAM BASED INCENTIVE PLANS

Preistman’s production plan – points

Rucker plan – added value

Scanlon plan – added value

Towne plan – based on labor cost reduction

Co-partnership – wages + % in profit

ORGANIZATION WIDE INCENTIVE PLANS

Profit sharing – Cash, Bonus shares, Payment of Bonus Act

Gain Sharing – Individual performance oriented, current distribution payments, Base line calculation

Employee Stock Ownership Plans(ESOP)- shares below market price based on certain eligibility

INCENTIVE SCHEMES FOR INDIRECT WORKER

Repairs and maintenance staff – efficiency

Store Staff – requisitions handled

Office staff – basis of performance

Material handling staff – Materials handled

Executives – Non monetary benefits

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