individual and group incentive plans

Amity Business School


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Incentives


Individual and Group Incentive

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Group Incentive Plans


Introduction:•Incentive wages refer to performance linkedcompensation paid to improve motivation and productivityof employees. It implies monetary inducements offered toemployees to perform beyond acceptance standards.Wage incentives include all the plans that provide extra

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Wage incentives include all the plans that provide extrapay for extra performance in addition to regular wages forthe job.•According to the National Commission on Labour, “Wageincentives are extra financial motivation. They aredesigned to stimulate human effort by rewarding theperson, over and above the time rated remuneration, forimprovements in the present and targeted results”.


Essentials of Sound Incentive Plans:1. Proper Climate: In the absence of mutual trust andunderstanding between management and workers, awage incentive system may be viewed as an attempton the part of management to coerce for production.2. Workers’ Participation: A wage incentive planshould be installed in consultation with workers and

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should be installed in consultation with workers andtheir union. Involvement of employees will ensure thatthey fully understand the objectives and mechanism ofthe plan.3. Scientific Standards: The standards ofperformance for payment of incentives should beestablished through scientific work study free frombias and favoritism.


4. Simplicity: The incentive plan should be easy tounderstand and simple to operate so that a workercan calculate his own earnings. The linkage betweenpay and performance should be clear.5. Equitable: The plan should provide equalopportunity to all workers to earn incentive pay.

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opportunity to all workers to earn incentive pay.Otherwise, it will cause dissatisfaction and jealousyamong workers who have no opportunity to earnmore.6. Flexibility: There should be scope for makingchanges in the scheme to rectify errors and to takecare of changes in technology, market demands etc.


7. Prompt Payment: The time gap between actualperformance and incentive payment should be as small aspossible. Once the job is completed, incentive should bepaid as soon as possible.8. Adequate Incentive: Incentives payments under thescheme should be large enough to motivate the workers.

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scheme should be large enough to motivate the workers.For example, an incentive payment of Rs. 100 to a workergetting Rs. 1000 per month is more meaningful than to aworker drawing a monthly salary of Rs. 5000.9. Ceiling on Earnings: A ceiling on the maximumincentive earning should be laid down to preventoverexertion and to ensure quality. Otherwise the plan maybecome detrimental to the health and welfare ofemployees.


11. Grievance machinery: Suitable machinery forquick and fair redressal of grievances arising fromthe implementation of the scheme should beinstalled.12. Appraisal system: A clear system for inspecting,

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counting and recording output of each worker shouldbe developed. The results should be made known tothe workers.13. Follow-ups: The operation and effectiveness ofthe scheme should be reviewed periodically. Thus,deficiency in the scheme or in its administrationshould be properly rectified.


Types of Wage Incentive Plans:Wage Incentive Plans

I. Individual Incentive Plans II. Group Incentive Plans

B. Based on OutputA. Based on Time1. Priestman Bonus Plan

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B. Based on OutputA. Based on Time

1. Halsey Plan

2. Rowan Plan

3. Emerson Efficiency Plan

4. Bedeaux Point Plan

1. Taylors’ Differential Piece Rate Plan

2. Merrick’s Multiple Piece Rate Plan

3. Gantt’s Task and Bonus Plan

2. Towne’s Gain-sharing Plan

3. Scanlon Plan


I. Individual Incentive plans and types:•Under individual incentive plans earnings are relateddirectly to the performance of individual worker.

•Individual incentives may be based on time or output.

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•Under time based plans, standard time is determinedand bonus is given if a worker completes the job in lessthan standard time.

•Under output based plans, a standard output isdetermined and workers producing more than thestandard output are given bonus.


Various Types of Individual Incentives Plans are:

A. Based on Time:1. Halsey Plan2. Rowan Plan3. Emerson Efficiency Plan

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3. Emerson Efficiency Plan4. Bedeaux Point Plan

B. Based on Output:1. Taylors’ Differential Piece Rate Plan2. Merrick’s Multiple Piece Rate Plan3. Gantt’s Task and Bonus Plan


A. Based on Time:

1. Halsey Plan:

•Under this plan, a standard time is fixed onbasis of past performance record.

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•A worker who completes his job within or morethan the standard time is paid a guaranteedtime wage at the normal rate.

•A bonus usually 50% of the time saved is paidto a worker who completes his job in less thanstandard time.


Illustration:Standard Time (S) = 8 HrsTime taken (T) = 6 HrsRate of Wages (R) = 20/HrBonus (P) = 50% of the time savedTotal wages (W) = (T x R) + (50 % x (S - T) x R)

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Total wages (W) = (T x R) + (50 % x (S - T) x R)= (6 x 20) + (50 x (8 – 6) x 20)

100= 120 + (0.5 x 2 x 20)= 120 + (1 x 20)= 120 + 20= Rs.140


Merits:

1. The plan is simple to understand.2. Worker can easily calculate his earnings.3. Both employer and workers get equal benefit oftime saved.

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time saved.4. Guaranteed minimum wage to every workerprovides a sense of security.5. The plan encourages the workers to be efficientas bonus is based on time saved.


Demerits:1. Standards based on past performance maynot be scientific and fair.2. Workers get only half of the benefit of theirefficiency.

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efficiency.3. If the workers rush through the job to savemore time, the quality of production may suffer.Wastage and spoilage may also increase.4. Much clerical work is involved becauserecords of time saved and bonus earned have tobe kept for each worker.


2. Rowan Plan:

This is a modified form of Halsey Plan.

•Under this plan, a minimum time wage is

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guaranteed to every worker at the normal rate.

•A standard time is determined in advance.

•The bonus is that proportion of the wages whichthe time saved bears to the standard time.


Illustration:Let us use the same data given above under Halsey Plan:Standard Time (S) = 8 HrsTime taken (T) = 6 HrsRate of Wages (R) = 20/HrTotal Wages= (T x R) + {T x R x ( Time Saved )}

Standard Time

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Standard Time= (6 x 20) + {6 x 20 x (2 )}

8= 120 + (120 x 1 )

4= 120 + 30= Rs.150

Note: In this method, Rs. 10 is earned more than the earliermethod (Halsey plan), i.e. Rs. 150 – Rs. 140.


Merits:1. The guarantee of minimum wage gives a feelingof security.

2. Both the employer and the workers share thebenefits of time saved.

3. The efficient workers get bonus at a diminishingrate if they save more than 50 % of the standard

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rate if they save more than 50 % of the standardtime. This provides a check against over speedingand deterioration in quality.

Demerits:1. The plan is difficult to understand for an averageworker.

2. Efficient workers are discouraged to save morethan half of standard time.


3. Emerson Efficiency Plan:•Under this plan, standard time for a job is determinedscientifically and a minimum time wage is guaranteed toall workers at the normal time rate.•Bonus is given at an increasing percentage beyond theprescribed level of efficiency (*usually 66.67 % ofefficiency).

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efficiency).•Efficiency of each worker is determined by dividing thestandard time by the time taken.

*Efficiency = (Std. Time) x 100Time Taken

= (8) x 10012

= 66.67 %


Illustration:For example, a workman takes 6 Hrs to complete the work instead of 8 Hrs.The efficiency is measures as follows:Standard Time(S) = 8 HrsTime taken (T) = 6 HrsRate of Wages (R) = 20/HrBonus: •10% upto 75% efficiency i.e.,

(8/x) x 100 = 75

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(8/x) x 100 = 75800/75 =xi.e. x = 10.66 Hrs.

•20% upto 100 % efficiency(8/x) x 100 = 100

800/100 = xi.e. x = 8 Hrs.

•30% beyond 100 % efficiency In this case the efficiency level is 8/6 x 100= 133.33%, therefore bonus at30% is payable.


Total Wages (W) = (T x R) + (% of bonus x T x R)

= (6 x 20) + (30 x 6 x 20)100

= 120 + (3600)100

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100= 120 + 36= Rs. 156


Worker A: Time taken 12 hrs = NilTotal Wages = Rs. 160

Worker B: Time taken 11 hrs = 10 x 11 x 20 = Rs. 22 100

Total Wages = Rs. 160 + Rs. 22 = Rs. 182

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Worker C: Time taken 8 hrs = 20 x 8 x 20 = Rs. 32100


Worker D: Time taken 6 hrs = 30 x 6 x 20 = Rs. 36100



Merits:1. Guaranteed time wage provides a sense ofsecurity to all workers.

2. It is fair as the rate of bonus is related to the levelof efficiency. Wages rise progressively withincrease in efficiency.

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increase in efficiency.3. It encourages healthy competition among workers.4. Bonus begins at 66.67 % efficiency which is withinthe reach of many workers.


Demerits:1. There is little incentive after 100% efficiency level.2. Employer may fix the standard time at a low levelmaking it impossible for most of the workers toearn bonus.

3. The system may create jealousy and disunity

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3. The system may create jealousy and disunityamong efficient and inefficient workers.

4. A great deal of clerical work is involved asefficiency may vary not only from one worker toanother but also from one time period to another.

5. This plan is not very flexible or selective.


4. Bedeaux Point Plan:

•Under this plan, standard time for the job is setscientifically and it is expressed in terms of B.• For instance, a standard time of 240 B means that thejob should be completed within 240 minutes.•In determining the Bs, the time of operation and the rest

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•In determining the Bs, the time of operation and the resttime both are taken into account.•Minimum time wage is guaranteed to all workers.•The workers who complete the job within or more thanthe standard time are paid at the normal time rate.•Those who complete the job in less than the standardtime are paid bonus for the time saved.•Generally, 75% of the wages for the time saved are paidas bonus to the worker and 25% to the foreman.


Illustration: Standard time (S) = 480 Bs (8 Hrs)Actual time (T) = 360 Bs (6 Hrs)Rate of wage (R) = Rs 0.35 per BTime saved = S - T = 480 - 360 = 120Total wages = (S x R) + {75% of R x (S - T)}

= (480 x 0.35) + {75 x 0.35 x (480 - 360)}100

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100= 168 + {3 x 0.35 x (120)}

4= 168 + 31.50= Rs. 199.50

Wage for the workman is Rs. 199.50. Foreman’s share from this workman is Rs. 25% i.e.Bonus = {25 x 0.35 x (480 - 360)}

100 = Rs. 10.50


Merits:

1. Minimum Wages are guaranteed to all workers.

2. The foreman is motivated to increaseproductivity as one fourth of the value of timesaved is paid to him.

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saved is paid to him.

3. This plan is suitable in factories wherein aworker is expected to perform different types ofjobs. All the jobs can be reduced to standardunits called Bs.

4. Efficiency of different sections or workers in thefactory can be compared.


Demerits:

1. Workers may resent sharing the bonus withforeman.

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2. Calculations involved are complicated andworkers may not be able to understand them.

3. Much clerical work is involved.


B. Based on Output:1. Taylors’ Differential Piece Rate Plan:•F.W. Taylor, the father of Scientific Managementdevised this plan.•Under this system, standard task is establishedthrough time and motion study.

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through time and motion study.•Two piece rates are laid down.•The lower rate for those workers who fail to completethe standard task within the allotted time and thehigher rate for those who complete the task within orless than the allotted time.•The objective is to provide sufficient incentive toworkers to work hard and achieve the standard.


Illustration:

Suppose the standard output is 50 units per day. The piecerates fixed are Rs. 3 and Rs. 4 per unit. Three workers A, Band C produce 40, 50, 60 units respectively during a day.Their total wages will be as follows:

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A = 40 x 3 = Rs. 120B = 50 x 4 = Rs. 200C = 60 x 4 = Rs. 240

In this way, an inefficient worker is penalized as he gets a lowerrate per unit.


Merits:

1. It provides sufficient incentives to efficient workersto put forth their best efforts.

2. Inefficient workers are penalized but encouraged toreach the standard.

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reach the standard.

3. Use of time and motion study help to improve andstandardize work methods.

4. Workers have not to share the reward with theforeman.


Demerits:

1. There is no guarantee of minimum wage toworkers.

2. The plan is harsh to workers who are just belowthe standard.

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the standard.

3. It treats the workers as machines rather than ashuman beings.

4. The employer may fix a very high standard whichworkers may find difficult to achieve.


2. Merrick’s Multiple Piece Rate Plan:•This plan was developed to overcome a drawback inTaylor’s Plan.

•This drawback relates to an abrupt change in piecerate.

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•Under it, three graded piece rates are prescribed.Workers producing less than 83% of the standardoutput are paid at a basic piece rate.

•Those producing from 83% to 100% of the standardoutput are paid 110% of the basic piece rate.

•Workers producing more than the standard outputare paid at 120% of the basic piece rate.


Illustration:Suppose the standard output is 50 units per day. The piecerates fixed are Rs. 3 per unit for 83% production (basic piecerate; 42 pieces); Rs. 3.30 per unit for 84%-100% production(110% of the basic piece rate; 43-50 pieces) and Rs 3.60 perunit for more than 100% production (120% of the basic piecerate; more than 50 pieces).

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Three workers A, B and C produce 40, 50, 60 unitsrespectively during a day.

Their total wages will be as follows:A = 40 x 3.00 = Rs. 120B = 50 x 3.30 = Rs. 165C = 60 x 3.60 = Rs. 216


Merits:1. This plan reduces the severity of the Taylor’s plan.2. It is less harsh to beginners or learners.3. It is more flexible.4. It is useful where the performance level is to beincreased to 100%.

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increased to 100%.Demerits:1. Minimum wage is not guaranteed to workers.2. It is liberal for the efficient workers. But all workersproducing from 1% to 82.9% of the standard outputare classified as substandard are paid at the samepiece rate.


3. Gantt’s Task and Bonus Plan:

• Under this plan, standard time for every task is fixedthrough time and motion study.

• Minimum time wage is guaranteed to all workers.

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• A worker who fails to complete the task within thestandard time receives wage for actual time spent atthe specified rate.

• Workers who achieve or exceed the standard getextra bonus varying between 20% to 50% of thehourly rate for the time allowed for the task.


Illustration:

•Suppose the standard time fixed for the job is 8 hours and the time rated is Rs. 20 per hour and the rate of bonus is 25%.

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rate of bonus is 25%.

•A worker who completes the task in 10 hours, he will be paid Rs. 160 (8 x Rs. 20) only.

•On the other hand, the worker who completes the task in 6 hours will receive Rs. 200 (Rs. 160 + 25% of Rs. 160).


Merits:

1. Minimum wage is associated to all workers.

2. Wages increase progressively will increase in

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2. Wages increase progressively will increase inefficiency. Therefore, there is sufficient incentivefor efficient workers.

3. Inefficient workers are not penalized severally.


II. Group Incentive Plans:

• In some cases, e.g., assembly line industries it isnot possible to determine the performance of anindividual worker.

• This is so because several workers are required tojointly perform a single operation.

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jointly perform a single operation.

• In such cases it is desirable to introduce a groupincentive scheme.

• Under such a scheme, the bonus is calculated for agroup of workers and the total amount is distributedamong the group members in proportion to thewages earned by each.


Various Types of Group Incentives Plans are:

1. Priestman Bonus Plan2. Towne’s gain-sharing plan

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2. Towne’s gain-sharing plan3. Scanlon Plan


1. Priestman Bonus Plan:

• Under this plan, a committee of workers andmanagement sets the standards of performance.

• A minimum wage is guaranteed to each worker.

• The group gets the bonus when actual output exceeds

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• The group gets the bonus when actual output exceedsthe standard.

• The group supervisor also gets a share in the groupbonus.

• The plan is easy and promotes team spirit amongemployees.

• But it makes no distinction between efficient andinefficient workers.


2. Towne’s gain-sharing plan:

• Towne’s gain-sharing plan is another system of group incentive.

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• 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 the foreman.

• The foreman gets a certain percentages as fixed in advance. The bonus is paid half yearly.


3. Scanlon Plan:

• The Scanlon plan has two basic features.

– First, financial incentives are used to increaseproductivity and to reduce costs.

– Secondly, departmental/plant screening committeesare set up to evaluate employee suggestions.

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The plan is based on the belief that plant widecooperation is essential for increasing productivity.

• Workers, supervisors and managers make suggestions forimproving productivity and cutting costs.

• These suggestions are screened by various screeningcommittees.

• If a suggestion is implemented successfully, all employeesshare the gains in productivity.


The Scanlon plan encourages a sense of partnershipamong workers. But it can be successful when thefollowing conditions are satisfied:

a. The number of workers should be small, preferablyless than 1,000.

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b. Product line and costs are stable.

c. There should be healthy industrial relations andgood supervision.

d. Management must have a strong commitment tothe plan.


Advantages:

1. Individual members of the group who occupy jobsrequiring special care and attention have not to bearthe whole loss of slow speed.

2. Charges of favoritism in the assignment of ‘tough’

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2. Charges of favoritism in the assignment of ‘tough’and ‘easy’ jobs are not likely to occur.

3. The skilled and experienced workers are motivatedto help and train inexperienced and new members.

4. All these factors create teamwork and cooperativespirit in the group.


Advantages of wage incentive plans:

1. Provide opportunities for hard working and ambitious workers toearn more.

2. Employees are encouraged to become innovative. They bring tothe notice of Management wasteful practices and problems thatretard productivity.

3. Incentive plans helps to improve discipline and industrialrelations. These plans are useful in minimizing absenteeism,

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relations. These plans are useful in minimizing absenteeism,accidents, and go slow.

4. The costs of supervision are reduced as workers them-selves are motivated to work hard and improve performance so as to earn monetary rewards.

5. A spirit of mutual co-operation and team work is created among workers.

6. Wage incentives are a sound technique of improving productivity. Workers are likely to work at their best when they are offered monetary rewards for good performance.


Limitations of Incentives Plans:

1. In the absence of ceiling on incentive earnings, someworkers may over work and thereby spoil their health.

2. In order to maximize output, workers may sacrifice qualityunless strict check or inspection is maintained.

3. Once an incentive plan is introduced, management mayface resistance while revising standards and rates due to

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3. Once an incentive plan is introduced, management mayface resistance while revising standards and rates due tochanges in technology methods, machinery and materials.

4. Strict vigilance becomes necessary to ensure that workersdo not disregard safety regulations.

5. Whenever production flow is disrupted due to the faultof management, workers insist on compensation.

6. Jealousy and conflicts among workers may arise whensome workers earn more than others.


Thank You

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Thank You

individual and group incentive plans

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