INCENTIVES

Pay for Performance

Pay for Results

Quiz……….

True or False?

Most performance measures for incentive plans focus on quality, cost control, or productivity

True

For incentive plans to work effectively, employees must see a clear connection between the incentive payments they receive and their performance

True

A key advantage of incentive plans is that they represent variable costs that are linked to the realization of goals as opposed to a fixed cost such as salary that may be largely unrelated to true performance (i.e., output).

True

Individual incentives foster teamwork

False

Employees receive a specified payment for each unit produced under a straight piecework program.

True

Under a differential piece rate plan, employees whose performance (i.e., production) exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who have not exceeded the standard amount

True

Team bonuses may be paid out equally to each team member, in proportion to their base pay, or in proportion to their relative contribution to the team

True

Contemporary reasons given by organizations for implementing incentive plans are:

1. to improve or maintain high levels of productivity.

2. to focus employee efforts on specific performance targets.

3. to link compensation rewards to the achievement of results.

4. all of the above.

4. all of the above.

A primary philosophy behind incentive systems is that:

1. they are supported by union officials.

2. employees will assume “ownership” of their jobs.

3. both quality and quantity will always increase with these plans.

4. they are always supported by employees.

2. employees will assume “ownership” of their jobs.

Because it communicates the importance of organizational goals, is the key to success of incentive plans.

1. measurement

2. the payout formula

3. profitability

4. job evaluation

1. measurement

Special benefits, such as assigned chauffeurs, country club memberships, and special vacation policies, given to executive employees are known as:

executive rewards perquisites golden parachutes assigned benefits

perquisites

Strategic Reasons for Incentive Plans Variable Pay

Tying pay to some measure of individual, group, or organizational performance.

Incentive Pay ProgramsEstablish a performance “threshold” to qualify

for incentive payments.Emphasize a shared focus on organizational

objectives.Create shared commitment in that every

individual contributes to organizational performance and success.

Incentives - Definition

Incentives are variable rewards granted to employees according to variations in their performance

Also called as payment by results Called as “incentive” for its motivational

content

Advantages of Incentive Pay Programs Incentives are most useful when:

Focused on key performance targets that produce employee and organizational gains.

Variable costs of payouts are linked to the achievement of competitively important results.

Directly relating payouts to achieving operating performance objectives (quantity and/or quality).

Teamwork and unit cohesiveness are fostered by basing payments to individuals on team results.

Used to distribute success among those responsible for producing that success.

DisadvantagesEmployee Opposition to Incentive Plans Production standards are set unfairly. Incentive plans are really “work speedup.” Incentive plans create competition among workers. Increased earnings result in tougher standards. Payout formulas are complex and difficult to

understand. Incentive plans cause friction between employees

and management.

This may also result in poor quality of work

Difficult to assess when new technologies are involved

Supervisors and employees may indulge in wrong production figures

Successful Incentive Plans are those where..

Employees have a desire for an incentive plan.

Employees are encouraged to participate.

Employees see a clear connection between the incentive payments they receive and their job performance.

Employees are committed to meeting the standards.

Standards are challenging but achievable.

Payout formulas are simple and understandable.

Payouts are a separate, distinct part of compensation.

Effective Incentive Plan Administration Grant incentives based on individual

performance differences. Have the financial resources to reward

performance. Set clearly defined, accepted, and

challenging yet achievable performance standards.

Use an easily understood payout formula Keep administrative costs reasonable. Do not “ratchet up” performance standards.

Types of Incentive schemes Schemes where worker’s earnings

vary in the same proportion as outputVary less proportionately than outputVary proportionately more than outputDiffer at different levels of output

Individual Incentive Plans

Straight PieceworkAn incentive plan under which employees

receive a certain rate for each unit produced.

Differential Piece RateA compensation rate under which

employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount.

Computing the Piece Rate

hourper units 5 unit)per time(standard minutes 12

hour)(per minutes 60

=

unitper `150 hour)(per units 5

rate)(hourly `750=

Piecework drawbacks Problems with piecework systems:

Piecework standards can be difficult to develop.Individual contributions can be difficult measure.Not easily applied to work that is highly mechanized

with little employee control over output.Piecework may conflict with organizational culture

(teamwork) and/or group norms.When quality is more important than quantity.When technology changes are frequent.When cross-training is required for scheduling

flexibility.

Individual Incentive Plans: Standard hour plan

An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”○ If employees finish the work in less

than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.

Merit Pay

Merit Pay Program (merit raise)Links an increase in base pay to how

successfully an employee achieved some objective performance standard.

Merit GuidelinesGuidelines for awarding merit raises that

are tied to performance objectives.

Earnings vary proportionately less than output

Gain sharing schemes as they result in gains for both employer and employee

Halsey Plan Rowan Plan Barth Scheme Bedaux Plan

Halsey Plan – incentive paid to a worker is equal to 50 % of time saved multiplied by rate per hour

Rowan plan – incentive paid to the employee is equal to the proportion of the time saved to the standard time.

Barth variable sharing system – incentive is determined by multiplying the std hour by the number of hours actually taken to do the job, taking the square root of the product and multiplying it by the worker’s hourly rate.

Bedaux scheme

Standard time for a job is fixed Each minute of the std time is called a point

or B Each job has a standard number of Bs Incentive is calculated as 75% of the number

of points earned, in excess of 60 per hour, multiplied by one sixtieth of the worker’s hourly rate.

Earnings varying proportionately more than output

The high standard hour system The high piece rate

Earnings (say 10rs/unit) is as per no of units produced. But increment in earnings for each unit of output above the standard is greater (say 12rs/unit).

Higher rates apply after the standards have been reached

Earnings differing at different levels of output Taylor’s Differential Piece rate system Merrick differential piece rate Gantt Task system Emersion’s plan Accelerated Premium system

Exercise – to submit on 3rd Jan ‘11Ram, Ragu and Ravi work for a manufacturing organization. Calculate their

earnings and incentives on a day’s production, in the various incentive schemes, with the following data given:

Standard time to assemble the unit: 8 hours Standard Bs = 60Bs per hour Rate per hour: ` (your roll number) Time taken by Ram: 6 hours Time taken by Ragu: 8 hours Time taken by Ravi: 10 hours

Under differential levels of output, these were the output of the three men. Standard output = 10 assemblies to be finished Rate given per assembly = ` (your roll number) X 10 Efficiency of Ram : 50 % Efficiency of Ragu : 90 % Efficiency of Ravi : 120 % Calculate their earnings along with their incentives in All 9 Types of

Incentive calculation as instructed in text

Group Incentive Plans

Gainsharing PlansPrograms under which both employees and

the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.

Advantages – Group Incentive Plans

Team incentives are effective when:They support group planning and problem solving,

thereby building a team culture.The contributions of individual employees depend

on group cooperation.They broaden the scope of the contribution that

employees are motivated to make.They reduce employee jealousies and complaints

over “tight” or “loose” individual standards.They encourage cross-training and the acquiring

of new interpersonal competencies.

Disadvantages – Group Incentive Plans Team incentives are ineffective when:

Individual team members perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus.

Intergroup social problems—pressure to limit performance and the “free-ride” effect— arise.

Complex payout formulas are difficult for team members to understand.

Indirect Workers - Incentives Those who do not directly contribute to the

production, but who is involved in the production activity indirectly like

Helpers Crane operators, canteen staff, security,

sales and accounts etc It is essential to pay them incentives to

avoid dissatisfaction and de-motivation Very difficult to measure their work and

calculate incentives Bonus is commonly given incentive for

them

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