wage n incentive system

INCENTIVES AND EMPLOYEE BENEFITS

EXCEL BOOKS17-1

17

Chapter

ANNOTATED OUTLINE

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INTRODUCTION A proper system of wage payment is absolutely essential to keep

employees in good humour. Ideally, such a system must have the

following characteristics:

Compensation Administration

Simple Beneficial Equitable Guaranteed minimum wage Balanced Incentive-oriented Quality output Certainty Cost effective flexible

Characteristics of a wage payment plan

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Variable Pay Or Pay For Performance Systems

Here the pay is linked to individual, group or organisational performance.

Employees have to compete and deliver results. Three types of variable

pay are commonly used:

Individual incentives: they link individual effort to pay

Group incentives: they link pay to the overall performance of the

entire group

Organisation-wide incentives: here employees are rewarded on the

basis of the success of the organisation over a specified time period.


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Essentials of a sound incentive plan


Guaranteed minimum wages

Simple

Equitable

Economical

Flexible

Supported by workers and unions

Motivating

Prompt payment

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Methods of Wage Payment

Methods of wage payment


M ethods of Remuneration

The Rate System Payment by Results

Flat tim e High wage G raduated tim e Piece rate P rem ium bonus Group bonus O ther incentiverate sys tem rate sys tem p la ns sys tem s ch e m e

Comb ination o fStraight p iece D ifferen tia l time and piece Profit C o -pa rtnership

w ork piece work rate sha ring

Taylor system Merrick system

Gantt task E m e rso n P ointand bonus effic iency s c h e m e s

sys te m s sys tem

Bedeaux H aynes Manitsys tem sys tem

H alsey p rem ium R o w an Acce leratingp lan s ch e m e prem ium bonus schem e

P riestm an ’s produc tion bonus Rucker plan Scanlon p lan Towne plan

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Time wage system: A worker is paid on the basis of time spent on the work, irrespective of the amount of work done.

Plus points Simple and easy to operate Guaranteed wages to workers Favoured by trade unions Good for precision jobs

Minus points Makes no distinction between efficient and inefficient workers Offers very little to efficient workers Requires close supervision so that workers do not waste

their time No relationship exists between wages and productivity

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Piece rate system: A worker is paid at a stipulated rate per piece or unit of output. This method is suitable where quality of work is not important, work is repetitive in nature, there is sufficient

demand for output to guarantee continuous work and the job is a standardised one

Plus points

Encourages efficient workers to produce more

Workers adopt better ways of getting things done, to earn more

Idle time is reduced to the minimum

Workers take every precaution to avoid machine breakdowns.

Cost of supervision is less


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Taylor's differential piece rate system: A worker is paid more if he finishes the assigned task before the stipulated time.

Merrick's differential piece rate system: This method uses threerates; up to 83%of the standard output workers are paid at the ordinary piece rate; between 83% to 100% at 110% of the ordinary piece rate and above 100% at 120% of the ordinary piece rate.


Minus points Delays beyond one's control could affect workers earnings adversely Beginners and slow learners are left behind in the race The focus on quantity would affect quality Workers may stretch themselves to unhealthy levels to earn more Encourages rivalry between workers


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Individual Incentive Plans


Halsey plan: Here the worker gets a guaranteed wages based on the time, irrespective of whether the assigned work is completed or not. If the worker is able to finish the task in less than the standard time, he or she is entitled to get fifty (in some cases one third) per cent of time saved at time rate in addition to normal time wages.

Rowan plan: It assures minimum time wages. Bonus is paid on the basis of time saved. But unlike a fixed percentage , it is calculated thus

Bonus = Time saved/Standard time X Time taken X hourly rate

Gantt task and bonus plan: Here time wages are guaranteed. Standard time for each task is fixed. Workers, who fail to finish the job within the time limits, get time wages. A worker who reaches the standard is paid time wage plus bonus at a fixed percentage (20 per cent)of normal time wages. If a worker exceeds the standards, he is paid a high piece rate.

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Individual Incentive Plans

Bedeaux plan: In this plan every operation is expressed in terms of standard minutes called as “B's” representing one minute. A worker

gets time wages for 100 % performance; ie, finishing the job exactly as per standards set. If actual performance exceeds the standard performance in terms of B's then 75% of the wages of time saved is paid to worker as bonus and 25% is given to the foreman.

Haynes manit plan: It is more or less like the bedeaux plan. Here the bonus is only 50 per cent as against 75 per cent, being paid to the

efficient worker. Of the remaining 50 per cent, 10% goes to the foreman and the rest to management.

Emerson's efficiency plan: If the worker achieves 67% efficiency, he gets bonus at a given rate. The rate of bonus increases gradually from 67% to 100%. Above 100% bonus will be at 20% of the basic rate plus 1% for each increase in efficiency.

Accelerate premium bonus plan: Here the premium is paid at varying rates for increasing efficiency.

Bonuses 17-11


It is an incentive payment granted to a worker at the end of a particular year, in addition to one’s normal standard wage.

The Payment of Bonus Act, 1965 The Act defines an employee who is covered by it as one earning Rs 2,500 p.m. (w.e.f. 1.4.93) basic plus dearness allowance and specifies the formula for calculating the allocable surplus from which bonus is to be distributed. The minimum bonus to be paid has been raised from 4 per cent to 8.33 per cent (w.e.f. 25.9.75) and is sought to be linked to increased productivity in recent times. Through collective bargaining, the workers, through their representative union, can negotiate for more than what the Act provides and get the same ratified by the government, if necessary. In the absence of such a process, the Act makes it mandatory to pay bonus to employees (who have worked in the unit for not less than 30 working days in a year) following a prescribed formula for calculating the available surplus. The available surplus is normally the gross profits for that year after deducting depreciation, development rebate/investment allowance/ development allowance, direct tax and other sums referred to in Sec. 6 The Act applies to every factory or establishment in which 20 or more persons are employed in an accounting year. Currently the position is such that even if there is a loss, a minimum bonus needs to be paid treating the same as deficit to be carried forward and set off against profits in subsequent years (Sec. 15). The Act is proposed to be changed since the amount of bonus, the formula for calculating surplus, and the set off provisions have all been under serious attack from various quarters.

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Merit Pay

Any salary increase awarded to an employee based on his or her performance is called merit pay. It is like rewarding the best performers with the largest increases in pay as an appreciative gesture from the employer. When high achievers are rewarded, they set the benchmarks for others to follow. But the whole process of recognising merit, measuring performance, picking up the winners need to be followed objectively.

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Commissions For Sales People

Compensation plans for sales personnel generally consist of a straight salary plan, a straight commission plan, or a combination of both.

Evaluation of Incentive Plans Incentives based on performance would definitely motivate people to give their best to the organisation. They can improve their standard of living. Other benefits include; better use of facilities, reduced supervision; reduced lost time, absenteeism and turnover. There is, of course, the dark side of the moon and the research evidence in this regard is somewhat mixed.

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Reasons for the failure of PFP systems

Poor perceived connection between performance and pay

Tendency of workers to speed up everything, leading to accidents, wastage of resources

Workers may ignore basic safety precautions in order to produce more

Workers have inflated ideas about performance levels and when they fail to receive expected rewards, they blame management

Jealousies may arise among workers because some are able to earn more than others. Unions, not surprisingly, are opposed to PFP systems because these would go against the spirit of “all for one and one for all”.

Often, setting acceptable, attainable, objective standards is not easy.

All said and done, money is simply a hygiene factor and has only limited potential to spur people to superior performance.

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Guidelines for PFP systems

Develop and implement PFP systems in an atmosphere of mutual trust and confidence

Make them easy to understand and implement

Establish the relationship between effort and reward directly and clearly

Recognise individual differences and set the targets keeping the expectations of people in mind.

Show clearly what is there in the plan for an efficient worker, apart from the guaranteed wages.

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Group or Team Based Incentive Plans

Here all team members receive an incentive bonus payment when production or service standards are met or exceeded. Methods in this category include Preistman’s production bonus, Rucker plan, Scanlon plan, Towne plan and Co partnership. Under co partnership, the worker gets his usual wages, a share in the profits of the company and a share in the management of the company as well.

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Compensation practices in India

Companies like Mastek, Godrej and Boyce have tried to link their rewards to team based performance in recent times quite successfully

Team based rewards: Best practices

Set quantifiable targets when evaluating team performance for rewards.

Ensure that top performers in each team earn the highest level of rewards.

Link team performance closely to the company's profits and overall financial health.

Avoid subjectivity when assessing both the team and its member's performance.

Offer uniform non-team based incentives to employees within each grade.

Other companies like Pfizer, Siemens have been linking rewards to shop floor workers based on the worker ability to meet productivity as well as performance targets. In any case, the emerging picture is quite clear especially in the post liberalisation era in India. The start that need entrepreneurial action from its employees will have to offer large doses of cash, goal linked incentive pay and possibly stock options to link compensation to profits. Mature companies, whose focus is on managing their earnings per share and protecting market shares, will have to seek out managerial talent and reward it with flexible tax-friendly compensation packages with benefits designed to improve the quality of working life.

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Organisation Wide Incentive Plans

These plans reward employees on the basis of the success of the organisation over a specified time period.

Profit sharing: Here the organisation agrees to pay a particular portion of net profits (given in cash or in the form of shares) to eligible

employees.

Gain sharing: It is based on a mathematical formula that compares a baseline of performance with actual productivity during a given period. When productivity exceeds the base line an agreed upon savings is shared with employees. Unlike profit sharing plans which have deferred payments, gain sharing plans are current distribution plans. These are based on individual performance and are distributed on a monthly or quarterly basis.

Employee stock ownership plan: It provides a mechanism through which certain eligible employees (based on length of service,

contribution to the department etc) may purchase the stock of the company at a reduced rate.

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Plus points

Empower the employee to participate in the growth of a company as part owner and get a fair share of the cake.

Helps the company to retain talented employees and make them committed to the job and the company

Better industrial relations, reduced employee turnover, lesser supervision, are other benefits

Organisation Wide Incentive Plans

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Incentive Schemes For Indirect Workers Since Indirect workers also play a key role in manufacturing

operations, their contributions need to be recognised and rewarded

appropriately. The list of beneficiaries here would include repairs

and maintenance staff, store staff, material handling staff, office staff

etc. Such schemes, however, must be based on some agreed

criteria aimed at improving the overall efficiency of the organisation

over a period of time.

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Fringe Benefits

These are extra benefits provided to employees in addition to the normal compensation paid in the form of wages or salaries.

Features Supplementary forms of compensation

Paid to all employees

Indirect compensation, since they are not directly related to performance

May be statutory or voluntary

Need for fringe benefits Employee demands Trade union demands Employer's preference A kind of social security To improve industrial relations

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Types of Fringe Benefits

Types of Fringe Benefits

Payment for Time E m ployee Safety and W elfare recreational O ld age andnot worked security hea lth fac ilities re tirem ent

bene fi ts

Hours of P a id Shift H oliday P a idw ork holidays p rem iu m pay vacation

R etrenchm ent Lay offcom pensa t ion com pensa t io n

Safety W orkm en ’s H ea lthm e a su res com pensa tion bene fi ts

C an teens C on su m er C red it H ou s ing Lega l a id E m ployee W elfare H oliday E ducational Trans- Parties &soc ie ties soc ie ties counse ll ing o rga n isa t ions h o m e s facilities porta tion picnic

Provident fund

D epos it linked insurance

Gratuity

Medical benefits

M isce-l lane ous

P e ns ion

wage n incentive system

Documents

wages of time

time savedstandard time

paid time wage

cent of time

basis of time

stipulated time

time limits

minimum time wages