INCENTIVES

Basic Concept

What is incentive? In simple words, incentive is anything that attracts a worker and stimulates
him to work. The incentives can be financial and non-financial. Both types of incentives play
important role under different conditions. For example, financial incentives are considered to be
more valued under the work conditions where wages are at low levels. On the contrary, non-
financial incentives are more preferable where wage levels are high and the rate of tax is
progressive. However, a review of research evidences indicates that there is a shift in emphasis in
the demands of employees and their unions from financial to non-financial benefits.

The term incentive has been defined differently by different authors. We produce here a few of
these definitions.

According to the National Commission on Labor,

"Wage incentives are extra financial motivation. They are designed to stimulate human effort
by rewarding the person, over and above the time rated remuneration, for improvements in the
present or targeted results".

Burak and Smith have defined incentive as, " An incentive scheme is a plan or program to
motivate individuals for good performance. An incentive is most frequently built on monetary re-
wards (incentive pay or a monetary bonus), but also may include a variety of non-monetary
rewards or prizes".

According to Venkata Ratnam and Srivastava, "A wage incentive scheme is a method of
payment for work of an acceptable quality produced over and above a specified quantity or
standard".

Now we can define incentive as a system of payment under which the amount payable to his
output. Such a payment is also called 'payment by results' (PBR). Thus, PBR refers to a method
which provides for the "direct linking of workers earnings to a measure of their performance”.

The main features of incentives from the above definitions can be listed as follows:
1 Incentives are based on a standard of performance for the job.
2 Incentives are measurable in monetary terms.
3 Incentives are meant to motivate workers for better and more
performance.
4 Incentives have direct linking to performance.
5 Incentives vary from person to person and from time to time for the
same person.
OBJECTIVES
1. Profitable for both workers and management
2. help to increase the production
 3. reduce cost
4. high up morale by rewarding workers in proportion to their output
5. recognize the worker for his good performance
6. improve utilization of equipment, materials and sevvice
7. should furnish a basis for cost control and labour control.
8. reduce labour turnover and absenteeism
9. aim at improve relations between workers and management.

LIMITATIONS
1. There is a possibility of reducing the quality of products since incentives are ususlly based
on output.
2. workers paid by results disregard security regulation in order to aceive output. It will
increase the danger of accidents
3. some workers may work day and night, it would affect their health.
4. jealousy and conflict may arise among employees, because some employees will earn
more .
5. workers may oppose introduction of new machines, methods as they fear that new
methods or machines will decrease their earnigs.
6. when production is disrupted due to management fault, the workers will insist to get
compensation.

An incentive scheme is usually based on three assumptions:

1. The belief that money is a strong motivator.

2. That the relationship between effort and reward can be systematically established. The
relationship so based leaves no doubts in the minds of the concerned employees.
3. The feedback to the employees is immediate and direct.

Classification of Incentives
Incentives are classified as under.

• FINANCIAL AND NON FINANCIAL INCENTIVES

• INDIVIDUAL AND GROUP INCENTIVES

(a) Financial incentives

Financial incentives include Salary, premium, reward, dividend, bonus, income from
investment. Financial incentives play a very important role in improving the performance of the
employees. Cash plays a very important role in fulfilling the needs of the individuals especially of
labor class.

(b) Non financial incentives

As the employees have other needs like respect and self centered needs , they can be motivated
with the help of following non-financial incentives.
• Job satisfaction
• Job security
• Respect and recognition
• Training and other employee improvement programs
• Housing/medical/educational facilities
• Opportunities for growth.
• Suggestion scheme, praise, employee-superiors relationship etc

Individual incentives

Individual incentive are the extra compensation paid to an individual for all production over a
specified quantity.

Advantages
1. Administration of individual incentives is simple because incentives can be given after the
assessment of individual’s work
2. each and everybody gets the return in accordance with work. This makes the person more
dedicated towards the work.
3. persons who do the work with less efficiency are not entitled to incentives.
Limitations
1. the employees inclination is more on quantity as compared to quality
2. rigidity of rates
3. this incentive system is inappropriate where delays are frequent and beyond the
individual’s control as well as where the work is automated.
4. adverse effect on speeding production upon the health of the employee.
5. there is a problem of restriction of output in view of group pressures from the fellow
employees.

Group Incentives
Goup incentives system involve co-operation among employees , management and the union
for reduction in labor, material and supply costs, strengthening of employee loyalty to the
company.
Advantages
1. Reduces absenteeism and production
2. reduces conflict and confusion among group members
3. group incentives lead to lesser control.

Requirement of good incentive

1. proper climate: this means that the relation between management and employees should
be good and free from suspicion
2. co-operation of workers
3. worker’s participation: wage incentive scheme should be implemented with the
consultation of workers and union.
4. scientific standard: the scheme must be based on scientific management.
5. simplicity: the incentive scheme should be simple and everybody must understand it.
 6. equitable: this means the scheme should give equal opportunity to all.
7. flexible: changes may be required due to technological changes, market demand etc
8. less costly and wide coverage.
9. guarantee minimum wages: it will ensure a security to all
10. ceiling on earning: the maximum amount of earnings must be fixed. It will help to
maintain quality
11. grievance settlement on time
12. timely payment of incentive
13. follow up: required to rectify the mistakes in incentive scheme.’

WAGE INCENTIVE

We may define wage incentive as a system of payment under which the amount payable to a
person is linked with his output. Such payment may be called “payment with result”
“t refers to all plans that provide extra pay for extra performance in addition to regular wages
for ajob”- by Hummel & Nickerson,

Types of Wage incentive Schemes

The following different wage incentive plans for Direct workers will be discussed here.

1. straight piece rate

2. Halsey Premium plan
3. Rowan Premium plan
4. Bedaux Point Plan
5. Gnat Task & bonus plan
6. Emerson efficiency plan
7. Taylors differential plan

Individual Incentive (PBR) Schemes

Under this plan, employees are paid on the basis of results. The chief incentive plans included
in this category are discussed in seriatim.

Halsey Premium Plan: This plan, originated by F. A. Halsey, an American engineer, is a

combination of the time and the piece wage in a modified form. Under this plan, a guaranteed
wage based on past experience is determined. If a worker saves time, he gets 50% of wages for
time saved (called premium) in addition to normal wages. It is optional for the worker to work on
the premium or not. Thus, this plan also provides incentive to efficient workers.

Advantages
• It is simple to understand. And guarantees time wages to employees
• The wages of time saved are shared by both employers and workers, so it is helpful in
reducing labor cost
• It makes distinction between efficient and inefficient workers.and gives increasing
 incentive to efficient workers
Disadvantages
• Quality of the work suffers because workers are in a hurry to save more and more time
to get more and more incentive
• Workers criticize this method on the ground that the employer gets a share of wages of
time saved.

Illustration
Rate per hour = Rs 15/hour
Time allowed for job = 20 hours
Time taken = 15 hours
Calculate the total earnings of the worker under the Halsey plan
S (standard time) = 20 hours
T(time taken) = 15 hours
R(rate) = Rs 15 per hour.
Total earnings = TXR+50%(S-T)XR
= 15X15+50/100(20-15)X15
= 225+2.5X15
Total wages for 15 hrs = 262.5
Find the effective rate of earnings = 262.5/15= Rs17.5

Rowan Premium Plan: This plan was developed by D. Rowan in 1901.

Under this method , the worker is again guaranteed wages at the ordinary rate for time taken by
him to complete the job. The difference between Rowan and Halsey Premium plans are in the
calculation of bonus.

Under Halsey plan, bonus is fixed percentage of the wages of time saved where as under
Rowan plan, bonus is that proportion of the wages of the time taken which the time saved to the
standard time allowed.

The bonus is S-T x T x R

S
and the total earnings will be calculated as

T x R + S-T x T x R
S
Where T= time taken(actual time), S= Standard time (time allowed),
R = Rate per hour

Assume R- hourly wage rate=Rs10

T- Actual time taken to complete the job = 4 hours
S- Standard time or allowed time = 6 hours
W= 10X4+(6-4 / 6 ) X10X4 = 40 + 13.3 = 53.3
 Bedaux plan

Under this plan, every operation or job is expressed in terms of so many standard minutes.,
which are called ‘Bedeaux points’ or B s ; each B representing I minute.through time and motion
study. Upto 100% performance ie upto standard Bs, the worker is paid time wages without any
premium for efficiency. If the actual performance exceeds the standard performance in terms of
Bs, then 75% of the wages of the time saved is paid to the worker as bonus and 25% is earned by
the foreman.

For example, standard time required for a job is 20 hours ie 1200 Bs in terms of minutes
(20x60) where as a worker has taken 16 hours ie 960 Bs instead of 1200 Bs . The worker has
saved 240 Bs or 4 hours (4x60). Suppose the time rate is Rs 20/- per hour , the time saved will be
equal to Rs 80 ( 4x20) the worker will get 75% of Rs 80/- . So his total earnings will be as follows
Time wages for 16 hours-actual time taken@ Rs 20 per hour = 320
Bonus 75% of 4hrs wages (75/100x4x20) = 60
Total earnings = 380

Emerson Efficiency Plan: Under this scheme, both standard work and day wage are fixed.
Bonus is paid on the basis of worker's efficiency. A worker becomes entitled to get bonus only
when his/her efficiency reaches to 67%. The rate of bonus goes on increasing till he achieves
100% efficiency. Above 100% efficiency, bonus will be 20% of the basic rate plus 1% for each
1% increase in efficiency. In this way, at 120% efficiency, a worker receives a bonus of 40% and
at 140% efficiency, worker gets 60% of the day wage as bonus.
• In this plan , bonus is payable only when efficiency touches 66.7 %of standard laid down.
• The amount of bonus payable increases progressively with increae in efficiency in such a
manner that at 100% efficiency, the bonus is 20% of hourly rate. For efficiency beyond
100% additional 1% bonus is payable for each 1% Iincrease in efficiency.beyond 100%.
• Thus at 110% efficiency bonus payable is 30% and total wages payable are time wages for
the actual time taken plus 30% of time wages as bonus.
• Illustration
Standard output/day of 8 hrs is 16 units. Actual output of a worker for 8 hrs is 20 units. Rate per
hour is Rs 2.5. calculate wage as per Emmerson’s efficiency plan
Level of performance actual output/standard outputx 100
20/16x100=125%
bonus payable is 45% as follows
At 100% efficiency 20%of time wages
For next 25% @1% for each 25%of time wages
Total bonus 45%
Time wages for 8 hours 8x2.5=20
Add 45% bonus 45/100x20 9
Total wages payable Rs 29/-
 Gantt Task and Bonus Plan: This plan is devised by H.L. Gantt. This plan combines time,
piece wage and bonus.
• First a standard time is fixed for doing a job
• The actual performance is calculated with standard time and efficiency is determined
• If a worker takes more time than standard time (his efficiency is below 100%), he is given
wages for the time
• If a worker takes standard time to perform the task (efficiency is 100%), he is given wages
for standard time and a bonus of 20%of wage earned
• If a worker takes less than standard time, he is given wages for standard time plus a bonus
of 20% of the wages for the standard time. In other words if the performance is more than
100%, he is given wage plus 20%of piece wages
Advantages
1. simple to understand
2. ensures guaranteed time wages to the worker who are below average
3. worker tries to become more efficient since increasing rate of bonus is very
satisfying to efficient workers.
4. fixed cost per unit decreases with increase in production due to incentive for
efficient workers

Disadvantages
1. it divides the workers into two categories, one who earns the bonus and the other who
does not.

ILLUSTRATION

Standard output per day = 1000 units

Guaranteed payment = Rs 500/= ie 50 Ps/unit
• Worker A produces 850 units, so his performace is 85%-he will get Rs 500/- the
guaranteed wages
• WorkerB’s level of performance is 1000 units. So he will get Rs 500 plus 20% bonus
pertaining to standard time ie 20% of 500 ie Rs 100. so Rs 600

• Worker C ‘s output is 1100 units, so his level of performance is 110% and therefore he
will get 20% piece wages as bonus

Piece wages for 1100 units @ 50 paise = Rs 550

20% bonus = rs 110
Total = Rs 660

Taylors Differential Piece rate System

This system was introduced by Taylor, the father of scientific management
 Taylor was of the view that that an inefficient worker had no place in an organization and he
should be penalised by paying low piece rate for low production. To encourage the worker to
complete the work in standard time , he is given a lower piece rate. Thus if standard production has
been fixed at 8 units/day of 8 hours , the higher piece rate for 8 units or beyond may be Re 1/= per
unit and lower rate for an output if less than 8 units per day, may be 80 paise
Per unit.
Hence Taylor decided to give a large reward to those who would complete the work within or less
than the standard time. The system is very harsh to inefficient workers on account of low rate and
low output.

ILLUSTRATION

Calculate the earnings of workers A and B under straight piece rate system and Taylor’s
differential piece rate system
Norma rate/hour = Rs 1.80
Std time/unit = 20 seconds
Differential to be applied = 80% below std and 120% above std
Worker A produces 1300 units per day and worker B produces 15000 units/day
Solution
Standard production per 20 seconds =1unit
Therefore per minute=60/20=3units, per hour 3x60=180 units, per day of 8 hours will be
180x8=1440 units
Normal rate/hour= Rs 1.80
Normal piece rate 180/180 units = 1 paise
Low piece rate below standard production 1P X80/100=8Paise
High piece rate at or above standard = 1PX120/100=1.2 Paise
FOR A
Under straight piece rate system 1300 units@1P – 1300X1/100=Rs 13
Under Taylors Differential plan 1300 units@ 0.8P=1300X8/10X1/100= Rs 10.40
FOR B
Under Straight piece rate = 1500@IP = 1500X1/100 = Rs 15
Under Taylors Differential plan = 1500@1.2=1500X12/10 X 1/100=Rs18

Group Incentive Schemes

The incentive schemes discussed earlier can be applied on a group basis also. Group incentive
schemes are appropriate where jobs are interdependent. It is difficult to meaningfully measure
individual performance and group pressures affect the performance of the members of the group.
The chief group incentive schemes are discussed here.

Profit-sharing: The concept of profit-sharing emerged towards the end of the nineteenth cen-
tury. Profit-sharing, as the name itself suggests, is sharing of profit of organization among
employees. The basic rationale behind profit-sharing is that the organizational profit is an outcome
of the co-operative efforts of various parties, therefore, employees should also share in profits as
shareholders share by getting dividend on their investment, i.e. share capital. The very purpose of
introducing profit-sharing is to strengthen the loyalty of employees to the organization. Thus,
profit-sharing is regarded as a stepping stone to industrial democracy.

Co-partnership: In a way, co-partnership is an improvement over profit-sharing. In this

scheme, employees also participate in the equity capital of a company. They can have shares
either on the basis of cash payment or in lieu of other incentives payable in cash like bonus. Thus,
under co-partnership scheme, employees become shareholders also by having company shares.
Now, employees participate in both —profits and management of the company. The finer points
of this scheme are that it recognizes the dignity of labor and also of a partner in the business. This
would, in turn, develop a sense of belongingness among the employees and encourage them to
contribute their best for the development of the organization.

Scanlon Plan: The Scanlon plan was developed by Joseph N. Scanlon, a Lecturer at the
Massachusetts Institute of Technology in USA in 1937. The plan is essentially a suggestion
scheme designed to involve the workers in making suggestions for reducing the cost of operation
and improving working methods and sharing in the gains of increased productivity.

The plan is characterized by two basic features. First, both employees and managers can
participate in the plan by submitting their suggestions for cost-cutting methods. Second, increase
in efficiency on account of cost-cutting is shared by the employees of the unit.

The Scanlon plan, wherever adopted, has been successful to encourage a sense of partnership
among employees, improved employee-employer management relations, and increased
motivation to work.

The criticism labeled against group incentive is that the incentive benefits being similar to all
members of the group, the best performers may loose incentive. However, this can be overcome if
group incentive scheme generates peer-level pressure for superior performance and also reduces
the need for supervision. Stability in group may be a necessary condition to make the group
incentive .scheme successful.

As regards the ultimate impact of incentives on organizational performance, the research studies
conducted in India report that incentive schemes have a positive impact on productivity, labor
cost, and industrial relations. It is concluded that "money" has a "salutary" impact on production.