Performance Management SystemCase Study

Of

Visakhapatnam Steel Plant

On

Motivating Employees through Incentive Scheme

Learning & Sharing

by

Sandeep Deshpande

Article Published in Journal of NIPM, Jan – Mar 05 issue – contributed by Mr. Panchanan Chaudhuri – Executive Director (HRM), Rashtriya Ispat Nigam Ltd., Visakhapatnam Steel Plant.

IntroductionVisakhapatnam Steel Plant (VSP) was reported to BIFR as a potentially sick company in the year 2000 with more than 50% of its capital eroded through accumulated losses. It made a turnaround in 2002-03 by registering a net profit of Rs. 521 Crs. Now, a debt free EVA positive company is all set for expanding its capacity from 3 Million Tonne Liquid Steel per annum to 10 Million Tonne Liquid Steel per annum in two phases. All the production shops are operating at 120% to 125% above the rated capacity. One of the major contributing factors towards turnaround of VSP is its IS. In this presentation you will find the, conceptual aspects of formulating an IS & its operational aspects with reference to VSP.

The purpose of IS is to motivate employees to higher levels of performance based on the following.

•Employee can improve his level of performance by 1/3rd more output than his normal level, if suitably motivated. •Employee can be motivated through Financial Incentive or Non Financial Incentive like; recognition, job satisfaction, a good working environment etc. •However, it is widely observed that monetary inducements bring forth that extra effort from an employee, especially in the lower & middle levels of an organisation.

Any discussion on incentive schemes involves the following.a) Concept b) Formulation c) Implementation d) Administration.

Concept

• Considering Incentive as a component of Wage.

• Analysing incentive scheme as a motivator for higher performance.

• Viewing incentive as an approach to productivity bargaining.

Payment By Results (PBR)• Incentive Scheme(IS) is a system of PBR as

against guaranteed time wage, which is a system of Payment By Time.

• To pay fair day’s Wage against fair day’s Work.

• As against guaranteed time wage(basic), the PBR component of wage varies directly with the level of performance.

• IS at the operating level basically boils down to a relationship between the level of performance & its reward to an employee over and above the guaranteed time wage.

Formulation

• The following points are considered during the formulation of an incentive scheme :– Lower cut-off point / threshold level.

– The incentive curve.

– The differential of payment.

– Type of Scheme

– Coverage

– Management of Transition

– Settlement Period.

Lower Cut-Off Point• The threshold level for payment of incentive,

sometimes mentioned as lower cut-off, is decided on the basis of the following :– Current level of performance vis-à-vis capacity /

standard performance.– Industry-wise norms.– Level of Wages

• Incentive payment neither made at very low level of capacity utilisation nor be too high and beyond the reach of workmen.

• Decision about THRESHOLD LEVEL demand a pragmatic approach.

Different Views on Incentive Payment

• Classical Authors suggested that Incentive Payment (IP) should start beyond 100% of standard performance. But practically looking, in any heavy industry achieving 100% capacity utilisation itself requires strong motivation on the part of employee. Therefore, the incentive payment generally starts from 75% to 80% of capacity utilisation.

• As per the Fredrick Taylor, human being under motivation can give 1/3rd more output beyond his normal level of performance. He designed the piece rate system of payment. In this 1% of extra wage (time rate)is paid for each 1% of extra performance beyond 100% of Standard Performance. However, the payment is limited to 33¹/з more to save workmen from undue fatigue.

• To understand the financial implications of an incentive scheme, one has to appreciate that when performance goes up, savings are generated in terms of labour cost and fixed cost. These saving are shared between labour and capital. The part paid to the labour for higher performance is known as the Incentive Amount. If payment is limited to 100% saving on labour cost, UNIT DIRECT LABOUR COST remains constant and the organisation gains by way of additional revenue through savings in fixed cost.

• Some schemes suggest that savings in labour cost above the standard performance level should be paid to the labour as their incentive.

• Some suggest that a part of savings on fixed cost may also be given to the labour.

• Payment should be differential between the levels as per their wage curve.

• Incentive schemes with the same rates of payment between various levels of skills are also not totally uncommon – especially when group is involved for a specific output.

Different Views on Incentive Payment

Incentive Curve

• Ideally, the incentive curve should be of concave nature. It means that there should be accelerated rate of incentive payment at higher and higher levels of performance. This is because the degree of difficulty involved in improving performance by say, same one percent is more and more as the level of performance is higher and higher

Type of Scheme• Based on Specific need of the organisation.

• Based on individual performance are adopted with the individual performance as the unit of reference.

• If the nature of work is interdependent, group schemes are adopted.

• Plant or Enterprise scheme are required for cost reduction, effective management of resources, reducing manpower, developing better work methods, etc.,

• Present tendency is to mix of the different approaches by relating part of the payment on volume and a part on techno-economic performance with an overall linkage to productivity.

• Other factors may also linked to the incentive scheme but SIMPLICITY should be the essence of any scheme.

Coverage• Previously – one man one machine ratio.• Now, due to advance technology we have to

consider broad functions viz, operation, maintenance, services etc., are integrated into the PBR system.

• Differential ought to be maintained between the direct & indirect employees & also within the direct employee.

• More benefit to be given for harder, hotter & more hazardous working to keep them motivated to work in disagreeable working conditions.

Management of Transition

• Management of Transition depend on careful study of the environmental variables besides other attendant factors in the organisation. It is very complex in nature & will be depend on assessment & observation.

Settlement Period

• Payment of Incentive could be a month, a fortnight or a week.

• Short period may not provide sufficient time to consolidate on the production trend.

• Long period may lose its motivating quality.

• Generally in many industry period of settlement is a month.

Implementation

• Crucial & most important aspect of any Incentive Scheme.

• Most situations, union interaction becomes a compulsion.

• Finalization of Departmental performance parameters. (Discussion on Peculiar Issues)

• It is advisable to involve as many employees as possible in the interaction process for smooth implementation of the scheme

Administration• A detailed procedure is to be drawn up for

administering the scheme. • Responsibility centres are fixed for feeding of

information on performance levels, safety/Accident records and any other relevant factors required for calculation of incentive earnings.

• These centres would be the PP, IE, Finance & Systems departments.

• Simple formats are to be designed so that uniform and accurate data is received from the various departments.

Other Tools • Display boards placed at strategic locations

on the shop floor.– Information of Target achieved & incentive

earned.

• Incentive schemes are designed for specific periods.

• Reassessment could be done – Is there any stability in the earnings.– Is scheme serves the purpose of providing

motivating for higher level of performance.

Panacea Syndrome

• Incentive Schemes should not be considered as a panacea for all the problems in an organisation.

• Designed incentive scheme may not serve its purpose if other factors like; effective supervision, prevalence of conducive I R climate, efficient management of inputs etc. are not adequately take care of.

• IS should be viewed only as an important input in the overall context of management.

VSPs Incentive Scheme• In VSP incentive scheme is operational for Non-

executive employees in levels from S-1 to S-9 & Executive employees from levels E-1 to E-6 as per the following.

– Performance Based Incentive Scheme for Non-Executives.– Executive Incentive Scheme.

• Silent features of the Scheme areA. Capacities of all departments corresponding to 3.0 Mn

Tonnes of Liquid Steel Per Annum (the rated capacity of the plant) has been taken as 100% performance level.

B. The schemes are based on two factors of performance with Weightages as indicated below.

Factors Non Executives Executives

i) Production (Volume) Factor 80% 70%

ii) Techno – Economics Factors 20% 30%

The potential, i.e. maximum earning at 100% performance level is given below.

Grades / Levels Volume Component (Rs.)

Techno-Economic Component (Rs.)

Total (Rs.)

S1 – S2 550 138 688

S3 – S5 830 208 1038

S6 – S8 1260 315 1575

S9 1330 333 1663

E1 – E2 1243 532 1775

E3 – E6 1313 562 1875

The incentive curve for the production component is :% fulfillment of rated capacity Monthly earnings as % of potential for

production component

75 57.5

80 64

100 100

125 145

There is a steep increase in incentive earnings beyond 100% of DPR capacity by using a money multiplier in volume component of earnings.

TEF factor• There are three techno-economic factors for each

department. The monthly earnings will be derived by adding earnings from the production and TEF components. The earnings of an individual will be calculated by multiplying the total amount (gross incentive) by three factors as given below:– Incentive eligibility factor for the department. (A)– Attendance factor of an individual employee. (B)– ‘No Fire’ factor. (C)

The INCENTIVE ELIGIBILITY factors for employees of the different departments are as given below :

Department Eligibility

Coke Oven and Coal Chemical Plant

1.2Sinter Plant

Blast Furnace Deptt.

Steel Melting Shop

Other Deptts. 1.0

Attendance Factor

No. of Days Attendance Factor

24 days and above 1.0

19-23 days 0.8

16-18 days 0.6

Below 16 days 0.0

To encourage good attendance, the following factors are given depending on actual attendance of an individual in a calendar month

To bring about awareness and to control fire accidents, factors applicable in relation with minor/major fire accidents are given below

Factor for No Fire

a) Minor – No. of fire accidents in a department in a month. Multiplication factor

Nil 1.1

1 1.0

2 0.9

3 0.8

4 & above 0.0

b) Major – Stopping production/activities for 8 hours and above

1 0.8

2 & above 0.0

Other Schemes

• An amount of Rs. 75/- is paid as incentive to each employee if there is no reportable accident in the department in a calendar month.

• In case of fatal accident in the department in the calendar month, the earnings from the safety factor will be nil. In addition, each employee will have to contribute Rs. 75/- from his/her incentive earnings of that month. The money thus collected will be handed over to the bereaved family.

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