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MODULE-4

Incentive


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Incentive-definition

y An Incentive is a reward to a specific behavior,designed to encourage that specific behavior. It isalso known as inducement.

y It is an inducement or supplemental reward thatserves as a motivational desired behavior.

y It envisages a basic rate usually on time basisapplicable to all workers and incentive rates payable

to the more efficient among them as extracompensation for their meritorious performance interms of time, cost and quality.


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Contd..

y The incentive rates may take the form of bonus orpremium.

y Bonus means payment to workers of the entire

benefit accruing from savings in costs, time,improvement in quality etc.,

y Premium means the benefits accruing to the firm asthe result of higher output or better quality will be

shared equally or in some agreed basis between themanagement and the workers.


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Types of Incentives

y There are two types of incentives

a. Individual incentives

b. Organization wide incentive


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Individual incentive

y Individual incentive system tries to tie individual effortto additional rewards.

y Conditions necessary for the use of individual incentiveplans

a. Individual performance must be identifiedb. Individual competitiveness must be desiredc. Individualism must be stressed in the organizational

culturePopular approaches include piece work plans,(such as

Taylor's differential piece rate plan, Merricksdifferential piece rate plan, etc.) standard hour plans,(such as Halsey plan, bandeaux plan, Emerson's planetc) gain sharing its advantages and disadvantages.


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Piece rate Incentive

y Piece rate incentive is the most common form of individual enticement for production workers.Employees are paid a fixed rate for each unit of outputproduced.

y The amount to pay per unit of output is determine asfollows:

1. The typical pay rate for the job is determined, probablyby a wage survey.

2. Then the typical output per day is measured.3. A time and motion study by industrial engineers may

also provide information on the number of units thatan employee should be able to make per day


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Contd

y The average daily wage is divided by average unitsper day to produce the price paid per piece.

y For example, if the average daily rate is 96$ and each

employee ought to be able to produce 96 units perday, the rate paid for each piece will be 1.00$.

y They are two approaches:

a. Taylor Differential piece rate System

b. Merricks Differential piece rate system


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A. Piece rate: Taylors Differential Piece RateSystem

y F.W Taylor, the father of scientific management,originated this system. The main features of this planare:

a. There shall be two piece work rates, one is lowerand the other is higher.

b. The standard of efficiency is determined either interms of time or output based on time and motionstudy

c. If a worker finishes work within standard time (orproduces more than standard output within time)he will be given high piece rate


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Contd..

y This system penalizes the slow worker by paying lowrate because of low production, rewards an efficient

worker by giving him high rate because of higher

production.y In other words, if the output of a worker is less than

the standard output, he is paid a low rate and viceversa


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Merricks Differential piece rate system

y We have seen that in Taylor's method, the effect onthe wages is quite severe in the marginal cases. Toremove this defect,

y

Merrick came out with a multiple piece rate system.There are three piece rates under this schemesinstead of two, and workers producing below thestandard output are not penalized by the low piecerate.

y Since the earnings increase with the increasedefficiency, performance above the standard will berewarded by more than one differential piece rate.


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Contd..

y Up to 83% of the standard output workers are paid atthe ordinary piece rate.

y 83% to 100% at 110% of the ordinary piece rate

y Above 100% at 120% of the ordinary piece rate.


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Standard Hour Plan:

y This standard hour plan is similar to the straightpiece work plan except that the standard is set intime units. Automobile repair shops often use such

systems.y Popular approach include Halsey Plan

y Bedeaux plan

y Emersons efficiency plan


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Halsey Plan

y This plan originated by F.A Halsey (an American engineerrecognizes individual efficiency and pay bonus on the basis oftime saved. The main features of this plan are:

1. Standard time is fixed for each job or operation

2. Time rate is guaranteed and the worker receives theguaranteed wages irrespective of whether he completes thework in the time allowed or takes more time to do the same.

3. If the job is completed in less than the standard time, theworker is paid a bonus of 50% (331/3percent under Halsey-

weir plan) of time saved at time rate in addition to normaltime wages.

Total earnings=time taken * hourly rate plus bonus

Bonus=50%of time saved


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Bedeaux Plan

y Under this plan, every operation or job is expressed in termsof so many standard minutes, which are called Bedeauxpoints or B points, each B representing one minute throughtime and motion study.

y

Up to 100% performance, i.e. up to standard Bs, a worker ispaid time wages without any premium for efficiency.

y If the actual performance exceeds the standard performancein terms of Bs then 75% of the wages of the time saved is paidto the worker as bonus and 25% is earned by the foremen.

y If the standard time is 10 hours actual time taken is 8 hoursand rate per hour Rs.1, the worker will get.

= 8 hours at Rs.1+75% of 120 (POINTS SAVED)*1/60

=Rs.9.50


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Emersons Efficiency Plan

y Under this plan, when the efficiency of the workerreaches 67% he gets bonus at the given rate.

y The rate of bonus increases gradually from 67% to

100% efficiency. Above 100% bonus will be at 20%of the basic rate plus 1% for each 1% increase inefficiency.


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Gain Sharing

y A gain sharing plan aims at increasing productivityor decreasing labor costs and sharing the resultantgains (usually a lumpsum payment) with employees.

y

It is based on a mathematical formula that comparesa baseline of performance with actual productivityduring a given period.

y When productivity exceeds the base line an agreed-upon savings is shared with employees.

y Gain sharing is built around the idea that involvedemployees will improve productivity through moreeffective use of organizational resources.


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Benefits ofGain Sharing

y Gain sharing plans are current distribution plans. Theyare directly related to individual behavior and aredistributed on a monthly or quarterly basis.

y Gain sharing plans tend to increase the level of

cooperation across workers and teams by giving them acommon goal.

y Managers are not required to base their calculations oncomplex mathematical formulae, nor they are required to

closely look into specific contributions of individuals orindependent teams. It is easier for both, to formulatebonus calculations and to achieve employee acceptanceof those plans.


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De-merits of gain sharing

y It protects low performers.

y Where rewards are spread across a large number ofemployees, poor performance may get rewards for

non performance at the cost of bright performers.y Poorly designed bonus formulae

y Lack of management support for employeesparticipation.

y Increasing cost factors that undermine the bonusformula, poor communication, lack of trust, andapathy on the part of employees


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Organization Wide Incentive Plan

y Organization wide incentive plans reward employeeson the basis of the success of the organization over aspecified time period.

y These plans seek to promote a culture of ownershipby developing a sense of belongingness, cooperationand teamwork among all employees.


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Scanlon Plan

y Under this plan, constant proportion(i.e., ratio ofwages to sales value) of the added value of output ispaid to the workers who are responsible for the

addition of the value.y The added value is the change in market value

(including profit) resulting from an alteration in theform, location or availability of product service,

excluding the cost of purchased material or servicesused in production.


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Kaiser plan

y It is also called as preistmans production bonus

y Under this system, a standard is fixed in terms ofunits or points.

y If actual output, measured similarly, exceeds thestandard, the workers will receive bonus inproportion to the increase.

y Therefore this system can operate in a factory where

there is mass production of a standard product withlittle or no bottleneck.


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Profit Sharing

y Profit sharing is a scheme whereby employersundertake to pay a particular portion of net profits totheir employees on compliance with certain serviceconditions and qualifications.

y The purpose of introducing profit sharing schemeshas been mainly to strengthen the loyalty to the firm

by offering them an annual bonus.

y The share of profit of the worker may be given in

cash or in the form of shares in the company.y These shares are called bonus shares. It is governed

by the payment of bonus act.


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y It inspires the management and the worker to besincere, devoted and loyal to the firm.

y It helps in supplementing the remuneration ofworkers and enables them to lead a rich life.

y It is likely to induce motivation in the workers andother staff for quicker and better work so that profits

of the firm are increased which in turn increases theshare of the worker therein.

y Workers do not require close supervision.

y It attracts talented people to join the ranks of a firm

with a view to share the profits.


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Demerits

y Workers may not get anything if the business doesnot succeed.

y Management may dress up profit figures and deprive

the workers of their legitimate share it profits.y Workers tend to develop loyalty toward firm

discounting their loyalty toward trade unions.

y Fixation of workers share in the profits of a firm may

prove to be a bone of contention in the long run.


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Need for incentive

y To increase productivity.

y To drive or arouse a stimulus work.

y To enhance commitment in work performance.

y To psychologically satisfy a person which leads to jobsatisfaction.

y To shape the behavior or outlook of subordinatetowards work.

y

To inculcate zeal and enthusiasm towards work.y To get the maximum of their capabilities so that they

are exploited and utilized maximally.


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Non financial incentive

y The incentives which cannot be measured in terms ofmoney are under the category of Non- monetaryincentives.

y Whenever a manager has to satisfy the psychologicalneeds of the subordinates, he makes use of non-financial incentives. Non- financial incentives can beof the following types:-


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Contd

Security of service- Job security is an incentive whichprovides great motivation to employees. If his job issecured, he will put maximum efforts to achieve theobjectives of the enterprise. This also helps since he is

very far off from mental tension and he can give his bestto the enterprise.

Praise or recognition- The praise or recognition isanother non- financial incentive which satisfies the egoneeds of the employees.

Sometimes praise becomes more effective than any otherincentive. The employees will respond more to praise andtry to give the best of their abilities to a concern.


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Contd

Suggestion scheme- The organization should lookforward to taking suggestions and inviting suggestionschemes from the subordinates.

This inculcates a spirit of participation in the employees.

This can be done by publishing various articles written byemployees to improve the work environment which can

be published in various magazines of the company.

This also is helpful to motivate the employees to feelimportant and they can also be in search for innovative

methods which can be applied for better work methods. This ultimately helps in growing a concern and adapting

new methods of operations.


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Contd

Job enrichment- Job enrichment is another non- monetaryincentive in which the job of a worker can be enriched.

This can be done by increasing his responsibilities, giving himan important designation, increasing the content and nature of

the work. This way efficient worker can get challenging jobs inwhich they can prove their worth. This also helps in thegreatest motivation of the efficient employees.

Promotion opportunities- Promotion is an effective tool toincrease the spirit to work in a concern.

If the employees are provided opportunities for theadvancement and growth, they feel satisfied and contented andthey become more committed to the organization.


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Fringe Benefits

y The term fringe benefits refers to the extra benefitsprovided to employees in addition to the normalcompensation paid in the form of salary.

y Many years ago, benefits and services were labeledfringe benefits because they were relatively insignificant or fringe components of compensation.


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Features of fringe benefits

y They are supplementary forms of compensation.

y They are paid to all employees based on themembership in the organization.

y They are indirect compensation because they areusually extended as a condition of employment andare not directly related to compensation

y They help to raise the living conditions of employees

y They may be statutory or voluntary .


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Need for fringe benefits

y Employee demands

y Trade union demands

y Employers preference

y As a social security

y To improve human relations


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Objectives of fringe benefits

y To create and improve sound industrial relationsy To motivate the employees by identifying and satisfying

their unsatisfied needsy To provide security to the employees against social risks

like old age benefits and maternity benefits.y To protect the health of the employees and to provide

safety to the employees against accidents

y To promote employee welfarey To create a sense of belongings among employees and to

retain them. Hence, fringe benefits are called goldenhandcuffs

y To meet the requirements of various legislations relatingto fringe benefits.


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Types of Fringe benefits

It is broadly classified into five categories:

y Payment for time not worked

y Employee security

y Safety and health

y Workmens compensation

y Health benefits

y

Voluntary arrangementsy Welfare and recreational facilities old age and

retirement benefits


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Payment fro time not worked

y This category includes:

a. Hours of work: section 51 of the factories act, 1948,specifies that no adult worker shall be required to work

in a factory for more than 48 hours in any week.Section 54 of the act restricts the working hours to 9 on any

day.

b. Paid holidays: according to the factories act, 1948, anadult worker shall have weekly paid holidays ,preferably Sunday. When a worker is deprived of

weekly holidays, he is eligible for compensatory holidays of the same number in the same month.


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Contd.

c. Shift premium: companies operate second and thirdshifts, pay a premium to the workers who are required to

work during the odd hours shift.

d. Holidays pay: generally organizations offer double thenormal rate of the salary to those workers, who workduring holidays.

e. Paid vacations: workers in manufacturing, mining andplantations who worked for 240 days during a calendar

year and eligible for paid vacation at the rate of one dayfor every 20 days worked in case of adult workers and atthe rate of one day for every 15 days worked


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Employee Security

y Physical and job security to the employee should alsobe provided with a view to ensure security to theemployee and his family members.

y When the employees services get confirmed , his jobbecomes secure.

y Further, a minimum and continuous wage or salarygives a sense to the life. The payment of wages

act,1936, the minimum wages act of 1948, thepayment of bonus act 1965, provide income securityto the employees. they are of two kinds:


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Contd..

y Retrenchment compensation: the industrial disputesact, 1947, provides for the payment of compensationin case of lay-off and retrenchment.

y The non-seasonal industrial establishmentsemploying 50 or more workers have to give onemonths notice or one months wages to all the

workers who are retrenched after one years of continuous service.

y The compensation is paid at the rate of 15 days wagefor every completed year of service with a maximumof 45 days wage in a year.


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Contd..

y Lay off compensation: employees are entitled to lay-off compensation at the rate equal to 50% of the totalof the basic wage and dearness allowance for the

period of their lay off except for weekly holidays. Layoff compensation can normally be paid up to 45 daysin an year.


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Safety and health

y Employees safety and health should be taken care inorder to protect the employee against accidents,unhealthy working conditions and to protect the

workers productive capacity.y Workmens compensation: according to

workmens compensation act of 1923, the act isintended to meet the contingency of invalidity and

death of a worker due to employment injury or anoccupational disease specified under the act at thesole responsibility of the employer.


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Health Benefits

y Today, various medical services like hospital, clinical anddispensary facilities are provided by the organizationsnot only to employees but also to their family members

y Employees State Insurance Act 1948, dealscomprehensively about the health benefits to beprovided.

y This act is applicable to all factories, establishmentsrunning with power and employing 20 or more workers.

y Employees in these concerns and whose wages do notexceed Rs.1000 per month are eligible for benefits underthe act.


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Contd..

y Benefits under this act include:

1. Sickness benefit

2. Maternity benefit

3. Disablement benefit

4. Dependants benefit

5. Medical benefit


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Voluntary arrangements

y Most of the organizations provide health services over andabove the legal requirements to their employees free of cost bysetting up hospitals, clinics, dispensaries and homeopathicdispensaries. Companies elaborate health service programsinclude:

1. Providing health maintenance service, emergency care, onthe job treatment care for minor complaints, healthcounseling, medical supervision in rehabilitation, accidentand sickness prevention, health education programmes,treatment in employee colonies.

2. Medical benefits are extended to employee family membersand to the retired employees and their family members.

3. Small organizations which cannot


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Welfare and recreational facilities

y Welfare and recreational benefits include:

a. Canteens

b. Consumer Stores

c. Credit Societies

d. Housing

e. Legal aid

f. Employee counselingg. Welfare organizations

h. Holiday homes


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Contd

i. Educational facilities

j. Transportation

k. Parties and picnics

l. Miscellaneous


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Old age and retirement benefits

y Industrial life generally breaks joint family system.The saving capacity of the employees is very low dueto lower wages, high living cost and increasing

aspirations of the employees and his familymembers.


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Contd

y As such, employers provide some benefits to theemployees, after retirement and during old age, witha view to create a feeling of security about the old ageand retirement benefits.

y These benefits include:

a. Provident fund

b. Pension

c. Deposit linked insurance

d. Gratuity

e. Medical benefit

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