Incentives

08/04/2023 Arup Bhattacharya 1

INCENTIVE – CONCEPTS AND TYPES

BY ARUP BHATTACHARYA

Head – Human Resource, ANTS India Pvt. Ltd.


MODULE 4Incentives – definitions, Types of incentives, Individual incentives: Measured day work, Piece work, Standard Hour, Gain Sharing, its advantages and disadvantages, Organization Wide incentives – Scanlon Plan, Kaiser Plan, Profit Sharing, Non – financial incentives, Fringe Benefits – Definition, Objectives, Types of Fringe Benefits.


INCENTIVES

• A reward or inducement for a specific behaviour, designed to encourage that behaviour.

• Motivates and encourages the worker to produce more(quantitative) and better(qualitative).

• Addition to wages which are otherwise paid to the worker also called “Payment by Results.” (ILO).


Contemporary understandings

• An incentive is the factor that motivates a person to achieve a particular goal.

• An incentive is an offer of something of value, sometimes with a cash equivalent and sometimes not, meant to influence the payoff structure of a utility calculation so as to alter a person's course of action.

• Both parties stand to gain from the resulting choice of incentive.


• Incentives vary from individual to individual• But most people are attracted towards

activities which offer the following: - pleasant sensations (sensory incentive) - novel situations, providing varied and exciting stimuli (curiosity incentive) - reassurance and support from a group (affiliation incentive) - an opportunity to work independently (independence incentive)


- a feeling of self-control and not being dominated by others (power incentive)

- low levels of frustration and hostility (aggression incentive)

- a strong sense of achievement and success (achievement incentive).

• Psychologists also recognize that in order to reach long-term goals, a sense of achievement must be reinforced continually by successful completion of short-term intermediate goals.


Types of Incentives• Broadly incentives can be classified into: - Direct Incentives - Indirect Incentives • Further direct or indirect can be classified into - Financial Incentives - Non – Financial Incentives - Semi – Financial Incentives


Comparison

Incentive Type Advantages Disadvantages

Financial Focus on hitting target

Achievement given a value

Rewards are sometimes small

Can demoralise if not earned

Non-Financial Can recognise employee priorities and lifestyles

Can encourage attachment to business

Can be taken for granted

May be inappropriate


Incentive Schemes

• Plans which provide for reward to an employee for the good work done by him.

• A system of wage payment under which the earnings of an employee, or a group of employees, or all employees in an organization is directly related to the output of an acceptable quality and over and above a standard laid down by means of predetermined formulae.


• Thus in an incentive scheme the worker gets a guaranteed minimum wage + some extra payment or bonus done over and above the standard work calculated by some formulae.

• Incentives schemes encourage higher levels of staff performance.

• The rewards usually relate to the achievement of certain goals, either personal, team or organisational, or a combination of all.


Benefits of IS to Business

• An effective system of incentives could: - persuade people to join the organisation - retain existing staff - increase staff motivation, morale and loyalty - boost productivity - link individual and business performance - focus employees on achieving targets - build teamwork


Benefits of IS to Staffs

• An effective system of incentives could help: - enhancing the quality of working life - rewarding staff efforts - adding value to the employment

contract


Characteristics of a Good IS

• Should affordable, transparent and appropriate to the business and the jobs that they relate to.

• Should be worth introducing them after consulting with staff or unions.

• Should enhance staff motivation.• Should ensure good working conditions and other

good management practices, such as performance management, appraisals and appropriate communication and training programmes.


• Should operate by means of well defined and easily understood formulas.

• Should be based on scientific work management. The standards must be realistic.

• Should be well planned, installed and maintained.

• Should have provisions for amendments.• Should review specific objectives for each

employee periodically.• Rewards should clearly and closely relate to

the efforts done by individual or group.


Types of Incentive Schemes• The incentive schemes may be of two types: - Individual Incentive Schemes - Group Incentive Schemes• Group Incentive Schemes are generally

preferred by employers. • Individual IS deals with individual output while

group IS deals with aggregate output.


Comparison Incentive Scheme Advantages Disadvantages

Individual 1) Focuses individual on achievement.

2) Better utilisation of equipment.

3) Reduced absenteeism. 4) Extra pay and extra

output are linked.

1) Can be divisive2) Disparity of amount

drawn.3) Drooping down of

morale. 4) Individual earnings

can fluctuateGroup 1) Team-working.

2) Less supervision. 3) Shorter training time. 4) Can improve individual

under-performance.5) Shorter training time.

1) Individual skills undervalued.

2) Rivalry among workers in a group increases.

3) Under-contributors may be bullied


Setting up an Incentive Scheme

• Identify the scheme's objectives.• Consult with staff and trade unions• Relate the scheme to the business'

remuneration system.• Ensure that the planned scheme is competitive.• Decide on performance measures for the staff.• Run a pilot scheme and evaluate results.• Regularly review your scheme and obtain

feedback.


CASE STUDY – 1

• Fact File - Client : Towergate Partnership - Event : ‘Chairman’s Club Incentive Scheme’ - Location : New York. - Attendees : 25


Brief

• The Towergate Partnership wanted to introduce a company wide incentive programme for their entire customer focused staff.

• The scheme needed to be based on the staff’s annual sales targets, with the top 25 staff being rewarded with a trip of a lifetime to a foreign destination.

• The launch date of the scheme had to coincide with the staff receiving their annual targets.

• To maximise the staff’s awareness of the scheme, support material would be needed for all the offices across the UK.


Relation of Performance to Reward

• the person being paid understands that a particular outcome or behaviour, when compared successfully with the performance standard, will lead to a specified reward.

• the performance standard must be clearly stated.

• the ratio between it and the reward should be clearly understood.


Performance-Reward Ratio.


Three geared ratios


Performance Rating

• Used for incentive payments under work – measurement schemes.

• British Standard Institution (BSI) formulas are used.

• Expressed as 100/133 or 75/100.• 100 or 75 is average performance without

incentive.• 133 or 100 is the performance of a fully

motivated employee.


Formulae

Where P.R = Performance Rating.


Question 1

• An operator produces 120 units in a day. A working day has 8 hour. Standard time to produce each unit is 240 seconds. Calculate the performance rating of the operator. If the operator produces 132 units calculate the percentage change in performance.


Measured Day Work

• Became popular in large batch or mass production factories in ‘50s and ’60s.

• Provide for the pay of employees to be fixed on the understanding that they will maintain a specified level of performance.

• Fundamental principle is that there is an incentive level of performance and the incentive payment is guaranteed in advance putting the employees in obligation to perform at the effort level required.


• Seeks to produce an effort – reward bargain.• Disadvantage is that the set performance

target can become an easily attainable norm• May be difficult to change even after

extensive renegotiations.• Relatively lower and has been abandoned by

most of the organizations.


Essentials of Measured Day Work

• Total commitment of management, employees and trade unions which can be achieved by careful planning and joint consultation.

• Effective work measurement and efficient Production, Planning and Control (PPC).

• Efficient Inventory System• Development of job evaluation and performance

appraisal.• Good control system to take swift corrective

measures.


Straight Piece Rate System

• Applied to simple manual operations like producing number of similar articles, loading, unloading etc. by individual effort.

• A piece rate for the completion of the job is fixed.• If a worker produces more acceptable jobs in a

prescribed time he gets extra money.• Used where work is standardized, capable of

dividing into pieces and is of repetitive nature.


Formulae

Earnings of a worker = total output( measured in terms of units) X (rate per unit.)


Advantages

• Provides direct incentive for increased output.• Easy to understand and calculate.• Overhead costs are reduced as a result of their

distribution over a greater number of units.• Cost of supervision reduces because in order

to earn more the workers try to produce more.

• Protects workers against unduly low earnings.


Disadvantages

• May lead to greater wastage of raw materials and greater depreciation of machines an tools due to higher speed of work.

• Quality of work may be ignored.• Unnecessary speeding up of work adversely

affects the health of the worker which may lead to accidents.

• Minimum wage is not guaranteed.


Standard Hour Plan

• Provides incentives to employees based on the time saved by them during the job course.

• Employees’ productivity and quality is evaluated with respect to the set standards.

• Worker finishing in the standard time is given no incentive.

• Usually applied for higher jobs in which a job takes several days for completion.


Gain Sharing

• A technique that compensates workers based on improvements in the company's productivity.

• A bonus incentive system designed to improve productivity through employee involvement, with the gains from "working smarter" shared between the employer and the employees according to a predetermined formula

• Gain sharing, in one form or another, has been around since the 1930's.


It Includes

(1) a financial measurement and feedback system to monitor company performance and distribute gains in the form of bonuses when appropriate, and

(2) a focused involvement system to eliminate barriers to improved company performance


• Gain sharing works best when company performance levels can be easily quantified.

• Employee involvement significantly enhances the effectiveness of incentive pay.

• When used simultaneously, productivity gains from combining these techniques can exceed gains achieved separately.


Advantages • Help companies to achieve sustained increases in

productivity. • Employees become more involved in the

productivity gains made by the employer. • Employees can share in the benefits of employee

sponsored improvements. • Enhances commitment to organizational goals. • Leads to improvements in other measures of

company performance, including: teamwork, product quality, lower rates of absenteeism, defects, and "downtime."


Disadvantages

• Requires employers to recalculate each worker's "regular rate" of pay.

• Employers may restrict this type of compensation to exempt employees.

• The formulas and program may be difficult to understand.

• Requires a shift to a more team oriented management style.


Organization wide Incentive Plans • Also called group incentive plan.• Used when individual jobs are not readily

measurable.• Also used when a given work’s speed is limited by

the output rate of preceding operators. • Each employee is paid incentive on the basis of

collective performance of his group.• Generally preferred by the employer.• Not liked by highly competent or productive

employees whose colleagues are not so productive


Examples

• Fabrication• Assembly• Maintenance work• Indirect work in which the operations are

closely related.


Features of Organization wide Incentive Plans

• Reward an increase in organization-wide outcomes that directly affect the cost and/or profit picture of the organization.

• a change in the relationship between management on the one hand and employees on the other.

• a high degree of cooperation.


Types of Group Incentives Plan

• The Scanlon Incentive Plan• The Priestman Production Incentive/ Kaiser

Incentive Plan.• Profit Sharing.


Fringe Benefits• Benefits which employees or directors receive

from their employment but which are not included in their salary cheque or wages.

• On the tax return form they are called 'benefits in kind.‘

• Include such things as company cars, private medical insurance paid for by the employer and cheap or free loans.

• Some fringe benefits will not be taxed, some will and some will be taxed only for employees who are directors or higher paid.

Incentives

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