incentives

1. INCENTIVES AND
PERFORMANCE-BASED PAY
Subject: Human Resource Management
Prof Meenakshi Malhotra
Prepared by: Ashok Kumar
Nikki Latta
Ravneet Kaur
MBA GEN A
March 15th, 2017

2. WHAT ARE INCENTIVES?
Incentives are variable awards granted to employees according to variations in their
performance. Anything that can attract an employee’s attention and motivate them
to work can be called as incentive. An incentive aims at improving the overall
performance of an organization.

3. IMPORTANCE OF
INCENTIVE PLANS
 Motivational Tool
 Promoting Teamwork
 Morale Boosters
 Higher degree of Service to customers
 Cost of supervision is reduced
 Desired results

4. PRE-REQUISITES OF EFFECTIVE
INCENTIVE SYSTEM
 The co-operation of workers in the implementation of an incentive scheme is
essential . Workers' co-operation may be secured through proper discussion with
their representatives. In particular, workers' co-operation is necessary in:
I. The methods followed in measuring the results or output upon which
payment is based;
II. The methods followed in setting wage rates for different classes of work;
and
III. Appropriate safeguards concerning earnings, job security and
settlement of disputes over piece-work rates and allotted time.

5. PRE-REQUISITES OF EFFECTIVE
INCENTIVE SYSTEM
 The scheme must be based on scientific work measurement. The
standards set must be realistic and must motivate workers to put in better
performance.
 There is greater need for planning. Many incentive schemes, started
hurriedly, planned carelessly, and implemented indifferently have failed and have
created more problems for the organization than they have tried to solve.
 Indirect workers, such as supervisors, foremen, charge hands, helpers, crane
operators and clerical staff should also be covered by incentive schemes.

6. PRE-REQUISITES OF EFFECTIVE
INCENTIVE SYSTEM
The other safeguards are:
 The incentive scheme should be appropriate to the type of work carried out
and the workers employed.
 The reward should be clearly and closely linked to the efforts of the
individual or group.
 Individuals or groups should have a reasonable amount of control over
their efforts and therefore their rewards.
 The scheme should operate by means of a well-defined and easily-
understood formula.
 Provisions should be made for controlling the amounts paid, to en- sure
that they are proportionate to effort.
 Provisions should be made for amending rates in defined circumstances

7. TYPES OF INCENTIVE
SCHEMES

8. EARNING VARY IN THE
SAME PROPORTION AS
OUTPUT

9. STRAIGHT PIECE-WORK
SYSTEM
 The Straight Piece-Work System is the simplest incentive
method in which the rate per unit of output is fixed, and the
earnings of the worker are computed by multiplying his total
output by the rate per unit.
 Such as, if the per unit rate is 10 Paise and the total output
is 1000 units, then his earnings will be 0.10 x 1000 = Rs 100.

10. STANDARD HOUR SYSTEM
 The Standard Hour System is an incentive scheme in which the
standard time in terms of hours is set for the completion of a job.
The rate per hour is then determined. Under this method, the
worker is paid for a standard time irrespective of whether the job is
completed in the standard time or less. This means that the worker
is paid the same wages even if the time spent is more than the
standard hours unless he/she is guaranteed the time wages.

11. STANDARD HOUR SYSTEM
 Standard time = 8 Hours
Rate per hour = Rs 2
 Case 1: Time taken = 6 hours
Earnings = 8 x 2= Rs 16
 Case 2: Time taken = 10 Hours
• Time wages are not guaranteed, then the worker’s earnings will be Rs 16 (8
x2).
• Time wages are guaranteed, then the worker’s earnings will be Rs 20 (10 x 2).

12. EARNING VARY LESS
PROPORTIONATELY
THAN OUTPUT

13. HALSEY PLAN
 Under Halsey Plan, the standard time for the completion of a job is fixed and
the rate per hour is then determined. If the time taken by a worker is more than
the standard time, then he shall be paid according to the time rate, i.e. time taken
multiplied by the rate per hour. In case, the worker completes the works in less
than the standard time, then he/she will be paid according to the actual time, i.e.
time-rate plus the bonus calculated at a specified percentage of the saved time.
Generally, the bonus percentage varies from 30-70 percent. The usual bonus
share paid to the worker is 50% of the time saved multiplied by the rate per
hour

14. HALSEY PLAN
 Standard Time: 8 hrs
Rate per Hour: Rs 2
Case (1): Time Taken = 8 hrs Earnings = 8 x 2 = Rs 16
Case (2): Time Taken = 10 hrs Earnings = 10 x 2 = Rs 20
Case (3): Time Taken= 6 hrs
Earnings: Time wages = 6x 2 = Rs 12 Bonus = ½ x 2 x 2 = Rs Rs 2
Thus, in the above example, the worker’s total earnings are Rs 14 (time wages
+bonus), if he has completed the work in 6 hrs, less than the standard time.

15. ROWAN PLAN
 Under Rowan Plan, the standard time for the completion of a job
and the rate per hour is fixed. If the time taken by the worker is more
than the standard time, then he is paid according to the time rate, i.e.
time taken multiplied by the rate per hour.
 In case, the worker completes the work in less than the standard
time; then he is entitled to a bonus along with the time wages.
 Bonus = Time Saved/ Standard Time

16. ROWAN PLAN
 Standard Time = 8 hrs
Rate per hour = Rs 2
Case (1): Time Taken = 8 hrs Earnings = 8 x 2 = Rs 16
Case (2): Time Taken = 10 hrs Earnings = 10 x 2 = Rs 20
Case (3): Time taken = 6 hrs
Earnings:- Time Wages = 6 x 2 = Rs 12
Bonus = 2/8 X 2 = Rs 1.5
 Thus, in the above example, the worker completing the work in 6 hrs, less
than the standard time, the total earnings will be Rs 13.50 (time wages+bonus).

17. BARTH VARIABLE SHARING
PLAN
 Under Barth Variable Sharing Plan, the earnings of the worker
are ascertained by taking the square root of the standard hour
multiplied by the number of hours actually taken for the completion
of the job and then multiplying it by the worker’s rate per hour.

18. BARTH VARIABLE SHARING
PLAN
 Standard Time = 8 hrs
Rate per Hour = Rs 2
 Case (1): Time Taken = 10 hrs
= 8.94 X 2 = Rs 17.88
 Case (2): Time Taken: 8 hrs
= 8 X 2 = Rs 16
 Case (3): Time Taken: 6 hrs
= 6.92 X 2 = Rs 13.84
 Thus, the worker will earn Rs 13.84, in case he works for less than standard, hours i.e., 6 hrs.

19. BEDAUX PLAN
 The Bedaux Plan is an incentive scheme in which the standard time for the
completion of a job is fixed and the rate per hour is defined. Each minute of the
standard time is called as point or B, such as in one hour there are 60 Bs.
 Under Bedaux plan, every job has a standard number of Bs. If the worker
completes the job in more than standard hours, then he is paid according to
the time-rate, i.e. time taken is multiplied by the hourly rate. In case, the work is
completed in hours less than the standard time; then the worker is entitled to the
bonus in addition to the hourly rate. A bonus is equal to the 75% of the
earned/saved points (in excess of 60 per hour) multiplied by one-sixth of the
hourly rate.

20. BEDAUX PLAN
 Standard Time = 8 hrs
Rate per Hour = Re 1
Case (1): Actual Time = 10 hrs Earnings = 10 X 1 = Rs 10
Case (2): Actual Time = 6 hrs
Earnings: Time-wages = 6 X 1= Rs 6
Bonus:
Standard Bs = 60 X 8 = 480 Actual Bs =60 X 6 = 360
Saved Bs = 120 (480-360)
Thus, total earnings = Rs 6 +1.50 = 7.50

21. Earnings Differing at Different
Levels of Outputs
1. TAYLOR
2.MERRICK
3.GANTT
4.EMERSON

22. TAYLOR’S DIFFERENTIAL
PIECE RATE SYSTEM
There is low rate for output below
the standard, and a higher piece-rate
for output above the standard with a
large bonus of 50% of the time-rate
when the standard output is attained.
2 RATES

23. TAYLOR’S DIFFERENTIAL PIECE
RATE SYSTEM (CONTD.)
Standard Output = 100 units Rate per Unit = 10 paise
Differentials to be applied:
120 percent of piece-rate at or above the standard
80 percent of piece-rate when below the standard.
 Case (i) Output = 120 units,
Earnings = 120*(120/100)*0.10= Rs.14.40
 Case (ii) Output = 90 units,
Earnings = 90*(80/100)*0.10=7.20

24. MERRICK DIFFERENTIAL
PIECE–RATE SYSTEM
It is a modification of earlier system with three instead of two rates.
Std Output = 100 units 3 RATES
Piece Rate = 10 paise
1. UPTO 83% - BASE PIECE-RATE
2. 83-100% - 110% OF BASE RATE
3. ABOVE 100% - 120% OF BASE PIECE RATE

25. MERRICK DIFFERENTIAL PIECE –
RATE SYSTEM (CONTD.)
 Case (i) Output= 80units Efficiency = 80/100*100=80% Earnings: As the
efficiency is less than 83%, only base piece-rate applies: 80*.10=8.00
 Case (ii) Output = 90 units Efficiency = 90/100*100=90% Earnings: As the
efficiency is more than 83% but less than 100%, 110% of the base piece-
rate applies: 90*(110/100)*0.10=9.90
 Case (ii) Output = 110 units Efficiency = 110/100*100=110% Earnings: As
the efficiency exceeds 100%, 120% of the base piece- rate applies:
90*(120/100)*0.10=13.20

26. GANTT TASK SYSTEM
 The worker is guaranteed his /her time-rate for
output below the standard. On reaching the std output
or task, which is set at a high level, the worker is entitled
to a bonus of 20% of time wages.
TIME BASED
3 RATES

27. GANTT TASK SYSTEM
(CONTD.)
Rate per hr = Rs 0.50, High piece-rate = Rs 0.10, Std Output = 80 units, Time Taken
= 8hrs
Case (i) Output = 70 units. As the output is less than the standard only time
wages are paid to the worker. Earnings = 8*.50= Rs 4.00
Case (ii) Output = 80 Units Earnings: As output is equal to the standard, the
worker is entitled to time wages plus 20% of time wages as bonus. Time wages =
8*.50=4.00 Bonus = 20/100*4=Rs 0.80 Total Earnings = Rs.4.80
Case (iii) Output earnings= 110 Units. As the output is more than the standard, the
worker is entitled to a high piece- rate. 110*.10= Rs.11.00

28. EMERSON’S PLAN
 A standard is set for the job, & efficiency of each worker is determined by
dividing the time taken by the std time.

29. EMERSON’S PLAN
Std Output in 10 hrs = 100 units, Rate per hr = Rs 1
 Case (i) Output in 10 hrs = 50 units Earnings: Efficiency = 50% As efficiency is below 67 %
the worker is entitled to time wages only. 10*1=Rs 10.00
 Case (ii) Output in 10 hrs = 100 units Earnings: Efficiency = 100% The worker is entitled to
time wages plus 20% of time wages as bonus. Time Wages = 10*1 =Rs 10.00 Bonus =
20/100*10 =Rs 2.00 Earnings: = 10 + 2 =Rs12.00
 Case (iii) Output in 10 hrs = 130 units Earnings: Efficiency = 130% At the rate of 20% at
100% efficiency & one percent increase for every one percent increase in efficiency, the worker
is eligible for 50% of the time wage as bonus. Time Wages = 10*1 =Rs 10.00 Bonus =
50/100*10 =Rs 5.00 Earnings: = 10 + 5 =Rs15.00

31. GROUP INCENTIVES
PLANS
 Group based or team-based incentives plans reward all team members equally based on overall
performance of the team member.
 Under group based incentive plan, individual out put can’t be measured.
 So team performance is evaluated on the basis of time taken rather than output produced, if team
complete their target in well advanced to standard time the team member are eligible for incentives.
 Payment to team members may be made in the form of cash bonus or in the form of non-cash reward
such as pleasure trip, times off or luxury items.
 Team based incentives foster cohesiveness among tem members.
 Methods for team based incentives plans are
 Preistman’s production plan
 Town plan
 Co-partnership System

32. Preistman’s production plan
 This committee represents management and worker union set forth the
standard of performance in terms of number of units produced.
 This set of standards are set in advanced every week and month.
 If groups of workers achieve more than the performance level decided
initially, bonuses are made payable to those workers.
 % Bonus = (Actual Output – Standard Output) / Standard Output

33. TOWNE PLANS
 Under this system, bonus is related to cost reduction usually the
labour cost as compared with the predetermined standard.
 Its applicable to both supervisors and workers.
 Achieving cost saving not only on labour cost but also on overheads
is the crux of this type of incentive plan.

34. CO-PARTNERSHIP PLAN
 This system tries eliminate friction between the capital and labour. Under this
system, not only does workers share in the profits of undertaking but he also
takes part in its control and therefore, shares responsibilities. Few characteristics
of this plan are as follows:
• Payment of existing standard wages of labour.
• Payment of fixed rate of interest on capital.
• Division of the surplus profit between capital and labour in an agreed
proportion.
• Sharing in the control of business by the representatives of labour.

35. BONUS SCHEME FOR
INDIRECT WORKERS
Production cannot be increased by giving incentives to direct workers hence
indirect workers are equally important.
It is difficult to introduce an incentive scheme for indirect workers because
standards cannot be set easily, efficiency is difficult to measure & actual
output can’t be determined in relation to set standards.
VARIOUS WAYS:
 Indirect workers can be associated with direct workers for eg:
Supervisors, Material Handling Workers etc. & in this case bonus can be
linked to output of direct workers .i.e. % of average bonus earned by direct
workers.
 Indirect workers provide some general services, eg: Canteen staff,
Cleaners etc. & their bonus can be based on output of department, output
of entire organisation, merit rating, job evaluation, % of bonus for direct
workers or high time-rates.

36. CONTINUED.....
 Sometimes, bonus of indirect workers can be related to total production of dept. of
cost centre. In case of higher levels of production, higher rate of bonus are applicable.
POINTS TO BE CONSIDER WHILE INTRODUCING AN INCENTIVE SCHEME:
 It should be able to achieve all round efficiency.
 It should relate rewards to efforts.
 The bonus should be payable at some regular intervals.
 It should be introduced for a certain period.

37. INCENTIVE SCHEMES IN
INDIAN INDUSTRIES
 Introduced in 1946
 Not identical within industries also.
 Modifications done as per the suitability.
 Still in infancy stage

38. REFERENCES
 Human Resource Management (Text and Cases) by K Aswathappa