METHODS OF

WAGE PAYMENT
&

WHAT IS
COMPENSATION &
INCENTIVES?

The term COMPENSATION means to give something in return.

Whether in terms of money or product (i.e. goods & services).

From the organization point of view, to give something (generally in terms of

money) for the work we obtain from the employees. Which includes wages,
salaries & incentives.

To attract & retain effective & efficient manpower sound compensation policy
has to be designed.

The term INCENTIVES mean, something which encourages a person to

do something. Or the extra financial reward/ motivation.

Incentives is the performance-link reward to improve motivation & productivity

of the employees.

Incentives includes all that provide extra pay for the extra performance in
addition to regular wages for the job.

FEATURES OF INCENTIVE
PLANS

Minimum wages are guaranteed to all

workers.
Incentives by way of Bonus, etc., are
offered to efficient workers for the time
saved.
OBJECTIVES

Increase in productivity
Reduction in labor costs
Improvement in efficiency
Rise in workers earnings
Higher employee motivation & morale
Greater contribution to organizational effectiveness

Prerequisites for An Effective

Incentive System

In the absence of mutual trust between management & workers, an incentives

may be viewed as an attempt to improve production/ profit only.

Incentive plan should be installed in consultation with workers & union.

Payment of incentives should be free from bias & established through
scientific/ proper work study.

To implement incentives plane effectively minimum wages should be

guaranteed to every workers.

It should be easy to understand & simple to operate so that employee can

calculate their own earnings.

It should provide equal opportunity to all workers to earn incentives pay.

Plan should not be very costly in operation.
Plan should be flexible to adopt any changes later on.
Payment of incentives should be prompt i.e. as early as possible.
It should be adequate to motivate each employees.
Every plan should be reviewed periodically.

Short Term Pay-forPerformance Plans

Merit Pay

Lump-Sum Bonuses

Individual Spot
Awards
Individual Incentives

Long-Term Incentive
Plans
Employee Stock Ownership Plans
(ESOPs)

Performance Plans (Performance

Share and Performance Unit)

Broad-Based Option Plans (BBOP)

Group Incentive
Advantages:
Better co-operation among workers
Less Supervision
Reduced incidence of absenteeism
Reduced clerical work &
Shorter training time.
Disadvantages:
An efficient worker may be penalized for the
inefficiency of the other members.
The incentive may not be strong enough to serve its
purpose &
Rivalry among the members of the group defeats the
very purpose of team work & co-operation.

Basic forms of incentives.

The basic from of incentives are as follow.
Bonuses :- is an incentive payment that is given to an employee beyond
his normal standard wages. It is generally given at the end of the year &
does not become part of the basic pay.
The payment of bonus Act 1965 is applicable to every factory or
establishment in which 20 or more person are employed in an accounting
year.
Merit pay :- is a reward based pay on how well an employee has done the
assigned job. Higher the performance Greater will be the reward.
The payment is depend on individual employees performance.
Commission for sales people :- is paid on the basis of sales made by the
employee, through different plan. Such as
Salary plan :- where new salesman is appointed, is unable to generate new.
Commission plan :- where organization is totally based on sales of their
product.
Combination of both

Types of Incentive Schemes

Incentive Schemes

Earnings vary
Earnings vary less
in the same
Proportionately
proportion as output
than output
Straight Piece
Work

Earnings vary
Proportionately
more than output

Halsey Plan
Rowan plan

Standard
Hour

Barth Scheme
Bedaux Plan

Earnings differ
At different
Levels of output

High Piece
Rate

Taylor's
Differential
Piece Rate

High
Standard
Hour

Merrick
Differential
Piece Rate
Gantt Task
System
Emersons
Efficiency
plan

Straight Piece Work: It is a simplest & oldest

method. Here, Rate per unit of output is fixed & the
total earnings of worker are arrived at by multiplying
the total output by the rate per unit.
E.g.: If the rate per unit is 10 paisa & the total output of an
employee is 100 units, his or her earnings will be 100*0.10=Rs.
10.00.

Standard Hour: Also called 100 percent gainssharing. Standard time in terms of hours is fixed for
completion of a job. The rate per hour is then
determined.
E.g.: Standard Time: 10hrs
Rate per hour= Rs. 1.00
Case (i) Time taken = 8hrs
Earnings = 10*1=Rs 10.00
Case (ii) Time taken = 12 hrs
Earnings = 12*1=Rs 12.00 (If time wages are guaranteed)

Halsey Plan :

Recognizes individual efficiency & pays bonus

on the basis of time saved. Main features are:
Standard time is fixed for each job or operation.
Time rate is guaranteed.
If the job is completed in less than the standard time, the worker is
paid a bonus of 50% of time saved at time rate in addition to his
normal time wages.
Total Earnings = Time Taken* Hourly Rate + Bonus
Bonus = 50% of time saved (1/2*Time Saved*Hourly Rate)

E.g.: Std Time= 10 Hrs

Rate per hr= Rs. 1.00
Case 1 Time taken= 10 Hrs
Earnings = 10* 1=Rs. 10.00
Case 2 Time taken = 12 Hrs
Earnings = 12* 1=Rs. 12.00
Case 3 Time taken = 8 Hrs
Earnings = 8*1=Rs. 8.00

Bonus = *2*1 = Rs 1.00

Total Earnings = Rs 9.00

Rowan Plan:

Bonus paid to the employee is equal to

the proportion of the time saved to the standard time.
Time Saved

Bonus
=

Std. Time

Time Taken

Hourly Rate

Total Earnings = Time Taken * Hourly Rate + Bonus

E.g. :

Std Time= 10 Hrs

Rate per Hr= Rs. 1.00
Case 1 Time taken= 10 Hrs
Earnings = 10* 1=Rs. 10.00
Case 2 Time taken = 12 Hrs
Earnings = 12* 1=Rs. 12.00
Case 3 Time taken = 8 Hrs
Earnings = 8*1=Rs. 8.00
Bonus = (2/10)*8*1 = Rs 1.60
Total Earnings= Rs 9.60

Barth Scheme

: Does not guarantee the time

rate. The workers pay is determined by
multiplying the standard hour by the number of
hours actually taken to do the job, taking the square
root of the product & multiplying it by the workers
hourly rate.

Wages =

Standards Time* Time Taken *Hourly Rate

E.g. :
Std time = 10hrs
Rate per hour = Rs. 1.00
Time Taken = 8 hrs
Earnings = 8*10
*1
= 8.94 * 1 = Rs. 8.94

Bedaux Scheme:

Standard time for the job is fixed.

Each minute of the standard time is called A or B POINT.
Each job has a standard number of Bs. The worker receives
bonus which is equal to 75% of the number of points
earned, in excess of 60 per hour, multiplied by one sixtieth
of the workers hourly rate.

E.g.:

Std Time= 10 Hrs

Rate per Hr= Rs. 1.00
Case 1 time taken= 12 Hrs
Earnings = 12 * 1
=Rs. 12.00
Case 2 Time taken = 8 Hrs
earnings = 8*1
=Rs. 8.00
Bonus:
Std Bs
= 10*60 = 600
Actual Bs
= 8*60 = 480
Bs saved
= 120
Bonus
: 75 * 120*1 = Rs 1.50
100
60
Total earnings = 8+1.50=Rs. 9.50

Earnings differing at Different

Levels of Outputs:
Taylors 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.

E.g.:

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=Rs. 7.20

Merrick Differential PieceRate

System: It is a modification of earlier system
with three instead of two rates.
E.g.:
Std Output = 100 units
Piece Rate = 10 paise
Case (i) Output
= 80units
Efficiency = 80/100*100 = 80%
Earnings: As the efficiency is less than 83%, only base
piece-rate applies:
80*.10 = Rs. 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 = Rs. 9.90
Case (ii) Output = 110 units
Efficiency = 110/100*100 = 110%
Earnings: As the efficiency exceeds 100%, 120% of the

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. It operates as follows:
E.g.: Rate per hr
= Rs 0.50
High piece-rate = Rs 0.10
Std Output
= 80 units
Time Taken
= 8hrs
Case (i) Output
= 70 units
Earnings: 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
Earnings: As the output is more than the standard, the worker is
entitled to a high piece-rate.
Earnings :
110*.10 = Rs. 11.00

Emersons Plan:

A standard is set for the job, & efficiency

of each worker is determined by dividing the time taken by the std
time.
E.g.:
Std Output in 10 hrs
=
Rate per hr = Rs. 1.00

100 units

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 =Rs. 12.00

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 =Rs. 15.00

Scope of Incentive
Schemes

INCENTIVE SHEMES ARE DIFFICULT TO

APPLY IN:
Industries in which measurement of individual or
group output is rendered difficult or impossible
either by technical consideration or by
psychological circumstances which might be
prejudicial to output;
Industries in which the control of quality is
necessary & is particularly difficult, or in the case
of certain classes of workers, where high quality
& accuracy of work is of prime importance &
Industries in which the work is dangerous & it is
particularly difficult to ensue the observance of
adequate safety precautions