Incentive payments

Incentive pay links pay (as a reward) to performance

The idea of incentive pay is to create incentives for employees to improve their job performance by linking employee pay to employee job performance Incentive pay is also called:
Pay for performance Performance-based pay systems Performance-based reward systems

The reward for performance doesnt have to be pay

Pay is one possible reward, not the only possible reward

 Wage incentives include all the plans thatprovide extra pay for extra performance in addition to regular wages for the job. It implies monetary inducements offered to employees to perform beyond acceptance standards.

Conditions for Effective Incentives Plan

Plan is clearly communicated. Plan is understood. Rewards are easy to calculate Employees participate in administering the plan Employees believe they are being treated fairly Employees believe they can trust the company and that they have security Rewards are awarded as soon as possible after the desired performance.

Types of Incentive Schemes 1. Individual Incentives 2. Team Incentives 3. Organisational Incentives

Individual Incentives
Output oriented
Taylors Piece Rate

Time Oriented

Bonuses
Halsey Plan

Merit Pay

Commission

Merricks Piece Rate

Rowan Plan

Gantt Task System

Bedaux Plan

Emersons Efficiency plan

Piece Rate/ Output oriented

Piece rate incentive is given to the employees based on the number of units produced. This plan is practiced in the sectors dealing with manufacturing of products such as engineering automobile, telecommunication, FMCG, etc. Demerits
Delays beyond one's control could affect workers earnings adversely Beginners and slow learners are left behind in the race The focus on quantity would affect quality Workers may stretch themselves to unhealthy levels to earn more Encourages rivalry between workers

Taylor's differential piece rate system: A worker is paid more if he finishes the assigned task before the stipulated time. Merrick's differential piece rate system: This method uses three rates; up to 83%of the standard output workers are paid at the ordinary piece rate; between 83% to 100% at 110% of the ordinary piece rate and above 100% at 120% of the ordinary piece rate.

 Standard Hour Pay / Time Oriented 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.

Halsey Plan It takes into account the total time saved by the employee, and is a useful method for computing the incentive. The value of time saved by the employee is computed and the earning is shared by the employee and the organization. The total earnings of the worker is computed by the formula given below: TE = Time taken x Hourly rate + Bonus Bonus = 50% of time saved.

Rowan Plan
In this plan the bonus is calculated on the basis of the time worked. Thus the premium paid to the worker is a percentage of the time worked. If we consider our previous example, then the total earnings of the worker under the Rowan Plan would be: Time saved Time allowed Bonus = Time saved x time taken x hourly rate time allowed TE = time taken x hourly rate + bonus

Gantt Task

Day wages are guaranteed. Standard time is fixed. Time and high piece rate is decided. Worker who can not achieve the target is paid on time basis. Worker who achieves the target, will be paid wage plus bonus at fixed % (20%). If the worker exceeds the target, he is paid at higher piece rate.

Bedeaux plan

In this plan every operation is expressed in terms of standard minutes called as B's representing one minute. A worker gets time wages for 100 % performance; ie, finishing the job exactly as per standards set. If actual performance exceeds the standard performance in terms of B's then 75% of the wages of time saved is paid to worker as bonus and 25% is given to the foreman.

Emerson's efficiency plan

If the worker achieves 67% efficiency, he gets bonus at a given rate. The rate of bonus increases gradually from 67% to 100%. Above 100% bonus will be at 20% of the basic rate plus 1% for each increase in efficiency.

 Bonuses are given to employees on a pre established goal or criteria. The organizations set policies regarding the bonuses. Usually bonuses are provided during the festive season. Merit Raises Merit raises are given on the basis of predetermined policies. The employees are given raise on the basis of their performance. The performance standards are set by the organizations much in advance.

 Commissions Commission is a variable component of compensation package. It is given on the basis of business generated by the employee. Commission is a pre fixed component say 5% of the total sales done by the employee. It is practiced in the retail, FMCG and other sectors in the marketing and sales segment.

Organisational Incentives Profit Sharing Gain Sharing ESOPs

Profit Sharing Profit sharing incentive plans are practiced in retail and FMCG sectors. Other sectors too implement the plan based on organizational policies. It refers to giving out the share of profits the organization earned to all the employees. Indirectly all the organizations follow the plan by giving out the dividends.

Gain Sharing Gain sharing incentive plans undertake those employees who give outstanding performances and provide for cost saving measures. Organizations believe in sharing the profits with the employees who responsible for producing those results. are

 Anemployee stock ownership plan(abbreviated to "ESOP") is the practice of companies giving staff members shares in their company as part of their salary. An ESOP is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. It is an equity based deferred compensation plan. Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price over a period of time. Many companies use employee stock options plans to compensate, retain, and attract employees. These plans are contracts between a company and its employees that give employees the right to buy a specific number of the companys shares at a fixed price within a certain period of time. Employees who are granted stock options hope to profit by exercising their options at a higher price than when they were granted.

Team Based Incentive

Here all team members receive an incentive bonus payment when production or service standards are met or exceeded. Methods in this category include Preistmans production bonus, Rucker plan, Scanlon plan, Towne plan and Co partnership. Under co partnership, the worker gets his usual wages, a share in the profits of the company and a share in the management of the company as well.

Requisites of Effective Incentive System

Cooperation of workers in implementation of incentive scheme is essential. Scheme must be based on Scientific measurement. Standards set must be realistic. Indirect workers like Supervisors, Foreman, helpers, operators, keepers should be covered in incentive schemes. There is great need of planning.

Incentive Scheme in Indian Industry

Though incentive schemes are quite old but still in infancy. In most of the industries policies are not rational & does not include employees. Schemes are fine tuned according to industries benefit. Inflation reduces the motivational effect of Incentive. Schemes in public sector covers various attributes of incentive schemes. In most cases incentive schemes are able to achieve its objective of increasing efficiency and productivity.

Fringe Benefits
These are extra benefits provided to employees in addition to the normal compensation paid in the form of wages or salaries. Features are: Supplementary forms of compensation Paid to all employees Indirect compensation, since they are not directly related to performance May be statutory (PF) or voluntary (Transport). Help to raise the living condition of employees.

Need for fringe benefits Employee demands Trade union demands Employer's preference A kind of social security To improve human & industrial relations

Objectives
Improve industrial relations. Motivate employees to satisfy their needs. Provides security against social risk. Promotes employee welfare. Creates sense of belongingness. Meets legislative requirement with fringe benefits.

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