Incentives and Benefits

Learning Objectives

Understand the significance of incentive

schemes
Prerequisites of good incentive schemes
Incentive planning process
Types of incentives
 Meaning incentives

Incentives are any form of performance-based

financial and/or non-financial rewards payable
to attract and retain the best talents without
any permanent financial commitment to the
organization.
 Objectives of Incentives
Developing an ownership interest
Enhancing employee motivation
Improving employee retention
Facilitating a greater role for employees in
pay determination
Increasing performance and productivity
Reducing labour cost
Reducing the time and cost of supervision
Incentive planning process
 Prerequisites for a good incentive scheme

Transparency
Objectivity
Measurability
Attainability
Flexibility
Comprehensiveness
Cost-effectiveness
 Types of Incentive Schemes

Straight piece rate

Differential piece rates
Task and time bonuses
Merit rating
 Straight Piece Rate
Under this method, the same rate of incentive is
paid to the employees for each unit of goods
produced by them.
Incentives are computed and paid to the employees
in direct proportion to their performance in the job.
The formula for computing the earnings is
Wage earnings = Number of units produced x Piece
rate per unit.
EXAMPLE- If a worker produces 325 pieces per day
and he is paid at the rate of Rs.0.20 per piece, the
daily wage is 325 0.20 = Rs.65.
 Differential Piece Rates
In differential piece rate system, more than one piece
rate is offered to the employees. It is based on time
and motion study.
As part of this system, the organization sets several
standards of performance and also different wage
rates for each standard.
An employee reaching a particular standard of output
gets his or her wages computed on the basis of the
wage rate applicable for that category.
In this method, the wage rate increases as the output
increases and the employees are strongly motivated to
reach higher levels of productivity.
 Task and Time Bonuses
As per this incentive scheme, once the
employee reaches the standard output, his or
her wage incentive will begin to decline
afterwards.
The purpose behind this move is to discourage
speed in the production by the employees,
which was understandably the major defect in
the differential piece rates system.
This method encourages the employees to work
hard but never penalizes them for not reaching
the standard time.
 Merit Rating
Merit rating aims at evaluating the relative worth of
the employees.
In this method, the organization links a part of the
employees wages to their actual performance in
comparison with the standards set in terms of
factors like competency, initiative, attitude,
regularity, health, etc.
Depending upon the importance of these factors to
the job, the organization may assign points to each
of these factors.
The employees overall performance in the job is
then evaluated to determine their aggregate score,
which in turn, decides the incentives payable to
them.
 Limitations of the Incentive Schemes

Quality concerns
Employee attitude
Exploitation by management
Internal conflicts
Burnout problems
Unethical practices
 Important Link
https://www.youtube.com/watch?v=y0qjEBJq7Z4 - Employee
Incentives & employee motivation: How the Death Star was built on
time
https://www.youtube.com/watch?v=X_Ht8TD9Au8 - Workplace
Incentives Explained in 90 Seconds - Rewarding Staff at Work with
Onsite Experiences
https://www.youtube.com/watch?v=_GiuysFb-
iY&ebc=ANyPxKoQwjg3rPBfK_-E-
AhWtN0fXXmsaUxbhSvBFhEAGwDRO-KxGK011XO - 10 WAYS TO
MOTIVATE EMPLOYEES
https://www.youtube.com/watch?v=dgKKPQiRRag&ebc=ANyPxKpF
mEpldKDQroEucwxO8jhTLoIjANSbB-WQsK3S2kqC9dKhkhzznsry6vz
- How Motivation is Driven by Purpose - and not Monetary
Incentives
Individual Incentive
Programmes
 Taylors differential piece rate plan
Under this piece rate plan, two wage rates are
available to the employees. These are
Low piece rate for those employees whose
performance is less than the standard.
High piece rate for any performance which is
equal to or more than the standard.
The purpose of Taylor's differential piece rate is
to encourage efficiency and discourage
inefficiency among the employees.
Taylors differential piece rate plan (contd.)

The formula for computation of earnings

is
Earnings = actual output x piece rate
Efficiency level = actual output/normal
output) x 100
 Merrick multiple piece rate plan

Merrick plan contains three piece rates as

against Taylors double piece rates.
It provides for gradually rising piece rates
for the additional range of output
produced by the employees.
Merrick multiple piece rate plan (contd.)

The formula for the various categories of

output
Less than 83% = actual output x normal
piece rate
Between 83% and 100% = actual output x
normal piece rate x 110
Above 100% = actual output x normal
piece rate x 120%
 Emerson efficiency plan

In Emerson efficiency plan, a standard time

is set for each job and then the hourly rate is
determined. Finally, incentives are decided
in the form of bonus for different degrees of
efficiency.
As per this incentive plan, each employee is
eligible for an hourly rate based on the
actual working hours and also for the bonus
calculated on the basis of his or her
efficiency.
 Emerson efficiency plan (contd.)

The main feature of this incentive plan is

the availability of guaranteed minimum
wages for the employees irrespective of
their output in a day.
 Gnatt task and bonus system

The basic feature of this system is that the

employees are eligible to get the specific
reward if they are able to perform the job
within the standard time and then get
additional bonus if they are able to better
that time.
This system takes into consideration the
hourly rate, piece rate and the bonus plan
for deciding the wage earnings of the
employees.
Gnatt task and bonus system (contd.)

This method guarantees payment of

minimum wages to employees
irrespective of whether or not they reach
the standard time.
 Bedeaux system

The first step in the Bedeaux system is the

determination of the standard time for various
jobs.
The standard time is fixed in Bedeaux system
and is usually expressed in terms of minutes,
popularly called Bedeaux points (B points).
Each B point is equal to one minute and each
job has a standard number of B points.
 Bedeaux system (contd.)

Earnings as per the following formula

Earnings = actual time taken x time rate +
(75/100 ) x (B points saved/60) x hourly rate
 Barth variable incentive plan

As per the Barth scheme, the rise in

employee earnings need not be
proportionate to the output.
The distinguishing feature of the Barth
plan is the absence of any guaranteed
time rate for the employees.
 Barth variable incentive plan (contd.)

In this method, employee earnings are

calculated by multiplying the rate per
hour with the square root of the product
of standard hour and actual hour.
Earnings = rate per hour x (standard hour
x actual hour) 1/2.
 Halsey premium plan

In the Halsey premium plan, the employee is

entitled to get the incentive for the time saved
by him or her in a certain proportion.
Thus, the employees are induced to complete
the work well ahead of the standard time.
Minimum wages are assured for the
employees even if they fail to complete the
jobs within the standard time.
 Halsey premium plan (contd.)

The formula for this method is

Earnings = actual time taken x time rate +
50% of (time saved x time rate).
Time saved = difference between actual
time and standard time.
 Rowan incentive plan

In this method, an employee gets the time

rate for the actual hours worked and also
a bonus for the time saved if he or she
completes the job within the standard
time.
The employee who is unable to complete
the job within the standard time gets the
time rate for the actual time worked.
 Rowan incentive plan (contd.)

Earnings = actual hours worked x time

rate + (actual time worked/standard
time) x time saved x time rate
 Haynes incentive plan

In the Haynes system, the standard time

is expressed in terms of man-minutes
called MANT.
As per this system, an employee gets
the time rate for the actual time worked
and also a bonus for the time saved,
which is computed in man-minutes.
 Haynes incentive plan (contd.)

Depending upon the nature of work, the

employees and the foreman divide the
earnings from the time saved in the
ratio of 5:1 in Haynes incentive plan.
Group Incentive
Schemes
 Cost efficiency bonus plan

Under this plan, the organisation first

determines the standard cost for the
various elements of cost.
Next, it measures the actual cost
incurred by the group in accomplishing
the production goals or targets.
 Cost efficiency bonus plan (contd.)

Finally, the actual cost incurred by the

group and the standard cost are
compared to determine the savings in
the cost achieved by the group.
As per the cost efficiency plan, a
predetermined percentage of the savings
is distributed in the form of bonus to the
employees.
 Priestman bonus plan

In this plan, a group of experts set the

standard performance in terms of the
number of units for the whole work to be
carried out by a group within a specific
period.
Then, the actual performance of the group
is measured and is compared with the
standard performance.
 Priestman bonus plan (contd.)

When the actual performance exceeds the

standard performance, the group members
are entitled to a bonus computed.
However, when the groups performance is
less than below the standard performance,
then they are paid on the basis of time rate
without any bonus.
 Rucker incentive plan

The Rucker plan aims at achieving cost

saving not only on labour cost but also
on overheads.
The reward for the group is determined
on the basis of the difference between
the labour cost and the sales value of
production.
 Rucker incentive plan (contd.)

The total reward available to a group

depends upon the savings achieved in
terms of the value of production as a result
of efficient utilization of machinery,
materials and other equipments.
As per this system, any savings achieved by
the group in the value of production is
used as the basis for determining the
group incentive.
 Townes incentive plan

This method considers the savings in

labour cost alone for determining the
rewards payable to the groups.
In the first step, the standard labour
cost for the entire work is determined in
advance.
 Townes incentive plan (contd.)

Then the actual labour cost for that work

is measured and compared with the
standard labour cost.
Finally, the saving in the labour cost is
computed and a proportion of the saving
in monetary terms is distributed to the
group members.
 Scanlon incentive plan

The Scanlon incentive plan focuses on

achieving savings in the labour cost
alone.
In this method, the bonus is decided on
the basis of the difference between the
total labour cost and the sales value,
including the closing stock of goods.
Scanlon incentive plan (contd.)

A portion of the savings in labour cost is

retained for payment during lean
seasons when the group is unable to
achieve any cost reduction.
 Improshare
In this method, an organization seeks to
achieve savings by producing predetermined
quantity of goods within the standard time.
This method considers the relationship
between the targeted output and the
standard time (one of the inputs) for deciding
the group bonus.
A proportion of time saved as a result of
efficient and fast production is used to fix the
incentives payable to groups.
Organisation-wide
Incentive Plans
 Profit-sharing plan

The crux of the profit-sharing plan is to give

out a portion of the organizational profit to
the employees.
In this method, the organization first
determines the target profit i.e., the
standard profit for the entire organization.
At the end of a specific period (may be a
year), it ascertains the actual profit of the
organization.
 Profit-sharing plan (contd.)

Then it compares the actual profit with the

standard profit in order to determine the
excess profit.
Understandably, the employees get a share
in the excess profit of the organization.
 Employee stock option (ESOP) scheme

This is another style of profit sharing in which

organizations distribute the profit in an
indirect form.
An ESOP scheme develops a sense of
ownership among the employees and thus
enhances their involvement in the decision-
making process.
 Employee stock option (ESOP) scheme
(contd.)
Generally, the organization buys the shares
from the capital market, keeps them in a pool
called employee stock ownership trust (ESOT)
and issues the shares to the employees on
some predetermined basis.
 Stock option plan

In stock option, the employees are given

the right to buy the stocks of their company
in specific numbers during a specific period
at predetermined rates.
The employees can treat stock option as
another investment alternative available to
them.
They normally dispose of their stocks when
the market conditions are favourable for
selling.
 Evaluation of wage incentive schemes

Direct link with performance.

No permanent financial commitment.
Self-responsibility.
Optimum utilization of production capacity.
Low employee attrition.
Better labour-management relations.
 Limitations of the incentive schemes

Quality concerns
Employee attitude
Exploitation by management
Internal dissensions
Burnout problems
Unethical practices
Fringe Benefits
 Fringe benefit- meaning

Fringe benefits are benefits payable to the

employees over and above the direct
compensation and usually without any
reference to their performance.
 Objectives of fringe benefits

Attracting the best talents.

Being tax-free for the employees.
Improving employee morale.
Achieving the desired unity.
Improving industrial relations.
Concern for employee well-being and
reducing the HR cost.
 Forms of fringe benefits

Payment is without work.

Health and safety care.
Retirement benefits.
Housing facilities.
Other facilities like educational facilities,
canteen facilities, transport facilities, child
care facilities and relocation benefits.