Compensation and Incentives in the Workplace
I
INCENTIVE PAYMENT
UNIT- 6
What is compensation &
incentives?
Why
Incentives
are
Important?
What makes an
Incentives plan
effective?
Basic
forms of
incentives.
Classification of
Incentives
Plans
What is
compensation
&
incentives?
The
ter
m
COMPENSATION
mean
to
give
something
in
return.
Weather
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
company
policy has
to
be
designed.
The
term
INCENTIVES
mean,
something
which
encourages
do
something.
Or the
“extra financial reward/
motivation”.
Incentives
is
the
performance-link
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.
Why
Incentives
are
Important?
Incentives are considered beneficial
to
both employers as
well
as
employees
in
following
ways.
Workers
are likely to work at
their
best when they
are
offered
monitory
rewards for
good
performance.
Provide
opportunity for hard-working
&
ambitious employees
to
earn
more.
To
improve
work-flow,
work
methods
&
man
–
machine relation
ship.
To
bring
employee involvement to make employee
innovative.
Incentives are the sound technique of improving
productivity.
Help
to improve
discipline and industrial relation.
The cost of supervision are reduced.
To
obtain desired result.
In
the
absence
of
mutual
trust
between
employer
&
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.
What makes an
Incentives plan
effective?
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 haw
well
an
employee
done
the
assigned
job.
Higher the performance Greater will be the
reward.
The
payment is
depend on individual
employee’s
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
:- is
the
most
frequently used
method.
Basic
forms
of
incentives.
Classification
of
Incentives
Plans
Profit
sharing
Co-partnership
Gain-sharing
ESOPs
Incentives
plans
Output-based
Ind
i
vidual
T
i
m
e
-based
Organization-
wide
Group
Time-based
Time
based incentive plan
–
Under
t
i
m
e
based
pl
a
n,
p
e
r
hou
r
wage
rate
i
s
d
e
t
er
m
ined
&
incentives paid on the bases of
time
saved.
–
Time
based incentives plane
is
divided
in
four
different
ways.
–
Hasley plan, Rowan plan,
Emerson
plan, Bedeuax
plan.
–
This
all
plan more or less follow same method i.e. (pay bonus on
the
basis of
timed
saved by
employee),
but with
different
formula.
Output based incentive plan
–
Under output
based plan, per
piece
wage rate
is
determined
&
incentives paid
on
the bases of output produced. i.e. more output
in
standard
time
OR standard output
in less
time.
–
For output based incentive following 3
method can
be
used.
–
Taylor
plan,
Merrick
plan, Gnatt
plan.
In
d
i
v
i
d
u
a
l
Profit sharing
–
Profit sharing is
an
arrangement
by
which employees receive
in
addition
to
wages,
a share
is fixed in
advance
in
profit of
the
enterprise.
–
It
is an agreement
between
employer
& his
employee.
–
According
to
International Labour
Organization,
“Profit-sharing
is
a
method of industrial remuneration under which an employer
undertakes to
pay
to employee,
a
share
in
net
profit of the enterprise
in
addition
to
regular
wages”
Co-partnership
–
Co-partnership
is an
extension of
profit-sharing.
–
Under
this method
worker’s
share
in
company’s
profit is paid in
the
form of
share
by
which they become entitled
to
participate
in
decision-making
process.
Organization-
wide –
1
Gain-sharing
–
This
method
aims
at increasing productivity
&
decreasing
labour
cost
&
sharing the result gains wit
employee.
–
It
is based
on a
mathematical formula which compares
a
standard
perform with
actual
performance during given
period.
–
When actual performance
exceed
the standard performance, shaving
are shared with
employees.
ESOPs
(Employee
Stock Option Plans)
–
This
method is
originated
in
the USA
in
early
90s.
–
Under
this
plan,
the
eligible
employee
are
allotted
company’s
share
below the market
price.
–
The
term
“stoke
option”
implies
the
right
of
eligible
employee
to
purchase a certain
amount
of stoke
in
future
at an
agreed
price.
–
The
eligibility criteria
may
include length of service, contribution
to
the
department
etc…
Organization-
wide –
2
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
–
Rucker
plan
–
Scalon
plan
–
Town
plan and so
on…
Gr
o
up
P
R
E
-
R
E
Q
U
I
S
I
T
E
S
O
F
E
F
F
E
C
T
I
V
E
I
N
C
E
N
T
I
V
E
S
Y
S
T
E
M
All things considered, it may be concluded that in many industries or undertakings and
for a large group of operations, well-designed systems of payment by results shall yield
advantages to all concerned. Many of these advantages will be realized provided
sufficient safeguards are provided. Such p re-requisites are:
1. The co-operation of workers in the implementation of an incentive scheme is
essential because the employees somehow devise, if they do not like a scheme,
ingenious ways of evading or sabotaging the plan, often with the tacit connivance of
the foreman or supervisor,'' 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.
P
R
E
-
R
E
Q
U
I
S
I
T
E
S
O
F
E
F
F
E
C
T
I
V
E
I
N
C
E
N
T
I
V
E
S
Y
S
T
E
M
2. The scheme must be based on scientific work measurement. The standards set must
be realistic and must motivate workers to put in better performance. Workers must be
provided with necessary tools, equipment and materials so as to enable them reach
their standards.
3. Indirect workers, such as supervisors, foremen, charge hands, helpers, crane
operators, canteen staff, store keepers, and clerical staff should also be covered by
incentive schemes.
4. There should be management commitment to the cost and time necessary to
administer incentive schemes properly, and these must be carefully assessed before
embarking on an incentive programmed. There are many situations in which the
potential gains are just not worth the cost and effort involved.
5. 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.
P
R
E
-
R
E
Q
U
I
S
I
T
E
S
O
F
E
F
F
E
C
T
I
V
E
I
N
C
E
N
T
I
V
E
S
Y
S
T
E
M
6. The other safeguards are:
(i) The incentive scheme should be appropriate to the type of work carried out and the
workers employed.
(ii) The reward should be clearly and closely linked 10 the efforts of the individual or
group.
(iii) Individuals or groups should be able to calculate the reward they get at each of the
levels of output they are capable of achieving.
(iv) Individuals or groups should have a reasonable amount of control over their efforts
and therefore their rewards.
P
R
E
-
R
E
Q
U
I
S
I
T
E
S
O
F
E
F
F
E
C
T
I
V
E
I
N
C
E
N
T
I
V
E
S
Y
S
T
E
M
v) The scheme should operate by means of a well-defined and easily- understood
formula.
(vi) The scheme should be properly installed and maintained,
(vii) Provisions should be made for controlling the amounts paid, to en- sure that they
are proportionate to effort.
(viii) Provisions should be made for amending rates in defined circumstances
(ix) Create incentives for performance and disincentives for non-performance.
(x) Set and review specific objectives for each employee periodically.
SCOPE OF INCENTIVES SCHEMES
The incentive payments have a universal appeal and their
application is confined to certain important industries. Stated
differently, payment by results schemes are difficult to apply in:
1.
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.
2. Industries in which the control of quality is necessary and is
particularly difficult, or in the case of certain classes of workers,
where high quality and precision of work is of prime importance;
and
SCOPE OF INCENTIVES SCHEMES
3. Industries in which the work is especially dangerous and is
particularly to ensure the observance of adequate safety
precautions.
Barring the above three categories, incentive schemes can be
applied to all industries. Specifically, they are being successfully
employed in the textile and metallurgical industries, the metal
trades, mining and many branches of clothing, leather and rubber
industries. Incentive schemes have also been successfully applied
in certain countries and in certain circumstances in the building
industry and in chemical and other industries.
TYPES OF INCENTIVES SCHEMES
Incentives schemes are many and varied. The International Labor
Organization (ILO) classifies all the schemes of payment by results
into four categories. They are:-
1. Incentives schemes where the workers earnings vary in the
same proportion as output.
2. Schemes where earnings vary proportionately less than output.
3. Schemes where earnings vary proportionately more than
output.
4. Schemes where earnings differ at different levels of output.
TYPES OF INCENTIVES SCHEMES
As a rule, incentives must not be introduced in a newly set-up
unit. Workers must be content with time-rated earnings, at least,
during the first four to five years. The time period is necessary for
the unit to carve a niche for itself in the market. This being
achieved, it would be easy for the unit to sell increased output
brought in by incentives. Furthermore, as was noted earlier,
incentives are likely to affect the quality of output. Any defect in
quality would seriously affect fortunes of the newly set up unit,
particularly in its formative years.
Compensation and incentives play a vital role in attracting and retaining talented employees. Compensation refers to what employees receive in return for their work, including wages, salaries, and incentives. Incentives are extra rewards that encourage employees to perform better. They are important as they improve motivation, productivity, discipline, and industrial relations. Effective incentives plans should be fair, easy to understand, flexible, and regularly reviewed. Basic forms of incentives include bonuses, merit pay, and commissions for salespeople.
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Presentation Transcript
IINCENTIVE PAYMENT UNIT- 6
What is compensation & incentives? Why Incentives are Important? What makes an Incentives plan effective? Basic forms of incentives. Classification of Incentives Plans
What is compensation & incentives? The term COMPENSATION mean togive something in return. Weather 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 company policy has to be designed. The term INCENTIVES mean, something which encourages do something. Or the extra financial reward/motivation . Incentivesis the productivity of the employees. performance-link to improve motivation & Incentives includes all that provide extra pay for the extra p e r f o r m a n c e in addition to regular wages for thejob.
Why Incentives are Important? Incentives are considered beneficial to both employers as well as employees in following ways. monitory rewards for goodperformance. Workers are likely to work at their best when they are offered Provide opportunity for hard-working & ambitious employees to e a r n more. To improve work-flow, work methods & man machine relation ship. To bring employee involvement to make employee innovative. Incentives are the sound technique of improving productivity. Help to improve discipline and industrial relation. The cost of supervision are reduced. To obtain desired result.
What makes an Incentives plan effective? absence an incentives may be viewed as an attempt to improve production/ profitonly. Incentive plan should be installed in consultation with workers & union. Payment of incentives should be free from bias & established t h r o u g h scientific/ proper workstudy. To implement incentives minimum wages shouldbe 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. In the of mutual trust between employer & workers, plane effectively
Basic forms of incentives. The basic from of incentives are asfollow. 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 basicpay. 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 haw well an employee done the assigned job. Higher the performance Greater will be thereward. The payment is depend on individual employee sperformance. Commission for sales people :- is paid on the basis of sales made by the employee, through different plan. Suchas Salary plan :- where new salesman is appointed, is unable to generatenew. Commission plan :- where organization is totally based on sales of their product. Combination of both :- is the most frequently usedmethod.
Classification of Incentives Plans Incentivesplans Organization- wide Individual Group Profit sharing Time-based Co-partnership Time-based Gain-sharing Output-based ESOPs
Individual Time based incentive plan Under time based plan, per hour wage rate is determined & incentives paid on the bases of timesaved. Time based incentives plane is divided in four differentways. Hasley plan, Rowan plan, Emerson plan, Bedeuaxplan. This all plan more or less follow same method i.e. (pay bonus on the basis of timed saved by employee), but with differentformula. Output based incentive plan Under output based plan, per piece wage rate is determined & incentives paid on the bases of output produced. i.e. more output in standard time OR standard output in lesstime. For output based incentive following 3 method can beused. Taylor plan, Merrick plan, Gnatt plan.
Organization- wide 1 Profit sharing Profit sharing is an arrangement by which employees receive in addition to wages, a share is fixed in advance in profit of the enterprise. It is an agreement between employer & his employee. According to International Labour Organization, Profit-sharing is a method of industrial remuneration under which an employer undertakes to pay to employee, a share in net profit of the enterprise in addition to regularwages Co-partnership Co-partnership is an extension ofprofit-sharing. Under this method worker s share in company s profit is paid in the form of share by which they become entitled to participate in decision-making process.
Organization- wide 2 Gain-sharing This method aims at increasing productivity & decreasing labour cost & sharing the result gains witemployee. It is based on a mathematical formula which compares a standard perform with actual performance during givenperiod. When actual performance exceed the standard performance, shaving are shared with employees. ESOPs (Employee Stock Option Plans) This method is originated in the USA in early90s. Under this plan, the eligible employee are allotted company s share below the market price. The term stoke option implies the right of eligible employee to purchase a certain amount of stoke in future at an agreedprice. The eligibility criteria may include length of service, contribution to the departmentetc
Group Group based or team-based incentives plans reward all team m em bers equally based on overall performance of the teammember. Under group based out put can t be measured. So team performance is evaluated on the basis of time taken r a t h e r 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 productionplan Rucker plan Scalon plan on incentive plan, individual
PRE-REQUISITES OF EFFECTIVE INCENTIVE SYSTEM All things considered, it may be concluded that in many industries or undertakings and for a large group of operations, well-designed systems of payment by results shall yield advantages to all concerned. Many of these advantages will be realized provided sufficient safeguards are provided. Such p re-requisites are: 1. The co-operation of workers in the implementation of an incentive scheme is essential because the employees somehow devise, if they do not like a scheme, ingenious ways of evading or sabotaging the plan, often with the tacit connivance of the foreman or supervisor,'' 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.
PRE-REQUISITES OF EFFECTIVE INCENTIVE SYSTEM 2. The scheme must be based on scientific work measurement. The standards set must be realistic and must motivate workers to put in better performance. Workers must be provided with necessary tools, equipment and materials so as to enable them reach their standards. 3. Indirect workers, such as supervisors, foremen, charge hands, helpers, crane operators, canteen staff, store keepers, and clerical staff should also be covered by incentive schemes. 4. There should be management commitment to the cost and time necessary to administer incentive schemes properly, and these must be carefully assessed before embarking on an incentive programmed. There are many situations in which the potential gains are just not worth the cost and effort involved. 5. 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.
PRE-REQUISITES OF EFFECTIVE INCENTIVE SYSTEM 6. The other safeguards are: (i) The incentive scheme should be appropriate to the type of work carried out and the workers employed. (ii) The reward should be clearly and closely linked 10 the efforts of the individual or group. (iii) Individuals or groups should be able to calculate the reward they get at each of the levels of output they are capable of achieving. (iv) Individuals or groups should have a reasonable amount of control over their efforts and therefore their rewards.
PRE-REQUISITES OF EFFECTIVE INCENTIVE SYSTEM v) The scheme should operate by means of a well-defined and easily- understood formula. (vi) The scheme should be properly installed and maintained, (vii) Provisions should be made for controlling the amounts paid, to en- sure that they are proportionate to effort. (viii) Provisions should be made for amending rates in defined circumstances (ix) Create incentives for performance and disincentives for non-performance. (x) Set and review specific objectives for each employee periodically.
SCOPE OF INCENTIVES SCHEMES The incentive payments have a universal appeal and their application is confined to certain important industries. Stated differently, payment by results schemes are difficult to apply in: 1. 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. 2. Industries in which the control of quality is necessary and is particularly difficult, or in the case of certain classes of workers, where high quality and precision of work is of prime importance; and
SCOPE OF INCENTIVES SCHEMES 3. Industries in which the work is especially dangerous and is particularly to ensure the observance of adequate safety precautions. Barring the above three categories, incentive schemes can be applied to all industries. Specifically, they are being successfully employed in the textile and metallurgical industries, the metal trades, mining and many branches of clothing, leather and rubber industries. Incentive schemes have also been successfully applied in certain countries and in certain circumstances in the building industry and in chemical and other industries.
TYPES OF INCENTIVES SCHEMES Incentives schemes are many and varied. The International Labor Organization (ILO) classifies all the schemes of payment by results into four categories. They are:- 1. Incentives schemes where the workers earnings vary in the same proportion as output. 2. Schemes where earnings vary proportionately less than output. 3. Schemes where earnings vary proportionately more than output. 4. Schemes where earnings differ at different levels of output.
TYPES OF INCENTIVES SCHEMES As a rule, incentives must not be introduced in a newly set-up unit. Workers must be content with time-rated earnings, at least, during the first four to five years. The time period is necessary for the unit to carve a niche for itself in the market. This being achieved, it would be easy for the unit to sell increased output brought in by incentives. Furthermore, as was noted earlier, incentives are likely to affect the quality of output. Any defect in quality would seriously affect fortunes of the newly set up unit, particularly in its formative years.
