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INCENTIVE SCHEME

Wages are and have been the most important factor influencing the employer employee relations. A good
wage plan is the one which satisfies the workers and at the same time brings profit to management.
Wage payment plans may be classified into two groups:
Non-Incentive plans like time or day rate system, and
Incentive wage plans.
Incentive
Incentive is an inducement or reward which is given to a worker for his efficiency and hard work. Incentives
motivate and encourage a worker to produce more and better. Incentives are in addition to the job hourly rate
and are in some proportion to the workers contribution towards production.
Classification of Incentive Scheme
Incentives may be classified as direct & indirect incentives and financial & non-financial incentives.
Direct Incentives are those which are given to an individual worker for his own contribution whereas
Indirect Incentives are those which are paid to a group of workers.
Financial Incentive involves direct monetary payment or benefit while Non-Financial Incentives involve
good working conditions, amenities and social benefit in the organisation.
Financial Incentive: Besides incentives for the immediate work contribution, workers may receive
additional financial benefit in the form of
1. Bonus and
2. Profit Sharing
Non-Financial Incentive: Non-Financial Incentive include
1. Job Satisfaction
2. Better and Healthy working condition and environment
3. Chances of promotion
4. Job security
5. Helpful and cooperative management
6. Training and other employee improvement programmes
7. Housing, medical, recreational and educational facilities.
Semi Financial Incentives: Semi-financial incentive include
1. Provision of subsidized lunch, recreational and medical facilities to the employees and subsidized
educational facilities for their children
2. Pension and other benefits.
Wage Incentive Plans
Wage incentive plans reward an employee for his good job performance. The various aspects of Job
Performance is:
Product Quantity
Product Quality
Utilisation of materials, plant, tool and services and
Efficiency
Almost all commonly employed wage incentive scheme guarantee a minimum wage plus incentive based
upon the operator performance. Normally the wage incentive plan should be based on the standard set by the
work study. The wage rate may be the result of the mutual agreement between employer and employee.
Essential Conditions of a Sound Wage Incentive Plan
The requirements of a sound wage incentive are:
It should be simple, easy to understand and operate. It should involve least clerical work.

It should be well planned and guarantee a minimum wage.


A worker should be rewarded in the proportion of his efforts and achievements.
A worker should get enough and adequate incentive for his contribution.
The scheme should preferably be based on time study data.
No limit should be put on a worker incentive scheme.
Once installed, the incentive scheme should be rigidly maintained.

Types of Wage Incentive Plans


The most commonly used wage incentive schemes for direct worker are as follows:
Straight Piece Rate System
In the straight piece rate system, a worker is paid straight for the number of pieces which he produces per
day. Thus,
Earning of a Worker = No. of Units Produced X Rate Per Piece.
In other words, if a worker drills 16 work pieces per day and for each work piece the wage is Rs. 5 then he
earns at a rate of Rs. 80 per day.
The wage rate per piece to be paid to the worker is decided as follows:
1. Through any appropriate work measurement technique determine the standard time required to drill
one hole in a work piece. Suppose it comes to be 30 minutes. It means in a working day (i.e., 8 hours)
a worker should be able to drill 16 work pieces.
2. From the local or national market the wages for such type of job is determined. Suppose it is Rs. 2000
per month, which means 2000/ (25X16) = Rs. 5 per piece (for a 25 days month).
Straight Piece Rate with a Guaranteed Base Wage
This method is an improvement over the straight piece rate system as it guarantees a minimum base wage.
Suppose the standard of output set by management is 16 pieces per day. If a worker produces less than this
amount he still gets the minimum guaranteed wage and if another worker exceeds this standard, he is given a
wage in direct proportion to the number of pieces produced by him at the straight piece rate.
The following example explains this scheme:
Let us assume the management has set an output standard of 16 pieces per day and a wage rate of Rs. 10 per
hour. If there are 8 working hours in a day then per piece wage is Rs. 5, i.e., (10X8)/16 = Rs. 5.
The guaranteed wage will be 8 X 10 = Rs. 80 per day.
Now, if a worker produces less than the output standard set (i.e., 16 pieces per day) he still gets Rs. 80 per
day.
On the other hand, if a worker exceeds the output standard and makes 20 pieces per day then his earning will
be 20 X 5 = Rs. 100 per day.
One of the disadvantages of this method is that it does not offer sufficient incentive for a worker who
exceeds the set output standard. For e.g.- A worker who produces say 14 pieces per day, still gets Rs. 80 for
the day- that means he earns @ Rs. 80/14 i.e., Rs. 5.71 per piece whereas a worker producing 20 pieces per
day, gets Rs. 100 only i.e., he earns @ Rs. 5 per piece.
Differential Piece Rate System
A differential piece rate system tends to overcome the disadvantages of the piece rate system by providing a
guaranteed base. It bases itself on differential wage rates; a worker who exceeds the output standard is paid a
higher wage rate per piece and the worker who fails to do so gets his earnings at a low piece rate. This
system as suggested by F.W. Taylor had the disadvantage that the inferior or fresh workers, who were unable
to reach output standard, could earn very little and hardly survive.

The Gantt Task and Bonus Plan


This plan has been devised by H.L. Gantt and is the only one that pays a bonus percentage multiplied by the
standard time. Under this system fixed time rates are guaranteed. Output standards and time standards are
established for the performance of each job. Workers completing the job within the standard time or in less
time receive wages for the standard time plus a bonus which ranges from 20-50 percent of the time allowed
and not time saved. When the worker fails to turn out the required quantity of a product, he simply gets his
time rate without any bonus.
In simple words in a Gantt Plan a guaranteed wage is provided and the worker reaching output standard get a
wage rate increase and workers exceeding output standard are paid at a higher wage rate. Gantt Plan is an
improvement over the Taylors Differential Plan.
Thus under Gantt Plan there are three stages of payment:
Below the standard performance- only the minimum guaranteed wage is to be paid,
At the standard performance- above wage plus 20% of time-rate will be paid as bonus and
When the standard is exceeded, a higher piece rate is paid but there is no bonus.
Group Incentive Plan
A group incentive plan is preferred to an individual incentive plan where
The output or effective contribution of each worker cannot be effectively measured
The output of the worker can of course be measured but it is related with the output of others
All the workers in a group are equally skilled.
The principle of group incentive plan can be Evaluate the collective performance of the group
Calculate the collective performance of the group
Divide the earnings in equal or any other proportion amongst the worker- depending upon the
qualities possessed by the each worker. The group leader may be given biggest share because he is
responsible for the successful completion of the job. The division of earnings, if carried out unwisely
and without proper thought, may deteriorate team spirit, spoil the job and create conflicts and
resentment among the workers.
Incentive for Indirect Workers
Workers may be classified as- Direct Workers and Indirect Workers
Direct Workers are those who operate the machine and turn out the production. For e.g. a drilling or
welding operator is a direct worker.
Indirect Workers are those who assist, guide and supervise the direct workers during production process.
They may be classified as:
Material Handlers, Crane Operators, Maintenance Men, etc.
Shop Inspectors, Foremen and Supervisor.
Managers.
The main difficulty associated with the incentive payment to indirect workers is that their contribution
towards production cannot be accurately measured and hence it is extremely difficult to reward them
effectively and suitably.
Suggested Incentive Scheme ForLabourers, Crane Operators, Set-up Men, Maintenance Men, etc.: They can be given the same or half
the incentive what the direct worker get. Or,
They can be given a bonus at a flat rate of 8-12%.
Supervisory Staff: Supervisory staff can be paid an incentive on the output for which it is responsible. There
are a number of factors on which incentive can be based such as-

The number of satisfactory units produced by his section/department in one day or one week.
The number of work hours saved in achieving the same output.
Reduction in scrap or wastage.
Net cost saved for the organisation.
The number of orders in whose case the delivery dates were met.
Managerial Staff: For running as concern effectively, it is highly necessary to maintain the interest and
participation of the managerial staff. Incentive to managerial staff may be in the form ofBonus: Bonus may be given to managerial staff in the proportion to their merits, job requirements or salary
drawn by them.
Issue of Shares: Company shares may be issued to managerial staff. The number of shares, naturally builds
up year by year and this induces a sense of discipline, loyalty and cooperation in the managers who start
realizing that they are partners in the company and they have to work sincerely and whole heartedly for the
same. In this way labour turnover automatically gets minimised.
Profit Sharing: As per the mutual agreement between the employer and the indirect workers, a portion of
the company profit may be shared by the indirect workers, in addition to their normal wages. The share of
profit which goes to a particular person may depend upon his salary, length of service, merits and
responsibilities.
Fringe Benefits: Free Accommodation, Provision for Conveyance and Phone Facilities, Financial Assistance
in the time of Difficulty, Subsidised Children Education, etc.