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Published by prith21
INCENTIVE SYSTEM in compensation management
INCENTIVE SYSTEM in compensation management

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Published by: prith21 on Jun 06, 2009
Copyright:Attribution Non-commercial


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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 benefits shall berealized when sufficient safeguards are provided. Such prerequisites 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 of supervisor. Worker’s cooperation may be secured through proper discussion with their representatives.In particular, worker’s co-operation is necessary in:
the methods followed in measuring the results or output upon which payment is based
the methods followed in setting wage rates for different classes of work and
appropriate safeguards concerning earnings, job security and settlement of disputes over  piece-work rates and allotted time.To prove that the schemes were often introduced without workers’ co-operation andconsequently met with failure we quote the following:‘ .. the practice adopted by several industrial establishments in the Mumbai region inregard to the preparation of an incentive scheme is to hire an industrial consultant and tomake him work in the establishment under the cloak of secrecy, until a scheme has beenfinally prepared. It is only after several months that the workers of the establishment andtheir unions begin to suspect that some scheme is under preparation. Trade union leaders,who are not employees currently, are not even allowed to watch how standards have beenevolved. Naturally, the workers reject out-of-hand, a scheme prepared so surreptitiously.’2.The scheme must be based on scientific work measurement. The standards set must berealistic and must motivate workers to put in better performance. Workers must be provided with necessary tools, materials and equipments 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 in the incentivescheme.
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 anincentive program. There are many situations in which the potential gains are just notworth the cost and effort involved. It also means a commitment in terms of integrity to
the spirit as well as the letter of the programme – having the courage to abide by it whenthe payout deteriorates and the honor to own up when the results are not forthcoming.5.There is a greater need for planning. Many incentive schemes, started hurriedly, plannedcarelessly and implemented indifferently have failed and have created more problems for the organization than they have tried to solve. This was what happened to three big plantsof Hindustan Steel (now SAIL), where an incentive scheme was introduced during 1960s.Though the initial objective of raising the output was achieved, problems arose regarding production of sophisticated items and improvement of the quality of products. Thescheme did not function satisfactorily from the point of view of maintenance of plant andequipment, which, in turn affected output. The performance of ancillary units like therepair shops was unsatisfactory because the incentives in these shops were based on theoverall steel production and not the units’ own performance. Thus, the need for careful preparation for the installation of an incentive scheme.6.The other safeguards are:(a)The incentive scheme should be appropriate to the type of work carried out and theworkers employed.(b)The reward should be clearly and closely linked to the efforts of the individual or group.(c)Individuals or groups should be able to calculate the reward they get at each of the levelsof the output they are capable of achieving.(d)Individuals or groups should have a reasonable amount of control over their efforts andtherefore their rewards.(e)The scheme should operate by means of a well-defined and easily understood formula.(f)The scheme should be properly installed and maintained.(g)Provisions should be made for controlling the amounts paid, to ensure that they are proportionate to effort.(h)Provisions should be made for amending rates in defined circumstances.(i)Create incentives for performance and disincentives for non-performance.
Set and review specific objectives for each employee periodically.
Prerequisites of a Good Wage Incentive Scheme
The installation of an incentive scheme presupposes the existence of certain prerequisites, whichare, more often than not, ignored. Quite often, incentive payments are just taken to be necessary part of the total wage packet, and hastily conceived schemes are introduced primarily because of  pressures from workers and trade unions. such schemes naturally result in a number of personnel problems which may, in fact, be
1.Impediments to improve productivity
It is, therefore, advisable to ensure that a proper climate exists for the introduction of suchschemes. Some important considerations, which should ordinarily be taken into account whilechoosing a particular type of wage incentive scheme, are:(i)The management should strive to create a proper climate by adopting sound policies of recruitment, promotion, trading etc., right from the inception of an enterprise. Unless there ismutual understanding and concern for improving productivity, even a well-conceived incentivescheme may not yield the optimum results. Therefore, the management must concentrate oncreating a proper industrial relations climate before introducing incentive schemes.(ii) The objectives of the scheme must be clear, and these should be well understood at the levelsof management and of workers. Certain specific factors may be selected as the basis for ascheme. Too many factors selected at a time may make it complicated. The scheme should suit both the particular enterprise and its workers. At every stage, right from the conception of thescheme to conducting studies, etc., all the workers and supervisors should be consulted so thatthey understand the objectives and benefits of the scheme and may contribute to its success.(iii)Incentive schemes should be installed only when production has reached 60 per cent of therated capacity. Care should be taken to provide a suitable gestation mechanism in the scheme ona time-bound basis so that incentive payments at a lower level of the performance are allowedonly for limited time periods. The quantum of incentive paid at the low levels of production andefficiency should be such as to ensure that earnings continuously increase when the targets areraised.(iv)The scheme chosen should be one which would result in overall economy for establishment.Incentives should not only increase production but also result in higher productivity and lower cost per unit; and the gains of increased productivity should be shared both by the employer andthe employed.(v)The scheme should not be very costly in operation, i.e., it should not involve the maintenanceof very elaborate records, complicated calculations, and too much material handling.(vi)The scheme should be based on a work study, and the work contents of various jobs should be stabilised.(vii)In principle, each individual or group should be paid according to effort and productivity, for disparity in earnings may create discontent. Unless the scheme i.e. well defined, it may turn outthat indirect groups may receive higher incentive earnings than the main production group.(viii)The scheme should have elasticity to take care of technological and other changes taking place from time to time and rectify errors that may have crept in at the time of its initialintroduction.

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