Incentive

MODULE-4

Incentive-definition
An Incentive is a reward to a specific behavior,

designed to encourage that specific behavior. It is also known as inducement. It is an inducement or supplemental reward that serves as a motivational desired behavior. It envisages a basic rate usually on time basis applicable to all workers and incentive rates payable to the more efficient among them as extra compensation for their meritorious performance in terms of time, cost and quality.

Contd..
The incentive rates may take the form of bonus or

premium. Bonus means payment to workers of the entire benefit accruing from savings in costs, time, improvement in quality etc., Premium means the benefits accruing to the firm as the result of higher output or better quality will be shared equally or in some agreed basis between the management and the workers.

Types of Incentives
There are two types of incentives

a. Individual incentives
b. Organization wide incentive

Individual incentive
Individual incentive system tries to tie individual effort

to additional rewards. Conditions necessary for the use of individual incentive plans a. Individual performance must be identified b. Individual competitiveness must be desired c. Individualism must be stressed in the organizational culture Popular approaches include piece work plans,(such as Taylor's differential piece rate plan, Merricks differential piece rate plan, etc.) standard hour plans, (such as Halsey plan, bandeaux plan, Emerson's plan etc) gain sharing its advantages and disadvantages.

Piece rate Incentive

Piece rate incentive is the most common form of

individual enticement for production workers. Employees are paid a fixed rate for each unit of output produced. The amount to pay per unit of output is determine as follows: 1. The typical pay rate for the job is determined, probably by a wage survey. 2. Then the typical output per day is measured. 3. A time and motion study by industrial engineers may also provide information on the number of units that an employee should be able to make per day

Contd
The average daily wage is divided by average units

per day to produce the price paid per piece. For example, if the average daily rate is 96$ and each employee ought to be able to produce 96 units per day, the rate paid for each piece will be 1.00$. They are two approaches: a. Taylor Differential piece rate System b. Merricks Differential piece rate system

A. Piece rate: Taylors Differential Piece Rate System

F.W Taylor, the father of scientific management,

originated this system. The main features of this plan are: a. There shall be two piece work rates, one is lower and the other is higher. b. The standard of efficiency is determined either in terms of time or output based on time and motion study c. If a worker finishes work within standard time (or produces more than standard output within time) he will be given high piece rate

Contd..
This system penalizes the slow worker by paying low

rate because of low production, rewards an efficient worker by giving him high rate because of higher production. In other words, if the output of a worker is less than the standard output, he is paid a low rate and vice versa

Merricks Differential piece rate system

We have seen that in Taylor's method, the effect on

the wages is quite severe in the marginal cases. To remove this defect, Merrick came out with a multiple piece rate system. There are three piece rates under this schemes instead of two, and workers producing below the standard output are not penalized by the low piece rate. Since the earnings increase with the increased efficiency, performance above the standard will be rewarded by more than one differential piece rate.

Contd..
Up to 83% of the standard output workers are paid at

the ordinary piece rate. 83% to 100% at 110% of the ordinary piece rate Above 100% at 120% of the ordinary piece rate.

Standard Hour Plan:

This standard hour plan is similar to the straight

piece work plan except that the standard is set in time units. Automobile repair shops often use such systems. Popular approach include Halsey Plan Bedeaux plan Emersons efficiency plan

Halsey Plan
This plan originated by F.A Halsey (an American engineer

recognizes individual efficiency and pay bonus on the basis of time saved. The main features of this plan are: 1. Standard time is fixed for each job or operation 2. Time rate is guaranteed and the worker receives the guaranteed wages irrespective of whether he completes the work in the time allowed or takes more time to do the same. 3. If the job is completed in less than the standard time, the worker is paid a bonus of 50% (331/3percent under Halseyweir plan) of time saved at time rate in addition to normal time wages. Total earnings=time taken * hourly rate plus bonus Bonus=50%of time saved

Bedeaux Plan
Under this plan, every operation or job is expressed in terms

of so many standard minutes, which are called Bedeaux points or B points, each B representing one minute through time and motion study. Up to 100% performance, i.e. up to standard Bs, a worker is paid time wages without any premium for efficiency. If the actual performance exceeds the standard performance in terms of Bs then 75% of the wages of the time saved is paid to the worker as bonus and 25% is earned by the foremen. If the standard time is 10 hours actual time taken is 8 hours and rate per hour Rs.1, the worker will get. = 8 hours at Rs.1+75% of 120 (POINTS SAVED)*1/60 =Rs.9.50

Emersons Efficiency Plan

Under this plan, when the efficiency of the worker

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

Gain Sharing
A gain sharing plan aims at increasing productivity

or decreasing labor costs and sharing the resultant gains (usually a lumpsum payment) with employees. It is based on a mathematical formula that compares a baseline of performance with actual productivity during a given period. When productivity exceeds the base line an agreedupon savings is shared with employees. Gain sharing is built around the idea that involved employees will improve productivity through more effective use of organizational resources.

Benefits of Gain Sharing

Gain sharing plans are current distribution plans. They

are directly related to individual behavior and are distributed on a monthly or quarterly basis. Gain sharing plans tend to increase the level of cooperation across workers and teams by giving them a common goal. Managers are not required to base their calculations on complex mathematical formulae, nor they are required to closely look into specific contributions of individuals or independent teams. It is easier for both, to formulate bonus calculations and to achieve employee acceptance of those plans.

De-merits of gain sharing

It protects low performers.

Where rewards are spread across a large number of

employees, poor performance may get rewards for non performance at the cost of bright performers. Poorly designed bonus formulae Lack of management support for employees participation. Increasing cost factors that undermine the bonus formula, poor communication, lack of trust, and apathy on the part of employees

Organization Wide Incentive Plan

Organization wide incentive plans reward employees

on the basis of the success of the organization over a specified time period. These plans seek to promote a culture of ownership by developing a sense of belongingness, cooperation and teamwork among all employees.

Scanlon Plan
Under this plan, constant proportion(i.e., ratio of

wages to sales value) of the added value of output is paid to the workers who are responsible for the addition of the value. The added value is the change in market value (including profit) resulting from an alteration in the form, location or availability of product service, excluding the cost of purchased material or services used in production.

Kaiser plan
It is also called as preistmans production bonus

Under this system, a standard is fixed in terms of

units or points. If actual output, measured similarly, exceeds the standard, the workers will receive bonus in proportion to the increase. Therefore this system can operate in a factory where there is mass production of a standard product with little or no bottleneck.

Profit Sharing
Profit sharing is a scheme whereby employers

undertake to pay a particular portion of net profits to their employees on compliance with certain service conditions and qualifications. The purpose of introducing profit sharing schemes has been mainly to strengthen the loyalty to the firm by offering them an annual bonus. The share of profit of the worker may be given in cash or in the form of shares in the company. These shares are called bonus shares. It is governed by the payment of bonus act.

 It inspires the management and the worker to be

sincere, devoted and loyal to the firm. It helps in supplementing the remuneration of workers and enables them to lead a rich life. It is likely to induce motivation in the workers and other staff for quicker and better work so that profits of the firm are increased which in turn increases the share of the worker therein. Workers do not require close supervision. It attracts talented people to join the ranks of a firm with a view to share the profits.

Demerits
Workers may not get anything if the business does

not succeed. Management may dress up profit figures and deprive the workers of their legitimate share it profits. Workers tend to develop loyalty toward firm discounting their loyalty toward trade unions. Fixation of workers share in the profits of a firm may prove to be a bone of contention in the long run.

Need for incentive

To increase productivity.

To drive or arouse a stimulus work.

To enhance commitment in work performance. To psychologically satisfy a person which leads to job

satisfaction. To shape the behavior or outlook of subordinate towards work. To inculcate zeal and enthusiasm towards work. To get the maximum of their capabilities so that they are exploited and utilized maximally.

Non financial incentive

The incentives which cannot be measured in terms of

money are under the category of Non- monetary incentives. Whenever a manager has to satisfy the psychological needs of the subordinates, he makes use of nonfinancial incentives. Non- financial incentives can be of the following types:-

Contd
Security of service- Job security is an incentive which provides great motivation to employees. If his job is secured, he will put maximum efforts to achieve the objectives of the enterprise. This also helps since he is very far off from mental tension and he can give his best to the enterprise. Praise or recognition- The praise or recognition is another non- financial incentive which satisfies the ego needs of the employees. Sometimes praise becomes more effective than any other incentive. The employees will respond more to praise and try to give the best of their abilities to a concern.

Contd
Suggestion scheme- The organization should look forward to taking suggestions and inviting suggestion schemes from the subordinates. This inculcates a spirit of participation in the employees. This can be done by publishing various articles written by employees to improve the work environment which can be published in various magazines of the company. This also is helpful to motivate the employees to feel important and they can also be in search for innovative methods which can be applied for better work methods. This ultimately helps in growing a concern and adapting new methods of operations.

Contd

Job enrichment- Job enrichment is another non- monetary incentive in which the job of a worker can be enriched. This can be done by increasing his responsibilities, giving him an important designation, increasing the content and nature of the work. This way efficient worker can get challenging jobs in which they can prove their worth. This also helps in the greatest motivation of the efficient employees. Promotion opportunities- Promotion is an effective tool to increase the spirit to work in a concern. If the employees are provided opportunities for the advancement and growth, they feel satisfied and contented and they become more committed to the organization.

Fringe Benefits
The term fringe benefits refers to the extra benefits

provided to employees in addition to the normal compensation paid in the form of salary. Many years ago, benefits and services were labeled fringe benefits because they were relatively insignificant or fringe components of compensation.

Features of fringe benefits

They are supplementary forms of compensation.

They are paid to all employees based on the

membership in the organization. They are indirect compensation because they are usually extended as a condition of employment and are not directly related to compensation They help to raise the living conditions of employees They may be statutory or voluntary .

Need for fringe benefits

Employee demands

Trade union demands

Employers preference As a social security

To improve human relations

Objectives of fringe benefits

To create and improve sound industrial relations To motivate the employees by identifying and satisfying

their unsatisfied needs To provide security to the employees against social risks like old age benefits and maternity benefits. To protect the health of the employees and to provide safety to the employees against accidents To promote employee welfare To create a sense of belongings among employees and to retain them. Hence, fringe benefits are called golden handcuffs To meet the requirements of various legislations relating to fringe benefits.

Types of Fringe benefits

It is broadly classified into five categories: Payment for time not worked Employee security Safety and health Workmens compensation Health benefits Voluntary arrangements Welfare and recreational facilities old age and retirement benefits

Payment fro time not worked

This category includes:

Hours of work: section 51 of the factories act, 1948, specifies that no adult worker shall be required to work in a factory for more than 48 hours in any week. Section 54 of the act restricts the working hours to 9 on any day. b. Paid holidays: according to the factories act, 1948, an adult worker shall have weekly paid holidays , preferably Sunday. When a worker is deprived of weekly holidays, he is eligible for compensatory holidays of the same number in the same month.
a.

Contd.
c. Shift premium: companies operate second and third shifts, pay a premium to the workers who are required to work during the odd hours shift. d. Holidays pay: generally organizations offer double the normal rate of the salary to those workers, who work during holidays. e. Paid vacations: workers in manufacturing, mining and plantations who worked for 240 days during a calendar year and eligible for paid vacation at the rate of one day for every 20 days worked in case of adult workers and at the rate of one day for every 15 days worked

Employee Security
Physical and job security to the employee should also

be provided with a view to ensure security to the employee and his family members. When the employees services get confirmed , his job becomes secure. Further, a minimum and continuous wage or salary gives a sense to the life. The payment of wages act,1936, the minimum wages act of 1948, the payment of bonus act 1965, provide income security to the employees. they are of two kinds:

Contd..
Retrenchment compensation: the industrial disputes

act, 1947, provides for the payment of compensation in case of lay-off and retrenchment. The non-seasonal industrial establishments employing 50 or more workers have to give one months notice or one months wages to all the workers who are retrenched after one years of continuous service. The compensation is paid at the rate of 15 days wage for every completed year of service with a maximum of 45 days wage in a year.

Contd..
Lay off compensation: employees are entitled to lay-

off compensation at the rate equal to 50% of the total of the basic wage and dearness allowance for the period of their lay off except for weekly holidays. Lay off compensation can normally be paid up to 45 days in an year.

Safety and health

Employees safety and health should be taken care in

order to protect the employee against accidents, unhealthy working conditions and to protect the workers productive capacity. Workmens compensation: according to workmens compensation act of 1923, the act is intended to meet the contingency of invalidity and death of a worker due to employment injury or an occupational disease specified under the act at the sole responsibility of the employer.

Health Benefits
Today, various medical services like hospital, clinical and

dispensary facilities are provided by the organizations not only to employees but also to their family members Employees State Insurance Act 1948, deals comprehensively about the health benefits to be provided. This act is applicable to all factories, establishments running with power and employing 20 or more workers. Employees in these concerns and whose wages do not exceed Rs.1000 per month are eligible for benefits under the act.

Contd..
Benefits under this act include:

1.
2. 3.

4.
5.

Sickness benefit Maternity benefit Disablement benefit Dependants benefit Medical benefit

Voluntary arrangements
Most of the organizations provide health services over and

above the legal requirements to their employees free of cost by setting up hospitals, clinics, dispensaries and homeopathic dispensaries. Companies elaborate health service programs include: 1. Providing health maintenance service, emergency care, on the job treatment care for minor complaints, health counseling, medical supervision in rehabilitation, accident and sickness prevention, health education programmes, treatment in employee colonies. 2. Medical benefits are extended to employee family members and to the retired employees and their family members. 3. Small organizations which cannot

Welfare and recreational facilities

Welfare and recreational benefits include:

a. Canteens
b. c.

d.
e. f.

g.
h.

Consumer Stores Credit Societies Housing Legal aid Employee counseling Welfare organizations Holiday homes

Contd
i. Educational facilities j. Transportation k. Parties and picnics l. Miscellaneous

Old age and retirement benefits

Industrial life generally breaks joint family system.

The saving capacity of the employees is very low due to lower wages, high living cost and increasing aspirations of the employees and his family members.

Contd
As such, employers provide some benefits to the

employees, after retirement and during old age, with a view to create a feeling of security about the old age and retirement benefits. These benefits include: a. Provident fund b. Pension c. Deposit linked insurance d. Gratuity e. Medical benefit