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INCENTIVE PLANS

A. Individual Incentives 1. Taylors Differential Piece Rate System 2. Merricks Differential Piece Rate System 3. Gantt Task and Bonus Plan B. Time based Plans 1. Halsey Plan 2. Rowan Plan 3. Emersons Plan 4. Bedeaux Plan C. Group-based Incentive Plans 1. Priestmans Production Bonus 2. Co-Partnership 3. Scanlon Plan 4. Profit Sharing 5. Employee Stock Option Plan

A. INDIVIDUAL INCENTIVES

1. TAYLORS DIFFERENTIAL PIECE RATE SYSTEM


Taylors differential system was devised by F.W.Taylor as a part of the scheme of scientific management. Under this system, the standard task is established after careful time and motion study and two piece rates are set. The low rate is for sub standard performance and high rate for standard and above standard performance. The main features of the scheme are: Day wages are not guaranteed. A standard time for job is established. Two piece rates are fixed. If the worker does the work with the standard time, he receives the higher piece rate, whereas if he takes longer time he receives the lower piece rate. 83% for inefficient workers and 175% for efficient workers.

ADVANTAGES Taylors plan is easy to understand and operate. It helps the employer in increasing production by offering higher rates to more efficient workers. It attracts efficient workers. Where the overheads are high, its incidence per unit cost is reduced because of increased production.

DISADVANTAGES It penalizes very severely the slow or inefficient workers as a slight fall in production will considerably affect their warnings. It makes wide discrimination between efficient and inefficient workers and thus creates rivalry and disturbance among workers. It does not guarantee the minimum day wages and this insecurity affects the morale of workers. Labour cost will differ between the two levels of performance because of two different rates.

2. MERRICKS DIFFERENTIAL PIECE RATE SYSTEM


This is a modification of the Taylors Differential piece rate system and uses three wage rates, instead of two, and workers producing below the standard output are not penalised by the low piece rate. The features of this scheme are as follows: Up to 83% of the standard output, workers are paid at the ordinary piece rate. 83% to 100% of the standard outputs, workers are paid at the ordinary piece rate. Above 100%, at 120% of the ordinary piece rate.

Like Taylors plan, this method also does not guarantee minimum wages. The general criticism levelled against Taylors plan also applies to it except that it lessens the punitive character of Taylors plan.

3. GANTT TASK AND BONUS WAGE PLAN


Minimum wage is given to anybody, who completes the job in standard time. If the job is completed in less time, then there is a hike in wage-rate. This hike varies between 20% to 50% of the standard rate. In this plan minimum wage is guaranteed. Its specialty is that it combines time rate, piece rate and bonus. A worker who is unable to produce the standard output receives only the time wage. He becomes eligible for bonus only when he attains or exceeds the standard output within the standard time. The rate of bonus varies as mentioned above. Thus if a worker attains the standard output, he will be paid time rate plus a bonus at a fixed percentage (20%) of normal time rate. If the worker exceeds the standard, he is paid a higher piece rate. Merits: 1. It has time wage, piece rate and bonus. Thus its a three in one scheme. 2. It guarantees daily minimum wage. 3. It provides enough opportunities for efficient workers to earn more. 4. It satisfies the in-efficient worker by providing him time rate wages, thus not ignoring the efforts put in. Demerits: 1. It is not easy to understand. 2. The fluctuations in the output levels of different workers not attaining the standard, are ignored and they receive only minimum wage.

B. TIME BASED PLANS 1. HALSEY PLAN


Introduced by F.A. Halsey, it is a simple combination of time and piece methods of wage payment. Under this plan, amount of bonus depends upon the time saved by the worker. A standard time is fixed for each job and if a worker completes the job in less than the standard time, he gets wage for the time worked plus a bonus equal to 50% of the value of the time saved. But if a worker completes the job in full standard time or more than the standard time, he gets wages at the time rate. Thus wages according to time basis are guaranteed. Calculation of bonus and total earnings is done by the following formula: Bonus = 50% (Time saved * Rate per hour)

Total earnings = (Time taken * Rate per hour) + 50% (Time saved * rate per hour) Where, Time saved = Standard time Time taken

2. ROWAN PLAN
This plan was introduced by D. Rowan in 1901. As before, the bonus is paid on the basis of time saved. But unlike a fixed percentage in the case of Halsey Plan, it takes into account a proportion as follows: Time Saved Time Allowed Thus, under this plan Bonus is that proportion of the wages of time taken which the time saved bears to the time allowed or standard time. Bonus = Time Saved Time Allowed (Standard Time) Total Earnings = Time Taken Hourly Rate + Bonus MERITS 1. It assures minimum time wages. It is more liberal than the Halsey plan in that it provides incentive to work and earn extra remuneration. 2. As the increase in effort is much less rewarded after a certain stage, an automatic check for limiting production of inferior quality of goods is ensured. Time Taken Hourly Rate

3. This automatic check enables the worker to earn a fair wage, because there is less chance of rate-cutting by the employer, as he is not paying extraordinary wages. DEMERITS 1. The ordinary worker may find the bonus calculation a bit difficult. 2. Like Halsey Plan, this plan does not encourage extraordinary efficiency. For example, if the time saved is more than half the total, earnings begin decreasing.

3. EMERSONS EFFICIENCY PLAN


In this plan bonus becomes payable only when efficiency touches 66 2/3 rd% of the standard laid down. If a worker takes 10 hrs to complete a job for which standard time fixed is 66 2/3rd% hrs, he is entitled to get some bonus. The amount of bonus payable increases progressively with increase in efficiency in such a manner that at 100% efficiency, the bonus is 20% at the hourly rate. For efficiency beyond 100% additional 1% bonus is payable for each 1% increase in efficiency. The plan is very beneficial to the workers as they are guaranteed wages for the actual time and are entitled to get bonus even if they reach 66 2/3 rd% efficiency.

This plan provides sliding scale of bonuses. For efficiency below 66.66% only, time wage and no bonus At 66.66% efficiency: time wage +1%of day wage At 90% efficiency: time wage +10%of day wage At 100% efficiency: time wage +20%of day wage

MERITS Easy to understand It is suitable for beginners Gives incentives for skilled and efficient work Can be applied to both individuals as well as group of workers Calculations are logical as we have fair basis for incentive to produce more

DEMERITS It is unsuited for ambitious workers. Once you reach the standard i.e.,100% further incentive is very mild.

4. BEDEAUX INCENTIVE SCHEME


It is a combination of time and bonus scheme. Standard time for a job is determined by time study. Standard production per hour is determined and the unit of measurement is minute. An hour is taken as sixty minutes. Each minute of standard time or allowed time is called a Bedaux point (B). The number of points is being determined in respect of each job. If actual time is more than the standard time, the worker is paid on hourly basis. Excess production is counted in points, for which a bonus of 75% is allowed to the worker and remaining 25% goes to the employer. Thus hourly rate plus 75% of the points saved, multiplied by one-sixtieth of hourly rate is the earnings of a worker. In this plan also, a minimum base-wage is guaranteed. The wage payment scheme is as follows: (i) When actual Bs earned by worker (Bw) > Bs for standard time Wage = RS + [B(W) - B(s)] * 0.75R/60 (ii) When Bs caused by worker (Bw) < Bs for standard time Wage = RS

Example Standard time (including rest allowance) = 60 hour + 360 Bs Actual time (including rest) = 5 hour = 300 Bs Wage rate = Rs.20 per hour As Bs earned by worker is less than standard Bs to complete the job, Wages = 20 6 * 0.75 * 20 = Rs.135

ADVANTAGES Minimum base wage is guaranteed For time saved as compared to standard time, 75% of the compensation is given to worker. Rest 25% may be given to his supervisor. Bedeaux point may be added up for a worker even if his job requires different assignments in a day.

DISADVANTAGES It tempts the workers to sacrifice for output and might Result in a higher wastage. The calculation of bonus under this scheme requires more clerical work.

C. GROUP BASED INCENTIVE PLANS 1. PRIESTMANS PRODUCTION BONUS SCHEME


A standard performance in terms of output or point is fixed by this scheme. The workers as a whole, becomes entitled to bonus, if by producing output above the standard output , or by securing points more than the standard points, they can be account for better performance. On the basis of the ratio of excess performance to standard performance, bonus is paid according to this scheme. Obviously, time wage is guaranteed under this scheme. Thus, where there is mass production of standard articles with continuous flow of work, this scheme can be extended to the entire factory. ADVANTAGES Simple, easy to understand, improves employee morale and teamwork. DISADVANTAGES As the bonus is paid based on performance, there might be unhealthy competition among employees.

2. SCANLON PLAN
DEFINITION: Cost saving productivity-incentive plan in which any saving (computed per unit of output) compared with an agreed upon standard labor cost is shared equally between the workers and the firm. The Scanlon plan has been successfully used by a variety of public and private companies for many decades. These plans combine leadership, total workforce education, and widespread employee participation with a reward system linked to group and/or organization performance. The Scanlon plan is a gain sharing program in which employees share in preestablished cost savings, based upon employee effort. Formal employee participation is necessary with the Scanlon Plan, as well as periodic progress reporting and an incentive formula. The philosophy of the plan is to promote group co-operation and solving of organizational problems. Cooperation and involvement start in the creation of the plan with a Design Team and continue once the Plan is implemented with Production and Screening Teams. CALCULATION OF SCANLON PLAN BONUS: Historically, the Scanlon plan bonus was calculated on the historical ratio of labor cost to sales value of production. Joe believed that is was very important that employees understand how the bonus is calculated and this method was easy for employees to understand. One of the few articles written by Joe Scanlon is about profit sharing. Joe felt that profit sharing as a way to create a bonus was fine as long as everyone understood "profits." He concluded that most don't understand how profits are calculated. Today Scanlon Plans have been created that use only financial measures (like profits), operational measures (like quality) Combinations of financial measures and operational measures and no bonus at all. Financial incentives under the Scanlon Plan are ordinarily offered to all employees including managers and sometimes executives. In several small Scanlon organizations the bonus was even offered to key suppliers. ADVANTAGES: Scanlon Plans increase job satisfaction, financial literacy, engagement, financial performance, quality, and on time delivery. Decreased sick leave usage and reductions in work backlogs and overtime costs. Both the employees and the company receive fair shares. Installation process takes time to implement Once a plan is installed it requires time and energy to maintain.

DISADVANTAGES:

Requires a great deal of training and development of employees. The equal bonus may not reflect the actual work or contribution performed by all staff.

3. CO-PARTNERSHIP
Co- partnership incentive plan is one of the group incentive plans which is similar to Profit- sharing incentive plan. Share of the profit that a company makes may be given in cash or in the form of shares to an employee. Employees are entitled to share the profits at an agreed percentage in addition to the wages. Under Copartnership, share of profit is given in the form of shares. The scheme recognizes the principle that every employee contributes something towards profit and he should be paid a percentage thereof. Here, employees are given shares in the capital of the business and as a result of which they receive profit accruing thereon. These shares may r may not carry voting rights. ADVANTAGES: Co- partnership applies to all employees irrespective of efficiency. It increases the employees morale and thereby reducing labor turnover. It creates a sense of belongingness within employees towards the organization. DISADVANTAGES: Here, profits are shared equally between inefficient and efficient employees, thus creating a sense of dissatisfaction amongst the efficient employees. Share of profit is given once a year. Employees may lose interest in it. Employees generally do not get access to accounts of the organization. They cannot ascertain the profits of the organization. This may lead to confusion which may later result in strikes, lockouts, etc by the employees. 4.

PROFIT SHARING
Profit sharing is a type of group incentive scheme which provides direct or indirect payments to the employees depending on the companys profitability. It is paid in addition to the employees regular salary and bonus.

The profit sharing plans are based on predetermined economic sharing rules that define the split of gains between the company as a principal and employee as an agent. Whatever profit the company is earning, employees will get a fixed percentage of that profit earned. This plan increases the morale of the employees and motivates them. It brings in a sense of belongingness to the employees as they have a share in profit. In this way, the

company motivates the employees by making them feel that they are contributing something towards profit and hence should be paid a percentage there off.

5. EMPLOYEE STOCK OPTION PLAN


An employee stock ownership plan (abbreviated to "ESOP") is the practice of companies giving staff members, shares in their company as part of their salary. An ESOP is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. Under the ESOP plan, companies provide their employees the opportunity to acquire the company's shares at a reduced price or free of cost. Employee ownership appears to increase production and profitability, and improve employees' dedication and sense of ownership. Since employees are owners they are interested to see that companies shares perform well. The company will buy back the shares at a market price when the employee retires. The employee gets tax benefit on interest on loan taken for buying the shares and the dividend is taxfree. (The tax rules vary from country to country.)One of the disadvantage to company is that there may be problem when the company compelled to buy back shares from employ when they retires. ESOP participants will be allowed to vote their allocated shares at least on major issues, such as closing or selling the company, but democratic way can lead to slow decision-making.

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