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COMPENSATION MANAGEMENT

INCENTIVE SYSTEM
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 be
realized 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:

(a) the methods followed in measuring the results or output upon which payment is based
(b) the methods followed in setting wage rates for different classes of work and
(c) 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 and
consequently met with failure we quote the following:

‘ .. the practice adopted by several industrial establishments in the Mumbai region in
regard to the preparation of an incentive scheme is to hire an industrial consultant and to
make him work in the establishment under the cloak of secrecy, until a scheme has been
finally prepared. It is only after several months that the workers of the establishment and
their 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 been
evolved. 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 be
realistic 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 incentive
scheme.
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 program. There are many situations in which the potential gains are just not
worth the cost and effort involved. It also means a commitment in terms of integrity to
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the spirit as well as the letter of the programme – having the courage to abide by it when
the 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, planned
carelessly 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 plants
of 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. The
scheme did not function satisfactorily from the point of view of maintenance of plant and
equipment, which, in turn affected output. The performance of ancillary units like the
repair shops was unsatisfactory because the incentives in these shops were based on the
overall 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 the
workers 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 levels
of the output they are capable of achieving.
(d) Individuals or groups should have a reasonable amount of control over their efforts and
therefore 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.
(j) 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, which
are, 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
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1.Impediments to improve productivity
It is, therefore, advisable to ensure that a proper climate exists for the introduction of such
schemes. Some important considerations, which should ordinarily be taken into account while
choosing 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 is
mutual understanding and concern for improving productivity, even a well-conceived incentive
scheme may not yield the optimum results. Therefore, the management must concentrate on
creating 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 levels
of management and of workers. Certain specific factors may be selected as the basis for a
scheme. 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 the
scheme to conducting studies, etc., all the workers and supervisors should be consulted so that
they 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 the
rated capacity. Care should be taken to provide a suitable gestation mechanism in the scheme on
a time-bound basis so that incentive payments at a lower level of the performance are allowed
only for limited time periods. The quantum of incentive paid at the low levels of production and
efficiency should be such as to ensure that earnings continuously increase when the targets are
raised.
(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 and
the employed.
(v)The scheme should not be very costly in operation, i.e., it should not involve the maintenance
of 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 out
that 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 initial
introduction.
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(ix)The scheme should not undermine co-operation amongst the workers. It should rather
stimulate co-operation with a view to achieving the common objective of increasing the well-
being of the business and, therefore, of the workers in general.
(x) Performance standards and norms for incentive payments should be set up at the average
performance level of the employees, i.e., they should not be too high nor too low. Such
performance standards should be set as are within the control of employees. The adoption of
objective assessment procedures and the use of functional responsibility are to be advocated in
addition to such indices of productivity as wage cost per unit sale, salary savings on inventory,
etc.
(xi)To make the scheme effective, a climate should be created in which the employees feel that
the management is fair and just in its dealings with them on wage incentive matters. For this
purpose, mutual discussions and appropriate management action would be called for.
(xii)Incentive payment should be made as soon as possible after a job is completed. Any hastily
conceived or haphazardly introduced incentive scheme does more harm than good. Therefore, it
should be introduced after a proper consideration of the various preparatory measures.
2. Incentive Plans for White Collar Workers/Salesman
The salesmen are usually given incentives in the form of sales commissions. One study reported
that almost 75% of the organisations surveyed paid salesmen on some type of incentive basis.
This is due to three factors:
(i) The unsupervised nature of most sales work.
(ii) Tradition in the market, and
(iii) The assumption the incentives are needed to motivate salesmen.
There are several incentive plans, each appropriate for different markets, products, etc., but all
plans are basically variations of three types of plans: straight salary, straight commission, and
combination plans.
a. Straight Salary Method: Is not an incentive plan; the salesman is simply paid on weekly,
monthly, or on yearly basis. The advantages of this method are that:
(i) The salesmen know in advance what their income will be; and
(ii) The expenditure on salesmen is known beforehand.
The disadvantages are:
(i) This method tends to shift salesman’s emphasis to just making the sale rather than prospecting
and cultivating long- term customer; and
(ii) Pay is not related to results. This lack of relationship reduced salesmen’s performance.
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b.Straight Commission Basis: Under this method the salesmen are paid on the basis of sates
effected, i.e., they are paid for results and only for results. Therefore, high performance salesmen
are generally attracted. But the disadvantages are:
(i)Salesman focuses on making a sale on high volume items. Cultivating dedicated customers
and working to push hard-to-sell items are often neglected,
(ii)Salesmen tend to be less company-oriented and more money-oriented, and the company has
less control over them;
(iii)Salesmens income generally fluctuates widely.
(c) Combination Method of Salary and Commission Basis:
Under this, salesman not only gets a fixed salary but also a commission in proportion to the sales
effected. The advantages of this method are:
(i)Since salesmen are assured of minimum earnings, they are relieved of financial worries.
(ii)The company has more control over its salesmen, as there is sizable salary component in most
combination plans. So that it can direct salesman’s activities by detailing what services and
salary component is being paid for.
But the main disadvantage is that salary is not related to performance; only incentive value of
money is being traded off for its security value. Such plans also tend to become very
complicated, and misunderstanding often results in frustration. In spite of these disadvantages,
these plans are widely used with several basic variations.
d.Salary Plus Commission: Commission Plus Drawing Account where not only commission is
paid but the salesman is also allowed to draw on future earnings to get him through low sales
period; commission plus bonus, where salesmen are paid primarily on the basis of commission
but they are also given a bonus for activities like slow moving items; and salary plus bonus,
wherein salesmen are paid a basic salary; and also given a bonus for carrying out specified
activities.
3. Incentives for Management Employees
In many orgnisations, the managers are paid bonus. There are two types of bonus plans: one
determined by formula (i.e., some criteria like increased sales) and two, determined by some
discretion used in allocation of bonus (i.e., paid on more or less permanent basis). The bonus
plans are generally reviewed annually to make them more effective. For top level management,
bonuses are generally tied to overall corporate results. The size of bonus is much higher for top-
level executives, and lower for the lower level executives.
For effective implementation of incentive plans:
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1) Link the incentive with the company’s strategy.
2) Ensure that effort and rewards are directly related.
3) Make the plan understandable and calculable by the employees.
4) Set effective standards.
5) Guarantee the standards.
6) Guarantee an hourly base rate.
7) Get support for the plan.
8) Develop good measurement systems.
9) Emphasize long-term as well as short-term goals.
10) Take the corporate culture into consideration.

Precautions against ill Effects of Incentive Systems
Experience has shown that incentive schemes are not an unqualified blessing in themselves.
They are fraught with some dangers that have to be guarded against during the course of their
evolution and implementation.
First, there is a tendency amongst workers to sacrifice quality for quantity. This calls for a strict
system of checking and inspection.
Second, incentive schemes bring about certain fixity in the operations and undermine flexibility,
which is an essential requirement in view of the rapid progress in technology. Such changes in
technology, methods, machines and materials involve a revision of norms and rates. The
incentive schemes should, therefore, be adequately provided with such revision in case of
significant changes.
Thirdly, there is a .danger that safety regulations would be disregarded by workers and this may
result in higher accident rates. This may be solved by greater vigilance on the part of workers
concerned.
Fourthly, there is a danger that workers would tend to overwork and undermine their heal. This
may be checked by fixing a ceiling on incentive earnings.
Finally, incentive schemes sometimes lead to jealousies and misunderstanding among the
workers because the difference in their earnings. However, differences in earning will differ for
workers according to the differences in their abilities and efforts. Moreover, trade unions
discourage ill feelings or jealousies amongst its members.