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ALLAMA IQBAL OPEN UNIVERSITY

SUBJECT NAME: COST ACCOUNTING

NAME: ATIFA TANVIR

SESSION: MBA (2nd) Autumn 2009

Roll # AD511555

ASSIGNMENT TOPIC: WAGE INCENTIVE PLANS
FOR VARIOUS CATAGORIES
OF EMPLOOYEES

PRESENTED TO: MS. RUKHSANA ASIF

I want to thank my teacher and colleagues who helped me a lot in preparing this task Last but not the least. I express my heartiest regards to my parents who supported me morally. This project not only enlarges my vision but also show me the real picture of the ethical issues. spiritually and prayed for my success to achieve all goals in my life. . ACKNOWLEDGEMENT First and the foremost I offer my gratitude to Holy Lord for enabling me to complete this fascinating but hard working project.

One hundred percent bonus plan. Abstract A worker’s total compensation may be based on negotiated labor contracts. productivity studies. Group bonus plan etc. The operation of an incentive wage plan requires not only the combined efforts of the personnel department. . opportunities and Threats that are included in the assignment. factory engineers and accountants but also the cooperation of workers. As far as case study is concern. Therefore. incentive wage plans and guaranteed hourly wages. be applicable to situations in which workers can increase output or provide for proportionately more pay for output above standards or set fair standards so that extra efforts will result in bonus pay. To be successful an incentive wage plan must. A standard hour’s or day’s work should be established so workers can exceed it with reasonable effort and thereby receive full benefit from the incentive. weaknesses. This wage incentive plan has some strengths. job evaluation. In contrast to pay by the hour. profit sharing. different incentive wage plans are applied in the industries for this purpose. labor unions. Kohinoor Textile Mills Ltd uses or apply Straight Piece work Plan for its workers. week or month an incentive wage plan rewards workers in proportion to their increased high quality output. such as Straight piecework.

Table of Contents  Wage incentive plans  Purpose of wage incentive plan  Types of wage incentive plan o Incentive wage plan based on piece rate  Straight piece rate  Piece rate with guaranteed time rate  Differential piece rate  Taylor’s Differential System  Marrick’s Multiple Piece Rate System o Incentive Wage System Based on Time Rate o Halsey Plan o Rowan Premium Plan o Gantt task and bonus plan: o Bedeaux plan: o Emerson's efficiency plan: o One Hundred Percent Bonus Plan: o Group Bonus Plan: o Organizational Incentive Plan:  GainSharing Plan • Scanlon  Profit Sharing Plan:  Incentive Plan for White Collar Workers / Salesman  Incentive for Management Employees:  For Effective Implementation of Incentive Plan  CASE STUDY  KOHINOOR TEXTILE MILLS  SWOT Analysis  Ocnclusion  Recommendations  References .

A standard hour’s or day’s work should be established so workers can exceed it with reasonable effort and thereby receive full benefit from the incentive. an incentive wage plan must be:  Applicable to situation in which worker can increase output. The plan seek to ensure greater output. labor unions. The term incentive wage system refers to methods of remuneration whereby wages earned by the workers vary with their output. and at the same time to reduce unit cost. The operation of an incentive wage plan requires not only the combined efforts of the personnel department.  Set fair standards so that extra effort will result in bonus pay. to increase control over labor cost by ensuring more uniform unit cost. Along with these essentials. profit sharing. Naturally. factory engineers and accountants but also the cooperation of workers. or month an incentive wage plan rewards worker in proportion to their increased high quality Output. incentive wage plans and guaranteed hourly wages. the plan needs to be reasonably simple and understandable Purpose of Wage Incentive Plan: The primary purpose of an incentive wage plan is to induce workers to produce more to earn a higher wage. producing more in a given period of time should result in higher pay. The greater number . WAGE INCENTIVE PLAN A worker’s total compensation may be based on negotiated labor contracts. productivity studies. week. In contrast to pay by the hours. and to change the basis for reward from hours served to work accomplished. job evaluation. To be successful.  Provide for proportionately more pay for output above standard.

Many wage incentive systems retain the names of industrial engineers and efficiency experts who originate the plans  The piece rate plan  Halsey premium plan  Rowan premium plan  Barth premium plan  Bedeaux point plan  Scalon plan  Time rate plan Incentive Wage Plan Based on Piece Rates: Piece rate systems offer wages to the workers according to number of unit produced or operations performed. Types of Wage Incentive Plan: In actual practice. Just-in-time and other productivity enhancement program urge employees to perform well and to exercise initiative. time wages and output wages are not clear cut and distinct. standards should be clearly set and communicated to the workers. However. Incentive plans typically involve wage rates based on various combinations of output and time. Predetermined piece rate is multiplied by the number of pieces produced to arrive at the earned wages. Companies are striving to increase productivity of employees at every level. Therefore. The danger over the long term is that base pay incentive will lose their identity as employees begin to consider the incentive as part of base. . there is an art to establishing appropriate wage levels and meaningful incentive plans. Incentive wage plan can enhance the establishment of a working environment in which everyone must perform.of unit produced should also result in a lower cost per unit for factory overhead and labor cost combined. if the plan is to have its desired effect.

Moreover. exert pressure for a guaranteed minimum wage. workers are paid at standard rates for the pieces produced.  Cost of supervision is less Minus Points:  Delays beyond one's control could affect workers earnings adversely  Beginners and slow learners are left behind in the race  The focus on quantity would affect quality . Earned wages: Piece rate X Pieces produced Different variations of piece rate systems are as follows: Straight Piece Rate: Under straight piece rates. Such factors include power failure. The standard piece rate is determined by time and motion studies. but those workers who produce above standard output are paid on piece rate basis. The same standard piece rate applies to all workers without any regard that some of the workers are more efficient than the others. to earn more  Idle time is reduced to the minimum  Workers take every precaution to avoid machine breakdowns. faulty material. There are no guaranteed minimum wages for the workers. straight piece rates are not favorably viewed by workers. The reason for guaranteed time rate is that. shortage of material etc. Plus Points:  Encourages efficient workers to produce more  Workers adopt better ways of getting things done. Piece Rate With Guaranteed Time Rate: Under this system time rate earnings are assured to workers. and labor unions. the workers should be protected against low productivity and low wages caused by factors beyond their control. machine breakdown. piece rate are coupled with guaranteed time rates. Therefore.

A worker is paid more if he finishes the assigned task before the stipulated time. 0.  Workers may stretch themselves to unhealthy levels to earn more  Encourages rivalry between workers Differential Piece Rates: Differential piece rates systems offer higher piece rates to workers attaining desired level of productivity. between 83% to 100% at 110% of the ordinary piece rate and above 100% at 120% of the ordinary piece rate. 0.  Taylor’s Differential System  Marrick’s Multiple Piece Rate System Taylor’s Differential System This system was introduced by Taylor. up to 83%of the standard output workers are paid at the ordinary piece rate.Hence Taylor decided to give a large reward to those who would complete the work within or less than the standard time. The system is very harsh to inefficient workers on account of low rate and low output. he is given a lower piece rate. For example.25 is paid to workers producing less then the standard output and Rs. The purpose is to provide stronger incentive to workers to increase the output.Taylor was of the view that an inefficient worker had no place in an organization and he should be penalised by paying low piece rate for low production. Marrick’s Multiple Piece Rate System: This method uses three rates. . may be 80 paise Per unit.30 per piece is paid to workers producing standard output or more. Thus if standard production has been fixed at 8 units/day of 8 hours . the father of scientific management. To encourage the worker to complete the work in standard time . the higher piece rate for 8 units or beyond may be Re 1/= per unit and lower rate for an output if less than 8 units per day. piece rate of Rs.

 Makes no distinction between efficient and inefficient workers  Offers very little to efficient workers  Requires close supervision so that workers do not waste their time  No relationship exists between wages and productivity Halsey Plan: Here the worker gets a guaranteed wages based on the time. Halsey Premium plan 50% of the time saved as premium . Efficiency of workers is measured in hours produced and not in pieces produced.Earning of efficient workers under defferential piece rates shall be higher than the aernings under straight piece rate. premium are paid to workers exceeding the standard effieinecy level. In simple words A worker is paid on the basis of time spent on the work. In addition to regular time rate earnings. he or she is entitled to get fifty (in some cases one third) per cent of time saved at time rate in addition to normal time wages. irrespective of the amount of work done. irrespective of whether the assigned work is completed or not. Incentive Wage System Based on Time Rate: Time based incentive wage systems pay to the worker according to the time rates for hours worked. If the worker is able to finish the task in less than the standard time. Plus Points:  Simple and easy to operate  Guaranteed wages to workers  Favoured by trade unions  Good for precision jobs Minus Points. Main advantage to employer is the reduction in per unit fixed factory overhead costs caused by greater volume of output.

Total earnings = TXR+50%(S-T)XR = 15X15+50/100(20-15)X15 = 225+2.5 Find the effective rate of earnings = 262. If a worker exceeds the standards. get time wages. it is calculated thus Bonus = Time saved/Hours alloed X Hours worked X Time rate Gantt task and bonus plan: Here time wages are guaranteed. he is paid a high piece rate. . Standard time for each task is fixed.5 Rowan Premium Plan: It assures minimum time wages. Bonus is paid on the basis of time saved.5X15 Total wages for 15 hrs = 262.But unlike a fixed percentage .5/15= Rs17. Workers. who fail to finish the job within the time limits. A worker who reaches the standard is paid time wage plus bonus at a fixed percentage (20 per cent)of normal time wages. Halsey Weir Premium plan offers 30% of the time saved as premium Example: Rate per hour = Rs 15/hour Time allowed for job = 20 hours Time taken = 15 hours Calculate the total earnings of the worker under the Halsey plan S (standard time) = 20 hours T(time taken) = 15 hours R(rate) = Rs 15 per hour.

Example: If a worker produces 100 units in an 8 hour shift and the standard time is 80 per units per shift (or 10 units per hour). Emerson's efficiency plan: If the worker achieves 67% efficiency. It differs in that standards are stated not in terms of money. ie. The rate of bonus increases gradually from 67% to 100%. and the worker is paid for the standard time at the hourly rate if the unit is completed in the standard time or less. Above 100% bonus will be at 20% of the basic rate plus 1% for each increase in efficiency. but in time per unit of output. finishing the job exactly as per standards set. One Hundred Percent Bonus Plan: It is a variation of the straight piecework plan. a standard time is allowed to complete a unit. he gets bonus at a given rate. In other . the worker is paid the hourly rate for 10 hours. Instead of price per piece.Bedeaux plan: In this plan every operation is expressed in terms of standard minutes called as “B's” representing one minute. A worker gets time wages for 100 % performance. If actual performance exceeds the standard performance in terms of B's then 75% of the wages of time saved is paid to worker as bonus and 25% is given to the foreman.

and each worker is in effect paid a bonus for time saved. 10 per hour for a regular 8 hour shift. 320 per 8 hour shift or Rs. Hour of works and units produced are reported to the payroll department. where the reported hours worked are multiplied by the hourly production standard to determine the standard units. Standard production is 50 units per hour or 400 units per shift and overhead is Rs. it is frequently impossible to separate the work of one member of a crew. the bonus is computer for each day. an efficiency ratio must be figured for every worker before earnings can be computed. Each payroll period. Usally the bonus earned by the group is divided among the group members in proportion to their base pay rate. Unit produce in axcess of the standard are regarded as time saved by the groups. In . Although the worker of each employee is essential to machine operations. Group Bonus Plan: Iondustry uses a great variety of incentive wage plan . A worker on the assembly line cannot increase output without the operation of entire group Group bonus plan.some of which depend on the superior productive performance of a whole department or an entire factory and can include support or indirect labor as well as direct labor. In this. like plans designed for individual incentive. 40 per hour. Fectory operations using large machines often require employee to work in groups or crew. are intended to encourage production at rates above a standard.variations of the 100% bonus plans. savings are shared with the supervisor and or the company. Production standards in units of output per hour are set by industrial engineers. Each worker in the group receives an hourly rate for production up to the standard output. Example: A crew of 10 workers uses costly equipment and each is paid Rs.

Scanlon: The Scanlon plan was developed by Joseph N. Unlike profit sharing plans which have deferred payments. When productivity exceeds the base line an agreed upon savings is shared with employees. GainSharing Plan: It is based on a mathematical formula that compares a baseline of performance with actual productivity during a given period. gain sharing plans are current distribution plans. . the bonus can be computer for each week. These are based on individual performance and are distributed on a monthly or quarterly basis.other group or individual incentive plans. month of quarter. In situation where productivity of whole organization needs improvement. The plan is essentially a suggestion scheme de- signed to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity. an organizational and gainsharing plan may be the best answer. Organizational Incentive Plan: Management should evaluate the strengths and weaknesses of both individual and group incentive plans to determine what is best for their organizations. a Lecturer at the Massachusetts Institute of Technology in USA in 1937. Scanlon.

each appropriate for different markets.  Tradition in the market.  Helps the company to retain talented employees and make them committed to the job and the company  Better industrial relations. etc. are other benefits. This is due to three factors. One study reported that almost 75% organizations paid salesman on some type of incentive basis. lesser supervision. reduced employee turnover.  The assumptions the incentives are needed to motivate sales man. Second. Incentive Plan for White Collar Workers / Salesman: The salesman usually given an incentive in the form of sales commissions. and increased motivation to work. There are several incentive plans. but all plans are basically variation of three types of plans ..  The unsupervised nature of most sales work. Advantages:  Empower the employee to participate in the growth of a company as part owner and get a fair share of the cake. increase in efficiency on account of cost-cutting is shared by the employees of the unit. has been successful to encourage a sense of partnership among employees.The plan is characterized by two basic features. both employees and managers can participate in the plan by submitting their suggestions for cost-cutting methods. products. The Scanlon plan. Profit Sharing Plan: Here the organisation agrees to pay a particular portion of net profits (given in cash or in the form of shares) to eligible employees. First. wherever adopted. improved employee-employer management relations.

 Straight salary method  Straight commision basis  Combination method of salary and commision basis  Salary plus commission Incentive for Management Employees: In many organizations the managers are paid bonus. There are two types of bonus plan. For top level management. For Effective Implementation of Incentive Plan: Link the incentive with company’s strategy Ensure that efforts and reward are directly related Make the plan understandable and calculableby the employees Set effective standards guarantee an hourly base rate get support for the plan develop good measurement systems Emphasize long term as well as short term goals Take the corporate culture into consideration . bonuses are generally tied to overall corporate result. The size of bonus is much higher for top level executives.  Determined by formula (some criteria like increased sales)  Determined by some discretion used in allocation of bonus (paid on more or less permanent basis) The bonus plan is generally reviewed annually to make them more effective.