Block 4

Design of Performance Linked
Reward System
UNIT 13 DESIGN OF PERFOMANCE
LINKED REWARD SYSTEM
Objectives
After going through this unit, you should be able to:

• define what you mean by performance-linked reward system,
• understand alternative forms including merit incentive pay, productivity
bargaining and productivity-linked bonus,
• determine suitability of the various types of reward systems according to the
types and levels of maturity of organisations,
• map out the various requirements for introducing a performance-linked reward
system,
• develop an appreciation of the various steps involved in designing a
performance-linked reward system,
• understand pitfalls and safeguards required,
• build feasibility and acceptance in the design, and
• learn recent trends.
Structure
13.1 Introduction
13.2 Forms and Choice of Performance-linked Reward System
13.3 Steps in Designing
13.4 Issues and Trends
13.5 Annexure I: Integrated Incentive Scheme: An Example
13.6 Annexure II: Designing and Reviewing an Incentive Scheme: A Check List of
Items
13.7 Self-Assessment Test/Exercise
13.8 Further Readings
13.1 INTRODUCTION
Performance-related reward system involves rewarding employees according to their
performance, or results achieved or contribution to organisations performance as
individuals or as a part of a group. It involves a shift of focus from remuneration
models based on the worth of jobs and employee skills to their performance.
Designing a performance-linked reward systems is conditioned by a variety of factors

such as the nature of business, type of technology, the attitude of unions and human
resource management strategies of the organisation. Therefore, no particular model
can be recommended; it has to be custom-tailored.
Performance-linked reward systems reduce labour cost, result in increases in real

wages and motivate performance. They provide a method of absorbing cost
escalation on account of pay increases and thus help in sustaining competitiveness of
the organisation.
It has been increasingly realised that performance-related pay, if used in isolation,

may have little impact on motivation for performance. Appropriate conditions in the
organisation have to be created for performance-linked reward systems to be
motivationally effective. These conditions, for instance, will involve proper
information,
5
Reward System, Incentives
and Pay Restructuring consultation, communication mechanisms, training and development of employees,
developing proactive attitude and performance-oriented culture, providing non-
monetary incentives and evolving an efficient performance management system and
so on.
Reward system cannot be seen in isolation from compensation management.

Compensation management is getting increasingly integrated with business and
human resource management strategy. Reward system should, therefore, be
considered as an aid to better performance in a performance management system
which may be integrated with the overall business plan and strategy.
13.2 FORMS AND CHOICE OF PERFORMANCE LINKED

REWARD SYSTEM
There are several types of performance-linked reward schemes. Generally, these are
designed to-share with or distribute to employees as individuals, groups or a
collectivity productivity gains, profit improvement or financial results of enterprise
performance. Such schemes fall into the following broad categories:
1). Schemes based on individual or small group performance including piece rates,
traditional merit pay, and sales commission.
2). Incentive schemes which may relate pay to profits on the basis of a pre-
determined formula.
3). Bonus schemes based on contribution to productivity and profitability according
to a pre-determined formula with gains sometimes distributed among the
individual employees on the basis of merit rating.
4). Productivity Bargaining.
5). Employee Strike Options Plan (ESOP).
6). Competency-based pay.
1. Merit Incentive Pay
A common method which has long been in existence is pay increase or bonus
payment on the basis of performance rating.
The merit incentive pay scheme provides another method of recognising and
rewarding differential performance. This method could particularly be suitable for
office staff. The scheme essentially involves the following steps:
a) The determination of result-oriented merit rating procedures,
b) The identification of job factors and their relative importance,
c) The formulation of a scale of reward, and
d) The communication of the basis of monetary reward.
Illustratively, job factors of salesman can be identified as (a) sales promotion, (b)
realisation of outstandings, and (c) good-will calls, (d) after-sales service and, (e)
investigation of complaints.
These tasks will differ in their degree of importance. This difference can be
recognised by imputing numerical values to different job factors. Hypothetically, let
us assign weight values of 5, 3 and 2 respectively to the above tasks. In practice,
weight values can be ascertained through job analysis.
Suppose it is intended to give an incentive opportunity of 20 per cent.

Correspondingly, let there be 20 performance points, each point constituting 1 per
cent of basic wage. If each identified job factor has a 4-point scale, then the 20 points
6 will be distributed as follows:
Table 1 Scale of Distributing Incentive Opportunity Points Reward System
Job Factors Scale Values
1 2 3 4
1. Sales tasks 0 3 6 10
2. Realisation of outstandings 0 1.8 3.6 6
3. Goodwill calls, etc. 0 1.2 2.4 4
Maximum points = 20
Each degree will have to be precisely and operationally defined. Take, for example,
the job factor of sales task. The four points on the scale can be defined as follows:
Table 2 Definition of a Point on the Merit Rating Scale
1 2 3 4
Unsatisfactory Satisfactory Fair Good
Sales target not Sales target 3% above sales 5 per cent above
achieved achieved achieved sales achieved
The actual merit rating score will give the percentage of basic wage or basic wage
plus D.A. as incentive bonus. Given a result-oriented merit rating procedure and its
objective operation in an organisation, it should not be difficult to install a merit
incentive pay system. This is not to minimise the difficulties that are usually
encountered in operating a -merit rating system. The effectiveness of the performance
appraisal system will depend on the soundness of the performance appraisal system.
Sometimes merit increments and merit awards are also given in recognition of
superior performance on the part of individuals. These are poor substitutes for a
system of merit incentive pay because of several shortcomings.
Under a system of merit increments, there is no prompt relationship between reward
and effort. The quantum of reward at a point of time will be considered inadequate.
Additional cost in the form of enhanced allowances is built for the company on
permanent basis. Employees continue to benefit from their best performance even if
it remains below standard in the future.
Employees getting merit awards cannot visualise a proportionate relationship
between their performance and reward. The basis of determining the quantum can not
be explained to employees who are not given such awards. This may evoke jealously
and friction and may thus jeopardise cooperation and goodwill.
Incentive Payments
Lumpsum payments such as sales commission is another traditional method.
Generally, the performance and the payment of lumpsum are linked by a formula.
Sales commission, however, does not generally consider other parameters of
performance such as realisation of outstandings and selling high profit margin
products.
Another traditional method of rewarding performance is piece rates. There are
several weaknesses in this system. It is not easy to agree with workers on the
standard output required. Frequent changes may be needed in the standard output due
to technology changes and this may lead to conflict between unions and management.
Also factors other than individual performance such as change in work method affect
output. Conflicts may also arise between different work groups when one group is
dependent on another. There is a potential for conflict when norms have to be revised
because of such factors as technology changes. Also, modernisation of technology
and automation have rendered piece rates somewhat obsolete.
2. Incentive Schemes
Output-based incentive scheme are appropriate where tasks are repetitive and
measurable. These involve the following steps:
1) Selecting the objectives
2) Determining the parameters of performance in accordance with the objectives
7
and Pay Restructuring 3) Determining the norms or base values or benchmark values for each parameter
4) Determining performance-reward relationship
5) Fixing the relative importance of the selected parameters, that is, their
weightages
6) Designing information and procedure formats
7) Determining the maximum payable incentive amount (incentive opportunity)
and , payment period
8) Formulating a communication and review scheme
These and other related aspects are illustrated in the example given in Annexure-I.
These are, however, not suitable for high technology and service activities, which
require information sharing, problem solving and team work. Productivity gain or
profit sharing or employee stock options plan (ESOP) may be suitable types for such
activities.
Group Incentive and Productivity Gain Sharing
Under the productivity gain sharing schemes, productivity gains are shared in
accordance to an agreed pre-determined formula. Profit sharing gives a share of
profit. Sometimes, the quantum of bonus is determined on the basis of profit as well
as productivity improvements according to a pre-determined benchmark value for
each of them. An illustration of such an approach is provided below:
Table 3 Linking Compensation to Corporate Performance
Bonus Matrix
P 14% 1.75 2.00 2.25 2.50 2.75 3.00 3.00 3.00
R 13% 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.00
O 12% 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00
F 11% 1.00 1.25 1.25 1.75 2.00 2.25 2.50 2.75
I 10% 1.00 1.00 1.00 1.50 1.75 2.00 2.25 2.00
T 9% 1.00 1.00 1.00 1.25 1.50 1.75 2.00 2.25
A 8% 1.00 1.00 1.00 1.00 1.25 1.50 1.75 2.00
B 7% 1.00 1.00 1.00 1.00 1.00 1.24 1.50 1.75
I 6% 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50
L 5% 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25
I 4% 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
T 2% 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
T 0% 0 0 0 0 0 0
BM +0.1 +0.2 +0.3 +0.4 +0.5 +0.6
PRODUCTIVITY GROWTH
Note: BM = Benchmark Productivity
Calculation of Benchmark Productivity
Year 1994 1995 1996
Productivity 11 16 14
Benchmark of 1997 = (2.1 + 2.6 + 2.4) ( 1/3) = 2.37
1). Profitability is defined as the ratio of operating profit before bonus to operating
capital Operating capital is the sum of current and fixed assets.
2). Productivity is defined as the ratio of value added to total labour cost, or what is
commonly known as labour cost competitiveness.
3). The profitability and productivity can be easily calculated form audited financial
8 statements.
Sometimes the bonus determined on the basis of profit and productivity improvement Reward System
as above is distributed among employees according to their performance appraisal
ratings.
Productivity Bargaining
Productivity bargaining can provide yet another method of improving productivity
and linking wage increases- to such improvements. Productivity bargaining,
however, does not mean an incentive scheme or wage increases in return for.
assurances and promises from unions for achieving production targets. This method
implies (a) a detailed. analysis of the firms operations, (b) the identification of cost
reduction possibilities, (c) estimation of savings in cost, and (d) the development of a
system o indexing wage increases with cost reductions actually realised over time.
The climate for productivity bargaining has never been more favourable than now. It
is for managements to take initiative and build this approach in. their, collective
bargaining relationship with Unions.
Long-Term Incentive (ESOP)
Long-term incentive in the form of employee stock options schemes are operated
both to improve long-term incentive and to reduce fixed cost.
ESOP envisages employee participation in and ownership of a company’s equity.
This plan is intended to provide an incentive to the employees to improve the all-
round performance and growth of the company and share its prosperity. The plan
usually involves allotment of equity shares according to a laid down procedure and
subject to governmental regulations, laws and rules. The employees benefit in the
form of enhanced market value of his shares and capital gains, which in turn depend
on company’s and employee performance. Several software and high-tech
organisations such as Infosys have conceived and designed such plans.
Competency-based Pay
The competency is a critical determinant of performance. Therefore, there is an
increasing interest .in offering monetary incentive for acquiring competencies required
for higher performance on the present job or for the next job. Such competency may
for instance include values, attitude and behavioural characteristics which influence
performance.
In designing a performance linked reward scheme, choice of an appropriate scheme
should be considered as critical. The choice will be determined by a variety of factors
such as the nature of the organisation, the nature of technology, the nature of profits,
the nature of markets, the human resource strategy and business objectives. For
reviewing an incentive scheme and designing an appropriate scheme, a checklist is
appended as Annexure-I.
13.3 STEPS IN DESIGNING

There is a variety of forms of performance-linked schemes. These must be closely
adapted to the particular conditions of individual enterprises and the concerned
groups of companies. In designing a custom-tailored performance-linked reward
scheme, the following steps are important:
1. Custom-Tailored
There is little scope for relying on model or standardized schemes.
Attempts to impose specific performance-linked reward systems through central
regulations generally appear to fail. Frequently the appropriateness of what is being
required may appear questionable from the perspective of individual enterprises.
Therefore, care must be taken in adapting such schemes to the particularities of
individual enterprises.
2. Objectives
The objectives of the schemes need to be carefully formulated. Such objectives are
needed to guide the selection of performance measures, the specification of bonus
calculation formulae and the reaching of common understanding on the size of 9
bonuses
and Pay Restructuring that may be expected through the schemes. The potential for performance
improvement may vary greatly from one enterprise to another, as well as with the
passage of time. Both the short and long run objectives for the scheme should be
identified.
Selection of Performance Measures
The selection of performance measures must be consistent with the scheme
objectives; these must encourage those types of behaviour considered important for
organizational performance such as increasing output, reducing labour and other
costs, improving quality or timeliness of delivery, encouraging co-operation amongst
work groups, enhancing adaptability and innovations, etc. In addition, they must not
be pursued at the expense of other performance parameters. At the same time, the
measures of performance selected should, to a large extent, be under employee
control, and not influenced by external influences. Employees will be demotivated if
their best efforts are offset by factors they cannot control. The unit, the performance
of which is measured, should be small enough to ensure that workers can see some
relation between their efforts and rewards. To ensure motivational effectiveness, the
measures of performance should also be easily understood by the workers concerned,
subject to ready verification if suspicions arise, and be calculable at frequent
intervals.
4. Basis
Depending on circumstances, performance awards may be determined on the basis of
improvements over the previous year, improvements over a base period performance,
or the maintenance of a high level of performance. Bonuses which become
exceptionally large should be integrated into basic wages in order to avoid distortions
in pay structures. Where necessary, it may be advisable to resort to procedures for
stabilising bonuses of lengthening the period over which performance is calculated.
5. External Influences
To the extent possible, the initial agreement establishing the scheme should specify
how target performance levels are to be dealt with when their achievement is affected
by external influences such as changes in. production methods, product mix and
prices of inputs and outputs.
6. Distribution
The rule for the distribution of bonuses amongst workers should be simple and
widely supported. It may be based on wage rates or average earnings. Also, to
discourage excessive absenteeism, bonus is sometimes varied with the number of
hours or days worked. See Annexure-I for details. However, distributions in
accordance with assessments of individual worker performance by supervisors may
be problematic, especially if such assessments lead to significant variation in pay.
7. Equity
There should be equal opportunities to earn bonuses, even though the performance
measures may vary. In addition, performance targets should be set after a careful
scrutiny of the historical behaviour of the measures selected. The quantum of bonus
should be significant enough to evoke extra efforts. At the same time performance
awards should not be so large as to put at risk a significant part of employee earnings
for reasons beyond their control.
8. Safeguards
Such schemes should not be substituted for wage increases that otherwise would have
been granted or replace fixed wages with variable wages.
Performance pay should supplement rather than replace existing wage bargaining
arrangements and should not question the need to maintain basic wages at adequate
levels. Perhaps of even greater importance in some contexts may be the need to give
10 assurances to existing employees that productivity improvements would not place
jobs in jeopardy.
9. Involvement and Communication Reward System
Such schemes must be perceived as acting in the interest of employees as well as
employers. Accordingly such schemes must be implemented in ways that convince
employees that they will receive a fair share of the benefits derived from their extra
efforts and their jobs will not be threatened.
Schemes based on collective performance work more effectively when the scheme
objectives and operation are explained in detail to all the employees concerned. The
success of schemes depends to a large extent on the amount of effort given by
management to consultation at various stages - in the planning and design of the
scheme, in the process of implementation and monitoring of results. In addition, the
schemes have a better chance of success if employees are provided with full
opportunities to present their ideas for bringing about improvement. Performance-
linked schemes function most effectively when they are accompanied by a formal
participative system that facilitates: (a) the transformation of agreed practical
suggestions into actual changes in operating methods and procedures; (b) two-way
communications at all levels on operating difficulties and general business trends.
10 Union Participation in the Design
Performance reward schemes may work most effectively when worker
representatives are given full opportunity to participate in their design and
administration. Such involvement may facilitate comprehension and acceptance of
scheme objectives. Moreover, workers may only fully trust the scheme if it has been
elaborated in consultation and agreement with worker representatives and they are
subsequently given opportunities to verify that awards are being calculated fairly.
Also, the commonality of interests of workers and employers in improved
productivity, performance, earnings and equity is likely to be much more apparent
where pay systems are developed and elaborated in accordance with rules established
through collective bargaining.
11. Review
There should be a clear provision for modifications owing to changes in production
methods or in prices or inputs or outputs.
The effectiveness of all pay systems decays with time and the duration of schemes
based on collective measures of performance is particularly short. Accordingly it
should be foreseen that the basic parameters of such schemes would undergo regular
periodic revisions. Indeed it should be expected from the outset that the collective
performance measures and targets would undergo continuing change every few years
in the light of the experience.
13.4 ISSUES AND TRENDS

1. Level of Education
The level of education of the employees, among other factors, will determine what
type of scheme is likely to be easily understood by them and will motivate them. The
nature of the business and the operations will also influence. Organisations in low
cost manufacturing or which promote innovation, skills and higher performance or
which are in service industries may need to consider different forms of performance
pay. Their business and human resource management strategy will differ; the form
and content as well as objectives of performance pay should be consistent with them.
2. Trade Union
The chance of success of performance-linked pay will depend on the tradition of
collective bargaining and attitudes of unions. While the negative attitudes hinder its
introduction, the positive attitude considerably facilitates it.
3. Organisational Culture
Performance pay gives better results in organisations characterised by employee 11
and Pay Restructuring involvement and team spirit. A pro-active culture in the organisation is found to be
valuable to performance and productivity.
4. Package of Monetary and Non-Monetary Incentives
Performance pay is at best an element in the reward management and motivational

system. Besides performance pay, it is essential to pay attention simultaneously to
such aspects as re-organisation of work process, training, employee involvement and
participative decision-making, opportunities to contribute ideas and knowledge, non-
monetary recognition, career development and goal setting.
5. Rewarding Good Performance
Rewarding good performance may include, among others, such mechanisms as cash
awards, appreciation letter and certificates, training in reputed institutions, foreign
travel, job enlargement and enriched roles, publicity in newsletters and membership
of professional societies, etc. For higher effectiveness of performance-linked pays
system, such reward mechanisms should also be used.
6. Performance Pay and Performance Management
It is increasingly realised that performance is affected by a variety of factors. These

factors, for instance, will include knowledge and skills which are developed through
training, work attitudes and intrinsic rewards. These and other factors which affect
performance are considered in the wider context of performance management and
human resource management with performance pay constituting an element of it.
7. Caveats
It is being increasingly realised that
i) The performance pay systems should be designed to promote the kind of

performance an organisation needs. It should, therefore, be integrated with
human resource management strategy for better performance and growth of the
organisation.
ii) The performance pay should underpin the organisation’s main values such as
team work, creativity, flexibility and quality.
iii) The system should provide an impetus to and support the behaviour expected of
the employees. Therefore, it must communicate to employees the type of
behaviour to be rewarded and the way in which it will be rewarded.
iv) The reward system should be strengthened through re-organisation of work
process and enlarged job responsibilities, training, consultation, communication
and participatory system. Employees should also be consulted in the formulation
of the plan.
v) The criteria for determining performance should be objective, measurable, easily
understood and related to what employees can control.
vi) The quantum of performance pay should be significant enough to be
motivationally effective and its distribution should be equitable.
vii) The payment of performance pay should follow the performance as soon as
possible and as frequently as possible.
viii) The performance level should be achievable; otherwise it will have a
demoralising effect.
ix) The quantum of pay should be sufficiently flexible to absorb downturn and
adequately reward when performance is good; it should also safeguard the
12 minimum remuneration for the value of the job.
and Pay Restructuring
UNIT 14 INCENTIVES FOR BLUE AND
WHITE COLLARS
Objectives
After going through this unit, you should be able to understand:
• the classification of incentives,
• different incentive systems,
• working of incentive schemes, and
• wage incentive plans for different categories of employees.
Structure
14.1 Introduction
14.2 Meaning and Definition
14.3 Classification of Incentives
14.4 Merits and Demerits
14.5 Pre-requisites of Effective Incentive Scheme
14.6 Incentive Systems
14.7 Wage Incentive Plans
14.8 Working of Incentive Schemes
14.9 Summary
14.10 Review Questions
14.1 INTRODUCTION
The term iincentivei has been used both in the restricted sense of participation and in
the widest sense of financial motivation. The concept of incentive implies increased
willingness or motivation to work and not the capacity to work. It refers to all the
plans that provide extra pay for extra performance in addition to regular wages for a
job. Under this programme, the income of an individual, a small group, a plant work-
force or all the employees of a firm are partially or wholly related to some measure of
productive output. Wage incentives are extra financial motivation. They are designed
to stimulate human effort by rewarding the person, over and above the time-rated
remuneration, for -improvements in the present or targeted results. Basically, the
wage incentive implies a system of payment under which the amount payable to a
person is linked with his output. Such a payment may also be called payment by
results.
14.2 MEANING AND DEFINITION

Incentives are monetary benefits paid to workmen in recognition of their outstanding
performance. An incentive scheme is a plan or programme to motivate individual or
group performance. An incentive programme is most frequently built on monetary
rewards (incentive pay or monetary bonus), but may also include a variety of non-
monetary rewards or prizes. The International Labour Organisation (ILO) refers to
incentives as payment by results But it is appropriate to call them iincentive systems
of payment emphasising the point of motivation, that is the imparting of incentives to
workers for higher production and productivity. Unlike wages and salaries which are
relatively fixed, incentives generally vary from individual to individual, and from
20 period to period for the same individual.
Incentives for Blue and White
14.3 CLASSIFICATION OF INCENTIVES Collars
Incentives can be classified into: (i) direct compensation, and (ii) indirect
compensation. Direct compensation includes the basic salary or wage that the
individual is entitled to for his job, overtime-work and holiday premium, bonuses
based on performance, profit sharing and opportunities to purchase stock options, etc.
Indirect compensation includes protection programmes (insurance plans, pensions),
pay for time not worked, services and perquisites.
Also incentives may broadly be classified into monetary and non-monetary.
Monetary incentives have an important contribution to make within the total
motivation pattern. They provide extra-financial motivation, by rewarding the worker
over and above his regular remuneration for performing more than the targeted work.
Some of the financial motivations are overtime wages, higher basic wages, incentive
bonus, merit increments, suggestion rewards; various allowances, promotion and
fringe benefits.
Some of the non-financial incentives are good human relations, self-respect,
recognition, status, sense of belonging, appreciation, higher responsibility, greater
authority, job satisfaction, improved working conditions, greater leisure, etc. All
these motivate workers to raise their productivity.
ILO classifies incentive schemes into four categories: (i) schemes in which earnings
vary in proportion to output, (ii) schemes where earnings vary proportionately less than
output, (iii) schemes where earnings vary proportionately more than output, and (iv)
schemes where earnings differ at different levels of output.
Incentives have also been classified into individual, group and organisation-wide. In
an individual incentive plan, the rewards of incentives are based solely on individual
performance. It is the extra compensation paid to an individual over a specified
amount for his production effort. Such a system is feasible only where an individual
can increase the quantity and quality of his output by his own individual efforts and
where his output can be measured. The payment is normally on a monthly basis,
though in a few cases it may be quarterly or other convenient periods. The standards
of performance have been set by a qualified industrial engineering analyst, using
technically sound work measurement procedures. The rewards under this plan are
almost always immediate, that is, paid daily or weekly.
The advantages of individual wage incentive plans are relatively obvious and
straightforward. First and foremost, the individual incentive plan rewards the individual
for his or her production. The more the worker produces, the more, the worker earns.
Second, the individual incentives appeal to the basic need for money found in most
people. Almost everyone will work harder, up to a point, when there is a justifiable
reason to believe that increased productivity will bring about a personal gain. Although
individual wage incentives have advantages, there are also limitations. Individual wage
incentives work best with jobs that are primarily operator-controlled. They may also
lead to labour problems. Incentives, because they reward production levels, can lead to
quality problems. Safeguards must be taken to ensure that quality is not sacrificed for
quantity. It is the output of the group rather than that of each individual member of the
group that can be measured most conveniently or accurately.
Group or area incentive schemes provide for the payment of a bonus either equally or
proportionately to individuals within a group or area. The bonus is related to the output
achieved over an agreed standard or to the time saved on the job - the difference
between allowed time and actual time. Such schemes may be most appropriate: (a)
where people have to work together and team work has to be encouraged; and (b)
where high levels of production depend a great deal on the co-operation existing among
a team of workers as compared with the individual efforts of team members. Group
bonuses are calculated on the basis of the output of the team and are divided among the
members either equally or in specified proportions, with more being given to skilled
employees than to those who are unskilled. Group incentives are usually applied to
small teams and the rewards are based on the performance of the entire group. The
bonuses are often much larger than individual wage incentives. Group incentive plans,
since they evaluate overall performance, are applicable to a wide variety of tasks.
21
Sometimes, however, they are applied to all workers of a department or even of a
whole undertaking. One of the
and Pay Restructuring disadvantages of group incentive plan is that there is a possibility of ignoring the
individual performance as the rewards are based on group performance. In large
groups it is often inevitable that there will be slackers who can disrupt the
functioning of the whole group.
Some of the advantages of group incentive plans are:
(i) Better co-operation among workers
(ii) Less supervision
(iii) Reduced incidence of absenteeism
(iv) Reduced clerical work
(v) Shorter training time.
The disadvantages of group incentive plans are:
(i) An efficient worker may be penalised for the inefficiency of the other members
in the group
(ii) The incentive may not be strong enough to serve its purpose
(iii) Rivalry among the members of the group defeats the very purpose of team work
and co-operation.
The organisation-wide incentive system involves co-operation and collective effort of
the employees and management in order to accomplish broader organisational
objectives, such as: (i) to reduce labour, material and supply costs; (ii) to decrease
turnover and absenteeism; (iii) to strengthen employee loyalty to the company; (iv) to
promote harmonious labour management relations. One of the aspects of the scheme
is profit-sharing under which an employee receives a share of the profit fixed in
advance under an agreement freely entered into. Some of the advantages of such a
scheme are: (i) it inculcates in employees' a sense of economic discipline as regards
wage costs and productivity; (ii) it engenders improved communication and increased
sense of participation; (iii) it is relatively simple and its cost of administration is low;
and (iv) it is non-inflationary, if properly devised.
14.4 MERITS AND DEMERITS

The primary advantage of incentives is the inducement and motivation of workers for
higher efficiency and greater output. It may not be difficult to get people for fixed
wages and salaries. But with fixed remuneration, it is difficult to motivate workers to
give better performance. Fixed remuneration removes fear of insecurity in the minds
of employees.
Earnings of employees would be enhanced due to incentives. There are instances
where incentive earnings exceed two to three times that of the time rated wages or
salaries. Increased earnings would enable the employees to improve their standard of
living.
There will be reduction in the total as well as per unit of cost of production through
incentives. Productivity would increase resulting in greater number of units produced
for given inputs. This would bring down the total and unit cost of production. The
production capacity is also likely to increase.
The other advantages of incentive payments are: reduced supervision, better
utilisation of equipment, reduced scrap; reduced lost time, reduced absenteeism and
turnover and increased output. Furthermore, systems of payment by results would, if
accompanied by organisation and work measurement, enable firms to estimate labour
costs more accurately, than under the system of payment by time. This would
facilitate the application of cost control techniques like standard costing and
budgetary control
On the other hand, systems of payment by results may have disadvantages. There is a
tendency for the quality of products to deteriorate unless steps are taken to ensure
maintenance of quality through checking and inspection. This involves added
expenses:
Difficulties may arise over the introduction of new machines or methods. Workers
may oppose such introduction for fear that new piece of bonus rates set may yield
lower earnings; or when new machines or methods are introduced, they may slacken
22 their rate
Incentives for Blue and White
of work. Collars
Another disadvantage is that jealousies may arise among workers because some are
able to earn more than others.
One of the greatest difficulties with the incentive systems is in the setting of piece or
bonus rates. Rate fixing involves delicate problems of judgment in which there is
always a risk of error. If rates are set too low, workers are bound to be dissatisfied
and will be under pressure to work very hard. If rates are set too high, workers may
slacken their efforts at times and employers may not take recourse to revision of rates
because the earnings are too high.
Difficulty also arises in determining standard performance. Many organisations
follow a safe route to fix the standards - which is usually the average of past years
performance. Past performance may not be the ideal basis for fixing production
norms.
Most of the problems of financial incentives arise either from the inadequacies of the
particular system or from incorrect application and insufficient control. In western
countries, as also in India, it has now been realised that economic gain has ceased to
be a source of motivation and that greater emphasis should be placed on non-
economic factors. Many empirical researchers have shown that monetary incentives
alone do not bring about the desired motivation.
14.5 PRE-REQUIS1TES OF EFFECTIVE INCENTIVE

SCHEME
All things considered, it may be concluded that 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 advantages will be realised
provided sufficient safeguards are provided. Such pre-requisites are:
The co-operation of workers in the implementation of an incentive scheme is
essential. In particular, workers co-operation is necessary wherein: (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.
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, equipments and materials so as to enable them reach
their standards.
3 Indirect workers, such as foremen, supervisors, charge hands, helpers, crane
operators, canteen staff, store keepers, and clerical staff should also be covered by the
incentive schemes.
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 programme.
There is greater need for planning. Many incentive schemes, started hurriedly,
planned carelessly, and implemented indifferently have failed and have created more
problems for the organisation than they have tried to solve.
14.6 INCENTIVE SYSTEMS

The chief incentive systems are as follows:
(i) The Halsey System: This system which was developed by F.A. Halsey, provides
for the fixation of a standard time for the completion of the task. For the work
done in correct time or more, the actual time rate is paid, Thus, the minimum
wage is guaranteed even if the output falls below the standard. If the job is
completed in less than the standard time, the worker receives a bonus payment at 23
his time rate for a specific percentage of the time saved. This percentage
and Pay Restructuring may vary anywhere from 30 percent to 70 percent, but usually it is fixed at 50
percent (the other 50 percent going to the share of employer). Thus, if a worker
does the work in 6 hours against that of 10 hours standard, he gets bonus after 6
hours plus 50 percent of 4 hours, i.e., 2 hours, as bonus. The other 50 percent (2
hours) is shared by the employer (Given Formula at below).
(ii) The Rowan System: Under this system also a standard time is allowed for a job,
and bonus is similarly paid for any time saved. This plan differs from the Halsey
plan only in regard to the determination of the bonus. In all other respects, the
two are the same. The premium is calculated on the basis of the proportion which
the time saved bears at standard time. Thus, if a worker does work in 6 hours
against the 10-hour standaid, the wage payable is 6 hours wages plus 40 percent
of the wages as. bonus (See Formula).
(iii) The Bedaux Point System: Under this system, the standard time set is divided
into a number of points at the rate of one minute per point. The bonus is
calculated at 75 percent of the points earned in excess of 60 per hour. Thus, if
the standard time is 10 hours and if the worker completes the job in 7 hours and
if his hourly rate is 0.96 money units, the standard number of points for
completing the job is 600 points. The worker thus earns 600 points in 7 hours.
His bonus, therefore, will be 75 percent of 180 x 0.96/60 which is equal to 2.16
money units. If a worker does not reach the standard, he is paid at his time rate.
This system is really more than the incentive system, since it enables the
management to record the output of any worker of the department in units which
show at once if the production is up to the standard the management desires.
(iv) The Taylor Differential Piece-rate System:' This system was introduced by
.Taylor with two objectives. First, to give sufficient incentive to workmen to
induce them to produce up to their full capacity, and second, to remove the fear.
of wage cut. There is one rate for those who reach the standard; they are given a
higher rate to enable them to get the bonus. The other is the lower rate for those
who are below the standard; so that the hope of receiving a higher rate may
serve as an incentive to come up to the standard. Workers, are expected to do
certain units of work within a certain period of time. This standard is determined
on the basis of time and motion.atudiest Such scientific determination assumes
that the standard fixed is not unduly high and is within the easy reach of
workers. On a proper determination of the standard depends the success of the
scheme. This system is designed to encourage the specially efficient worker with
a higher rate of payment and to penalise the inefficient by a lower rate of
payment. In practice, this plan is seldom used now.
(v) Premium and Task Bonuses: It has been devised by Gantt and is the only one
that pays a bonus percentage multiplied by the standard time. Under this system,
fixed time rate are guaranteed. Output standards and time standards are
established for the performance of each job. Workers completing the job Within
the standard time or in less time receive wages for the standard time plus a
bonus which ranges from 20 percent to 50 percent of the time allowed and not
time saved. When a worker fails to turn out the required quantity of a product,
he simply gets his time rate without any bonus. Its fairness and practical value
depends on the reasonableness of the standard fixed and the wages which
workers of average ability can earn without having to work at excessive speed
and becoming unduly fatigued.
(vi) The Profit-sharing System: The profit-sharing scheme is based on the same
principle as the group system where incentive is related to the collective effort
of the group. It is an anangement freely entered into under which an employer
24 gives to his employees a share the net profits of the enterprise, fixed in
UNIT 15: BONUS PROFIT SHARING AND
STOCK OPTIONS
Objectives
After going through this unit, you should be able to:

• understand the-concept of bonus, profit sharing and stock options,
• be familiar with relevant legal provisions, and
• be conversant with the purpose, process/approach and problems in administering
these as part of reward system:
Structure
15.1 Introduction
15.2 Bonus
15.3 Profit Sharing
15.4 Stock Options
15.5 Review Questions
15.6 Key words
15.1 INTRODUCTION
Bonus, profit sharing and stock options are among the various measures to promote
employees financial participation in the companies they work both in equity (stock
options) and in profits (bonus and profit sharing). Giving say and stake to employees
is part of an ongoing thrust towards democratizing the workplace. In actual
implementation, however, companies enjoy several options and also face several
problems.
15.2 BONUS
The Twentieth century dictionary defines bonus as, la premium beyond the usual
interest for a loan; an extra dividend to shareholders, a policy holders share of profits;
an extra payment to workmen or others.I Neither the Payment of Bonus Act, 1965
nor any other industrial law defines bonus.
The concept of bonus payment to workers originated in India during the first world
war in the cotton textile industry in Bombay and Ahmedabad in 1917. When the
practice was discontinued in 1923, there was a general strike and the Government of
Maharashtra appointed a committee headed by Sir Normal Mcleod, the then Chief
Justice of Bombay High Court to consider the nature and basis of payment of bonus
in the cotton textile industry of Bombay. The committee observed that the cotton
mills working in 1923, as compared to the situation in 1917, did not justify any
payment of bonus. Thus a link between profits and bonus was established in early
1920s. During second World War the paymen of bonus resumed and continued till
1945. In 1942, the bonus dispute in General Motors (India) Limited, was referred for
adjudication. In this case Justice Chagla observed that, It is almost universally
accepted principle now that the profits are made possible by the contribution that
both capital and labour make in any particular industry, and I think it is also
conceded that labour has a right to share in increased profits that are made in any
particular period. But the distribution of increased profits among workers is better
achieved by giving of an annual bonus than by a further increase in wages. Wages
must be fixed on the basis of normal conditions .1 The next year in the case of
Standard Vaccume Mill Company the adjudicator held that, 3If large profits were
30 made as aresult of the abnormal war conditions, it was but fair that a small fraction of
such profits should be given by way of bonus without whose labour and cooperation
the profits could not have been made.
Bonus, Profit Sharing and
In 1948 the Government of India has appointed a Committee on Profit Sharing. The Stock Options
Committee observed. that it was not possible to devise a system in which labour share
of profit could be determined on a sliding scale varying with production and favoured
trying out profit sharing bonus industry-cum-locality basis. as (a) an incentive to
production, (b) a method of securing industrial peace, and, (c) a step in the
participation of laobur in management.
In 1950 the Labour Appellate Tribunal held, in the case of Mill Owners Association
vs. Rashtriya Mill Mazdoor Sangh, that, Where the goal living wages has been
attained, bonus, like profit sharing, would represent more as the cash incentive for
greater efficiency and production. We cannot, therefore, accept the broad contention
that a claim to bonus is not admissible where wages have (as in the case before us)
been standardised at a figure lower than what is said to be the living wage. Where the
industry has capacity to pay, and has been so stabilised that its capacity to pay may
be counted upon continuously. It thus made a distinction between Eliving wagtail and
eactual wages and held that bonus could be used to bridge the gap between the two.
Five years later, Justice Bltagwati of the Supreme Court of India upheld the tribunal
judgement in the caase of Muir Mills Company vs. Suti Mills Mazdoor Union: lit is,
therefore, that the claim for ebomtat can be made by the employees only if as a result
of the joint contribution of capital and labour the industrial concerned has earned
profits. If m any particular year the working of the industrial concern has resulted in
loss there is no nor justification for a &expand for bonus. Bonus is not a deferred
wage. Because, if it were so., it would neceasarily rank for precedence before
dividends. The dividendi can only be paid out of profits and unless and until profits
are made no occasion, or question ran also arise for distribution of any sum as
ebonises’ among the employees. If the industrial concern has resulted in a trading
loss, there would. be no profits of the particular year available for distribution of
dividends, much less could the employees claim the distribution of bonus during that
year
Thus, profit was considered as a precondition for bonus. Several companies fi

including, for instance, Tam Iron and Steel Company, Indian Iron 'and Steel
Company, Bharat Tin Plate Company and Buckingham and Carnatic Mills - have
adopted voluntarily profit sharing bonuses. Notwithstanding this, there have been a.
series of disputes and a spate of strikes over bonus issue, with workers and their
unions contending bonus to be a deferred wage. In 1961 the Government of India
constituted Bonus Commission. Based on the report of the Commission in 1964,
Payment of Bonus Act was enacted in 1965 with a view to: (a) enforce statutory
liability upon employers covered by the Act to pay bonus to employees in the
establishments concerned, (b) define the principles for payment of bonus according
to the prescribed formula, (c) provide for payment of a minimum and maximum
bonus and linking payment of bonus with a scheme of eset-of and eset-on, and, (d) to
provide machinery for the enforcement of the liability for payment of bonus. The
salient features of the legislation are shown in Box 1. The legislation did not achieve
the intended objective of minimising conflict on account of bonus. During the
discussions before the Bonus Commission when the employers wanted a ceiling on
bonus, the workers asked for a floor. With the result, the legislation provided for a
minimum of bonus of 4 percent regardless of whether a company earns profit or not.
Subsequently it was raised to 8.33 per cent (section 10 of the Act) which is
equivalent to one month’s wages. In effect, this meant 13 months wages for 12
months work, and thus bonus has actually become, at the minimum level, a deferred
wage that bore no relationship whatsoever with either productivity or profitability.
The ceiling remained at 20 per cent, but with a provision far bargaining production
linked bonus (Section 31-A of the Act). There are instances in the public sector
where sick industries had agreed to pay more than 8.33 per cent.
31
and Pay Restructuring THE PAYMENT OF BONUS ACT, 1965
The Payment of Bonus Act, 1965 applies to ever' factory and every establishment in
which twenty or more persons are employed on any day during an accounting year.
The definition of the factory is the same as under the Factories Act, 1948. Under the
Act `establishment' has been defined as the place in which one is permanently fixed
for business, with necessary equipment, and office or place of business. An
establishment covered under the Act shall continue to be governed by this Act
notwithstanding that the number of persons employed below twenty.
Eligibility
Every employee shall be entitled to be paid bonus provided he has worked for at least
30 working days in a year.
Employee means any person employed on a salary or wage not exceeding Rs.1,600
per month. This upper ceiling was first revised to Rs.2,500 and then in 1995, to
Rs.3,500. For computing maximum bonus the limit was raised from Rs.1,600 to
Rs.2,500. During late 1990s the Government proposed to further increase the limit to
Rs.5,000 or even completely abolish the ceiling and cover all employees.
Salary or wage means all remuneration (other than remuneration in respect of overt-
time work) capable of being expressed in terms of money, including dearness
allowance. This, however, does not include value of any house accommodation,
supply of light, water, medical attendance or any service or any concessional supply
of food-grains, any travelling concession, any bonus such as incentive, production
and attendance bonus, any retrenchment compensation or any gratuity or other
retirement benefit, any other allowance or any commission payable to the employee.
Disqualification for Bonus
Under the Act an employee may be disqualified from receiving bonus if he is

dismissed from service for fraud; riotous or violent behaviour; or theft,
misappropriation or sabotage of property of the establishment.
Payment for Minmum Bonus
Every employer shall be bound to pay every employee in respect of any accounting
year a minimum bonus which shall be 8.33 per cent of the salary or wage earned by
the employee during the accounting year or one hundred rupees, whichever is higher,
whether or not the employer has any allocable surplus in the accounting year. If an
employee is below fifteen years of age, the minimum amount of one hundred rupees
in this case would be sixty rupees.
Payment for Maximum Bonus
Where the allocable surplus exceeds the amount of minimum bonus payable to the
employees, the employer shall be bound to pay every employee in respect of that
accounting year bonus which shall he an amount in proportion to the salary or wage
earned by the employee subject to a maximum of twenty per cent of such salary or
wage.
Proportionate Reduction in Bonus
Where an employee has not worked for all the working days in an accounting year, if
the minimum bonus of one hundred rupees is higher than 8.33% of his salary or wage
for the days he has worked, shall be proportionately reduced.
Computation of Number of Working Days
For the purposes of computing proportionate bonus, an employee shall be deemed to

32 have worked on the days on which he has been laid off under an agreement, standing
orders, or Industrial Disputes Act; on leave with salary or wage absent due to
Bonus, Profit Sharing and
Stock Options
33
and Pay Restructuring Maintenance of Registers, Records, etc.
Every employer shall prepare and maintain registers, records and other documents in
the prescribed form and manner for the purpose of this Act.
Penalty
If any person contravenes any of the provisions of this Act or fails to comply with the
direction given or requisition made to him, he is punishable with imprisonment
which may extend to six months or with fine of one thousand rupees or with both.
Bonus Linked with Productivity
Where the employer and the employees enter into an agreement or settlement for
payment of annual bonus linked with production or productivity in lieu of bonus
based on profits, such employees shall be entitled to be paid bonus of not more than
twenty percent and less than 8.33 per cent of the salary or wage earned by them
during the relevant accounting year.
Expenditure from Bonus Payment
The appropriate government, having regard to the financial position of any
establishment or class of establishments, may give exemption for such establishments
from all or any of the provisions of this Act.
Act not to Apply to Certain Classes of Employees
The Act is not applicable to apprentices and it excludes employees in an
establishment and in an industry carried on by or under the authority of an
department of the Central Government, or State Government or local authority.
The Act also does not apply to Seamen, employees registered or listed under any
scheme made under the Dock employees (Regulation of Employment) Act of 1948,
Employees of Life Insurance Corporation and General Insurance Companies, Indian
Red Cross Society, Universities and other educational institutions, inland water
transport establishments operating on routes passing through any other country,
Reserve Bank of India, Unit Trust of India, Industrial and Financial Corporations
established in the public sector, and employees engaged through contractors on
building operations and institutions established not purposes of profit.
The government employees are not covered by the Payment of Bonus Act. Still they
receive annual a certain amount over and above the salary fit loosely called ebonusi
under either of the following two schemes: (a) ex gratia payment, (b) productivity
linked bonus (PLB). Those who are covered under the PLB include those working in
Railways, Posts and Telecommunications and productions units under the Ministry of
Defence. Those who are not covered by PLB are given ex gratia payment fixed by
government annually on ad hoc basis. The concept of PLB to employees in
government services, including organisations mentioned above was not favoured by
Bhoothalingam Committee (1978) on wages, incomes and prices. Still, the PLB
scheme was first introduced in the Railways in 1979-80 and later extended to the
other departments.
The PLB schemes have by now become a permanent features, and the norms of
productivity subject to negotiation at periodic (usually once every three years)
intervals. The functioning of these schemes was are reviewed by a group of officers
headed by Bazle Karim, Secretary (Coordination), Cabinet Secretie, as the Chairman.
The IV Central Pay Commission observed that the Bazle Karim committee were of
the view that government departments constitute a single infrastructure for the
economy as a whole and that there should be no sense of discrimination resulting in
demoralisation among them as a group when the service conditions are uniform all
along. They suggested the evolution of a productivity linked bonus scheme for
central government employees as a whole. There are, however, problems in
considering productivity of government as a whole. The IV Central Pay Commission
34 observed that, while there is nothing to prevent government from making such
payment if it so desires, it is in the nature of a concession arising out
UNIT 16 ALLOWANCES AND BENEFITS
Objectives
After going through this unit you should be able to:

• understand the concepts of allowances and fringe benefits, and
• appreciate the need, purpose of allowances and fringe benefits.
Structure
16.1 The Need
16.2 Basic Wage
16.3 Dearness Allowance
16.4 Other Allowances
16.5 Fringe Benefits
16.6 Key Words
16.1 THE NEED

Normally remuneration package to employees were consisting of basic wage and
dearness allowance. In due course of time due to changes in job situations, changing
environment specially due to rising prices the basic wage and dearness allowance
together were not found adequate as remuneration package provided to. employees.
In order to take care of this situation employers have introduced various types of
allowances and fringe benefits to make the total compensation package adequate so
that employees may be able to fulfill their needs and discharge their duties
efficiently.
16.2 BASIC WAGE

Basic Wage is fixed on the basis of weightage given to jobs in an organisational
context at various levels on the basis of skills, efforts, qualifications etc which are
required to perform those jobs. Determination of weightage given to each job is done
on the basis of studies carried out by industrial engineers along with other experts.
Practices prevailing in other similar organisations are also taken into consideration.
16.3 DEARNESS ALLOWANCE

Employees are employed with a particular wage or salary rate. In due course of time
due to price increase, the real income of employees goes down. It means with the
same level of wages employees are unable to buy goods and services, which they
were able to buy before increase in prices. Dearness Allowance is paid to employees
by way of compensating them for the loss of real income caused to them by increase
in the cost of living due to increase in prices.
Systems of Payments of Dearness Allowance
The system of payment of Dearness Allowance are mainly classified into two
categories. They are: -
(i) Not linked to consumer price index numbers and
(ii) Linked to consumer price index numbers.
(i) Not linked to consumer price index numbers
(A) Flat Rate : Flat Rate system of payment is a method under which a fixed
40 amount is paid to all employees irrespective of their categories and wage scales. The
practice of paying Dearness Allowance at a fixed rate is regardless of any change in
the consumer price index.
(B) Graduated Scale: Workers belonging to higher income groups objected to the award Allowances and Benefits
of the same amount of Dearness Allowance to all employees irrespective of their wages
or salaries. , With this background the graduated scale system came into existence.
According to this method Dearness Allowance is paid on a graduated scale according
to various wage scale. On the basis of different wage scale the workers are divided
into groups. Dearness allowance increases with each scale of salary increase but after
a limit, their is no increase in the amount of Dearness allowance, whatever high the
wage rate is.
A minimum amount of dearness allowance is also set for the workers in each scale,
below which the dearness allowance is not allowed to fall.
This method is considered to be equitable and hence it is quite popular.
(ii) Linked to consumer price index numbers:
Under this system the dearness allowance is linked with the consumer price index
number.
(A)Flat rate: In this method dearness allowance rate per point or scale is fixed and
this varies only with variations in points of consumer price index numbers.
(B)As a percentage of Pay In this method the dearness allowance is fixed. It is
calculated as the percentage of pay per slab of the consumer price index numbers.
The dearness allowance is expressed as a fixed percentage of pay and equated to a
scale of points of the consumer price index.
The system of dearness allowance being linked with consumer price index is in
vogue today.
Prevalent Practice of Paying Dearness Allowance
The payment of Dearness Allowance for central government employees is based on
the recommendation of the Pay Commissions.
In the banking sector Dearness Allowance is paid as per the Desai Award. Under this
dearness allowance is paid at a rate of 3 percent for every 4 points rise over 100 in
the quarterly average of the consumer price index of the working class.
In various other industries and commercial houses, payment of dearness allowance is
paid in common according to the scales.
In many companies a 100 percent neutralisation system has been introduced against
the rise in prices. This implies that the employees are under complete protection
against the rising prices. On the other hand some organisations have provided a
ceiling on the payment of dearness allowances, in terms of maximum amount of
dearness allowance payable to a person.
41
and Pay Restructuring 16.4 OTHER ALLOWANCES
Apart from the basic, Dearness allowance, many other allowances are paid to
employees to compensate them adequately so that the total package of remuneration
provides them suitable compensation package.
The various allowances given to the employees are:-
(i) House Rent Allowance (HRA): Organisations are set up in various types of
locations such as urban centres; industrial belt etc.where houses are not available at a
reasonable rent.
If the employees are required to pay house rent as per the prevailing market rates, a
substantial portion of their wages will go as house rent and the employees will not be
left with sufficient money to meet their other requirements.
Hence HRA is paid to the employees enabling them to pay house rent for a suitable
accommodation . It varies according to the cost of living in different cities and
places.
Employees are paid HRA as per their slabs in their wages and salaries. This
allowance is not considered as wages. The HRA shall also not be reckoned for any
direct payment like gratuity, overtime, provident fund etc.
(ii) Leave Travel Allowance (LTA): Employees while working, seldom get
opportunity to visit places where they can go and spend sometime along with the
members of their families to get relaxed and reenergized for the work to be continued
with zeal and enthusiasm. For such purpose employees are also willing to visit their
native places.
Many organisations have introduced schemes commonly called Leave Travel
Assistance (LTA)/Leave Travel Concession (LTC) etc. and this facility facilitates the
employees to go to their home town or places for relaxation and reenergising .
Organisations have different types of practices for various categories of employees.
Normally employees who have completed a few years of service satisfactorily are
entitled to LTA/LTC.
(iii) Washing Allowance: While employees are working in various industrial
processes, various kind of dirt gets accumulated on their body and uniform. If the
employees do not keep themselves clean, they are likely to get different types of
diseases.
A particular amount is paid as washing allowance to certain categories of employees
and they are expected to keep themselves clean.
In some organisation duty uniforms are provided to front line employees who directly
come in touch with customers .These employees are given washing allowance and
are expected to keep their unforms clean and make better presentation before the
customer.
Once washing allowance is provided, the employers are in a position to enforce a .
standard of cleanliness on the workforce which will ultimately force the employees to
keep themselves clean and in due course of time, the organisation will have its own
standard of cleanliness.
(iv) Conveyance Allowance: For smooth and efficient functioning of any
organisation, employees are required to come to work place in time. Employees who
neither have got a residence in the housing colony nor at any nearby places,
commutes everyday distance by various means while coming to -work place. While
commuting employees loose hilt of time and energy and after reaching work place
they find themselves exhausted.
In order to facilitate employees to come to the work place comfortably and in time ,
employers provide convence allowance to the employees for availing better transport
service, or maintaining and using own vehicle. The conveyance allowance is paid to
employees for the days in which he receives normal wages. This however is not paid
for days on which he is on leave without pay.
(v) Shift Allowance (S'A);Some organisations are required to work continuously
42 under shift system because of the nature of production or service they have.
Normally there are three shifts 6 A.M. to 2 RM., 2 P.M. to 10 RM. and 10 RM. to 6
UNIT 17 DOWNSIZING AND VOLUNTARY
RETIREMENT SCHEME
Objectives
After studying the unit, you should be able to:
• understand the significance of downsizing in making the organizations
competitive,
• know the rationale for and the approach to voluntary separations, and
• be familiar with the economic, social and morale and motivational aspects of
downsizing and voluntary separations.
Structure
17.1 Introduction
17.2 Reasons for Downsizing
17.3 Voluntary Retirement Schemes
17.4 Exercises
17.5 Discussion Questions
17.6 Key Words
17.1 INTRODUCTION
Downsizing or rightsizing is an expression used to describe the strategy of achieving
competitiveness through reduction of workforce. Optimal utilization of resource is a
sustainable proposition, both economically and socially. Low unit labour costs are an
important consideration in attracting investment and generating more jobs, and thus
contribute to the reduction of unemployment and poverty.
If a company which was producing 1000 units with 100 persons is not able to do so
with just 80 persons, it can be said that the company has downsized its manpower
and improved its productivity. Doing more with less is denominator management. It
will increase productivity but not necessarily result in growth. If the same company is
able to produce 2000 units with 150 persons it has done both denominator and
numerator management. It achieved both growth and productivity.
In India in the pre-liberalisation era labour was protected in labour markets and
capital in product markets. In the post-liberalisation both feel less protected.
Company’s feel compelled to resort to denomenator management to become
competitive before they could think of numerator management. However, as
discussed later, labour laws in India make it difficult to adjust workforce. In such a
scenario voluntary separations to attractive payments (attractive relative to legally
ordained retrenchment compensation) cash rich companies are able to reduce their
workforce and in quite a few cases even close divisions/plants. The are legal,
financial, fiscal and social implications of downsizing through voluntary separations
are becoming the soft option. According to section 2(00) of the Industrial Disputes
Act (inserted through an amending act in 1953) asserts that retrenchment does not
include voluntary retirement of the workmen.
17.2 REASONS FOR DOWNSIZING

The possible reasons for workforce adjustment and downsizing could be both
external and internal.
External reasons
46
1) Structural and other changes in the economy/enterprises
Downsizing and Voluntary
2) Changes in environment Retirement Scheme
3) Changes in technology
4) Changes in ownership and control (including disinvestments, mergers,
acquisitions, etc.). In the past nationalization usually resulted in maintenance of
existing workforce or increase in workforce while disinvestments, mergers and
acquisitions usually warranted reduction in workforce
5) Business process re-engineering, including reassessment of manning pattern,
work simplification, etc.
6) Outsourcing, contracting out, parallel production, lease license manufacturing, etc.
7) Introduction of information technology (ERP, SAP, etc.)
8) Product/process obsolescence
9) Material substitution (for instance, jute to plastics)
10) Chronic sickness/corporate failure
11) Decline in employment elasticity due to automation of routine skills
Internal reasons
1) Improper/inadequate human resource planning
2) Wrong selection/recruitment/placement
3) Inadequate training
4) Inadequate/improper motivation/reward systems
5) Substitution of labour with capital
APPROACHES TO DEM., WITH WORKFORCE REDUNDANCY
The approaches could be several. But any and every approach must incorporate
marketable skills on a continuing basis. Learning should become lifelong pursuit.
Individuals must own a greater share of responsibility and have the willingness to
acquire multiple skills.
1) Combine worker flexibility with employment security. Develop a multiskilled,
flexible, adaptive and willing workforce to ensure internal changes in work
practices/ hours, etc. and locational (worker mobility across divisions/locations,
etc.), numerical (gang size not rigid), and functional flexibility (ability to
perform several tasks as needed).
2) Review job specifications at regular intervals to make skill requirements reflect
the current and future needs. For example, a paper manufacturer in south India
observed that, in the past workmen without much qualification were appointed
on account of a commitment with the union to employ a son of a workman who
retires/dies, and the educational level of the workman was not satisfactory. That
the lack of basic education of the workman is a negative factor was realised and
has been impressed upon the trade union, and SSLC (10 years of schooling) has
been stipulated as the minimum qualification. Similarly, at the supervisory and
other levels, qualified personnel have been inducted. In another case, a new
clause was incorporated in the appointment letter: Company requires the
employees to acquire new skills and you shall participate in such skill learning
schemes. On successful acquisition and application of new skills, you shall be
entitled to additional remuneration as per scheme. You shall also be placed on a
job different from that for which you have been employed.
3) Employment practices perpetuate and exacerbate obsolescence. Several Indian
organisations follow the practice of giving employment to one. of the heirs of
the deceased/retired employee, usually regardless of qualifications, at the time of
switching to or adopting modern, state-of-the-art technologies. The possible way
to deal positively with obsolescence is to stipulate realistic job specifications 47
and review them as job contents change. Also, opportunities can be provided to
and Pay Restructuring existing employees for acquiring new qualifications and skills.
4) Downsizing and job reduction should be the last resort in economies where
unemployment is high. It is irrational to talk about human resource development
and yet have as one of its goals tithe progressive reduction of manpower.
5) Entrepreneurship, self-employment and livelihood programmes, including
intrapreneurship and outplacement, are all fine ideals. But one needs to be
careful in prescribing entrepreneurship as a source of livelihood for the
redundant and for the unemployable. These, one must add at the cost of
repetition, must be preceded by necessary and adequate training and appropriate
follow-up systems/services.
6) Much has been made of the so-called elegal hurdles in the form of various
clauses in the Industrial Disputes Act. Permission for lay-off, retrenchment and
closure was considered elusive. The ILO Convention No.158 on Termination of
Employment at Employer Initiative suggests that technical, economic and
structural factors constitute valid reasons for termination of employment.
Strangely, in India, retrenchment is easy if there is transfer of ownership even
within the family, but not so even in the event of the firms imminent bankruptcy.
Public policy should insist on notice, consultation and higher compensation, not
prior permission.
7) Companies consider VRS as one option for labour adjustment (this is discussed
in detail later in this unit). Simultaneously organizations need to initiate action
for reassessing workflow and work norms; otherwise the work of the people
who leave the organization will either suffer or get contracted out.
Competitiveness can be achieved through cost cutting and value addition. Cost
cutting can be achieved not only through cutting labour costs but also through the
involvement of labour in cutting the costs of other inputs. Labour costs in most
enterprises do not exceed 10 to 15 per cent. Other input costs account for over 80 per
cent to 90 of the total costs. Companies gain more by cutting 10 per cent of other
input costs than what they can gain by cutting 50 per cent of labour costs. It is
difficult to secure employees cooperation to cut labour costs because such a strategy
of competitiveness would mean some of the workers losing their jobs or earnings or
both. It is my to secure the cooperation of employees in cutting other costs because it
means smart working rather than hard working. More so if the employees involved
are assured of a say and stake in the resultant savings.
SOCIAUNREACTNIBLE DOWNSIZING ITTUE NESTRUCTURXNG
Companies should be careful enough to avoid downgrading the organizations in the
name of or during the process of downsizing. Similarly, companies should endeavour
to upgrade, not just upsize the organizations. Proactive approach to downsizing is
preferable 'to reactive way of responding to the pressures of downsizing (see Table I
for ' the difference between the two).The difference between downgrading and
downsizing. and upgrading and upsizing is shown in Table 2.
48
Retirement Scheme
Corporate restructuring has become a global phenomena. Whatever be the driving

force for restructuring ii growth, maturity, decline, merger,' acquisition, alliances;
changes in ownership, technology, products, processes, materials, customer
preferences, etc. F1 the short-term implication for employees is downsizing. Starcher
(1999) identifies the following five paradoxes facing business in this context:
1) There is increasing evidence that those practices which provide more
meaningful work and higher quality of life in the workplace have a very direct
impact on profits through increased productivity, greater innovation, higher
quality and reliability, and more skilled and committed people at all levels. Yet
current management practices do not reflect this finding. In fact, there is
evidence, which indicates that some practices may be moving in 'exactly the
opposite direction.
2) We read that human and social capitals are becoming all-important in the post-
industrial economy. Human capital includes intelligence, values, technical
knowledge, experience, creativity, network of contacts, corporate memory, as
well as professional skills and experience. Nearly all corporate codes of ethics or
conduct state that people are out most important assets. Yet management actions
often destroy the human tissue of their own organizations as they downsize,
reduce training budgets, and divest whole ecommunities within their group.
3) Research shows that employee satisfaction translates into customer satisfaction.
Employee motivation and loyalty are closely related to customer loyalty, and the
most profitable customers are the long-term loyal ones. Yet many companies
still treat their employees as their costs. The human side of downsizing is often
carried out in a way that causes morale, motivation, loyalty, creativity, and 49
productivity of employees to suffer.
and Pay Restructuring 4) Surveys indicate that almost all large companies have downsized and many of
Ahem have downsized several times. Yet these same surveys show that fewer
than one in four downsizing really achieve their objectives of reducing costs,
increasing productivity, and improving quality and customer service.
5) Numerous studies have shown that over one-half of mergers and acquisitions do
not achieve their objectives. Often the only beneficiaries are the shareholders of
the company being acquired who cash in on over-inflated valuation, while
acquiring companies realize very limited added value. Yet 1998 saw more
mergers and acquisitions than any other year in history and 1999 has maintained
this pace.
In view of the above, enterprises need to seek adjustment and undertake restructuring
only when it is essential rather than as a fad or for ushering in change for the sake of
change. When restructuring leads to downsizing, they should assess the hidden costs
of downsizing and pay particular attention to information sharing, two-way
communication and consultation. There is a need to generate among the people in the
organization ownership of the changes proposed. Negotiated changes and flexibility
(Ozaki, 1999) are easier to implement than unilateral dictates from management
through office circulars.
MEASURES TO AVOID DOWNSIZING OR MIN ISE JOB LOSSES
In addition to the above, several measures could be considered to avert/minimize job
losses. There is a need for caution, though. Restrictions on hiring, for instance, if
continued over several years, may have unintended consequences and
dysfunctionalities in terms of critical skill gaps at a much later date. The following
are some of the measures that will minimize, if not preclude, job losses:
1) Restrictions on hiring for a limited period
2) Spreading reductions over time
3) Internal transfers
4) Training and retraining
5) Voluntary early retirement
6) Income protection
7) Restriction of overtime
8) Entrepreneurship
9) Extra shift/extended work week if demand is not a constraint
10) Counseling and outplacement
11) Reduction of normal hours of work
12) Priority of rehiring
17.3 VOLUNTARY TIREMENT SCHEMES (VRS)
Voluntary retirement is legally tenable and, forms an integral part of public policy. In
the wake of liberalization the Government has created a special fund called, National
Renewal Fund (NRF) and earmarked nearly 90 per cent of the fund to voluntary
retire over 100,000 employees from the central public sector undertakings which
have not been doing well commercially. The government service rules also provide
for voluntary retirement of civil servants as part of the governments efforts to
downsize the government.
In the public sector the Department of Public Enterprises (DPE) has framed
guidelines, which mot public enterprises owned and controlled by the central
government follow. The guidelines in force during the 1980s and early 1990s were:
(a) VRS open for employees who have completed 10 years of service or 40 years of
service;
(b) Management of the enterprise has the right not to consider any request under
VRS;
(c) Terminal benefits include:
50
(i) balance of provident fund accumulation,
(ii) leave encashment as per rules, Retirement Scheme
(iii) gratuity as per Gratuity Act,
(iv) one/three months notice pay as applicable,
(v) ex-gratia payment equivalent to 45 days emoluments (pay and dearness
allowance) for each completed year of service, or the monthly emoluments
at the time of retirement, or salary for the remaining period of service,
whichever is less, and,
(vi) travel for self or family to the place of settlement as per leave travel
entitlement.
(d) higher ex-gratia can be proposed only after the approval of the BPE. This rule,
however, does not apply in the case of existing schemes, and, (e) The above
rules apply to all categories of employees.
During late 1990s some public enterprises began to offer three months basic and
dearness allowance for every year of completed service. Some others extended
membership of benefits like medical and holiday homes, to voluntary retirees till the
date of normal superannuation.
In the central public sector, Steel Authority of India Limited (SAIL) has introduced a
scheme in 1999 for those with a minimum of 20 years in SAIL or above 50 years of
age. The monthly benefit, apart from the other benefits mentioned under the DPE
scheme above, are: 100 per cent of last drawn basic pay plus dearness allowance for
those who completed 55 years of age, 99 per cent to those above 52 years and below
55 years and 80 per cent to those at or below 52 years of age. The monthly benefits
are payable on a quarterly basis through cheque.
One of the most attractive VRS schemes in the private sector was introduced by the
Tata Iron and Steel Company Limited in 1998. It is called early separation scheme. If
the scheme is voluntary it should be voluntary for both employer and employee. If
the scheme is called early retirement scheme, management can legitimize discretion
of accepting or rejecting an application.
The following are the essential features of the TISCO scheme: Employees separating
before attaining the age of 40 years and who have not completed 10 years of service
as on the date of separation, will be entitled to get a monthly pension (basic and
dearness allowance) equivalent to the last salary drawn by them till their attaining the
age of superannuation (60 years). Employees crossing the age of 45 years will get
salary equivalent to 1.125 times of their last drawn salary (basic plus dearness
allowance) till the age of 60 years. Voluntary retirees and their families are entitled to
medical benefits till the age of superannuation and after attaining the age of 60 as per
benefits available to retiring employees. Voluntary retirees who stay outside
Jamshedpur and do not wish to avail company hospital facilities are entitled to Group
Mediclaim policy of New India Insurance Company for a total coverage of Rs.95,000
per annum,, each for self and spouse subject to deduction of Rs.100 per annum per
head. Employees separating and desirous of starting some business or vocation are
also eligible for a loan of Rs.2 lakh or 50 per cent of the pension benefits, whichever
is less.
Since the financial outgo on account of VRS is spread over several years, on a
monthly basis, the actual cost to the company is less than what it would have been
had the company paid the entire amount in lumpsum. From the employee point of
view, though the job is gone, income (last drawn basic plus dearness allowance) is
protected till he/she attains the age of 60.
Employees who opt for VRS are not entitled for future increases in pay due to wage
revisions or dearness allowance. They are also not eligible for reemployment.
However, some schemes provide that in case of those avail VRS during the pendency
of wage revision, the benefits of such wage revision will accrue to the concerned
persons also if a clause to that effect is incorporated in the VRS. While some
schemes provide for adjustment of outstanding. advances/loans against lumpsums of 51
gratuity and other payments, some foreign banks waived in full or substantially the
outstanding dues/loans of those who opt, for VRS.

Block 4

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Block 4

Uploaded by

Copyright:

Available Formats

Design of Performance Linked

After going through this unit, you should be able to:

Designing a performance-linked reward systems is conditioned by a variety of factors

Performance-linked reward systems reduce labour cost, result in increases in real

It has been increasingly realised that performance-related pay, if used in isolation,

Reward system cannot be seen in isolation from compensation management.

13.2 FORMS AND CHOICE OF PERFORMANCE LINKED

Suppose it is intended to give an incentive opportunity of 20 per cent.

13.3 STEPS IN DESIGNING

13.4 ISSUES AND TRENDS

4. Package of Monetary and Non-Monetary Incentives

Performance pay is at best an element in the reward management and motivational

5. Rewarding Good Performance

6. Performance Pay and Performance Management

It is increasingly realised that performance is affected by a variety of factors. These

It is being increasingly realised that

i) The performance pay systems should be designed to promote the kind of

14.2 MEANING AND DEFINITION

14.4 MERITS AND DEMERITS

14.5 PRE-REQUIS1TES OF EFFECTIVE INCENTIVE

14.6 INCENTIVE SYSTEMS

After going through this unit, you should be able to:

Thus, profit was considered as a precondition for bonus. Several companies fi

Disqualification for Bonus

Under the Act an employee may be disqualified from receiving bonus if he is

Payment for Minmum Bonus

Payment for Maximum Bonus

Proportionate Reduction in Bonus

Computation of Number of Working Days

For the purposes of computing proportionate bonus, an employee shall be deemed to

After going through this unit you should be able to:

16.1 THE NEED

16.2 BASIC WAGE

16.3 DEARNESS ALLOWANCE

17.2 REASONS FOR DOWNSIZING

Corporate restructuring has become a global phenomena. Whatever be the driving

You might also like