MAHARANA PRATAP GROUP OF INSTITUTIONS

KOTHI MANDHANA, KANPUR

(Approved by AICTE, New Delhi and Affiliated to Dr. AKTU, Lucknow )

Digital Notes
[Department of Business Administration]
Subject Name : Performance & Reward
Management

Subject Code : KMBN HR04

Course : MBA
Branch : -
Semester : IV
Prepared by : Mr. Rohit Verma

Reference No./BBA/RV/AM/MBAF010203T

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 UNIT-5
Compensation: Method of Pay and Allowance
Pay Structure: basic Pay, DA, HRA, Gross Pay, Take home Pay, etc
The pay structure or salary structure defines the compensation given to the employees. It shows the breakup of
the salary into various components. Based on various criteria such as the professional experience or employees,
or grades or bands the employees are categorized under, different pay structures may be defined in an
organization. One pay structure may be applicable to multiple bands or grades and one band or grade may have
multiple pay structures.

Pay structures offer a framework for wage progression and can help encourage appropriate behaviours and
performance, while pay progression describes how employees are able to increase their pay within their salary
grade or band.

Pay structures can be distinguished by two key characteristics: the number of grades, levels or bands; and the
width or span of each grade. For example:

Narrow-graded pay structures, often found in the public sector, typically comprise ten or more grades, with
jobs of broadly equivalent worth in each grade. Progression is by service increments, although due to narrow
grades employees can reach the top of the pay range relatively quickly, potentially leading to ‘grade drift’ and
jobs ranked more highly than justified

Broad-graded structures have fewer grades, perhaps six to nine, and greater scope for progression that can
counter ‘grade drift’ problems

Broad-banding involves the use of an even smaller number of pay bands (four or five). Designed to allow for
greater pay flexibility, typical broad-banding would place no limits on pay progression within each band,
although some employers have introduced a greater degree of structure

Job families group jobs within similar functions or occupations, with separate pay structures for different
‘families’ (e.g. sales or IT staff). With around six to eight levels, similar to broad-grading, job family structures
allows for higher rates of pay for sought-after specialist staff

Career families extend the metaphor with a common pay structure across all ‘job families’ rather than separate
pay structures for each family. Career families tend to emphasise career paths and progression rather than the
greater focus on pay of job families.

Basic Pay

This is the core of salary, and many other components may be calculated based on this amount. It usually
depends on one’s grade within the company’s salary is a fixed part of one’s compensation structure. Many
allowances and deductions are described in terms of percentage of the Basic Salary.

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Basic salary is the base income of an individual. Basic salary is the amount paid to employees before any
reductions or increases due to overtime or bonus, allowances (internet usage for those who work from home or
communication allowance). Basic salary is a fixed amount paid to employees by their employers in return for
the work performed or performance of professional duties by the former. Base salary, therefore, does not
include bonuses, benefits or any other compensation from employers. As the name suggests, basic salary is the
core of the salary of an employee. It is a fixed part of the compensation structure of an employee and generally
depends on her or her designation. If the appointment of an employee is made on a pay scale, the basic salary
may increase every year. Else, it remains fixed.

Methods of Payment: Time and Piece Rate

To select the best payment method, it can be helpful to think about it in terms of the above risk ladder. The nature of the
relationship with your buyer may also determine the settlement method used. 

Payment Method 1: Open account

This is probably the least secure payment method for you as the exporter. Your buyer receives the goods and then pays for
them, usually with a credit period attached (30, 60 or 90 days).

This payment method extends the period before which your business receives cash –and your working capital position
will be impacted further if a period of credit applies.

You might consider offering this option under the following circumstances:

 You have an established relationship with the buyer

 The buyer is a multinational business with strong buying power and strong buyer credit rating

 Smaller value exports.

Payment method 2: Bank collection

This is a more secure option than an open account, whereby, as the name suggests, your bank collects the money on your
behalf. It is also known as a documentary collection.

An instruction document is forwarded by your bank to your buyer’s bank for release against either Payment (Documents
against Payment) or Acceptance – of a Bill of Exchange (Documents against Acceptance).

This can be a good way of “meeting in the middle” with your buyer, wherein the risk is reduced (but not eliminated) for
you both.

It is also not as time consuming or costly as a letter of credit, and doesn’t take up any credit facilities.

Payment method 3: Letter of credit

A letter of credit is essentially a bank’s promise to another bank that you they know you and (hold your overdraft facility)
will act as a guarantor for your transaction. You need both banks’ party to the transaction to agree to act in this way.

Once it is agreed, in the event that your buyer is unable to make payment, the bank will cover and pay the outstanding
amount, provided that certain delivery conditions have been met.

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One of the important things to note from a payment method perspective is that, if ever you receive a letter of credit, ensure
you give it your immediate attention and check it in detail.

Remember, it is a document that should lead to your business being paid on time. Lack of attention to detail could delay
payment and cost you money.

Payment method 4: Advance payment

This is the most advantageous method for you as the exporter as, where the buyer has to pay for the goods before they
receive them. Consumers essentially do this every day when purchasing online, being charged either at the time of order
or when the goods dispatch.

This method is advisable in the following circumstances:

 You have a new relationship with the buyer, where there is a ‘lack of trust’ between buyer and seller

 The buyer does not have a strong credit rating

 You sell a unique/rare product of high value.

So, once you have selected the appropriate method of payment, allow sufficient time to get everything in place and make
sure you ask questions – of your buyer, if need be, and especially of your bank, who are there to help.

Time Rate System

Under this system, the amount of remuneration or the total wages outstanding to the workers depends on the time for
which he is employed. This is a simple and common method of wage payment. In this method, the workman is paid an
hourly, daily, monthly or yearly rate of wages.

Thus, the worker is paid on the basis of time but not on his/her performance or unit of output. A number of wages payable
to a workman under this method is to be calculated as follows:

Total wages = Actual time took x time rate

or, Total wages = Total hours worked x Wages rate per hour.

 
Advantages of Time Rate System
The following are the advantages of time rate system,

 Simplicity: It is really easy to understand and simple to calculate the earnings of workers under this
method.

 Guarantee of minimum wages: It guarantees minimum wages to the workers.

 Quality production: Since, a number of wages rate is not linked to the quantity of output, this
method ensures production of better quality due to the careful attention of the workers.

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  Unity among workers: Under this system, all workers falling under a particular category are paid
at an equal rate without any calculation of their quantity of output. It encourages a feeling of
equality among workers on account of which this method is also favored by trade unions.
 Economical: It involves less critical work and detailed records are not necessary. Since, the output
is not the criteria for identification of wages, tool and materials are handled carefully and wastages
are also minimized.

Disadvantages of Time Rate System

This method has the following disadvantages:

 No incentive to the efficient workers: It lacks incentive to efficient workers since all workers are
paid equally and no distinction is made between efficient and inefficient workers. So, effort and
rewards are not correlated.

 Go-slow policy: The worker in order to earn more wages may try to perform the work slowly which
leads to increase in labor cost per unit.

 Dissatisfaction among the efficient workers: The efficient workers are paid wages at the rate
equal to those payable to inefficient workers, which creates dissatisfaction among the efficient
workers.

 Payment for idle time: Under this method, the idle time of the workers is also paid that increases
the cost of production.
 The high cost of supervision: Since, there is no direct link between the quantity of output and
wages, wastage of time on the part of the workers is common and the negligence of which requires
considerable supervision leading to increased costs.

Piece Rate System

In this method, wages are paid to the employees after completion of work. Under it, a worker is paid on the basis of output
not the time taken by him. This is one of the simplest and most commonly used systems of wage payment. In this system,
the wage rate is expressed in terms of per unit of output, per job or per work-order. A number of wages payable to a
workman under this method is to be calculated as follows:

Total wages = Total output x Rate per Unit of Output.

Advantages of Piece rate system

The advantages of piece rate system are given below:

 Simplicity: Just like time rate system, the piece rate system is also simple to calculate and easy to
understand. It does not involve tedious calculations.

 The incentive to workers: This system provides an incentive to the workers to work hard as the
wages are paid on the basis of the quantity of output, not on the basis of time. So, efforts and
rewards are correlated.

 Ascertainment of accurate labor cost: Piece rate system wages are paid on the basis of output, the
exact cost of labor per unit of output or job can be ascertained.

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  No payment for idle time: Under this rating system, no payment were made to the worker for the
idle time as a result of which the cost of supervision is not considerable.

 Proper care and use of machines and tools: The workers take proper care of their machines and
tools since the breakdown of machines and tools means a decrease in output resulting in less
remuneration to them.

Disadvantages of Piece Rate System

 Less attention to quality: As the payment of wages is made on the basis of output, the workers
would try to produce more quantity of products and not focus on the quality of products which
results in production of less quality products.

 Inefficient use of machines and materials: Since, the wages are paid on the basis of the quantity
of output, an excessive wastage of materials and frequent breakdown of machinery may be caused
by the workers due to their efforts to obtain maximum output.

 No guarantee of minimum wages: Since, there is a direct relationship between quality of output

and wages, the workers suffer if they fail to work efficiently. There is no guarantee of minimum
daily wages to workers.

 Dissatisfaction among inefficient workers: The inefficient workers, who work slowly, become
dissatisfied by reason of lower wages as compared to the wages paid to their efficient counterparts.
 Adverse effect on worker’s health: The workers may try to work abnormally to earn more which
has an adverse effect on their health and efficiency. So, this method is not accepted by a trade union.

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 Fringe Benefits
Fringe benefits are a type of compensation provided to an employee outside of his normal wage or salary. Many years
ago, employers began to understand that potential employees give great consideration to the wage or salary offered. In an
effort to tempt a qualified individual to accept employment with the company, rather than going to a competing company,
many employers began offering non-wage compensation in addition to the actual salary offered.

These fringe benefits, often in the form of employer-paid life and health insurance policies, retirement benefits, and other
things that might aid in the recruitment of top quality, skilled workers. In fact, fringe benefits play a large role in keeping
workers motivated to do quality work and increase production. Some fringe benefits may be classified as taxable income
by the IRS.

Types of Fringe Benefit

Many employers offer employees an array of fringe benefits in addition to their salaries. Also considered “job-perks,”
these benefits cost employers, who pay for such perks, and are therefore considered a portion of the employees’ salaries
on their books, even if the benefits are not in the form of money, such as bonuses. There are many types of fringe benefit,
and which types are offered often depends on the type of employer, and value of the employee’s position.

1. Taxable Fringe Benefits

According to the IRS, any fringe benefit provided by an employer may be taxable, unless it is specifically excluded from
taxation. The IRS provides specific information regarding fringe benefits, including which are considered taxable. Some
of the fringe benefits that may be taxable under certain situations often include payment of, or reimbursement for, things
in an excessive amount. These include:

 Excessive Moving Expenses – if an employer reimburses or pays for an employee’s moving

expenses, when the move was less than 50 miles from the employee’s current residence, may be
taxed.
 Excessive Mileage Reimbursement – employer reimbursement for business-related driving of the
employee’s private vehicle may be taxable if the total exceeds the IRS’ standard mileage rate.
 Expense Reimbursement – expense amounts reimbursed to an employee with the employee’s
sufficient accounting, may be taxable.
 Clothing Reimbursement – employer reimbursement for clothing that is not strictly for work on
the job, but which is suitable for everyday street wear, is taxable.
 Working Condition Benefits – any equipment or supplies purchased by an employee that is used
for work purposes exclusively, it is tax free. If the item is used for any personal purpose at all, it is
taxable.
 Excessive Education Expenses – Educational assistance for education that is not job-related, or
which the amount exceeds the IRS allowable amount is taxable.
 Awards and Prizes – Employee awards and prizes that are given in cash, are taxable, unless they
are given to charity in the employee’s name. Valuable non-cash awards may also be taxable, unless
the value is minimal.

2. Non-Taxable Fringe Benefits

There are many types of non-taxable fringe benefits that may be offered to employees without increasing their tax burden.
Some of the most common tax-free types of fringe benefit provided to employees by private and public businesses
include:

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  Insurance Coverage- Insurance coverage is perhaps the most common fringe benefit provided to
employees, though the structure of how insurance is paid for has changed in recent years. Insurance
coverage may include employer-paid life insurance, health insurance, and short or long-term
disability insurance. When an insurance coverage fringe benefit is offered, the employer most
commonly shares the cost of premiums at a certain percentage, thus reducing the amount for which
the employee is responsible. Of course, insurance coverage may be offered entirely at the
employer’s expense. Some employers also offer health savings accounts to their employees, often
matching the employees’ contributions to the plan.
 Childcare Assistance- Childcare assistance is one fringe benefit that comes in handy for many
families, and may increase attendance at work, as well as productivity. This is because parents have
additional responsibilities in ensuring their children are well cared-for while they are at work. Many
large employers are offering on-site childcare, either free of charge, or at a discounted price. This
allows parents to concentrate on their work, knowing their children are close by, and being cared
for. Some smaller employers, while unable to maintain an on-site daycare facility, offer a cost-share
for daycare.
 Physical Fitness- Some employers make it a priority to ensure their employees have access to gyms
or fitness centers in order to promote a healthy lifestyle, which in turn increases attendance and
productivity. Some companies maintain on-site fitness centers, where employees can work out on
breaks or other off times, while others offer paid gym memberships, or memberships at a discounted
price.

 Education Assistance- Education assistance in the form of tuition reimbursement, or other

assistance in adding to an employee’s education or skill set, is one of the more popular types of
fringe benefit offered by employers. Helping an employee gain new job-related skills or knowledge
helps the company, as the employee is then able to work at a different level in his current position,
or may become able to advance into new areas of the business.

Allowances: overtime, city compensatory, travelling, etc

Allowance
An allowance is the financial benefit given to the employee by the employer over and above the regular salary. These
benefits are provided to cover expenses which may be incurred to facilitate the discharge of service for example
Conveyance Allowance is paid to foot expenses incurred for commuting to workplace. Some of these allowances are
taxable under the head Salaries. A few of them again could be partly taxable and few others are non-taxable or fully
exempt from taxes.

Here’s a glance at allowances that are either taxable, partly taxable or non-taxable:

(1) Taxable Allowances:

 Dearness Allowance: Dearness Allowance (DA) is an allowance paid to employees as a cost of

living adjustment allowance paid to the employees to cope with inflation. DA paid to employees is
fully taxable with salary. The IT Act mandates that tax liability for DA along with salary must be
declared in the filed return.
 Entertainment Allowance: Employees are allowed the lowest of the declared amount –one-fifth of
basic salary, actual amount received as allowance or Rs. 5,000. This is an allowance provided to
employees to reimburse the expenses incurred on the hospitality of customers. However,

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 Government employees can claim exemption in the manner provided in section 16 (ii). All other
employees have to pay tax on it.
 Overtime Allowance: Employers may provide an overtime allowance to employees working over
and above the regular work hours. This is called overtime and any allowance received for this is
fully taxable.
 City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban
centre which may be highly expensive and to cope with the inflated living costs in the cities. This
allowance is fully taxable.
 Interim Allowance: When an employer gives any Interim Allowance in lieu of final allowance, this
becomes fully taxable.
 Project Allowance: When an employer provides an allowance to employees to meet project
expenses, this is also fully taxable.
 Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the
employees. This is fully taxable.
 Cash Allowance: When the employer provides a cash allowance like marriage allowance,
bereavement allowance or holiday allowance, it becomes fully taxable.
 Non-Practicing Allowance: When physicians are attached to Clinical Centers of the various
Laboratories/Institutes, any non-practicing allowance paid to them become fully taxable.
 Warden Allowance: When an employer pays an allowance to an employee working as a Warden
i.e. Keeper in an educational Institute, the allowance received is fully taxable.
 Servant Allowance: When an employer pays an employee to engage services of a servant, such an
allowance is taxable.

(2) Non-Taxable
Some of the allowances, usually paid to Government servants, judges and employees of UNO are not taxable. These are:

 Allowances paid to Govt. servants abroad: When servants of Government of India are paid an
allowance while serving abroad, such income is fully exempt from taxes.
 Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are not taxed.
 Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
 Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is
not taxable.

The Minimum Wages Act 1948

In a labour surplus economy like India wages couldn’t be left to be determined entirely by forces of demand and supply as
it would lead to the fixation of wages at a very low level resulting in exploitation of less privileged class. Keeping this in
view, the Government of India enacted the Minimum Wages Act, 1948. The purpose of the Act is to provide that no
employer shall pay to workers in certain categories of employments wages at a rate less than the minimum wage
prescribed by notification under the Act. In fact the sole purpose of this act is to prevent exploitation of sweated and
unorganized labour, working in competitive market.

The Act provides for fixation / periodic revision of minimum wages in employments where the labour is vulnerable to
exploitation. Under the Act, the appropriate Government, both Central and State can fix / revise the minimum wages in
such scheduled employments falling in their respective jurisdiction.

The term ‘Minimum Wage Fixation’ implies the fixation of the rate or rates of minimum wages by a process or by
invoking the authority of the State. Minimum wage consists of a basic wage and an allowance linked to the cost of living

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index and is to be paid in cash, though payment of wages fully in kind or partly in kind may be allowed in certain cases.
The statutory minimum wages has the force of law and it becomes obligatory on the part of the employers not to pay
below the prescribed minimum wage to its employees. The obligation of the employer to pay the said wage is absolute.
The process helps the employees in getting fair and reasonable wages more particularly in the unorganized sector and
eliminates exploitation of labour to a large extent. This ensures rapid growth and equitable distribution of the national
income thereby ensuring sound development of the national economy.

It has been the constant Endeavour of the Government to ensure minimum rates of wages to the workers in the sweated
industries and which has been sought to be achieved through the fixation of minimum wages, which is to be the only
solution to this problem.

Essential Ingredient

 Wage should be by way of remuneration

 It should be capable of being expressed in terms of
 It should be payable to a person employed in respect of his employment or of work done in such
employment.
 It should be payable to a
 It should be payable if the terms of employment, express or implied, are fulfilled.
 It includes house rent allowance.
 It does not include house accommodation, supply of light, water, medical attendance, traveling
allowance, contribution of employer towards provident fund, gratuity , any scheme of social
insurance etc.

Classification of Wages
The Supreme Court has classified “Wages” into three categories. They are:

 The Living Wage ( highest standard of wage)

 The Fair Wage (between living and minimum wage)
 The Minimum Wage.( it is the lowest standard of wage)

Procedure for fixing and revising minimum wages (section 5)

The appropriate Government is required to appoint an Advisory Board for advising it, generally in the matter of fixing and
revising minimum rates of wages.

The Central Government appoints a Central Advisory Board for the purpose of advising the Central and State
Governments in the matters of the fixation and revision of minimum rates of wages as well as for co-coordinating the
work of Advisory Boards.

The Central Advisory Board consists of persons to be nominated by the Central Government representing employers and
employees in the scheduled employments, in equal number and independent persons not exceeding one third of its total
number of members. One of such independent persons is to be appointed the Chairman of the Board by the Central
Government.

Equal Remuneration Act, 1976

The Equal Remuneration Act, 1976 provides for payment of equal remuneration to men and women and help prevent
gender discrimination. Article 39 of the Indian Constitution envisages that the States will have a policy for securing equal

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pay for equal work for both men and women. To give effect to this constitutional provisions, the Equal Remuneration
Act, 1976 was introduced.

An Act to provide for the payment of equal remuneration to men and women workers and for the prevention of
discrimination, on the ground of sex, against women in the matter of employment and for matters connected therewith or
incidental thereto.

The purpose of the act is to make sure that employers do not discriminate on the basis of gender, in matters of wage
fixing, transfers, training and promotion. It provides for payment of equal remuneration to men and women workers, for
same work or work of similar nature and for the prevention of discrimination against women in the matters of
employment.

The salient features of the Equal Remuneration Act, 1976

 The Act is a Central Legislation and applies to the whole of India.

 The objective of the Act is to provide for protection against discrimination of women workers on the
ground of sex, about the payment of equal remuneration in the matter of employment.
 Restricting the employer to create terms and conditions in a contract of service or work of labor
contrary to equal pay for equal work doctrine and the provisions of Equal Remuneration Act.
 The Act doesn’t make a distinction like employment or the period of employment and applies to all
workers even if engaged only for a day or few days.
 No overriding effect is given to any agreement, settlement or contract to the provisions of the Equal
Remuneration Act.
 Any settlement or any agreement with the employee that is detrimental to the employee isn’t
allowed.
 The Ministry of Labour and The Central Advisory Committee are responsible for enforcing this Act.
 Meaning of equality of work: The equality of work is not based solely on the designation or the
nature of work but also on factors like qualifications, responsibilities, reliabilities, experience,
confidentiality, functional need and requirements commensurate with the position in the hierarchy
are equally relevant.
 When the employer doesn’t comply with the provisions of the act, he will be liable to pay fine,
imprisonment, or both.

Regulatory Compliance including Wage and Pay commission

Pay Commission is set up by Government of India, and gives its recommendations regarding changes in salary structure
of its employees. Since India’s Independence, seven pay commissions have been set up on a regular basis to review and
make recommendations on the work and pay structure of all civil and military divisions of the Government of India.
Headquartered in Delhi, the Commission is given 18 months from date of its constitution to make its recommendations.

Objective of pay/Wage Board in The Private/Government etc.  Organization

(i) To establish a fair and equitable compensation offering similar pay for similar work.

(ii) To attract competent and qualified personnel.

(iii) To retain the present employees by keeping wage levels in nine with competitive units.

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(iv) To keep labour and administrative costs in line with the ability of the organisation to pay.

(v) To improve motivation and morale of employees and to improve union management relations.

(vi) To project a good image of the company and to comply with legal needs relating to wages and salaries.

(vii) To establish job sequences and lines of promotion wherever applicable.

(viii) To minimise chances of favouritism while assigning the wage rates.

The following principles should be observed in the wage and salary administration:

1. Wage policy should be developed keeping in view the interests of all concerned parties viz.
employer, employees, the consumers and the society.
2. Wage and salary plans should be sufficiently flexible or responsive to changes in internal and
external conditions of the organisation.
3. Efforts should be made to ensure that differences in pay for jobs are based on variations in job
requirements such as skill, responsibility, efforts and mental and physical requirements.
4. Wage and salary administration plans must always be consistent with overall organisational plans
and programmes.
5. Wage and salary administration plans must be in conformity with the social and economic
objectives of the country like attainment of equality in income distribution and controlling inflation
etc.
6. These plans and programmes should be responsive to the changing local and national conditions.
7. Wage and salary plans should expedite and simplify administrative process.
8. Workers should be associated, as far as possible, in formulation and implementation of wage policy.
9. An adequate database and a proper organisational set up should be developed for compensation
determination and administration.
10. The general level of wages and salaries should be reasonably in line with that prevailing in the
labour market.
11. There should be a clearly established procedure for hearing and adjusting wage complaints. This
may be integrated with the regular grievance procedure, if it exists.
12. The workers should receive a guaranteed minimum wage to protect them against conditions beyond
their control.
13. Prompt and correct payments to the employees should be ensured and arrears of payment should not
accumulate.
14. The wage and salary payments must fulfill a wide variety of human needs including the need for self
actualisation.
15. Wage policy and programme should be reviewed and revised periodically in conformity with
changing needs. For revision of wages, a wage committee should always be preferred to the
individual judgement, in order to prevent bias of a manager.

Incentive Scheme: Individual, Group

Incentive Scheme
HR: Employee motivational program designed to encourage commitment to increasing productivity or in achieving some
worthwhile objective such as reducing the number of man-hours lost due to accidents.

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Marketing: Customer motivational program designed to encourage them to buy more of the firm’s products. Also called
bonus scheme or incentive program.

 (I) Individual Incentive Plan

Reward systems tied to the performance of individual employees are known as individual incentive plans. These plans
depend on category of workers for which they are designed. Under this plan mostly a certain pay rate is guaranteed and
the rewards represent additional compensation.

Under individual wage incentive plans three categories of personnel’s can be included. They are Production workers or
blue dollar workers, white collar workers such as salesman, and managerial personnel’s. All these categories of employees
have different needs, they differ in qualification and type of work, and therefore separate plans are designed for them.

Incentive Plans for Production Workers or Blue Collar Workers:

There are three categories of these plans:

(1) Incentive is proportional to extra output.

(2) Incentive is proportionately at lower rate than increase in output.

(3) Incentive is higher proportionately to rate of increase in output.

Under these plans, workers are rewarded individually when their performance exceeds pre determined standard.
Individual workers earn a bonus if they work more and produce more. These plans are therefore known as premium plans.
These plans are either time based or production based.

A standard time is determined for doing a job. A standard time serves as the basis of giving bonus to the workers if they
meet or exceed the standard. The worker is said to be efficient if he completes his job in less than the standard time. In
order to reward him for his efficiency, he may be given bonus under an appropriate incentive plan.

Advantages:

Incentive wage plan have following advantages:

(1) The standard output is determined on the basis of time and motion studies by the specialists and the rates of wages are
fixed for different jobs on the basis of job evaluation. This stimulates workers to work more.

(2) Increase in output leads to lowering of per unit cost, hence a direct gain to the employer.

(3) Less supervision is required as the workers are motivated to work more. This saves supervisor’s time for supervision.
He can utilize this time for other more important work.

(4) No conflict between employees and employers as the needs of both are satisfied because employees are rewarded for
their efficient work and employers are happy with the increased output.

Disadvantages:

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The wage incentive plan suffers from some of the demerits:

(1) Even though output is increasing the quality is at the receiving end. Employees give more stress on increase in output
neglecting the quality. Employees become quantity conscious and not quality conscious.

(2) Employees oppose the introduction of advanced and modern techniques of production because of the fear that they
may lose extra payment for extra output produced by them.

(3) There is an increase in cost of record keeper.

(4) Safety precautions are overlooked. May therefore lead to accidents.

(5) Slow workers become jealous of fast workers because comparatively their earnings will be less than their counterparts.

(6) This system increases their earnings. They may therefore put a demand for increased minimum wages.

(7) Management faces difficulties in determining the rate of bonus to be paid. Fewer rates may aggrieve the workers and
high rates may reduce their efficiency.

(II) Group Incentive Schemes:

It is observed that under individual incentive plans bonus is paid to the worker on the basis of individual’s performance.
This is in the case where the payment of bonus is not affected by the performance of others. But there are certain
situations where it is difficult to measure individual contribution. Here the performance each worker is affected by others.
Under such situations group incentive bonus schemes are introduced.

Under group incentive plan, bonus is calculated on the collective production of a group of interdependent workers and
distributed among members of group on some agreed terms and conditions. As far as possible the bonus so earned is
distributed equally among the members of the group.

The basis for distribution is on the following:

(1) Group bonus is distributed equally if all the members of the group possess similar skills.

(2) If the base wage of members is different than bonus may be distributed in proportion to the basic rates.

(3) Bonus may be paid to the members on a specified percentage depending on the basis of skill, experience, basic rate of
pay of each individual employee.

Following are the group incentive plans:

(1) Priestman’s Plan:

Under this, the starting point is productivity of the group. Standard output is laid for the group. Minimum wage is assured
to a group. The group members are entitled for a bonus if their output exceeds the set standard. The payment of bonus is
made in proportion to the excess of actual output over the standard output. This plan encourages the feelings of team spirit
among the members of the group. The employees behave as a group and work together to increase output. This scheme
does not consider the individual efficiency of worker. Thus the inefficient member of the group also get bonus.

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(2) Scanlon Plan:
This plan was devised by Joseph Scanlon in 1937, a trade union leader. Under this plan workers are involved in decision
making. They are encouraged to make suggestions regarding cost reduction and increasing productivity.

They are involved in the various screening committees in the plant to find out ways and means to judge the cost reduction
suggestions. In this way employees work with their supervisors, managers and other fellow employees on various
screening committees.

If the suggestions are successfully implemented, employees get share in the savings. To facilitate workers’ participation,
there are departmental committees consisting of representative of workers and management.

Periodical meetings of these committees are held to discuss the problems faced by the workers. They recommend
measures to increase production. It promotes healthy labour relations, minimizes supervision, increases efficiency and
sense of partnership among workers.

This plan suffers from certain drawbacks such as the inefficient worker gets rewarded because of better performance of
the group. It is also true that the suggestions of the employees are not given due consideration by the management.

(3) Profit Sharing:

Under the scheme of profit sharing a certain percentage of profit is distributed at fixed ratio among some categories of
employees annually. According to Henry R. Seager, “profit sharing is an agreement freely entered into by which the
employees receive a share, fixed in advance, of the profits.”

The decision of sharing of profit to the employees is informed in advance. The basis of profit sharing is decided on the
length of service or the number of working days in a year or the wages earned by a worker during a year.

It is direct incentive to a worker. The payment of profit can be made in cash or it can be deposited in the account of
provident fund of an employee. The advantage of this scheme is that workers develop common concern for the
development and progress of the undertaking.

Profit sharing is of two types:

(a) Current Profit Sharing:

It is the one directly paid to the employee annually or six monthly.

(b) Deferred Profit Sharing:

It is the one which is not paid directly to the employee but credited in his provident fund account or to pension account or
sometimes paid in the form of bonus shares.

Merits:

(1) Creation of industrial peace because workers are satisfied as they are getting an additional amount besides their wages.

(3) The bonus is paid only when the amount of profit exceeds the set target. It means bonus is not part of cost of
production.

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(4) Profit sharing scheme is based on the basic pay of the employees.

(5) Workers have share in profit and not losses incurred by the employer.

(6) It represents a reward for group effort and group efficiency.

(7) It brings about team spirit among the employees. They developed a sense of belonging to the organization, reduces
training time.

(8) Profit sharing results into equitable distribution of the profit.

Demerits:

(1) Employees are entitled to bonus when company earns profit. They do not get bonus when company recur losses.

(2) It is not possible for newly established company to pay bonus.

(3) There is no distinction between efficient and inefficient employees of the company while distribution of bonus.

(4) Bonus is paid to the employee once in a year. This does not motivate them for better performance.

Profit Sharing
“An agreement freely entered into, by which the employees receive a share, fixed in advance, of profits. In the discussions
of this Co-operative Congress, profits were further defined as being the actual net balance or gain realized by the final
operations of the undertaking in relation to which the scheme existed, and the sums paid to the employees out of the
profits were directly dependent upon the profits.”

Profit-sharing is the payment to employees in cash, stock, or future credits of some amount over and above the normal
remuneration that would otherwise be paid to these employees in the given situation. The payments do not have to be
derived from the current period involved but may be taken from an earned surplus from prior periods of operation. This
definition does not require an agreement fixing the percentage in advance.

Profit-sharing is an attractive supplement of a wage system. Under profit sharing an employer undertakes to pay his
employees a share in the annual net profits of the enterprise. This share is in addition to regular wages and is neither based
on time nor on output. Profit-sharing is an agreement entered into between the employer and the employees under which
the employer agrees to pay to the employees the share in the profit fixed in advance.

Profit-sharing is different from wage incentives which are directly connected with the output of workers. But profit-
sharing is related to the profits of the enterprise which depend on productivity and several other factors. It is a major
departure from the traditional concept of profit where it is treated as the exclusive monopoly of the employer. The
workers are treated as co-partners in the productive process and profit is treated as the outcome of the joint efforts of
employer and workers.

According to I.L.O. “Profit-sharing is a method of industrial remuneration under which an employer undertakes to

pay to his employees, a share in the net profits of the enterprise in addition to their regular wages” . Profit-sharing
arrangement enhances social justice, strengthens the common interest of capital and labour and increases the productive

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efficiency of the workers. It would be highly successful if the parties’ viz., labour and employers take each other into
mutual confidence.

The concept of profit-sharing is now accepted in the industrial world and also at the government level. In western
countries, profit- sharing is very popular among the industrial workers. However, this concept is not popular in India. We
have a system of bonus payment which is compulsory even when there is no profit to a company.

In India, workers and trade unions are interested in bonus payment and they are not interested in profit-sharing agreement.
This is because bonus payment is compulsory even when the workers are not co operative and there is no profit to the
industrial unit. However, profit- sharing is possible only when workers give full co-operation to raise the profits over and
above a particular limit.

Features of Profit-Sharing:
(1) The payment to workers under profit-sharing is generally made on cash basis, but it is also possible to make such
payment in shares or transfer of money to provident fund account of the employees.

(2) Workers share the profits only. They do not contribute to the losses incurred by the firm.

(3) Profit-sharing denotes the extra payment given to workers in addition to annual wages and allowances.

Types of Profit-Sharing:
In general there are two basic types of profit-sharing programmes:

(a) The current-distribution plan, in which the full amount of the employees profit share is given him at the time of
allocation, and

(b) The referred-distribution plan, in which the employee’s share of profits is given to him at some future date such as at
the end of 5 years, at retirement, disability, death, or termination of employment.

Of course there could be a combination of these two methods on practically any basis, such as 30 per cent of the
employee’s share to be distributed currently and the 70 per cent to be distributed on a deferred basis. The deferred profit-
sharing plans may or may not have an employee’s participating savings feature.

Plans calling for the employee’s saving in order to be eligible for his full share in profits may have almost any ratio if
allocation of profits in terms of participation. For instance, if the plan be a combination of current payments in cash or
stock and a deferred payment, the deferred part may depend entirely upon the employee’s participation in the savings
plan. The combined current and deferred distribution of profits seems to be gaining in popularity.

There is no doubt that such a plan has a stronger pull on the employee, particularly the newer employee, to increase his
efforts to add to the profit available for distribution. Since the deferred plan builds up an estate for the employee more
rapidly than any form of current distribution, this deferred distribution is likely to be preferred by the longer-service
employees.

Profit-Sharing’s Relation to Wages:

Profit-sharing is that part of the employee’s remuneration over and above what he would otherwise receive if he were paid
the going rate in the community for the services rendered. By this definition a man’s wage will not be lower because he
shares in profits.

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His share of profits may be in proportion to his wages, since this is a common method of allocating profits. It is not
unusual to consider length of service in the total allotment, but, even when this is considered, it is usually tied to the
employee’s wage as a basis of computation.

In the case of ordinary workers, it is highly improbable that the regular wage is materially lower under normal conditions
than it would be if profits were not being shared. The situation may be somewhat different in the case of some of the
higher executives. Since executives are usually in a better position to influence profits, it may be reasonable to remunerate
them in a greater degree through profit-sharing than the regular workers.

Merits of Profit Sharing:

(i) The workers are motivated and have a sense of belongingness to the firm. They cooperate voluntarily because their
prosperity depends upon the prosperity of the firm. If the firm earns higher profit, the workers will get higher amount of
bonus.

(ii) Profit-sharing brings about stability in the working of the enterprise. The rate of labour turnover is reduced because
the workers are connected with the management.

(iii) Profit-sharing results in equitable distribution of profit among the employer and the employees of the enterprise.

(iv) Profit-sharing is a step towards industrial democracy as employees are treated not only as wage earners but also as
partners in the progress of the company.

(v) There is industrial peace in the enterprise. The workers are satisfied as they get an additional amount over and above
their wages. A healthy atmosphere prevails in the enterprise. There is co-operation between labour and management as the
objectives of both are common, i.e., to increase productivity.

(vi) Profit-sharing acts as a driving force for higher production and productivity. The workers take more interest and
initiative leading to higher production.

(vii) The share of workers in the profits depends upon the efforts, initiative and hard work of the employer and employees.
This brings about a team spirit among the workers and employers. The chances of conflict are reduced.

Limitations of Profit Sharing:

(i) Profit-sharing gives equal benefit to all workers. Distinction is not made between good and bad workers. As a result,
sincere and efficient workers get less than what they deserve while bad or inefficient workers get more than what they
deserve.

(ii) Profit-sharing as a method of extra remuneration to workers is used during the period of prosperity when profits are
high. Profit sharing is not possible during the lean years of depression.

(iii) Unscrupulous management may manipulate the accounts to the detriment of the workers. The workers may, therefore,
get nothing due to dishonesty of the management. This will dampen the enthusiasm of the workers.

(iv) There is a high degree of uncertainty in profit-sharing. The share of profit will be paid only when the profit exceeds a
particular limit. The profit may not cross a particular limit due to market forces and the workers will suffer. Thus, profit-
sharing does not give full guarantee of extra-payment to the workers.

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(v) As the amount of profit is to be distributed after a specified period, there is no real incentive to produce more. The
incentive effect of the scheme is completely lost due to remoteness of the reward.

(vi) The scheme of profit-sharing does not eliminate the need for negotiations between the management and the labour
regarding distribution of profits to the labour.

Sometimes, relations between labour and management are adversely affected on profit-sharing agreement. This defeats
the very purpose of profit-sharing.

Profit-Sharing in India:
In 1948, the Central Government appointed a committee to study the problem of profit-sharing in industry. The committee
suggested the introduction of profit-sharing as an incentive to production as a method of securing industrial peace and as a
step of labour participation in management.

It however, did not give any exact formula of profit-sharing, but suggested that the share of labour should be 50%. This
scheme was not favoured by the employers and workers, and so the progress of this scheme was limited. The trade unions
preferred minimum bonus to profit-sharing.

The progress of profit-sharing in India has been insignificant. This is partly due to statutory provision of payment of
minimum 8.33% bonus to workers under the Payment of Bonus Act. However, in many industries, the concept of
productivity linked bonus has been introduced under which higher bonus is payable to workers where their productivity is
higher. The Government has also given encouragement to this scheme in the recent years.

The reasons of failure of profit-sharing in India have been summed up as follows:

Some employers in India introduced profit-sharing schemes with a view to stimulating interest among their workers in
increasing production. There was, however, no change in the outlook of these employers.

They did not treat the workers with justice and fairness and refused either to consult or to inform them on matters of
common interest in the working of the industry. Requests for facilities for looking into the balance sheets of the
companies were presented as unwarranted interference in the sphere of management.

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