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Incentive payments .
Meaning of incentive plans:
incentive plans are the monetary
benefits paid to workmen in
recognition of their outstanding
Features of incentive
A feeling of secured income fails to evoke
positive response. Positive response will
surely come when incentives are included
as a part of the total remuneration.
Earnings of employees would be enhanced
due to incentives. There are instances
where incentive earnings exceed two to
three times rated wages or salaries.
Increased earnings would enable the
employees to improve their standard of
Advantages of incentive
Reduced absenteeism.
Better utilization of equipment.
Reduced scrap.
Reduced lost time.
Incentive packages are a very attractive
proposition for managements because they
do not affect employer’s contribution to the
provident fund and other employee
retirement benefits.
Types of incentive plans.
Incentive schemes where the workers’ earnings
vary in the same proportion as output.
Schemes where earnings vary proportionately
less than output.
Schemes where earnings vary proportionately
more than output.
Schemes where earnings differ at different
levels of output.
1.Incomes varying in proportion to
The chief characteristic of this scheme where
incomes vary in proportion to output is that
any losses or gains resulting directly from a
worker’s output accrue to him or her ( leaving
to the employer any gains or losses in
overhead costs per unit of output).
Earnings varying proportionately
less than output.
These schemes are called as ‘gain sharing
schemes” as both employer and employee
share the gains resulting from the time saved.
The worker may be paid for half ( or any other
fraction ) of the saved, the employer getting
the balance.
Earnings varying proportionately
more than output.
This category includes two methods, the high
piece rate and the high standard hour
system. Under the former, the earnings of the
worker in proportion to his or her output, as in
straight is greater.
The higher rates start applying after the
standards have been reached. Similarly the
same logic applies to the high standard hour
Earnings differing at different levels
of output.
These systems can best be explained by
describing how earnings vary from minimum
to maximum at different levels of output.
Earnings for part of the range may vary
proportionately less than output and for
another part proportionately more or more
usually in the same proportion as output.
Group incentive plans.
The most common system where in group
incentive plans are applied is piece work
system. The total earnings of a group are
first determined in accordance with the
incentive method which is followed, and
the earnings are then distributed among
the members of the group on some
equitable basis.
If the group consists of members with equal
skills, the earnings are divided equally
among them.
When the members are of unequal skills, the
earnings of the group may be divided among
the members in proportion to their individual
time-rates, or according to specified
percentages, or in some cases only among a
certain number of members of the group.
Advantages of group incentive
Better co-operation among workers.
Less supervision.
Reduced incidence of absenteeism.
Reduced clerical work.
Shorter training time.

Disadvantages of group
incentive plans.
An efficient worker may be penalized for the
inefficiency of the other members in the
The incentive may not be strong enough to
serve its purpose.
Rivalry among the members of the group
defeats the very purpose of team work and
Production and productivity are often used
Production refers to the total output and
productivity refers to the output relative to
Productivity refers to the amount of goods and
services produced with the resources used.
 Quantity of goods and
 produced
 Productivity =
 Amount of resources used

Two variables are the amount of production
and amount of resources used.
Productivity can be
increased by
Increasing production using the same or
smaller amount of resources.
Reducing the amount of resources while
keeping the same production or increasing it.
Allowing the amount of resources used to
increase as long as production increases
Allowing production to decrease ass long as
the amount of resources used decreases
Increased productivity contributes to the
competitive advantage of an organisation.

When productivity increases, the company can

pay higher remunerations to its employees
without boosting inflation.

Increased earnings without corresponding

increase in inflation adds to the standard of
living of the people.
Improving productivity does not mean working
harder; it means working smarter.

Not just doing things right but doing right


Today’s economy demands that, we do more

with less people, less money, less time, less
space and fewer resources in general.

High productivity

 Men more productive
 Money
 Machines organisations

Low productivity
 Men less productive
 Money
 Machines organisations


Input resources of the production process
comprises of capital, labour, materials and

Types of productivity measurements are
 1. Partial productivity
 2. Multi factor approach
The resources of productivity when measured
separately are called partial productivity.

 output in a given
Partial productivity=
 labour hours used in
Partial productivity is calculated for the
purposes of analysis and remedial actions.

Among all the inputs, direct labour is mainly
used as the denominator for calculating
partial productivity as they occupy a pride
place in the manufacturing systems.
The method of calculating productivity
considering all the resources is called multi
factor approach.
 output in a given period
Total productivity =

 labour+
 energy used in same
Labour Productivity
 There are at least 3 ways of measuring
labour productivity:
i.) Output per man- hour

 Labour Productivity = Output

 Man –hours used
ii.) labour hours per unit of output:

 Labour Productivity

 = Total labour hours used

 Output
Labour Productivity
iii.) Added value per unit of labour cost:
Labour Productivity

= Added value for the product *
 Total wages.

 * (Sales values – cost of bought out items)

Problems of Labour Productivity:
Problem in numerically expressing the related

Productivity measures need to be selected

carefully. Example ‘number of citations issued
per inspection day’ is an inappropriate
measure to judge the productivity of a
pollution control board.
Problems of Labour Productivity:

Non clarity regarding how productivity ratios
reflects the change over a period of time.

Work processes are complex and unwieldy

Ways of Improving
Understand the factors that influence the
relationship between output and input such
 1.) Considering with regard to increase or
decrease the productivity.
 2.) Considering the cost.
 3.) Considering the influence of the work
Ways of Improving
Check the quality of human resources and
provide enough T&D to bridge the gap
between the standard and the actual
Capital investment in newer and better
machinery, equipment, facilities.
Ways of Improving
Scientific management.
 1.) production planning.
 2.) Production control.
 3.) Inventory control.
 4.) Operation research.
 5.) Cost control.
 6.) Budgetary control.
Production function- Areas of
Improving volume of production.
Reducing reduction rates.
Minimizing rework rates.
Maintaining delivery schedules.
Controlling idle time of machine and men.
industrial engineering norms.
Updating processes and procedures.
Production function- Areas of
Maintaining accuracy and timeliness of MIS.
Decreasing money set up time.
Controlling overtime.
Good house keeping.
Checking absenteeism, thefts/pilfers age
and misconduct.
Eliminating accidents.
Production function- Areas of
Effective grievance handling.
Effective training and team building.
Minimizing inventory and achieving better
Total quality management. (TQM)
Business process reengineering (BPRE)
Learning Curves
Learning Curves:
 The Learning Curve analysis based on the premise
that as an organization gains experience in
manufacturing a product, the resource inputs
required per unit of output diminish over life of
the product.

 In the beginning of production runs, workers are

unfamiliar with there tasks and the amount of
time required to produce the first few units is

 As the workers learn their tasks, their performance

improves. The performance time drops off rather
dramatically at first, and it continues to fall at
some slower rate until a performance plateau or
levelling-off is reached. This learning pattern
applies to group and organizations as well as

The learning curve concepts
are based on:
a)Where there is life, there can be learning.
b)The more complex the life, the greater the life of
c)The rate of learning can be sufficiently regular to
be predictive.

It is possible to estimate:
1)The average number of labour-hours required to
produce “n” units in a production run.
2)The total number of labour-hours required to
produce “n” units in a production run.
3)The extra number of labour-hours required to
produce the “nth ” unit of production run.

There are three approaches
of learning curve analysis:

 1. Arithmetic Analysis.

 2. Logarithmic Analysis.

 3. Learning Curve Table

 1.Arithmetic Analysis.
 This is the simplest approach to learning curve
 It is based on this fundamental concept:
– As the number of units produced doubles, the
labour-hours per unit decline by a constant
 It is useful when we want to find out the labour-
hours required to produce “n” units and “n”
just happens to be a number that is one of
the double values.
 If we want to find the labour-hours required to
produce the seventh unit, Arithmetic analysis
does not help us then we have to look for
Logarithmic Analysis for help.
2. Logarithmic Analysis.

In Logarithmic Analysis the time taken to

produce the nth unit(Tn) is given by the
 Tn = T1 (nb)
 where,
 “T1” is the time taken to produce the first
 “b” is the slope of the learning curve.
The value of ‘b’ is depend on the learning rate.
Uses Of Learning Curve:
 It is useful in man-power planning and cash
flow analysis.
 Cash flow analysis involves the timing of cash
outlay and inflows associated with a new
 It is possible to calculate labour-hours required
to produce every additional unit of output.
 It is possible to estimate cash inflow needed to
produce the new product.
 The learning curve theory also used to
Industrial engineers and other staff specialist
to develop labour cost estimates for new
products and services.
 Cost estimates are highly useful for bidding
 In job shops and custom service operations,
learning curve-theory is highly significant,
1. Product and services tend to be custom-
designs that require workers to start near
the beginning of small batches.
2. Batches tend to be small; thus labour-hours
per unit improve dramatically from the
first to the last unit.
3. Product/service designs tend to be complex;
thus labour-hours per unit improve quickly.
Limitations Of Learning
 Learning curve analysis almost impossible to
develop prices labour-hour estimates for the first
unit or to determine the appropriate learning
 These difficulties limit the uses of learning curve
 Learning curve depicts improvement in productivity
over time, productivity does not improve
exclusively because workers are learning.
 The reason for the improved productivity are
numerous, including changes in work methods,
product engineering, facilities layout, equipment
design, employee trainings and others.
 Learning curve analysis is generally of the greatest
benefits in labour-intensive conversion processes.