INCENTIVE – CONCEPTS

AND TYPES
BY
ARUP BHATTACHARYA
Head – Human Resource, ANTS India
Pvt. Ltd.

06/01/10

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MODULE 4
Incentives – definitions, Types of
incentives, Individual incentives:
Measured day work, Piece work,
Standard Hour, Gain Sharing, its
advantages and disadvantages,
Organization Wide incentives –
Scanlon Plan, Kaiser Plan, Profit
Sharing, Non – financial
incentives, Fringe Benefits –
Definition, Objectives, Types of
Fringe Benefits.

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INCENTIVES
• A reward or inducement for a specific
behaviour, designed to encourage
that behaviour.
• Motivates and encourages the worker
to produce more(quantitative) and
better(qualitative).
• Addition to wages which are
otherwise paid to the worker also
called “Payment by Results.” (ILO).

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Contemporary
understandings
• An incentive is the factor that
motivates a person to achieve a
particular goal.
• An incentive is an offer of something
of value, sometimes with a cash
equivalent and sometimes not,
meant to influence the payoff
structure of a utility calculation so
as to alter a person's course of
action.
• Both parties stand to gain from the
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• Incentives vary from individual to
individual
• But most people are attracted
towards activities which offer the
following:
- pleasant sensations (sensory
incentive)
- novel situations, providing
varied and exciting stimuli
(curiosity incentive)
- reassurance and support from a
group (affiliation incentive)
- an opportunity to work
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- a feeling of self-control and not being
dominated by others (power incentive)
low levels of frustration and hostility
(aggression incentive)
- a strong sense of achievement and
success (achievement incentive).
• Psychologists also recognize that in
order to reach long-term goals, a
sense of achievement must be
reinforced continually by successful
completion of short-term
intermediate goals.

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Types of Incentives
• Broadly incentives can be classified
into:

- Direct Incentives

- Indirect Incentives
• Further direct or indirect can be
classified into

- Financial Incentives

- Non – Financial Incentives

- Semi – Financial Incentives
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Comparison
Incentive Type

Advantages

Disadvantages

Financial

Focus on hitting
target

Rewards are
sometimes small

Non-Financial

Can demoralise if not
Achievement given a earned
value
Can recognise
Can be taken for
employee priorities granted
and lifestyles
Can encourage
attachment to
business

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May be inappropriate

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Incentive Schemes
• Plans which provide for reward to an
employee for the good work done
by him.
• A system of wage payment under
which the earnings of an employee,
or a group of employees, or all
employees in an organization is
directly related to the output of an
acceptable quality and over and
above a standard laid down by
means of predetermined formulae.
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• Thus in an incentive scheme the
worker gets a guaranteed minimum
wage + some extra payment or
bonus done over and above the
standard work calculated by some
formulae.
• Incentives schemes encourage
higher levels of staff performance.
• The rewards usually relate to the
achievement of certain goals,
either personal, team or
organisational, or a combination of
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Benefits of IS to Business
• An effective system of incentives could:

- persuade people to join the
organisation

- retain existing staff

- increase staff motivation, morale
and loyalty

- boost productivity

- link individual and business
performance

- focus employees on achieving
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Benefits of IS to Staffs
• An effective system of incentives
could help:

- enhancing the quality of
working life

- rewarding staff efforts

- adding value to the
employment contract

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Characteristics of a Good IS
• Should affordable, transparent and
appropriate to the business and the
jobs that they relate to.
• Should be worth introducing them after
consulting with staff or unions.
• Should enhance staff motivation.
• Should ensure good working conditions
and other good management
practices, such as performance
management, appraisals and
appropriate communication and
training programmes.
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• Should operate by means of well
defined and easily understood
formulas.
• Should be based on scientific work
management. The standards must
be realistic.
• Should be well planned, installed and
maintained.
• Should have provisions for
amendments.
• Should review specific objectives for
each employee periodically.
• Rewards should clearly and closely
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Types of Incentive Schemes
• The incentive schemes may be of
two types:

- Individual Incentive Schemes

- Group Incentive Schemes
• Group Incentive Schemes are
generally preferred by employers.
• Individual IS deals with individual
output while group IS deals with
aggregate output.

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Comparison
Incentive Scheme
Individual

Group

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Advantages
Disadvantages
1) Focuses individual Can be divisive
on achievement.
2) Disparity of
2) Better utilisation of amount drawn.
equipment.
3) Drooping down of
3) Reduced
morale.
1)
Team-working.
1)
absenteeism.
4) Individual
Individual skills
earnings
2)
4) Less
Extrasupervision.
pay and extra undervalued.
can fluctuate
3)
Shorter
2) Rivalry among
output
are training
linked.
time.
workers in a group
4) Can improve
increases.
individual under3) Under-contributors
performance.
may be bullied
5) Shorter training
time. Arup Bhattacharya
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Setting up an Incentive
Scheme
• Identify the scheme's objectives.
• Consult with staff and trade unions
• Relate the scheme to the business'
remuneration system.
• Ensure that the planned scheme is
competitive.
• Decide on performance measures for
the staff.
• Run a pilot scheme and evaluate
results.
• Regularly review your scheme and
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CASE STUDY – 1
• Fact File

- Client : Towergate Partnership

- Event : ‘Chairman’s Club
Incentive Scheme’

- Location : New York.

- Attendees : 25

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Brief
• The Towergate Partnership wanted to
introduce a company wide incentive
programme for their entire customer
focused staff.
• The scheme needed to be based on the
staff’s annual sales targets, with the top
25 staff being rewarded with a trip of a
lifetime to a foreign destination.
• The launch date of the scheme had to
coincide with the staff receiving their
annual targets.
• To maximise the staff’s awareness of the
would be
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Bhattacharya

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Relation of Performance to
Reward
• the person being paid understands
that a particular outcome or
behaviour, when compared
successfully with the performance
standard, will lead to a specified
reward.
• the performance standard must be
clearly stated.
• the ratio between it and the reward
should be clearly understood.
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Performance-Reward
Ratio.

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Three geared ratios

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Performance Rating
• Used for incentive payments under
work – measurement schemes.
• British Standard Institution (BSI)
formulas are used.
• Expressed as 100/133 or 75/100.
• 100 or 75 is average performance
without incentive.
• 133 or 100 is the performance of a
fully motivated employee.
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Formulae



Where P.R = Performance Rating.

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Question 1
• An operator produces 120 units in a
day. A working day has 8 hour.
Standard time to produce each unit
is 240 seconds. Calculate the
performance rating of the operator.
If the operator produces 132 units
calculate the percentage change in
performance.

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Measured Day Work
• Became popular in large batch or mass
production factories in ‘50s and ’60s.
• Provide for the pay of employees to be
fixed on the understanding that they
will maintain a specified level of
performance.
• Fundamental principle is that there is
an incentive level of performance and
the incentive payment is guaranteed
in advance putting the employees in
obligation to perform at the effort
level required.
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• Seeks to produce an effort – reward
bargain.
• Disadvantage is that the set
performance target can become an
easily attainable norm
• May be difficult to change even after
extensive renegotiations.
• Relatively lower and has been
abandoned by most of the
organizations.

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Essentials of Measured Day
Work
• Total commitment of management,
employees and trade unions which
can be achieved by careful planning
and joint consultation.
• Effective work measurement and
efficient Production, Planning and
Control (PPC).
• Efficient Inventory System
• Development of job evaluation and
performance appraisal.
• Good control system to take swift
corrective measures.
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Straight Piece Rate System
• Applied to simple manual operations
like producing number of similar
articles, loading, unloading etc. by
individual effort.
• A piece rate for the completion of the
job is fixed.
• If a worker produces more acceptable
jobs in a prescribed time he gets
extra money.
• Used where work is standardized,
capable of dividing into pieces and
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Formulae


Earnings of a worker = total output(
measured in terms of units) X (rate
per unit.)

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Advantages
• Provides direct incentive for
increased output.
• Easy to understand and calculate.
• Overhead costs are reduced as a
result of their distribution over a
greater number of units.
• Cost of supervision reduces because
in order to earn more the workers
try to produce more.
• Protects workers against unduly low
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Disadvantages
• May lead to greater wastage of raw
materials and greater depreciation
of machines an tools due to higher
speed of work.
• Quality of work may be ignored.
• Unnecessary speeding up of work
adversely affects the health of the
worker which may lead to
accidents.
• Minimum wage is not guaranteed.
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Standard Hour Plan
• Provides incentives to employees
based on the time saved by them
during the job course.
• Employees’ productivity and quality
is evaluated with respect to the set
standards.
• Worker finishing in the standard time
is given no incentive.
• Usually applied for higher jobs in
which a job takes several days for
completion.
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Gain Sharing
• A technique that compensates workers
based on improvements in the
company's productivity.
• A bonus incentive system designed to
improve productivity through
employee involvement, with the gains
from "working smarter" shared
between the employer and the
employees according to a
predetermined formula
• Gain sharing, in one form or another,
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It Includes
(1)a financial measurement and
feedback system to monitor
company performance and
distribute gains in the form of
bonuses when appropriate, and
(2)a focused involvement system to
eliminate barriers to improved
company performance

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• Gain sharing works best when
company performance levels can
be easily quantified.

• Employee involvement significantly
enhances the effectiveness of
incentive pay.

• When used simultaneously,
productivity gains from combining
these techniques can exceed gains
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Advantages
• Help companies to achieve sustained
increases in productivity.
• Employees become more involved in
the productivity gains made by the
employer.
• Employees can share in the benefits of
employee sponsored improvements.
• Enhances commitment to
organizational goals.
• Leads to improvements in other
measures of company performance,
including: teamwork, product quality,
lower rates of absenteeism, defects,
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Disadvantages
• Requires employers to recalculate
each worker's "regular rate" of pay.
• Employers may restrict this type of
compensation to exempt
employees.
• The formulas and program may be
difficult to understand.
• Requires a shift to a more team
oriented management style.
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Organization wide Incentive
Plans
• Also called group incentive plan.
• Used when individual jobs are not
readily measurable.
• Also used when a given work’s speed is
limited by the output rate of
preceding operators.
• Each employee is paid incentive on the
basis of collective performance of his
group.
• Generally preferred by the employer.
• Not liked by highly competent or
productive employees whose
colleagues are not so productive
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Examples



Fabrication
Assembly
Maintenance work
Indirect work in which the operations
are closely related.

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Features of Organization wide
Incentive Plans
• Reward an increase in organizationwide outcomes that directly affect
the cost and/or profit picture of the
organization.
• a change in the relationship between
management on the one hand and
employees on the other.
• a high degree of cooperation.

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Types of Group Incentives
Plan
• The Scanlon Incentive Plan
• The Priestman Production Incentive/
Kaiser Incentive Plan.
• Profit Sharing.

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Fringe Benefits
• Benefits which employees or directors
receive from their employment but
which are not included in their salary
cheque or wages.
• On the tax return form they are called
'benefits in kind.‘
• Include such things as company cars,
private medical insurance paid for by
the employer and cheap or free loans.
• Some fringe benefits will not be taxed,
some will and some will be taxed only
for employees who are directors or
higher paid.
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