Wage incentive plans

1. Wage Incentive Plans £ Wage
Incentive Schemes

2. Wage Incentive Plans £ Wage
Incentive Schemes

3. Presented to : Presented by:

Ms. Ashu Vashishth Komal Sahi(13)
Manu Vermall7)
Shobitash Jamwal(29)

4. Cp

Structure Of Presentation

+ Introduction to Wage Incentive Plans

- Types of Wage Incentive Plans

+» Designing Wage Incentive Plans

- Wage Incentive Plans for Individuals

+ Wage Incentive Plans for Groups

+ Enterprise Incentive Plans

+ Prevalent Systems in India

+ Precautions against ill-effects of Incentive
Plans

5. Wage incentive plans

A system related to employee wages where additional pay
is allotted for on the job performance that has exceeded
standard levels.

6. Alms Of Wage Incentive Plans

(i) To improve the profit of a firm through a reduction in the
unit costs of labour and materials or both

(ii) To avoid or minimize additional capital investment for the
expansion of production capacity.

(iii) To increase a worker's earnings without dragging the firm
into a higher wage rate structure regard less of productivity.
(iv) To use wage incentives as a useful tool for securing a better
utilization of manpower. Better production scheduling and
performance control and a more effective personnel policy.

2
Exempt or
Non-Exempt? 9

7. Types of incentive wage plans:

+ PERSONNEL INCENTIVE WAGE PLANS
+ GROUP INCENTIVE WAGE PLANS.

8. Kinds of Incentive Plan

Individual incentive ¡Group incentive plan
plan

Based on time | | Based on productivity | | Priest man’ s plan

( Halsey plan | Taylor plan Profit sharing
( Rowan plan | Merrick plan Scanlon plan
( Emerson plan | Gantt plan

9. Procedure to design wage incentive plan:

The basic steps are:

i. Selecting the objective of the Incentive Scheme and determining
the factors that facilitate quantitative measurement of the objective;
ii. Measuring and developing performance standards for the selected
factors;

iii. Determining performance-reward relationship;

iv. Determining payment period;

v. Designing suitable paper work and information flow procedure;

vi. Reviewing the scheme; and

vii. Installation and maintenance of the scheme.

10. Principles to make wage incentive plans
successful:

+ Suitable climate.

+ Just and equitable.

+ Flexible.

+ Attractive.

+ Economical

+ Information as to goals.

+ Grievance procedure

+ Stability.

+ Attainable standards.

+ Minimum guaranteed
wages.

11. Incentives plans for
workers

System for indirect workers:
(1) Payment of a certain incentive based on the
output or the performance of the department or
the factory, and

(2) A specified percentage of incentive earned
by direct workers.

13. Factors considered in designing
schemes for maintanence workers :

+ machine down time
+ production loss
+ maintenance costs, etc.

14. Supervisory incentives plans:
Incentives plans for supervisors are based upon:

(i) Based on the output of the department, in units or in value.

(ii) Based on the standard hours of work done or hours saved or the
overall departmental performance expressed in terms of actual 'and
standard hours,

(iii) Based on reduction in waste or rejects, reduction in costs, increase
in yield or recovery.

(iv) Fulfillment of delivery promises.

(v) Based on reduction in machine down time for maintenance
supervisors

(vi) Reduction in shop overtime hours.

(vii) House-keeping and accident rate

(viii) Combination of the above factors.

15. Incentive plans for executives :

CARROT-AND-STICE
MANAGEMENT

16. Administering Incentive Plan

+ While incentive plans based on productivity can reduce direct
labour costs, to achieve their full benefit they must be carefully
thought out, implemented and maintained.

+ A cardinal rule is that thorough planning must be combined
with a “proceed with caution” approach.

3 important points need to be kept in mind for effective
administration of incentive plans. These are :-

18. Type of Wage Incentive Plans

Wage incentive plans can be
classified as :

(i) plans for blue-collar workers
(ii) plans for white-collar workers
(iii) plans for managerial
personnel

Because each of these categories
have separate & distinct needs &
specific plans tailored for each
category may prove beneficial.

19. I. Incentive plans for Blue-collar
workers : for Individuals

All bonus of premium

plans relate to 2 factors ‘Systems under which the

rate of extra

+ They set a standard time proportion o the extra
for completion of a output
definite output or piece
of work for a fixed wage; 5
The fixing ofa rate of proportionately

percentage by which Bere

bonus would be earned

bya worker over & rate of incentives is
above his set wage, if the proportionately higher than
an dar tate saved) therate of increase in output |
or the standard output is

exceeded.

Short Term Plans

20. Incentive Wage Plans

ADVANTAGES DISADVANTAGES

Payment by results may be relied upon to +
yield inereased output, lower cost of
production, & higher income to workers.

+ It's a direct stimulus to workers to
improve organization of work & eliminate
lost time and other waste.

+ Labour and total costs per unit of output +
can be estimated more accurately in
advance.

+ Less direct supervision is needed.

+ Conflicting interests of employers & +

employees are unified. Increased
efficiency & smooth working can be
promoted & sustained. .

Quality tends to deteriorate unless there is a stricter
system of checking and inspection.

Payment of results may lead to opposition or restriction
‘on output when new machines & methods are proposed
or introduced due to jobs being restudied and earnings
reduced.

Workers tend to regard their highest earnings as norms
& press for a considerable higher minimum wage.

Amount & cost of clerical work increases, if done

manually.

Danger of disregarding safety regulations & thereby
increasing rate of accidents.

Jealousy may arise among workers to earn more than
others.

Difficult to set piece or bonus rates accurately. If too
low-workers are under pressure to work too hard &
become dissatisfied; if too high- they may slacken their
efforts to avoid revision of rates,

21. Setting Performance Measures

-The Keys

+ Performance measures—at all organizational
levels—must be consistent with the strategic

goal
+ Defi
chan

s of the organization
ne the intent of performance measures and
mpion the cause relentlessly.

+ Involve employees.
+ Consider the organization's culture and

wor!
perf

«force demographics when designing
ormance measures.

+ Widely communicate the importance of

per

ormance measures.

A 1. (1

22. individual incentive Plans

1. Time Rate Based Premium Plans :

Under time based plan, per hour wage rate is determined & incentives are
paid on the basis of time saved.

Time based incentives plan is divided in different ways.

Halsey plan, Rowan plan, Emerson plan, Barth plan, Bedeuax plan.

All these plans more or less follow the same method i.e. (pay bonus on the
basis of timed saved by employee), but with different formula.

2. The Standard Hour System :

Under this plan, the task standards are expressed in time. A definite hourly
rate is paid for each task hour of work performed. The unit of payment is
he task time. The worker is paid full value for the time saved.

Example: If the standard is 20 units per hour, and the worker completes

he work in 45 minutes, he gets the full hourly wage for 45 minutes of
work.

23. (b) The Halsey Premium Plan -

A standard time is set for completing a job or a unit of work which is
usually based on past production records. If the job is completed in less
than the standard time, the worker is paid at his time rate for the actual
time taken, and, in addition, is rewarded at his time-rate for a definite
percentage of the time saved.

This percentage varies from 30 to 70 per cent of the time saved, the most
common percentage being 50 per cent, and the other 50 per cent being the
employer's share.

Conditions:

Time Taken < or = Actual Time

Time taken > Actual Time (No incentive)
Incentive Bonus = T*R + 50%(S-T)*R
Example:

Standard time = 8 hours

Worker's hourly rate = Re. 1

Actual time taken to complete the job = 6 hours

Total earnings = (6hours x Re.1) + 50% (8-6) x Re.1 = Rs. 7
for 50 per cent of the time saved under 50:50 Sharing

‘The Halsey System can also be applied to indirect workers, such as
maintenance, where the work can be estimated.

24. Merits of Halsey Premium Plan

1. It guarantees a fixed time wage to slow
workers and, at the same time, offers
extra pay to efficient workers.

The cost of I is reduced bec:

because of the percentage premium
the piece rate of pay gradually
s with increased production.

he plan is simple in design and easy to
introduce,

|. As the wages are guaranteed, it does not
create any heartburning among such
workers as are unable to reach the
standard.

Demerits of Halsey Premium Plan

on past performance instead of
ds

1. Depen
making new stan

. Workers can beat the game by spurting
on certain jobs to capture a premium &
soldiering on other jobs to rest under the
protection of the guarantee of day wages.

int of view of administration,
left alone to decide whether
er the standard

From the
the worker is
or noto produce more a
has been reached.

(c) The Halsey Weir Premium Plan - Similar to the
Halsey Premium Plan except that 50% of the time
saved is given as premium to worker.

Bonus =

Y x

Time saved x

Hourly rate

25. (d) The Rowan Premium Plan-

In this system also, a standard time is allowed for a job, and a bonus is paid if the
job is completed in less than the standard time. The time saved is calculated as
percentage of the standard time, and the same percentage of the workers’ rate is
credited as bonus for the time saved. Guaranteed time-rate will be paid for
standard and below standard performances.
Bonus= T*R +(S-T/S)* T*R
= Time Saved / Time Allowed x Timetaken x Hourly Rate

26. (e) The Emerson Efficiency Plan —

Standard time is set for the standard jobs. The day wage is assured. The actual times
taken to complete the jobs are recorded. There is no sudden rise in wages on
achieving the standard of performance. Remuneration based on efficiency rises
gradually.
The individual efficiency is then calculated by dividing the standard time by the
actual time.

Up to 67 per cent efficiency = the worker is, paid at, his time-rate.

Above this and up to 100 per cent efficiency a bonus is paid.

At 100 per cent efficiency= a bonus of 20 per cent is payable.

Thereafter an additional one per cent bonus is paid for each additional one per cent
efficiency.

8 hours 16 hours 50%

8 hours 8 hours 100%

8 hours 4 hours 200%

27. (f) The Bedeaux Point Plan System —

In the Bedeaux System, a standard time is allowed for a job based on work
measurement. Each minute of the allowed time is called a "point” or a"B". Every
job is expressed in terms of Bs (after Bedeaux), which means that a job should
be completed in so many minutes. Thus a standard hour would consist of 60
Bs, or and a standard day of 8 hours, 480 Bs. A bonus is paid for the number of
Bs saved, i.e., the time saved. If a particular work is rated as 60 Bs (or 1B hour),
the worker is allowed 1 hour for its completion and receives a bonus of 75% for
the number of Bs, i.e. time saved.

Suppose a worker earns 600 Bs in a day; if the rate per point is Re. 0.01, his
total earnings would be :

= Rs. 480 x 0.01 + 3% (600-480) x 0.01

=Rs. 4.80 + Re.0.90 = Rs. 5.70.

This system may be convenient for application where workers are assigned
different types of work. Since the output can be expressed in terms of points or
Bs, the system would also be helpful for planning purposes.

29. 2. Piece Rate Based Premium Plans :

Under output based / piece rate plan, per piece wage rate is
determined & incentives paid on the bases of output produced. i.e.
more output in standard time OR standard output in less time.

For output based incentive following methods can be used.

Taylor plan, Merrick plan, Gantt plan.

The Straight Piece-Work System -

The straight piece-work system compensates the worker directly in
proportion to the output. The worker gets paid at a specified rate
per unit of output. (There is. however. one modification to this
system that the workers’ time rate is guaranteed)

Example:
Rate per piece = Re. 0.10,Total number of pieces produced = 100
Earnings=100 x Re.0.10 = Rs.10

Direct labour costs per unit of output remains constant above the
standard, but
the total unit costs decrease due to reduction in certain overhead

costs.

30. Standard output 100 Units

Rate per Unit Rs. 0.10

Differential to be applied 120% of piece-rate at or above the standards
80% of piece-rate when below the standards

31. Upto 83% of standard output a piece rate + 10% of the time-rate as bonus

Above 83% and upto 100% of standard same piece rate + 20% of time rate as bonus
output
Above 100% of standard output same piece rate + NO BONUS

32. Under this plan, there are 3 stages of payment :

Below the standard Only the minimum guaranteed wage is to be
performance paid

2. At the standard performance This wage + 20% of time rate as bonus

1

3. When the standard is exceeded A higher piece rate is paid, but NO BONUS.

3. Accelerating Premium Systems :

These are the systems which provide for a guaranteed minimum wage for output below
standard.

For low & average increases in output above the standard, small increment in earnings are
allowed. Increasingly large earnings are conceded for above output, the increment being
different for each 1% increase in output. Very significant increases in earnings are given for
really high output.

In this system, the production is pushed up higher & higher by discouraging low output &
rewarding at an increasingly effective higher rate outputs.

Such schemes are generally adopted when much higher outputs than what are currently
obtained are to be achieved.

34. Merit Pay Guidelines Chart

Amerit pay guidelines chart is a “lookup” table for awarding merit
increases on the basis of

(1) employee performance,

(2) position in the pay range,

(3) time since the last pay increase.
Concerns:

What should unsatisfactory performers be paid?

What should average performers be paid?

How much should superior or outstanding performers be paid?

MERIT PAY GUIDE CHART

QUINTILE (POSITION IN RANGE)

PERFORMANCE LEVEL a

Outstanding (5)
Superior (4)
Competent (3)

Needs improvement (2)
Unsatisfactory (1)

35. Lump-sum Merit Program :
Program under which employees receive a year-end merit payment, which is not
added to their base pay.

Advantages
+ Provides financial control by maintaining annual salary expenses and not
escalating base salary levels.
+ Contains employee benefit costs for levels of benefits normally calculated from
current salary levels.
+ Provides a clear link between pay and performance.

5. Sales Incentives :

Straight Salary

Straight Commission

Salary and Commission
Combinations

38. 7. Executive Compensation —

Base salary

Short-term incentives or
bonuses

Long-term incentives or stock

plans

39. Group Incentive Plans

Under such plans, each member of the group receives
a "bonus" based on the output of the group as a whole.
Few reasons why we use such plans are as follows:

+ Sometimes several jobs are inter-related, where
one's performance impacts other worker's
performance too.

+ Emphasis on cost reduction and TQM has led many
orgainzations to adopt such plans.

+ Such plans encourage co-operation among groups

+ Variation in group incentive plans is less as
compared to individual incentive plans which
makes it more stable

40. Types of Group Incentive Plans

Types of Group Incentive plans which are considered
easy to use are as follows:

+ Priestman's Production Bonus Plan

+ Towne Plan

+ Co-partnership system

+ Gain Sharing Plan

+ Team Compensation

It is amazing how much you can accomplish

when it doesn’t matter who gets the credit

41. Priestman's Production Bonus Plans

This committee represents
management and worker union set
forth the standard of performance

in terms of number of units PRODUCTIVI TY
produced. a ] ]

This set of standards are set in
advance every week and every
month.

If group of workers achieve more
than the performance level decided
initially, bonuses are made payable
to those workers.

% Bonus= (Actual Output- Standard

tput)/ Standard Output
rezi

42. Towne Plan

Under this system, bonus is
related to cost reduction
usually the labour cost as
compared with the
predetermined standard.

Its applicable to both
supervisors and workers.

Achieveing cost saving not
only on the labour cost but
also on overheads is the crux
of this type of incentive plan.

rezi

43. Co-Partnership Plan

This system tries to eliminate friction between the capital and labour. Under
this system, not only does workers share in the profits of undertaking but he
also takes part in its control and therefore, shares responsibilities. Few
characteristics of this plan are as follows:

+ Payment of existing standard wages of labour.

+ Payment of fixed rate of interest on capital.

+ Division of the surplus profit between capital and labour in an agreed
proportion.

+ Sharing in the control of the business by the representatives of labour.

45. Scanlon Plan

Scanlon Plan is that employees should offer ideas and suggestions to improve
productivity and in turn be rewarded for their constructive efforts. This plan
provides for the stablishment of a reserve fund into which 25% of any earned
bonus is paid to cover deficits when labour costs exceed the norms.

Feedback

46. Rucker Plan

The share of production(SOP) or Rucker Plan normally covers just
production workers but may be expanded to cover all

employees. The financial incentive of the Rucker Plan is based on any
improvement in this relationship between the total earning of hourly
employees and the production value that employees create.

It is commonly used in firms which are planning to move from a
traditional style of management toward a higher level of employee
involvement.

“Value ofservices a 4 $100,000
Less oulsite purchases a :
(materials, supplies, energy, e

3. Value added 3
4. Rucker standard
"0% of #3)

Bonus pool

47. Improshare Plan

Improshare- Improved productivity through sharing- was
developed by Mitchell Fain. Bonuses in this plan are based on
the overall productivity of the work team. It includes both
production and non-production employees.

The bonus is based not on dollar savings, as in the Scanlon &
Rucker Plans, but productivity gains that result from reducing
the time it takes to produce a finished product.Bonuses are
determined monthly by calculating the difference between
standard hours and actual hours dividing the result by actual
hours.

Both employees and company receive 50% of the improvement.

48. Earnings-at-Risk Plan

As the name signifies , earning-at-risk places a portion of an
employee's base pay at risk. Basic philosophy behind these
programs is that employees should not expect substantial
rewards without assuming some risk for their performance.

An employee's base pay might be set at 90% i.e. 10% lower then
market value-risk part, the loss to be regained through
performance. e.g. Saturn corporation.

49. Team Compensation Plan

Team incentive plans reward team members with an incentive bonus when agreed upon
performance standards are met or exceeded.

One catch with setting Team
this companies use the thi
« Firstly, setting perfo!
+ Secondly, size of incentive bonu:

+ Thirdly, payoutsformula is establish,

$
LIN

$200 $200 $200 $200 $200 $200

Z£ À A x.

Qualified Qualified Qualified Qualified Qualified Qualified

Member. lember jember lember lember Member

is that not all the teams are alike, inspite of
ish team incentive payments.

50. Enterprise Incentive Plans

51. Profit-Sharing Plans

Profit sharing is any procedure by which an
employer pays, or makes available to all regular
employees, special current or deferred sums
based on organization's profits. Profit sharing
here means cash payments made to eligible
epmloyees at designated time periods, as
distinct from profit sharing in the form of
contributions to employee pension funds.

Profit sharing plans differ in the proportion of
profits shared with the employees and in
distribution and form of payment.

Profit sharing varies from 20-25 % of the net
profit, distribution can be on equal basis or
may be based on regular salaries or some
formula that takes into account seniority and/
or merit, while the payments can be disbursed
in form of cash, deferred, or made on the basis
of combining the two forms of payments.

[A

“Good news!...l' ve set up a generous profit sharing
plan for all of you.”

52. Stock Options

Stock option plan are sometimes
implemented as part of an employee benefit
plan or as part of a corporate culture linking
employee effort to stock perfromance.By
allowing employees to purchase stock, the
organization hopes they will increase their
productivity, assume a partnership role in
the organization and thus cause the stock
price to rise.

Stock option plans grant to employees the
right to purchase a specific number of
shares of the company's stock at a
guaranteed price during a designated time
period.

e.g. Nike, Apple, Quaker Oats and Enron etc
¿Guide stock options to employees.

53. Employee Stock Ownership Plans

ESOP takes two primary forms: a stock
bonus plan and a leveraged plan. With
either plan , the public or private
employer establishes an ESOP trust
that qualifies as a tax-exempt
employee trust under section 401(a) of
the internal revenue code.

With stock bonus plan, each year the
organization gives stock to ESOP or
gives cash to the ESOP to buy
outstanding stock.

Leveraged ESOP works much same as
do the stock bonus plan, except that
the ESOP borrows money from a bank
or other financial intitution to purchase
stock.

56. Wage Incentive Plans £ Wage
Incentive Schemes