Types of Incentive Plans | Wages | Human Resource Management

The various incentive plans can be classified into two groups: 1. Individual Incentive Plans 2. Group Incentive Plans.

Type # 1. Individual Incentive Plans:

Under individual incentive plan, individual employee is paid incentive on the basis of individual performance or output. The employers are liable to pay incentives to those employees who are producing more than the standard output. Individual incentive plans can be either time based or production based.

In case of time based incentive plans, a standard time is determined for doing a job and this standard time served as a basis for giving incentive. A worker is considered as efficient, if he completes his job in less than standard time. The worker is awarded for his efficiency by giving incentive under some incentive plans.

Some of the time based incentive plans are:

I. Halsey Incentive Plan.

II. Rowan Incentive Plan.

III. Emerson Efficiency Plan.

IV. Bedeaux Incentive Plan.

In case of production based incentive plans, a standard of output is determined and wages are paid on the basis of number of units produced.

Some of the production based incentive plans are:

I. Taylor’s differential piece rate system.

II. Merrick’s multiple piece rate plan.

III. Gantt’s task and bonus wage plan.

Time-Based Plans:

All the above mentioned time based incentive plans are explained below:

I. Halsey Incentive Plan:

In this method a standard time is fixed for the completion of the job. A minimum base-wage is guaranteed to every worker. If a worker completes his job in just the standard time, he will not be given any incentive. If a worker performs his job in less than standard time, he is given incentive. The incentive will be equal to 50% of the time saved by the worker.

W=TR+(S-T)R%

Where

W=Total Wages

S=Standard time

T=Time taken to complete the job

%=Percentage of wages of time saved to be given as incentive

R=Rate;

For example, if rate hour is Rs.3 standard time for completion of job is 10 hours.

A worker completes the job in 8 hours, his total wages will be:

W= 8x 3+ (10-8)3×1/2

= Rs.27

In the above example, worker is given an incentive of 50% (1/2) of time saved.

Advantages:

a. It is simple.

b. Each worker is guaranteed a minimum wage.

c. This is beneficial to efficient worker.

d. Causes no harm to new worker, trainee, or slow worker.

e. Management shares benefits of over-achievement by workers.

Disadvantages:

a. Workers get only a percentage of return on their over-achievement.

b. The quality of production may suffer as workers may do work in hurry,

c. There may be difficulties in setting standard time for different jobs.

II. Rowan Plan:

This plan is quite similar to Halsey plan. It differs only in terms of calculation of incentive for time saved. The worker gets the guaranteed minimum wages. The incentive for completing the job in time lesser than standard time is paid on the basis of a ratio, which is time saved over standard time per unit standard time.

Incentive is calculated as:

Incentive or Bonus=S-1/SX T x R

Total wages=T x R+ incentive

=T x R(S-T)/S x T x R

Where, W=Total wages

S=Standard time

T=Time taken to complete the job

R=Rate;

For example, if rate per hour is Rs.3and standard time for completion of job is 10 hours.

A worker completes the job in 8 hours, his total wages will be:

W=8×3+ (10-8)/10x 8x 3=Rs.28.4

Advantages:

a. This system checks over-speeding and overstrain by worker.

b. Each worker is guaranteed a minimum wage.

c. Efficiency is rewarded.

Disadvantages:

a. The workers find it difficult to understand.

b. Discourages workers to over-achieve.

c. Workers may not like sharing of profit for over-achievement.

III. Emerson’s Efficiency Plan:

In this plan, a minimum wage is guaranteed to every worker on time basis and incentive is given on the basis of efficiency. Efficiency is determined by the ratio of time taken to standard time. Payment of bonus/incentive is related to efficiency of the workers. Incentive will be given to those workers who attains more than 2/3^rd i.e. 66.67% of efficiency. No incentive will be given at 66.67% efficiency. At 100% efficiency incentive is 20% of the hourly rate. For efficiency exceeding 100%, 1% incentive/bonus is paid for every 1% increase in efficiency.

For example, if standard time for a job is 6 hours and hourly rate is Rs.3. If a worker completes a job in 6 hours, the efficiency of worker is 100%. His wages will be 6 x 3 + bonus @20% i.e. Rs.18 + 20% of 18 = Rs.21.6

Advantages:

a. Minimum wages are guaranteed.

b. It is simple to understand.

Disadvantages:

i. Incentive after attaining standard is very low.

IV. Bedeaux Point Plan:

Bedeaux system also called units or point system also guarantees a minimum base wage. Under this plan, the standard time and time taken for each job is reduced to minutes. Each minute is referred to, as ‘B’ i.e. one hour is the same as 60B’s. The workers who complete the job within standard time are paid at a normal time rate.

Those who complete the job in less time are paid bonus. The bonus paid to the worker is 75% of the wages for time saved. The time saved is divided between workers and management.

The formula for calculating wages is:

W=TR+75% (S-T)R

where, w= Total wages

S=Standard time

T=Time taken to complete the job

R=Rate;

For example, if standard time for a job is 6 hours i.e 360 B’s and wage rate is Rs.3 per hour. If a worker completes his job in 5 hours i.e 300 B’s, he saves 60B’s.

His total wages will be:

W=5×3+75 %(6-5)x3

=15+75%of 3=Rs.17.25

Advantages:

a. Minimum wages are guaranteed.

b. Management also shares some percentage of bonus.

Disadvantages:

a. Incentive after attaining standard is very low.

b. Workers do not like their bonus to be shared by management.

Output-Based Plans:

I. Taylor’s Differential Piece Rate System:

This system was introduced by Taylor, the father of scientific management. The main characteristics of this system are that two rates of wage one lower and one higher are fixed. A lower rate for those workers who are not able to attain the standard output within the standard time; and a higher rate for those who are in a position to produce the standard output within or less than the standard time.

For example, if standard production in 8 hours is fixed at 10 units. The lower piece rate is Rs.3 and higher piece rate is Rs.3.5. If a worker produces 9 units, his wages = 9 x 3 = Rs.27. In case a worker produces 10 units, his wages = 10 x 3.5 = Rs.35.

Advantages:

a. Provides incentives to efficient worker.

b. Inefficient worker is penalized.

c. This system is simple and easy to implement.

Disadvantages:

a. Minimum wage is not assured,

b. There are chances that quality of work may suffer,

c. This system is not liked by below average workers, as they do not get any incentive.

II. Merrick’s Multiple Piece Rate Plan:

To overcome the limitations of Taylor’s differential piece rate system, Merrick suggested a modified plan in which, three-piece rates are applied for workers with different levels of performance.

These are:

a. Workers producing less than 83% of the standard output are paid at basic rate.

b. Workers producing between 83% and 100% of standard output will be paid 110% of basic piece rate.

c. Those producing more than 100% of the standard output will be paid 120% of basic piece rate.

Advantages:

a. Efficient workers are rewarded handsomely.

b. Minimum wages are guaranteed.

Disadvantages:

a. There is wide gap in slabs of differential wage rate.

b. Over emphasis on high production rate.

III. Gantt’s Task and Bonus Plan:

This plan is based on careful study of a job. The main feature of this plan is that it combines time rate, piece rate and bonus. A standard time is fixed for doing a particular job. Worker’s actual performance is compared with the standard time and his efficiency is determined.

If a worker does not complete the job within standard time i.e. he takes more time than the standard time (efficiency below 100%), he will not receive any bonus but he is given wages for the time taken by him.

If a worker completes the job within standard time (100% efficiency), he is given wages for the standard time and bonus of 20% of wages earned.

If the worker completes the job in less than the standard time (i.e. efficiency more than 100%), wages are paid according to piece rate.

Advantages:

a. Minimum wages are guaranteed.

b. It is simple to understand.

c. Efficient workers can earn more money.

Disadvantage:

a. Emphasis on over speed or high production rate.

Type # 2. Group Incentive Plans:

A group incentive plan scheme is designed to promote effective teamwork, as the bonus is dependent on the performance and output of the team as a whole. Under group incentive plan, each employee is paid incentive on the basis of collective performance of his group to which he belongs. Within the group, each employee gets an equal share of the incentive.

Some of the group incentive plans are:

I. Priestman’s Plan.

II. Scanlon’s Plan.

I. Priestman’s Plan:

In this plan workers are not considered individually but collectively. This system considers the productivity of all workers as a whole. Bonus is paid in proportion in excess of standard output per week. If in a year, the output increases either above the standard output or the output of the previous year, the wages are increased in the same ratio.

For example, if in 2009 the output per worker per unit time is 10 units and in year 2010 the output per worker per unit time comes out to be 12 units, the wages in 2010 will be 20% more than in 2009. The drawback of this system is that individual efficiency is not considered.

II. Scanlon’s Plan:

A Scanlon plan is a type of gain sharing plan that pays a bonus to employees when they improve their performance or productivity by a certain amount as measured against a previously established standard. A typical Scanlon plan includes an employee suggestion program, a committee system, and a formula-based bonus system. A Scanlon plan focuses attention on the variables over which the organization and its employees have some control.