Wage Incentive Plans: Objectives, Advantages, Limitations and Types

Wage Incentive Plans: Objectives, Advantages, Limitations and Types!

Wage incentive refers to performance linked compensation paid to improve motivation and productivity. It is the monetary inducements offered to employees to make them perform beyond the acceptance standards.

According to the National Commission of Labour “wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person over and above the time rated remuneration, for improvements in the present or targeted results”.

Scott defines it as “any formal and announced programme under which the income of an individual, a small group, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity output”.

Human and Nickerson define it in simple terms as “all the plans that provide extra pay for extra performance in addition to regular wages for a job”.

Objectives of Wage Incentive Schemes:

(i) To use wage incentives as a useful tool for securing a better utilisation of manpower, better productivity scheduling and performance control, and a more effective personnel policy.

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

(iii) To increase a worker’s earning without dragging the firm into a higher wage rate structure regardless of productivity.

(iv) To avoid additional capital investment for the expansions of production capacity.

Principles of a Good Wage and Salary Administration:

a. Simple and easy to understand.

b. Union management agreement.

c. Time standard must be fixed.

d. Reward must be proportional to the effort.

e. Complaints and grievances must be properly attended to.

f. The plans should not change frequently and must be tried out continuously for some length of time.

g. Equity and fairness.

h. Workers must be made to understand the plan.

i. Method study must precede time standard.

j. There must be a min guaranteed payment.

Advantages of Incisive Plans:

Wage incentive plans benefit not only the employees but also the employers.

a. Wage incentive plans provide an opportunity for hardworking and ambitious workers to earn more.

b. It encourages employees to be innovative. They come out with more efficient ways of doing work by overcoming the problems related to productivity and wasteful practice.

c. Incentive plans help to improve discipline and industrial relations. Effective incentive plan helps in minimizing absenteeism, accidents etc.

d. The self motivation on the part of the workers to work hard and improve performance so as to earn monetary rewards will reduce the cost of supervision.

e. The scientific work study undertaken before introducing the incentive plans helps in improving work flow, work methods etc.

f. The employees are encouraged to work as a team with mutual co-operation as their activities is interdepen­dent, and any obstruction on the part of a worker can affect the output and rewards.

g. According to the National Commission on Labour, “wage incentive is the cheapest, quickest and surest means of increasing productivity.”

Limitations:

a. Jealousy and conflicts among workers may arise when some workers earn more than others.

b. Unless strict check and inspections are maintained, quality may come under stake in the enthusiasm among workers to increase productivity.

c. In the absence of a ceiling on incentive earnings, some workers may spoil their health.

d. Strict vigilance becomes necessary to ensure that workers do not disregard safety regulation.

e. The cost and time of clerical work increases in introducing and administrating the incentive plans.

f. Whenever production flow is disrupted due to the fault of management, workers insist on compensation.

Types of Wage Incentive Plans:

Following are the types of wage incentive plans.

They can be diagrammatically represented as below:

1. Straight Piece Rate Plan:

Under the straight piece rate plan workers are paid based on their output. For example, if the piece rate is Rs. 4 per piece of the product, then a worker who turns out 40 pieces/day earns Rs. 160 (Rs. 4 x 40) as his wage for that day. Whereas another employee who produces 32 pieces/ day earns Rs. 128 (Rs. 4 x 32 pieces). Hence a fast worker earns more compared to the slow worker.

Advantages:

i. Motivates the workers to increase their output.

ii. Simple and easy to understand.

iii. improve productivity.

Disadvantages:

i. No guaranteed minimum wage. This makes workers insecure.

ii. Great disparity of earning between slow and fast workers.

iii. Wastage might increase.

iv. Quality of production may suffer as the workers concentrate on quantity.

v. Interpersonal relationship suffers due to jealousy and competition to earn more.

vi. Enforced idleness like electricity failure or machine breakdown, adversely affect earning of workers.

2. Standard Piece Rate with Guaranteed Minimum Wage:

Here the minimum guaranteed wage is fixed on hourly basis. A worker gets the minimum fixed wage/day plus the incentive for the number of pieces produced. To illustrate this, assume that there is 8 hour’s shift the piece rate is Rs 4 and a minimum fixed wage of Rs 16/ hours (Rs 16 x 8 hours = Rs. 128 per day). The standard time/piece is 15 min.

Now, there are two workers A and B. (If worker A produces 25 prices/day then he earns: Rs. 128 (min. guaranteed wage) + Rs. 100 (Rs. 4 x 25 pcs) = Rs. 228/ day

If worker B produces 40 pieces / day then he earns Rs. 128 (min. guaranteed wage) + Rs. 160 (40 pieces x Rs. 4) = Rs. 228/ day)

Advantages:

i. Min. guarantee improves sense of security.

ii. Disparity between slow and faster workers is reduced.

Disadvantages:

i. Demotivate faster worker.

ii. Slow workers get higher piece rate viz Rs. 5.12 (128/ 25).

Differential Piece Rates:

The shortcoming of the above mentioned incentive plans have given way Differential piece rates. The differential piece rates are classified under two heads viz. Individual incentive plans and Group incentive plans.

Individual Incentive Plans:

The different plans here are discussed below:

(a) Halsey Plan:

The features of this plan are:

a. Min. wage is guaranteed.

b. Additional bonus is provided to workers who

Wage and Salary Administration 147 complete the job in less than the “standard time”. Bonus is a certain proportion to the time saved. This proportion is fixed at 50% in this plan.

The total wage is calculated as:

T x R + 50% (S – J) x R

Where J – time taken

R – Rate of wage

S – Standard time

50% – The bonus percentage.

Illustration:

S = 10 hours, J = 8 hours; R = Rs. 5 / Hr; Bonus = 50%

Φ = 8 x 5+(50/100) x (10 – 8) x 5

Φ = Rs. 45.

Advantages:

i. Guaranteed min. wage exists.

ii. Simple and easy.

iii. Dispensed with time consuming and costly process of work study.

iv. Management share a part of bonus on time saved.

Disadvantages:

i. Workers get only half of the benefit of their efficiency.

ii. If the worker’s rush through the job to save time, the quality may suffer.

iii. Workers object management in sharing bonus on time saved.

iv. Sufficient incentive is not provided to fast workers.

(b) Rowan Plan:

This is a modified form of Hasley Plan, developed by James Rowen of England. The Rowan Plan pays more than the Halsey Plan. This is possible if a worker completes the task in half the standard time of the task. If more than 50% time is saved then the bonus he earns decreases.

Therefore, Total wage = J x R + [J x R x (Time saved/std. time)]

Illustration:

S = 10 hours; J = 8 hours; R = Rs. 5 / hrs.

Φ =8 x 5 + [8 x 5+ (2/10)]

Φ = Rs. 48

Advantages:

i. Minimum guaranteed wage exists.

ii. Both the employees and the workers share the benefits of time saved.

iii. The efficient workers get bonus at diminishing rate if they save more than 50% of the standard time. This checks over-speeding.

Disadvantages:

i. Incentive provided for fast worker is not sufficient.

ii. Workers dislike management sharing bonus of time saved.

(c) Gantt plan:

This plan was developed by Henry L. Gantt. Here standard time for every task is fixed through time and motion study. Minimum time wage is guaranteed to all workers.

A worker who fails to complete the task within the standard time receives wages for actual time spent at the specified rate. Workers who achieve or exceed the standard get extra bonus varying between 20% to 50% of the hourly rate for the time allowed for the task.

Illustration:

(S) Suppose the standard time fixed for the job is 8 hours and (T) time rate is Rs. 10 hours and the rate of bonus is 25%, then a worker who completes the job in 10 hours will be paid Rs. 10 x 8 = Rs. 80. On the other hand the worker who completes the job in 6 hours will be paid Rs 100 (Rs. 80 + 25% of Rs. 80).

Advantages:

i. Minimum guarantee exists.

ii. Fast worker is paid bonus at higher rate proportional to their output.

iii. Standard worker is paid 20% bonus.

iv. Part of bonus is shared by the organisation.

Disadvantages:

i. Sharing of bonus by organisation is resentment.

ii. Disunity among the slow and the fast workers.

(d) Bedeaux Plan:

This plan is developed by Charles E. Bedeaux in 1911. Here the minimum time wage is guaranteed to all workers. The workers who complete the job within or more than the standard time are paid at the normal time rate.

Workers who complete the job in less than the standard time are paid bonus, generally 75% of the wage for the time saved and 25% to the foreman.

The wage rate is calculated as:

S x R + 75% of R (S – T)

Illustration:

S = 10 hrs; R = Rs. 5 / hrs; T = 8 hrs.

Then:

Φ = 10 x 5+ 75% (5) x (10-8)

= 50 + (3.75 x 2)

= 50 + 7.50

Φ = Rs. 57.50

Advantages:

i. Min. wage is guaranteed to all the workers.

ii. The foreman is motivated to the productivity as 25% of time saved is paid to him.

iii. This plan is suitable in factories wherein a worker is expected to perform different types of jobs.

Disadvantages:

i. Workers may resent sharing the bonus with foreman.

ii. Workers may find it difficult to understand the complete calculation involved in this method.

(e) Emerson’s Efficiency Plan:

This plan was developed by Harrington Emerson. Here minimum wage is guaranteed. Workers are paid different bonus rates as per their efficiency level. Bonus is given at an increasing percentage beyond the prescribed level of efficiency (usually 66.67%). Efficiency is measured by comparing the actual time taken with the standard time.

Illustration:

S = 10 hrs, T = 8 hrs, R = Rs. 5 / hr.

Bonus = 10% upto 75 % efficiency

20% for 75%- 100%

30% beyond 100%

Φ = (T x R) + (percentage of bonus x T x R)

In this case, the efficiency level in (10/8) x 100 = 125% and,

Bonus at 30% is payable.

Total wage = 8 x 5 + (30/100) (8 x 5)

= 40+12

Rs. 51.

If worker A takes 16 hrs, then his bonus is nil.

If worker B takes 14 hrs, his bonus is (1/10) x 14 x 5.

If worker C takes 10 hrs, his bonus is (2/10) x 10 x 5.

If worker D takes 8 hrs, his bonus is (3/10) x 8 x 5.

Advantages:

i. Guaranteed time wage provides a sense of security to all the workers.

ii. It encourages healthy competition among workers.

iii. Bonus begins at 66.67% efficiency which is within the reach of many workers.

Disadvantages:

i. There is little incentive after 100% efficiency level.

ii. The plan is not very flexible or selective.

iii. Employer may fix the standard time at a low level making it impossible for most of the workers to earn bonus.

Group Incentive Plan:

In some cases like an assembly line production it is not possible to determine the performance of an individual worker as several workers jointly perform a single operation. In such cases it is desirable to introduce a group incentive scheme. Here the bonus is calculated for a group of workers and the total amount is distributed among the group members in proportion to the wage earned by each.

(a) The Scalar Plan:

This is a group plan where the productivity of the entire work force is taken into account. In this plan bonus is paid at the rate of 1 % for every 1% rise in productivity. Workers are not paid the full amount of bonus earned by them in the same month.

A certain percentage is set aside as a “Resource Fund” to take care of fluctuation. At the end of the year, the balance remaining in the “Reserve Fund” is also distributed.

(b) Priest Man Bonus Plan:

Here a committee of workers and management set the standard of performance. A minimum wage is guaranteed to each worker. The group gets bonus when actual output exceeds the standard. The group supervisor also gets a share on the group bonus. This plan promotes team spirit among employees.

Other Forms of Incentives:

Apart from the above mentioned incentive plans; there are also other forms of incentives, especially for the white collared workers. They are briefly discussed below.

Employee Stock Option Plan:

This is popularly known as ESOP. This is a form of incentive where the employees are allotted the company share at a price below the market price. When the company achieve better results, the market price of its shares and the value of the employees’ shareholding rise.

This form of incentive plan is relatively new in India and is becoming popular of late. IT is motivating to the employee, as (it enhances a sense of belongingness to the organisation) shareholders are the owners of the organisation.

Profit Sharing:

Prof. Seager defines profit sharing as “an arrangement by which employees receive a share, fixed in advance of the profits”. Profit sharing usually involves the determination of an organisation profits at the end of the fiscal, year and the distribution of a percentage of the profits to the workers qualified to share in the earnings. The main objectives of profits sharing are to create unity of interest and the spirit of co-operation.

The theory behind profit sharing is that management should feel its workers will fulfill their responsibilities more diligently if they realize that their efforts may result in higher profits which will be returned to the workers through profit sharing.

In India this incentive scheme is not well received by both the management and the workers. Committee appointed by the Govt. of India suggested profit sharing as a method of ensuring industrial peace and a step towards workers’ participation in management and also suggested that 50% of the profit be shared among the workers.

Both the employers and the trade unions rejected this. The trade unions prefer bonus to profits sharing as bonus is payable irrespective of profit or loss under the Bonus Act 1965.

Fringe Benefits:

ILO describes fringe benefits as wages are often augmented by special cash benefits, by the provision of medical and other services or by payment in kind that form part of the cost for expenditure on the goods in services.

In addition workers commonly receive such benefits as holidays with pay low cost meals, low rent housing etc. such additions to the wage proper are sometimes referred to as fringe benefits.

Fringe benefits involve a labour cost for the employer and are not meant directly to improve efficiency. These add to the workers standard of living. Hence benefits may be statutory or voluntary.

They improve motivation and morale of workers by satisfying their needs and develops a sense of belonging and loyalty among workers. They also improve the public image of the organisation.