Incentive Scheme

17/08/2020 0 By indiafreenotes

An incentive scheme is a plan to motivate individual or group performance. An incentive scheme basically involves monetary rewards, i.e., incentive pay but also includes non-monetary rewards.

Incentives are variable rewards granted according to level of achievement of specific results. Incentives are payment for performance or payment by results.

In other words, an incentive plan must include in its purview the characteristics of time-based and output-based systems of wage payment.

There are a large number of such plans that are applied in industrial concerns these days. However, before these differ­ent types of plans are discussed, the various requirements of a sound wage-incentive system must be noted.

Types of Incentive Schemes: Individual and Group Incentive Scheme

The various types of incentives are classified into two broad categories: financial and non- financial. Here, we are concerned with financial incentives only. Financial incentives may further be classified as individual incentives and group incentives. Both are discussed now one by one.

  1. Individual Incentive (PBR) Schemes

Under this plan, employees are paid on the basis of results”. The chief incentive plans included in this category are discussed in seriatim.

(i) Taylor’s Differential Piece Rate Plan

This plan was developed by F. W. Taylor, the father of scientific management. Under this plan, Taylor prescribed two piece work rates. One, a higher wage rate for those who reach the standard work. Second, a lower wage rate whose performance is below the standard.

The standard work is determined on the basis of time and motion studies. This wage plan encourages and rewards the employees who are efficient by giving them wages at a higher rate. At the same time, the plan penalizes those who are slow performers by paying them at a low wage rate.

(ii) Halsey Premium Plan

This plan, originated by F. A. Halsey, an American engineer, is a combina­tion of the time and the piece wage in a modified form. Under this plan, a guaranteed wage based on past experience is determined. If a worker saves time, he gets 50% of wages for time saved (called premium) in addition to normal wages. It is optional for the worker to work on the premium or not. Thus, this plan also provides incentive to efficient workers.

(iii) Rowan Premium Plan

This plan was developed by D. Rowan in 1901. This plan, to a large extent IS similar to that of Halsey Premium Plan. The only difference is in regard to the determination of the premium. Unlike a fixed percentage in case of Halsey plan, it considers premium on the basis of the proportion which the time saved bears to the standard time.

(iv) Emersson Efficiency Plan

Under this scheme, both standard work and day wage are fixed. Bonus is paid on the basis of worker’s efficiency. A worker becomes entitled to get bonus only when his/her efficiency reaches to 67%. The rate of bonus goes on increasing till he achieves 100% effi­ciency. Above 100% efficiency, bonus will be 20% of the basic rate plus 1% for each 1% increase in efficiency. In this way, at 120% efficiency, a worker receives a bonus of 40% and at 140% efficiency worker gets 60% of the day wage as bonus.

(v) Gantt Task and Bonus Plan:

This plan is devised by H. L. Gantt. This plan combines time, piece wage and bonus. Standard time, piece wage and high rate per piece are determined. A worker who cannot complete standard work within standard time is paid only the minimum guaranteed wage. A worker performing up to the standard level of work gets time wage plus a bonus @ 20% of normal time wage. If the worker exceeds the standard, he is paid a higher piece rate but there is no bonus.

The above mentioned various incentive schemes indicate that the incentive may vary along with variation in earning with changes in performance or output.

Thus, based on linkages between perfor­mance and incentive, the various incentive schemes (PBR) may be classified into the four types as follows:

  • Incentives in the same proportion as performance.
  • Incentives varying proportionately less than performance.
  • Incentives varying proportionately more than performance
  • Incentives varying in proportions that varies with levels of performance.

The first of the above mentioned schemes is called the straight proportional scheme while the rest are nomenclature as differential or geared incentive scheme.

An employee’s performance, or say, output is not exclusively due to his own efforts but is influenced by some other factors also. For example, quality of raw material and equipments, their costs, timeliness of completion of job, etc. do also matter and count in one’s performance. Therefore, one’s performance must be measured in a holistic sense, taking all the factors into account. It has also been felt, over the years that incentives should be given on the basis of performance measured over an extended period of time (e.g. week, fortnight, month or longer) rather than by hour or day.

The underlying rationale is to sustain higher levels of productivity over a period of time and also maintain a measure of stability of employee performance and earnings. But, the duration between performance duration and incentive, i.e. reward should not be unduly lengthened; otherwise it may dampen em­ployee motivation. Therefore, it has been suggested that incentives should be given to the employ­ees at least on a monthly basis.

  1. Group Incentive Schemes

The incentive schemes can be applied on a group basis also. Group incentive schemes are appropriate where jobs are interdependent. It is difficult to meaningfully measure indi­vidual performance and group pressures affect the performance of the members of the group. The chief group incentive schemes are discussed here.

(i) Profit-sharing

The concept of profit-sharing emerged towards the end of the nineteenth century. Profit-sharing, as the name itself suggests, is sharing of profit of organisation among employees. The International Co-operative Congress” held in Paris in 1889 considered the issue of profit-sharing and defined it as “an agreement (formal or informal) freely entered into by which an employee receives a share fixed in advance of the profits”.

The basic rationale behind profit-sharing is that the organisational profit is an outcome of the co-operative efforts of various parties, therefore, employees should also share in profits as shareholders share by getting dividend on their investment, i.e. share capital. The very purpose of introducing profit-sharing is to strengthen the loyalty of employees to the organisation. Thus, profit-sharing is regarded as a stepping stone to industrial democracy.

Both the share (percentage) of profit to be shared by employees and mechanism for its distribu­tion are determined in advance and also made known to the employees. In order to be eligible to participate in profit-sharing. An employee needs to serve for a certain number of years and, thus, earn some seniority. As regards the forms of profit-sharing, Metzger has classified these into three categories, namely,

  • Current: Under this form, profits are paid to the employees in cash or by cheque or in the form of Stock option immediately after the determination of profits.
  • Deferred: Profits are credited to employees’ accounts to be paid at the time of retirement or at a time of his dissociation from organisation due to reasons like disability, death, sever­ance, withdrawal from employment, etc.
  • Combination: In this case, a part of employee share of profit is paid in cash or cheque or stock and the remaining part is deferred and credited to his/her account.

Employees receive their share in the organisational profit in the form of bonus. In India, the employee bonus is governed by the Payment of Bonus Act, 1965.

The major apprehensions expressed against profit-sharing is mat management may dress up profit figures, as is often done for tax evasion purposes, and deprive employees of their shares in profit. It is also commented that profit-sharing, being a long-term scheme, does not work as incentive due to the absence of immediate feedback about the efforts and rewards.

(ii) Co-partnership

In a way, co-partnership is an improvement over profit-sharing. In this scheme, employees also participate in the equity capital of a company. They can have shares either on the basis of cash payment or in lieu of other incentives payable in cash like bonus. Thus, under co-partnership scheme, employees become shareholders also by having company shares. Now, employ­ees participate in both —profits and management of the company.

The finer points of this scheme are that it recognizes the dignity of labour and also of a partner in the business. This would, in turn, develop a sense of belongingness among the employees and encourage them to contribute their best for the development of the organization.

(iii) Scanlon Plan

The Scanlon plan was developed by Joseph N. Scanlon, a Lecturer at the Massa­chusetts Institute of Technology in USA in 1937. The plan is essentially a suggestion scheme de­signed to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity.

The plan is characterised by two basic features. First, both employees and managers can partici­pate in the plan by submitting their suggestions for cost-cutting methods. Second, increase in efficiency on account of cost-cutting is shared by the employees of the unit.

The Scanlon plan, wherever adopted, has been successful to encourage a sense of partnership among employees, improved employee-employer management relations, and increased motivation to work.

The criticism labelled against group incentive is that the incentive benefits being similar to all members of the group, the best performers may loose incentive. However, this can be overcome if group incentive scheme generates peer-level pressure for superior performance and also reduces the need for supervision. Stability in group may be a necessary condition to make the group incentive scheme successful.

As regards the ultimate impact of incentives on organisational performance, the research stud­ies” conducted in India report that incentive schemes have a positive impact on productivity, labour cost, and industrial relations. It is concluded that “money” has a “salutary” impact on production.