MEANING OF INCENTIVE PLANS

Incentive Plans are the plans formulated to influence and motivate the workers to achieve the set targets to get the reward. The incentive is given to the worker by paying some bonus or premium in addition to their normal wages. Under an incentive plan, normally a standard time is fixed by means of time study of the performance of a specific job and the worker is paid a time rate plus specified proportion of the wages of the time saved by way of bonus.

The main object of introducing incentive plans is to reduce the per unit overhead cost by means of an increase in production. The incentive plans can be for lower level employees, middle management and senior management. An Incentive Plan comprises of incentives like

• Profit sharing
• Project bonuses
• Stock options
• Sales commission, etc.

TIME BASED INCENTIVE PLANS

It is one of the important types of Incentive Plans. Halsey premium Plan was originated by the Fredrick Arthur Halsey who was an American mechanical engineer and economist. He introduced this plan by publishing his article in the American Machinist Magazine in 1891.

According to this incentive plan, the employees are paid agreed hourly rate of wages for the actual time taken to complete the job plus a fixed percentage of the wages of the time saved by way of bonus or premium. The standard time is fixed for each unit or job on the basis of time studies and motion studies. The bonus provided to each employee on the basis of the time saved is one-half or one-third of the wages of the time saved.

CALCULATION OF TOTAL WAGES

Total Wages= T*R+ (S-T/2)*R

Where,

T= Actual time taken

S= Standard time Allowed

R= Rate of wages per hour.

FEATURES OF HALSEY PLAN

• Standard time for each job is fixed in advance.
• Wages are calculated on the time basis.
• The wage payment is guaranteed as the payment is made on time basis, so even inefficient worker will also get wages for the time taken to complete the job.
• Standard time is decided on the basis of time studies and motion studies.
• The bonus provided is 50% of the actual wages or sometimes one-third of the actual wages.

EXAMPLE: Suppose the hourly rate of wage is Rs. 1 per hour, standard time to complete the job is 16 hours and actual time taken is 12 hours. The calculation of wage rate under Halsey plan is as follows:

Total Wages= T*R+ (S-T/2)*R

= 12*1+(16-12/2)*1

=12+2

=Rs.14

The following are the advantages of Halsey plan:

• The calculation of wage rate under the Halsey Plan is easy and simple and does not involve tedious calculations.
• As per this plan, the minimum wage rate is guaranteed to the worker.
• As the minimum wage rate is guaranteed under this plan, the workers have a sense of security amongst them to get earnings.
• As per this plan, the efficient workers get rewarded by the way of bonus and inefficient workers do not get rewarded.
• As the workers feel motivated by getting extra reward their productivity increases.
• The benefit from the time saved is shared equally by the employer and employee.
• The employers also gain since direct labor cost and overheads cost per unit declines.

• The workers are given only 50% of the wages of the time saved not the full amount. Because of this, some workers oppose this plan.
• To complete the work before time, employee sacrifices the quality of the production.
• The standard time to complete the job is just an estimation which may not be true in all the cases.
• Due to over-speeding there are chances of wastage of raw-materials.

2.ROWAN PLAN

Rowan Plan was originated by David Rowan of Glasgow, USA. This incentive plans guarantees the hourly rate of wages to the workers. As per this plan, the worker is paid the wages comprise two amounts:

• The wage rate per hour for the actual time taken to complete the job.
• Amount of bonus for the time saved.

In case of Rowan plan, the bonus or premium is not provided on the fixed basis rather varies on the basis of time saved in comparison with standard time. The bonus of the worker who is able to finish the job in less than the allowed time, is equal to his time wage for that proportion of the time taken as the saved time bears to the time allowed. In other words, the ratio between the bonus and the time saved is equal to the ratio between the time taken and the time allowed.

i.e. Bonus Hours/ Time saved= Time Taken/ Time Allowed

or Bonus Hours: Time saved:: Time Taken: Time Allowed.

CALCULATION OF TOTAL WAGES

Total Wages= T*R+ (S-T/S)*T*R

Where,

T= Actual time taken

S= Standard time Allowed

R= Rate of wages per hour.

FEATURES OF ROWAN PLAN

• It is an individual incentive plan based on time rate system.
• The minimum wages are guaranteed in this system.
•  Standard time for each job is fixed in advance.
• The wage payment is guaranteed as the payment is made on time basis, so even inefficient worker will also get wages for the time taken to complete the job.
• Standard time is decided on the basis of time studies and motion studies.
• The rate of bonus or premium is not fixed under this plan.

EXAMPLE: Suppose the hourly rate of wage is Rs. 1 per hour, standard time to complete the job is 16 hours and actual time taken is 12 hours. The calculation of wage rate under Halsey plan is as follows:

•  Total Wages= T*R+ (S-T/S)*T*R
• = 12*1+(16-12/16)*12*1
• =12+3
• =Rs.15

The following are advantages of Rowan Plan

• The calculation of wage rate under the Rowan Plan is easy and simple and does not involve tedious calculations.
• As per this plan, the minimum wage rate is guaranteed to the worker.
• As the minimum wage rate is guaranteed under this plan, the workers have a sense of security amongst them to get earnings.
• As the workers feel motivated by getting extra reward their productivity increases.
• Because the premium is proportionate to the time saved, if the rate has been wrongly fixed, the effect will be less serious. So Rowan scheme is safer than Halsey Scheme from the point of view of employer.
• Fixed overhead per unit will be lower as result of higher output.
• Better wage is earned by the employees; their improvement in efficiency is rewarded.

• The workers do not like the idea of sharing the savings by both employer and employee, since the time is saved by the workers.
• The bonus hour’s rate will not exceed the 25% of the time allowed in any case.
•  The ordinary worker finds it very difficult to calculate the wages as per this plan.

3.BEDAUX PLAN

Bedaux plan was introduced by Charles E. Bedaux in 1911. The Bedaux plan is an incentive scheme in which the standard time for the completion of the job is fixed and the rate per hour is defined. Each minute of the standard time is called as a point or B, such as in one hour there are 60 Bs.

Under bedaux plan, every job has a standard number of Bs. If the worker completes the job in more than standard hours, then he is paid according to the time rate i.e. time taken is multiplied by the hourly rate. In case, the work is completed in hours less than the standard time, then the worker is entitles to the bonus in addition to the hourly rate. A bonus is equal to the 75% of the earned/ saved points multiplied by the one-sixth of the hourly rate. Even if the worker does not reach the standard, then he is paid according to the time-rate.

EXAMPLE: Suppose standard time to complete the job is 8 hours and rate per hour is Rs. 1. The wage rate as per Bedaux plan is calculated as follows:

• CASE I: Actual time= 10 hours.
• Earnings= 10*1= Rs. 10.
• CASE II: Actual Time= 6 hours.
• Earnings:
• Time wages= 6*1= Rs.6
• Bonus:
• Standard Bs= 60*8= 480
• Actual Bs= 60*6= 360
• Saved Bs= (480-360)= 120
• Bonus= (75/100)*(120*1/60)
• = 1.50
• Thus, total earnings= 6+1.50= Rs. 7.50

FEATURES OF BEDAUX PLAN

• Based upon the work measurement study, the standard time is established for each job in terms of points. One point is equal to one minute i.e. a standard hour consists of 60 points.
• Guaranteed wage rate is paid up to standard performance.
• Guaranteed wage rate plus incentive is paid above the standard performance.

• This plan is simple and easy to operate.
• This plan provides incentives for higher productions in the real sense.
• This brings in a competitive spirit amongst the workers to produce more.

• The calculations of this plan are complicated which are not understandable by the workers.
• Workers do not like that foreman should share their bonus.

4.EMERSON’s EFFICIENCY PLAN

This plan was introduced by Mr. Hemington Emerson. Under this plan of incentive wages, the wages are paid at the standard rate and the amount of bonus paid to the workers depends on the individual efficiency of the workers. Under this plan, the tools and equipments are standardized and the standard time for completing the work is determined so that an average worker of average efficiency may also complete the work within the standard time.

The efficiency of the worker is determined in the ratio of actual time taken by the worker with standard time of the work.

Emerson was of the opinion that generally the workers produce only 67% of the standard production, therefore the workers who produce more than this, must be rewarded with bonus. The rate of bonus increases with the increase in efficiency of the worker.

If a worker produces less than this, no bonus should be paid to him. The bonus is calculated on the following basis:

• Bonus must be 20% of his daily wages if the efficiency exceeds 100%.
• If efficiency exceeds by 10% over 100%, bonus will be 20%+10%= 30%.
• In the same manner, the rate of the bonus will be 40% at 120% level, 50% at 130% level and 60% at 140% level of efficiency.

• This method is simple and easily understood by workers.
• It gives minimum guaranteed wage to all workers.
• It is a good source of motivation, as the rate of bonus is directly related to efficiency in a rational manner.
• It helps to reduce job turnover and dissatisfaction and helps to increase the efficiency of the workers.

• It is not a good source of encouragement for every efficient worker, as benefit is normal above the standard level.
• It is difficult to maintain a separate record for different categories of workers.

PRODUCTIVITY BASED INCENTIVE PLANS

This plan was originated by Henry Laurence Gantt who was an American Mechanical Engineer. This plan is the combination of time rate system, differential piece rate systems and bonus systems. This plan ensures the minimum wages to the workers.

Under this plan, a standard time is fixed for doing a particular job and the actual performance of the worker is compared with the set standard and his efficiency is determined. The wage rate under this method is determined as:

• The worker who fails to attain the standard is paid the guaranteed time rate.
• The worker who attained the standard is paid the guaranteed wage rate.
• The worker going above the standard is paid a higher piece wage rate plus 20% bonus of the time rate.

Thus, with the very reduction in the time, the plan ensures progressive increase in total wages. For this reason, this plan is also known as ‘Progressive Rate System’.

FEATURES OF GANTT’S TASK AND BONUS SCHEME

• A standard time is fixed for completing the work.
• A worker taking standard or more time gets wages on hourly rate.
• A bonus ranging from 25% to 50% is paid for completing the task in less than standard time.

EXAMPLE: The Gantt’s Task system can be illustrated as follows:

• Rate per hour= 0.5 Rs.
• High piece rate= 0.10
• Standard output= 100 units
• Time taken= 8 hours.

CASE I: Output= 80 units.

Since the output is less than the standard, the worker is entitled to only time wages, so

Earnings= 8*0.5= Rs.4

CASE II: Output= 100 units.

As the output is equivalent to the standard, the worker is paid the time wages plus a bonus of 20% on time wages. Thus, earnings are

Time wages= 8*0.5= Rs.4

Bonus= 20/100*4= Rs. 0.8

Total earnings= 4+0.8= 4.8 Rs.

CASE III: Output= 110 units

Since the output is more than the standard, the worker shall be paid at a high piece-rate, thus

Earnings= 110*0.10= Rs. 110

The advantages of this method are as follows:

• As per this plan, the minimum wage is assured to every employee.
• The worker’s with low productivity do not get punished.
• This plan is a motivating factor for employees to increase their efficiency as it is directly related to incentive.
• This plan is most profitable for workers where efficiency is very high as the bonus is paid on the increased wage.

• Since minimum wage is guaranteed, workers reluctant to achieve the target and increase their efficiency.
• There is wide gap between wages of efficient and inefficient workers, which increases feeling of jealousy and conflicts among them.
• This system is against the interests of labor unions.
• If the standard performance is too high, it may cause dissatisfaction among the workers.
• It increases labor cost for low production.
• Adequate attention is paid in fixing the guaranteed time rate and determination of standard output, as any error creates disturbances among workers.

2.TAYLOR INCENTIVE PLAN

This system was introduced by Fredrick Winslow Taylor. Under this system, standard time for every work is determined on the basis of time and motion study. Two rates of wages are determined which are high rate and low rate. The workers, who complete their work within standard time or before standard time, are paid wages at high rate. The workers who fail to complete their work within or less than standard time will get wages at low rate.

FEATURES OF TAYLOR INCENTIVE PLAN

• The workers who complete their work in more than standard time will get wages at low rate.
• The workers who complete their work in less than standard time will get high rate of wages.
• Standard time of work is determined.
• Two rate of wages determined are low rate and high rate.

• This system helps in lowering down the cost of production per unit.
• This system is based upon scientific calculations, proper work and job standardization.
• Most important merits of this system are that it rewards an efficient worker and penalizes the inefficient worker.
• This system helps in eliminating the workers who are quite inefficient, because in the course of time, they will try to get the work elsewhere.
• This method reduces the supervision to the minimum.
• It encourages the worker to produce more and more.

• Workers in order to earn more will not care much for quality of the work, hence more wastages and rejections.
• Quantity orientation makes the workers to work fast, in due course the workers may neglect the safety measures.
• If the standard work of the worker is less than his normal capacity it causes great dissatisfaction among the workers.
• The greatest demerit of this plan is that it does not guarantee minimum wages. So this plan is opposed by the labor unions.
• This system classifies the workers into two categories: efficient or inefficient.
• This system is not suitable for the unity of the workers.

3.MERRICK EMERSON’S PLAN

Merrick’s Emerson Plan is an improvement over the Taylor’s plan. Under this plan, three rates of wages are determined in place of two rates:

• Straight piece rate up to 83% of the standard performance.
• 10% above the normal rate for producing between 83%-100%.
• 20% above the normal rate for producing more than 100% of the standard performance.

Under this system, the workers who complete 80% of the standard production get minimum wages. They do not get any bonus. The workers, who achieve the level of performance between 80% and 99% get 100% bonus also in addition to their wages. The workers, who achieve 100% of standard performance, get 10% additional bonus.

EXAMPLE: Suppose standard output is 200 units and piece rate is 10 paise. The wage rate as per Merrick’s Emerson plan is calculated as follows:

CASE I: Output= 160 units.

Piece rate= 10 paise.

Since the efficiency is less than 83%, the worker is paid only the basic rate i.e. 10 paise. Thus earnings will be Rs. 8.

CASE II:  Output= 180 units.

Efficiency= 180/200*100= 90%

As the efficiency is more than 83% but less than 100%, 10% above the normal rate is paid to the worker. Thus, Earnings= 90*(110/100)*0.1= Rs. 9.9

CASE III: Output= 220 units.

Efficiency= (220/200)*100= 110%

As the efficicency is 110%, 20% above the normal rate is paid to the worker. Thus, earnings= 110*(120/100)*0.1= Rs.13.30

FEATURES OF MERRICK EMERSON’S PLAN

• The minimum wage is not guaranteed under this system.
• Standard rate is established after a thorough analysis of each job.
• It encourages the workers to produce more and if they come up to 83% of the standard performance, they are going to get the piece rate above the standard piece rate.