Incentives Session-13

What Is Incentive Pay? Incentive pay links pay (as a reward) to performance – The idea of incentive pay is to create incentives for employees to improve their job performance by linking employee pay to employee job performance – Incentive pay is also called: Pay for performance Performance-based pay systems Performance-based reward systems The reward for performance doesn’t have to be pay – Pay is one possible reward, not the only possible reward

Why Use Incentive Pay? To use pay (and other rewards) to align the goals of each employee with the goals of the organization This way, when employees work toward their own goals, they are also working toward the organization’s goals If incentive pay works to enhance employee motivation, then the advantages include: Increased employee productivity & job performance Increased retention of high performers Increased ability of the organization to achieve its objectives Lower costs

Essentials of a sound Incentive plan Guaranteed minimum wage Simple Equitable Economical Flexible Support Motivating prompt

Types of Incentive Plans

Individual Incentive Plans Piece-rate: pay is a set amount per piece of production Taylor’s differential piece rate system The main features of this plan are: o Two piece work rates: one lower & one higher o Standard of efficiency is determined either in terms of time or output Merrick’s differential piece rate system Under this scheme three piece rates are there: o Up to 83% of the std output workers are paid at the ordinary piece rate o 83% to 100% at 110% of the ordinary piece rate o Above 100% at 120% of the ordinary piece rate

Taylor Plan: piece-rate with differential rates Example: Production standard = 60 pieces per hour Standard rate= $0.20 per piece Piece-rate = $0.25 per piece on production over 60 pieces if production equals or exceeds 125% of the production standard (1.25 × 60 = 75 pieces per hour) 80 pieces → (60 × $0.20) + [(80 − 60) × $0.25)] = $17.00

Individual Incentive Plans Standard hour plan: pay is based on the basis of time saved Halsey Plan Recognizes individual efficiency and pays bonus on the basis of time saved The main features of this plan are: o Standard time is fixed for each job o Time rate is guaranteed o If the job is completed in less than the std. time, the worker is paid a bonus of 50% of time saved at time rate in addition to normal time wage. o Total earnings= Taken Time X Standard Rate + ( Saved Time X Standard Rate) X 50/100 o Now solve this: Standard time to produce units 250 hrs. Time taken to produce the units 220 hrs. Hour rate of wages Rs. 4 /- What is the total earnings?

Individual Incentive Plans Standard hour plan: pay is based on the basis of time saved Rowan Plan o Unlike a fixed percentage in Halsey Plan, it takes into account a proportion: Time saved/Time allowed o Under this plan bonus is that proportion of the wages of time taken which the time saved bears to the time allowed or std. time o Bonus = Time saved/Time allowed X Time taken X Standard rate o Total Wage = Time taken X standard rate + Bonus o Now solve this: A worker takes 12 hrs to complete a job to time wage and 9 hrs on a scheme of payment by result. The rate of payment is Rs. 5/- per hr. Calculate his earning if he is paid on the basis of Rowan plan.

Individual Incentive Plans Standard hour plan: pay is based on the basis of time saved Bedeaux Plan o Every job is expressed in terms of std. minutes: Bedeaux points or B’s o Each B represents one min. through Time & motion study. o Under this plan: Up to 100% performance a worker is paid time wage without any premium for efficiency If actual performance > standard performance, then 75% of the wages of time saved is paid to the worker as bonus and 25% to the foreman. o Now solve this: If the standard time is 20 hours and time taken is 16 hours and rate per hour is Rs.20, how much the worker will get?

Individual Incentive Plans Bonuses: An incentive payment that is given to an employee beyond one’s normal standard wage. Generally given at the end of the year It is not a part of the base pay Payment of Bonus Act,1965

Individual Incentive Plans Merit pay and individual incentive plans: A reward based on how well an employee has done the assigned job. Pay is dependent on individual employee’s performance. A powerful motivator Set benchmarks Sometimes merit raises may backfire Can work where the job is well designed and performance criteria are well defined.

Individual Incentive Plans Lumpsum Merit pay: Employee receives a single lumpsum payment at the time of their review. Not added to the base pay. Clearly identifies the link between pay and performance.

Individual Incentive Plans Commissions for sales people: Salary plan Straight salaries Commission plan Pay is only a percentage of sales Combination plan Pay is a combination of salary and commissions

AdvantagesDisadvantages – May promote single- mindedness – Employees do not believe pay and performance are linked – They may work against achieving quality goals, and they may promote inflexibility. – Rewarded performance is likely to be repeated – Financial incentives can shape an individual's goals – Help the firm achieve individual equity – Fit in with an individualistic culture

Conditions Under Which Individual-Based Plans Are Most Likely to Succeed When the contributions of individual employees can be accurately isolated. When the job demands autonomy. When cooperation is less critical to successful performance or when competition is to be encouraged.