Dr. Urvashi Sharmacommerce.du.ac.in/web/uploads/e - resources 2020 1st/MBA HRD/Dr.… · What is an Incentive? Incentives are benefits that are promised to employees to motivate them

Dr. Urvashi Sharma

Performance-Linked Pay

What is a Reward?

A reward is a benefit that is provided in recognition of achievement, service, commendable behavior, etc. A reward is given to an employee only after he / she has provided evidence of his /her positive behavior and achievements. The aim of a reward is to show the employees that their work and effort are valued, and is given as an appreciation for the work already completed, as well as a motivation to keep improving their quality of work. Rewards can be in the form of money or can even be non-monetary in nature. Monetary rewards may be in the form of salary increments, bonuses, etc. Examples of non-monetary rewards include promotions, paid time off, flexible work hours, etc.

What is an Incentive?

Incentives are benefits that are promised to employees to motivate them to achieve their best and to improve their behavior, productivity, and output continuously. Incentives are granted to workers that perform below par, and to encourage them to achieve the desired level of performance or set goal. An example of an incentive would be, ―rewarding a $200 gift certificate to an employee achieving 30% increase in sales for the month.‖ Examples of other incentives include sales commissions, employee stock options, better offices and work spaces, higher allowances, etc. The aim of an incentive is to motivate and encourage employees to achieve desired performance, efficiency, and levels of output.

What do incentive mean?

An incentive scheme is a plan or program to

motivate individual or group performance. An

incentive program is most frequently built on

monetary rewards (incentive pay or a monetary

bonus)

WHAT DO YOU MEAN BY INCENTIVE WAGE PLANS?

Incentive wage systems are considered to be incentive management systems.

Traditionally, incentive wage plans have been thought of as payment plans based on the output of the employee.

But incentive wage systems of today go far beyond the simple single objective of payment for output.

Now-a-days incentive wage systems are so designed that the employee feels satisfied intrinsically as well as extrinsically.

FUNDAMENTAL OBJECTIVES OF WAGE INCENTIVE PLANs

A set of well-defined and communicated incentive

wage system aims at rewarding the employee more

effectively for his efforts and services rendered to the

firm than the simple base pay system. It aims at

bringing congruency between the objectives of

management and those of the employees.

The objectives of incentive wage systems have been

made clear by McGregor (1960) when he defines

them as “ A FORMAL METHOD PROVIDING AN

OPPORTUNITY FOR EVERY MEMBER OF THE

ORGANISATION TO CONTRIBUTE HIS BRAIN

AND CREATIVITY AS WELL AS HIS PHYSICAL

EFFORT TO THE IMPROVEMENT OF

ORGANISATIONAL EFFECTIVENESS…..”

Incentive wage systems provide the

opportunity for development to each and

every employee by linking pay to efforts for

development.

They aim at increasing the pride of the worker

in himself and his job.

They also attempt at seeing that each

employee gets paid accurately for what he

does, in direct proportion.

Benefits

To business

retain existing employees

increase their motivation, morale

and loyalty

boost productivity

link individual and business

performance

focus employees on achieving

targets

build teamwork

Indirect benefit, e g free health

assessments may reduce absences.

To employees

enhance the quality of working

life

reward employee efforts

add value to the employment

contract

SYSTEMS OF WAGE PAYMENT & INCENTIVES :

INDIVIDUAL INCENTIVES PLANS:

Individual payment schemes include

payment by results, piecework and bonuses,

work measurement (including measured day

work) and appraisal and performance related

pay

Many sectors of employment use pay

systems that contain direct links to

individual performance and results.

1. BASED ON TIME:

a) Halsey Plan

b) Rowan Plan

c) Emerson Plan

d) Bedeaux Plan

HALSEY PREMIUM PLAN :

The slow worker is paid time wages and efficient worker is paid some bonus in addition to the time wages ( normally 50% of wages for the time saved).

For example:

Standard time(s) = 10 hours

Rate (R) =Rs 4 per hour

Time Taken (T)= 6 hours

Rate of bonus (P)=50% of time saved

TOTAL WAGES = T X R+(S-T)XP X R

=6X4+(10-6) X 50%X4

= Rs 32.00

In halsey plan, the employee gets 33.33% benefit of wages for the time saved.

ROWAN BONUS PLAN

It is similar to halsey plan except the calculation of bonus.

Here bonus is calculated by taking proportion of time saved

to standard time.

EARNINGS=HOURS WORKED x RATE PER

HOUR+(TIME SAVED /STANDARD

TIME x HOURS WORKED x RATE

PER HOUR)

BEDEAUX PLAN

In this plan, standard time is expressed in minutes and are known as Bs.

Bonus is paid to the worker at the rate of 75% of the waged for time saved, the rest 25% goes to the foreman.

S= standard time

T= actual time

R= rate of wages

Total wages (w)= S x R + 75% of value of time

saved

EMERSON PLAN

A minimum wage is guaranteed to the workers. Conditions of work are standardized and a standard output is fixed which is to be completed within a specified time .

The pattern of incentive under this plan is as under:

if workers output is:

# less than 66.7% of the standard, he gets time wages.

# 66.67% to 80% of the standard, bonus payable is 4%.

# more than 80% till 90%, bonus is 10%.

# between 90% to 100% bonus is 20%.

After 100% 1 per cent bonus is given for every additional 1% efficiency.

2. BASED ON PRODUCTIVITY:

a) TAYLOR PLAN

b) GANTT TASK & BONUS WAGE PLAN

TAYLOR PLAN

Standard task is established. Two piece rates

are laid down.

The lower rate for those workers who fail to

complete the standard task within the

allotted time and higher rate for those who

complete the task within or less than the

standard time.

GANTT TASK & BONUS WAGE PLAN

DEVELOPED BY HENRY L. GANTT.

A worker who fails to complete the task

within the standard time receives wage 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.

Group Incentives

Compensation system which links pay to a

group's combined performance measured by

reduction in costs, increase in productivity,

progress in attaining firm's objectives, etc.

Scanlon plan

It was developed by Joseph Scanlon of the

United Steelworkers of America in 1927.

It has two main aspects:

Adopting a measure for increased productivity.

Sharing the gain accrued from that increased

productivity.

There are four degrees of cooperation in this plan:

Information cooperation by gathering

information.

Advisory cooperation through the process of

consultation.

Constructive cooperation by making

suggestions for improvement.

Joint union-management decision making.

Scanlon plan today have 4 principles:

Identity

Participation

Equity

Managerial competence

Rucker plan

It was developed by Eddy Rucker Nickels

Company.

The philosophical base of this plan is same

that of Scanlon plan but a major difference is

the base used to establish a measure of

productivity.

It is the value added by manufacture for each

dollar of input of payroll costs.

The procedure used is:

Identify a base period that provides data that will

be valid and useful for establishing standards.

Generate data

Sales Value of Production (SVP).

Cost of Materials, supplies, services, etc.

(COM).

Cost of Labor (COL).

Using these data, make the following standards:

Value added (VA)= SVP-COM.

Labour Contribution to VA (LCVA)=COL/VA.

Economic Productivity Index

(EPI)=1.00/LCVA.

Expected Value of Production

(EVP)=EPI*COL.

Labour’s contribution to savings are deposited

in a bonus pool with two-thirds of the bonus

paid to the employees monthly

Individual Incentives

Under a system of individual incentives, all or a portion of an individual’s pay is tied to their performance.

Group Incentives

Improve Organizational Performance

Organizational Measures

Measured Periodically

Team / Group Incentive Plans

Gain-Sharing Plans

Profit Sharing Plans

Earnings-at-Risk Plans

Principal Pay Strategies

1. Performance-related Pay:-

Pay systems where the pay received by the employee is varied according to the work output achieved.

In addition to payment-by-results it also includes merit-based approaches.

It consists of three sequential stages which are:-

Measurement needs

System of measuring individual employee performance against those measures

Assessment of performance

How to make PRP effective?

Integrating with performance management by managers who have the willingness and the skill to manage.

Trust between the manager and employee

Measurable work activity with validity and reliability

Systematic assessment of performance.

Variable Pay

A pattern where the employer divides an employee’s

salary into two parts—fixed and variable, whereby

the fixed part of the salary is credited to an

employee every month and the variable aspect

follows as per the goals and targets achieved.

Variable pay is:

not a part of salary

not guaranteed

based on individual, group, or organizational

performance.

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Variable Pay: Incentives for Performance

Variable

Pay Assumptions

Some people perform better

and are more productive than

others

Better performing employees

should receive more

compensation

Some jobs contribute more

to organizational success

than others

Part of compensation should

be tied directly to

performance and results

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Successful Variable Pay Plans

Effective Incentive Plans

Plan Fits the

Organization

Plan Rewards the

Appropriate

Actions

Plan effectively

Administered

Common purposes of variable pay include:-

rewarding individual performance,

rewarding group performance (e.g., completing a project, meeting organizational objectives, reducing costs),

encouraging employees to increase productivity, and

controlling payroll costs.

35

Why Variable Pay Plans Fail

Plan incentives are

not seen as desirable

Plan doesn’t reward

doing a good job

Plan doesn’t motivate

Plan rewards

teams/groups rather

than individuals

Plan doesn’t increase

base pay

Employees’

View of Variable Pay

Plan

Benefits of Variable pay plan

Encourage team-work

Promotes open lines of communication

It aligns rewards with key business priorities

Links compensation with profitability

Provides job stability

37

Types of Variable Pay Plans

38

Individual Incentives

• Piece-Rate Systems

–Straight piece-rate system

–Differential piece-rate system

• Bonus

• ―Spot‖ Bonuses

• Special Incentive Programs

–Performance awards

–Recognition awards

–Service awards

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Why Organizations Establish Variable Pay Plans for Groups/Teams

Group/Team-

Based Variable

Pay Plans

Improve

productivity

Tie pay to team

performance

Improve

customer service

or production

quality

Increase

employee

retention

40

Design of Group/Team Incentive Plans

Group/Team Incentive Plan

Issues

Distribution of

Group/Team

Incentives

Timing of

Group/Team

Incentives

Decisions About

Group/Team

Incentive

Amounts

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Group/Team Incentives

• Distributing Rewards – Same-size reward for each member

– Different-size reward for each member

• Problems with Group/Team Incentives – Rewards in equal amounts may be perceived as ―unfair‖

by employees who work harder, have more capabilities, or perform more difficult jobs.

– Group/team members may be unwilling to handle incentive decisions for co-workers.

– Many employees still expect to be paid according to individual performance.

42

Conditions for Successful Group/Team Incentives

43

Organizational Incentives

Primary Objectives

• Increase productivity and

organizational performance

• Attract or retain employees

• Improve product/service

quality

• Enhance employee morale

Drawbacks

• Disclosure of financial

information

• Variability of profits from year

to year

• Profit results not strongly tied

to employee efforts

Profit Sharing

44

Framework Choices for a Profit-Sharing Plan

45

Employee Stock Plans

• Stock Option Plan

– A plan that gives employees the right to

purchase a fixed number of shares of

company stock at a specified price for a

limited period of time.

• If market price of the stock is above the

specified option price, employees can

purchase the stock and sell it for a profit.

• If the market price of the stock is below the

specified option price, the stock option is

―underwater‖ and is worthless to

employees.

46

Employee Stock Plans

• Employee Stock Ownership Plan (ESOP) – A plan whereby employees gain significant stock

ownership in the organization for which they work.

– Advantages

• Favorable tax treatment for ESOP earnings

• Employees motivated by their ownership stake in

the firm

– Disadvantages

• Retirement benefit is tied to the firm’s future

performance

• Management tool to fend off hostile takeover

attempts.

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Executive Compensation

Executive Salaries

Executive Benefits

Executive Perquisites (Perks)

Annual Executive Incentives and Bonuses

Performance Incentives: Long Term vs. Short Term

Elements of Executive

Compensation

Forms of Performance-Linked Reward System

Merit pay

Skill-based pay

Bonus schemes

Team rewards

Organization-based schemes

Annual bonus

Gain-sharing

Profit-Sharing

EVA

Stock Options

Merit-based Pay or(Individual Performance-related pay)

It involves the following steps:-

– Determination of result-oriented merit rating procedures.

– identifying job factors and their relative importance.

– Formulation of a scale of reward.

– Communication of the basis of monetary reward

Skill-based Pay

Links pay to the level of schemes used in the job and application of additional skills by the persons carrying the job.

It can take two forms :-

Conventional

Progressive

Bonus Schemes

Relates the pay or part of the pay received by the employee to the various aspects like-

— number of items they produce or process

—Time they take to do a certain amount of work

Types :-

—Individual piece work

—Work measure schemes

—Measured day work

Individual Incentive Plans

Advantages

Rise in productivity

Lower production costs

Increases earnings of workers

Disadvantages

Conflict may arise

Resistance by the employees towards new technology

Increased turnover of employees

Team Rewards

Gain-sharing Plans:- a formula-based organisation or factory-wide bonus plan, which provides for employees to share in the financial made by a company as a result of its improved performance.

It is different from profit-sharing plans.

Gain-sharing plans

Advantages

a. Enhancement in coordination, teamwork, and sharing of knowledge

b. Social needs are recognised

c. Acceptance of change

d. Employees produce ideas an efforts

e. Focus on cost-saving

Disadvantages

a. Do not pay more for better performance

b. Lesser motivation

c. Pays bonus even when the is not earning profits

Profit-sharing Plan

Plans which require a designated profit target to be met before any payouts occur.

Advantages Disadvantages

Positive impact on organisation and individual performance

Cooperation is a desired behaviour

Increased participation of employees

Line-of-sight may be lessened

Increased turnover

Increased compensation risk

Group Incentive Plans

Organization-based Schemes

Annual bonus

Goal-sharing plan

Profit-sharing plan

ESOP

EVA

Questions???????

Gain-sharing v/s profit-sharing???

Variable pay?

Inividual piece work?

Merit-Pay – category????

Types of variable pay???

THANK YOU