WAGE INCENTIVE PLANS

Wage Incentive plans

• 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.
Principles of a Good Wage and Salary
Administration

• Simple and easy to understand.

• Union management agreement.
• Time standard must be fixed.
• Reward must be proportional to the effort
• Complaints and grievances must be attended properly
• The plans should not change frequently and must be
tried out continuously for some length of time.

• Equity and fairness.

• Workers must be made to understand the plan.

• There must be a minimum guaranteed payment.

Types of Wage Incentive Plans:
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:

• Motivates the workers to increase their output.

• Simple and easy to understand.

• Improve productivity.
 Disadvantages:

• No guaranteed minimum wage. This makes workers insecure.

• Great disparity of earning between slow and fast workers.

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

• Interpersonal relationship suffers due to jealousy and competition to earn

more.

• 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 pieces/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. 288/ day)
Advantages:

• Minimum wage guarantee improves sense of security.

• Disparity between slow and faster workers is reduced.

Disadvantages:

• Demotivate faster worker.

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

1. Individual incentive plans

2. Group incentive plans.
Individual Incentive Plans
 (a) Halsey Plan:
• Minimum wage is guaranteed.
• Additional bonus is provided to workers who 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.
Bonus
• The total wage is calculated as:
Φ = J x R + 50% (S – J) x R
Where J – time taken
Time saved
R – Rate of wage
S – Standard time
50% – The bonus percentage.
Example:

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.
 (b) Rowan Plan:

• This is a modified form of Halsey 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)]

Example:

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

Φ =8 x 5 + [8 x 5+ (2/10)]

Φ = Rs. 48
 (c) 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

• The wage rate is calculated as:

S x R + 75% of R (S – J)
Example:

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

Then:

Φ = 10 x 5+ 75% (5) x (10-8)

= 50 + (3.75 x 2)

= 50 + 7.50

Φ = Rs. 57.50
 (d) 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.
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.
 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.
Taylor’s Differential Piece-Rate Plan:

• F.W. Taylor started this method as a part of the scheme of scientific

management. The underlying principle of this system is to reward
an efficient worker and penalise the inefficient person. In Taylor’s
system, inefficient persons have no place in his organization.
• The standard time was fixed for completing a task with the help of
time and motion study. If a worker completes the task in the
standard time he is paid at higher rate and lower rate is paid if more
than the standard time is taken.
The main features of this system are:

 1. Minimum wages are not guaranteed in this plan.

 2. A standard time fixed for taking completing the task.
 3. Different rates are fixed for taking standard time or more.
 4. Higher rate is given if work is completed in standard or less time
and lower rate is offered if more than standard time is taken.
The method can be explained with the help of an example. A standard
output of 200 units is fixed in an 8 hours time. A rate of 45P is paid if
the output is 200 or more units and 35P, if production is less than 200
units. Worker A has produced 240 units and B produced 180 units. The
wages to be paid to worker, A will be Rs. 108 i.e. (240 x 0.45) and that
to B will be Rs. 63 i.e. (180 x 0.35).
Advantages:

• 1. This method is simple to understand and wages to be paid to a

worker can easily be calculated.
• 2. It offers good incentives to efficient workers.
• 3. This method is preferred by employers because it reduces
overhead expenses per unit by raising output.
Limitations:
• This method punishes slow workers very severely by giving them
lower rates hence less wages.
• A seed of disunity is sown among workers. Those producing less
will feel jealous of others.
• Workers are not guaranteed minimum wages and they feel insecure
about their earnings.
• It adversely affects the health of workers because they try to over
exert for reaching the standard output.
• It is difficult to determine labour cost because different rates are
paid for production purposes.
Merrick Differential Piece-Rate System

• The Merrick Differential Piece-Rate System is a modification

of Taylor’s differential piece-rate system in which three piece-
rates are used to distinguish between the beginners, the
average workers, and the superior workers, against two piece-
rates in Taylor’s system.
• The worker is paid the straight price rate up to 83% of the
standard output, 10 % above the normal rate for producing
between 83% – 100% and 20% above the normal rate for
producing more than 100% of the standard output. Here also,
the minimum wages of the worker are not guaranteed.
 The Merrick Differential Piece-Rate System can be illustrated by
the example given below
Standard Output = 200 units
Piece-rate = 10 paise
Case (1): Output = 160 units
Efficiency = 160/200 x 100 = 80%
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 (80 x 0.1).
 Case (2): Output= 180 units
Efficiency = 180/200 x 100 = 90%
As the efficiency is more than 83% but less than 100 percent, 10%
above the normal rate is paid to the worker. Thus,
Earnings = 90 x 110/100 x 0.1 = Rs 9.9
 Case (3): Output = 220 units
Efficiency = 220/200 x 100 = 110%
As the efficiency is 110%, 20% above the normal rate is paid to the
worker. Thus,
Earnings = 110 x 120/100 x 0.1 = Rs 13.30
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.
 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.

 Profit Sharing:

• Professor 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.
Other Forms of Incentives
 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.
 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 “Reserve Fund” to take care of

fluctuation. At the end of the year, the balance remaining in the
“Reserve Fund” is also distributed.
Fringe Benefits:

• It describes fringe benefits as wages are often augmented by special

benefits, by the provision of medical and other 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.