6 Incentives based payments - importance

1. It provides inducements and motivation of workers for higher

efficiency and greater output. With fixed pay it is difficult to motivate
workers to show better performance. Fixed pay removes fear of
insecurity in the minds of employees but it fails to evoke a positive
response which will come when incentives are included as a part of
the total remuneration
2. Earnings would be enhanced with incentives and improve standard
of living. There are instances when incentive earnings exceed two to
three times the time-rated wages or salaries.
3. Incentives will bring reduction in the total as well as unit cost of
production. Productivity would increase resulting in greater number
of units produced for given inputs.
4. Production capacity is also likely to increase. For eg. The bangalore
based Rail Plant, has now a production capacity of 77000 wheels and
48000 axles against the initial capacity of 56800 wheels and 23000
axles. The higher capacity has been achieved as a result of
implementation of a group incentive scheme carried out by the Rail
India Technical and Economic Services.
 Incentives based payments - importance

5. Reduced supervision, better utilisation of equipment,

reduced scrap, reduced lost time, reduced absenteeism and
turnover are other advantages of incentive payments.
6. Systems of payments by results would, if accompanied by
improved organisation and work measurement, enable firms
to estimate labour costs more accurately then under the
system of payment by time. This would facilitate the
application of cost-control techniques like standard costing
and budgetary control.
7. Incentives packages are very attractive for the mgmt because
they do not effect the employer’s contribution to the
provident fund and other employee-retirement benefits.
 Incentives based payments - disadvantages
1. There is a tendency for the quality of products to deteriorate
unless steps are taken to ensure maintenance of quality through
checking and inspection – this involves added expense. Benefits
gained in the form of increased output and lower cost may be
offset to a considerable degree by reduction in quality of products
and consequent loss of goodwill
2. Workers may oppose new machinery introduction for fear that
new piece or bonus rates set, when the job is restudied at intervals
of time, may yield lower incomes, or when new machines or
methods are introduced; they may slacken their rate of work in
order to avoid raising output to a level which would make a
restudy of the job necessary. Costs may not, therefore be lowered
to the extent that would be necessary if the workers were in time-
bases work. Most Unions agree that cuts in piece or bonus rates
are justifiable in such circumstances. But individual workers may
not share this view, and output and the level of costs may be
affected accordingly
 Incentives based payments - disadvantages
3. Workers may regard their highest earnings as normal and may,
therefore, press for a considerably higher minimum wage when
they are paid by results than when they are paid by the hour.
Payments by results, may, therefore, lead to higher labour costs in
certain industries such as coal mining where workers experience,
for reasons beyond their control, good and bad runs. Their
earnings on the days they have good runs are apt to be regarded
by them as normal earnings
4. There is ample evidence that some workers paid by results have
disregarded security regulations in order to achieve high output,
thus, increasing the danger of accidents. Overwork, working during
lunch hours also affects their health
5. Jealousies may occur among workers because they some are able
to earn more than others. In group incentive schemes fast workers
may be dissatisfied with slow workers. Where heavy work is
involved, old workers may face criticisms for being slow
 Incentives based payments - disadvantages

6. Setting of piece or bonus rates involve delicate problems of

judgement in which there is always a risk of error. Low rates
will dissatisfy workers as they are under pressure to work
very hard – high rates may make workers slacken their efforts
at times so that their employers may not have cause to ask
for a revision of rates because the earnings are too high.
Workers sometimes decide approximately how much they
feel they wish to earn, and are, therefore, not interested in
working for that part of the day which remains after they
have earned the amount they want.
7. Many organisations take a safe route to fix the standards of
performance – which is usually the average of past year’s
performance. Past performance may not be the idle basis for
fixing production norms
 Incentives based payments - disadvantages
8. The argument that incentives lead to higher earnings for workers
has its flip side also. As incentive earnings remained constant for a
long period, incentive pay was treated as guaranteed pay by
workers who pegged their consumption levels to much higher
levels. They made long-term investments in housings, durables
and even availed huge loans. As stocks piled up and production
came to a virtual standstill, the workers lost their incentive
payments. Worse for some, after deductions for loans, take home
pay was considerably less than guaranteed pay.
9. There is an ethical dimension to incentive payments as well. It is
unjust to pay extra when usual salaries and wages are already
paid. If an employee is paid for eight hours a day, he/she is
expected to show better performance for the day. Incentives may
also lead to corruption. Supervisors and workmen join hands
together to show wrong production figures and wrong time
bookings are made to enable workers to gain more incentives
 Incentives based payments - disadvantages

10. Incentives are said to motivate workers for higher

performance. But according to Herzberg’s theory money is a
hygiene factor which only helps to remove dissatisfaction.
For motivation to take place, other motivators like
opportunity for growth, , challenging job etc. must be
provided in addition to financial rewards.
 Types of incentive schemes

1. Incomes vary in proportion to output :

a. Straight piece rate : the rate per unit is fixed, and the total
earnings of a worker are arrived at by multiplying the total
output by the rate per unit. For eg. – rate per unit is 10p and
the total output is 100 – the earnings are 100 x 0.10=Rs.10
 Types of incentive schemes

b. Standard hour system : standard time in terms of hours is

fixed for completion of the job, the rate per hour is
determined. A worker is paid for a standard time at time rate
if he/she completes the work in the standard time or less.
The same wage is paid if more than standard time is taken,
unless he/she is guaranteed time wages. If time wages are
guaranteed, he/she gets paid on the basis of the time taken
multiplied by the time rate. Eg. – standard time – 10 hrs, rate
per hr – Re 1
Case (i) time taken – 8 hrs – earnings – 10 x 1 = Rs. 10.00
Case (ii) time taken – 12 hrs. – earnings if time wage is not
guaranteed = 10 x 1 = Rs. 10.00…. Earnings if time wage is
guaranteed = 12 x 1 = Rs. 12.00
 Types of incentive schemes
2. Earnings vary proportionately less than output :
a. Halsey Plan : standard time is fixed for the completion of the
job, rate per hour determined. If the worker takes the
standard time or more he/she is paid time rate (time rate is
guaranteed). Where work is done in less than ST, he/she gets
paid for the actual time + a bonus calculated as a specified %
of the saved time, usually 50%, the remaining going to the
employer. For eg. : ST – 10 hrs. – rate per hr. –Re 1
Case (i) time taken – 10 hrs – earnings – 10 x 1 = Rs. 10
Case (ii) time taken – 12 hrs – earnings – 12 x 1 = Rs. 12
Case (iii) time taken – 8 hrs – earnings :
time wages – 8 x 1 = Rs. 8.00
bonus – ½ x 2 x 1 = Rs. 1.00
Rs. 9.00
 Types of incentive schemes

b. Rowan System : standard time is fixed for the completion of

the job, rate per hour determined. If the worker takes the
standard time or more he/she is paid time rate (time rate is
guaranteed). Where work is done in less than ST, he/she gets
paid for the actual time + a bonus calculated as a % of the
worker’s time rate. This % is equal to the proportion of the
saved time, to the ST. For eg.: ST – 10 hrs. – rate per hr. –Re 1
Case (i) time taken – 10 hrs – earnings – 10 x 1 = Rs. 10
Case (ii) time taken – 12 hrs – earnings – 12 x 1 = Rs. 12
Case (iii) time taken – 8 hrs – earnings :
time wages – 8 x 1 = Rs. 8.00
bonus – 2/10 x 8 = Rs. 1.60
Rs. 9.60
 Types of incentive schemes
c. Barth variable sharing system : does not guarantee time wage. The
worker’s pay is ascertained by multiplying the ST by the number of hrs.
taken to do the job, taking the sq. root of the product and multiplying it
by the hourly rate For eg. : ST – 10 hrs. – rate per hr. –Re 1
Case (i) time taken – 12 hrs – earnings – √(12 x 10) x 1 = Rs. 10.95
Case (ii) time taken – 10 hrs – earnings – √(10 x 10) x 1 = Rs. 10.00
Case (iii) time taken – 8 hrs – earnings :
–√( 8 x 10 )x 1 = Rs. 8.94
 Types of incentive schemes

3. Earnings differ at different levels of output :

a. Taylor’s differential piece rate system : there is a low rate for
output below the standard, and a higher piece-rate for
output above the standard with a large bonus of 50 % of the
time rate when the standard output is attained. For eg. :
Standard output – 100 units
Rate per unit – 10 p
Differentials to be applied :
120 % of piece-rate at or above standard
80 % of piece-rate when below the standard

Case(i)Output = 120 units, earnings = 120x120/100x0.10=14.40

Case(ii)Output =90 units, earnings = 90 x 80/100x0.10= 7.20
 Types of incentive schemes
b. Merrick differential piece-rate system : with three instead of
two rates. One large step is broken into two, so as to
encourage new and average workers. Straight piece-rates are
paid upto 83% of the standard output, at which a bonus of
10% of the time rate is paid, with a further 10% bonus on
reaching the standard output. For outputs above the
standard, high piece rates may be paid. For eg. :
Standard output – 100 units
Rate per unit – 10 p
Case (i) output – 80 units – efficiency – 80% -
earnings – 80 x0.10 = Rs. 8.00
Case (ii) output – 90 units – efficiency – 90%
earnings – 90 x 110/100 x 0.10 = Rs 9.90
Case (iii) output – 110 units – efficiency – 110%
earnings – 110 x 120/100 x 0.10 = Rs 13.20
 Types of incentive schemes
c. Gantt Task system : the worker is guaranteed time rate for output
below the standard. On reaching the standard output or task,
which is set at a higher level, the worker is entitled to a bonus of
20% of the time wages. For output above the task, high piece rates
are paid. For eg. :

Rate per hour - Re. 0.50 High piece rate – 0.10

Standard output – 80 units Time taken – 8 hrs

Case (i) output – 70 units - earnings - 8 x 0.50 = Rs. 4.00

Case (ii) output - 80 units - earnings –
Time wages = 8 x 0.50 = Rs. 4.00
Bonus = 20/100 x 4.00 = Rs. 0.80
Rs. 4.80

Case (iii) output – 110 units earnings - Rs. 0.10 x 110 = Rs. 11
 Types of incentive schemes
d. Emerson’s Plan : a standard time is set, the efficiency of the worker
is determined by dividing the time taken by the standard time.
Upto 67% efficiency, the worker is paid by time rate. Thereafter, a
graduated bonus, which amounts to a 20% bonus at 100%
efficiency is paid to the worker. Thereafter, an additional bonus of
1% is added for each additional 1% efficiency.
For eg.: Standard output in 10 hrs. = 100units
Rate per hour = Re. 1.00
Case (i) output in 10 hrs. = 50 units - earnings : efficiency = 50%
10 x 1.00 = Rs. 10.00
Case (ii) output in 10 hrs. = 100 units - earnings : efficiency = 100%
Time wage - 10 x 1.00 = Rs. 10.00
Bonus - 20/100 x 10.00 = Rs. 02.00
Rs. 12.00
Case (iii) output in 10 hrs. = 130 units - earnings : efficiency = 130%
At the rate of 20% at 100% efficiency and 1% increase therafter, the worker is
eligible for 50% of the time wage as bonus
Time wage - 10 x 1.00 = Rs. 10.00
Bonus - 50/100 x 10.00 = Rs. 05.00
Rs. 15.00