Individual and Group Incentive Plans

Amity Business School

Incentives
1
Individual and
Group Incentive
Plans
2
Introduction:
•Incentive wages refer to performance linked
compensation paid to improve motivation and productivity
of employees. It implies monetary inducements offered to
employees to perform beyond acceptance standards.
Wage incentives include all the plans that provide extra
pay for extra performance in addition to regular wages for
the job.
•According to the National Commission on Labour, “Wage
incentives are extra financial motivation. They are
designed to stimulate human effort by rewarding the
person, over and above the time rated remuneration, for
improvements in the present and targeted results”.
3
Essentials of Sound Incentive Plans:

1. Proper Climate: In the absence of mutual trust and
understanding between management and workers, a
wage incentive system may be viewed as an attempt
on the part of management to coerce for production.
2. Workers’ Participation: A wage incentive plan
should be installed in consultation with workers and
their union. Involvement of employees will ensure that
they fully understand the objectives and mechanism of
the plan.
3. Scientific Standards: The standards of
performance for payment of incentives should be
established through scientific work study free from
bias and favoritism.
4
4. Simplicity: The incentive plan should be easy to

understand and simple to operate so that a worker
can calculate his own earnings. The linkage between
pay and performance should be clear.
5. Equitable: The plan should provide equal
opportunity to all workers to earn incentive pay.
Otherwise, it will cause dissatisfaction and jealousy
among workers who have no opportunity to earn
more.
6. Flexibility: There should be scope for making
changes in the scheme to rectify errors and to take
care of changes in technology, market demands etc.
5
7. Prompt Payment: The time gap between actual

performance and incentive payment should be as small as
possible. Once the job is completed, incentive should be
paid as soon as possible.
8. Adequate Incentive: Incentives payments under the
scheme should be large enough to motivate the workers.
For example, an incentive payment of Rs. 100 to a worker
getting Rs. 1000 per month is more meaningful than to a
worker drawing a monthly salary of Rs. 5000.
9. Ceiling on Earnings: A ceiling on the maximum
incentive earning should be laid down to prevent
overexertion and to ensure quality. Otherwise the plan may
become detrimental to the health and welfare of
employees. 6
11. Grievance machinery: Suitable machinery for

quick and fair redressal of grievances arising from
the implementation of the scheme should be
installed.
12. Appraisal system: A clear system for inspecting,
counting and recording output of each worker should
be developed. The results should be made known to
the workers.
13. Follow-ups: The operation and effectiveness of
the scheme should be reviewed periodically. Thus,
deficiency in the scheme or in its administration
should be properly rectified.
7
Types of Wage Incentive Plans:

Wage Incentive Plans
I. Individual Incentive Plans II. Group Incentive Plans
1. Priestman Bonus Plan

A. Based on Time B. Based on Output
2. Towne’s Gain-sharing Plan

1. Halsey Plan 1. Taylors’ Differential
Piece Rate Plan
3. Scanlon Plan
2. Rowan Plan
2. Merrick’s Multiple
Piece Rate Plan
3. Emerson Efficiency Plan
3. Gantt’s Task and

4. Bedeaux Point Plan Bonus Plan
8
I. Individual Incentive plans and types:

•Under individual incentive plans earnings are related
directly to the performance of individual worker.
•Individual incentives may be based on time or output.
•Under time based plans, standard time is determined

and bonus is given if a worker completes the job in less
than standard time.
•Under output based plans, a standard output is

determined and workers producing more than the
standard output are given bonus.
9
Various Types of Individual Incentives Plans are:
A. Based on Time:
1. Halsey Plan
2. Rowan Plan
3. Emerson Efficiency Plan
4. Bedeaux Point Plan
B. Based on Output:
1. Taylors’ Differential Piece Rate Plan
2. Merrick’s Multiple Piece Rate Plan
3. Gantt’s Task and Bonus Plan
10
A. Based on Time:
1. Halsey Plan:
•Under this plan, a standard time is fixed on
basis of past performance record.
•A worker who completes his job within or more
than the standard time is paid a guaranteed
time wage at the normal rate.
•A bonus usually 50% of the time saved is paid
to a worker who completes his job in less than
standard time.
11
Illustration:
Standard Time (S) = 8 Hrs
Time taken (T) = 6 Hrs
Rate of Wages (R) = 20/Hr
Bonus (P) = 50% of the time saved
Total wages (W) = (T x R) + (50 % x (S - T) x R)
= (6 x 20) + (50 x (8 – 6) x 20)
100
= 120 + (0.5 x 2 x 20)
= 120 + (1 x 20)
= 120 + 20
= Rs.140
12
Merits:
1. The plan is simple to understand.

2. Worker can easily calculate his earnings.
3. Both employer and workers get equal benefit of
time saved.
4. Guaranteed minimum wage to every worker
provides a sense of security.
5. The plan encourages the workers to be efficient
as bonus is based on time saved.
13
Demerits:
1. Standards based on past performance may
not be scientific and fair.
2. Workers get only half of the benefit of their
efficiency.
3. If the workers rush through the job to save
more time, the quality of production may suffer.
Wastage and spoilage may also increase.
4. Much clerical work is involved because
records of time saved and bonus earned have to
be kept for each worker.
14
2. Rowan Plan:
This is a modified form of Halsey Plan.
•Under this plan, a minimum time wage is
guaranteed to every worker at the normal rate.
•A standard time is determined in advance.
•The bonus is that proportion of the wages which
the time saved bears to the standard time.
15
Illustration:
Let us use the same data given above under Halsey Plan:
Standard Time (S) = 8 Hrs
Total Wages = (T x R) + {T x R x ( Time Saved )}
Standard Time
= (6 x 20) + {6 x 20 x (2 )}
8
= 120 + (120 x 1 )
4
= 120 + 30
= Rs.150
Note: In this method, Rs. 10 is earned more than the earlier
method (Halsey plan), i.e. Rs. 150 – Rs. 140.
16
Merits:
1. The guarantee of minimum wage gives a feeling
of security.
2. Both the employer and the workers share the
benefits of time saved.
3. The efficient workers get bonus at a diminishing
rate if they save more than 50 % of the standard
time. This provides a check against over speeding
and deterioration in quality.
Demerits:
1. The plan is difficult to understand for an average
worker.
2. Efficient workers are discouraged to save more
than half of standard time.
17
3. Emerson Efficiency Plan:

•Under this plan, standard time for a job is determined
scientifically and a minimum time wage is guaranteed to
all workers at the normal time rate.
•Bonus is given at an increasing percentage beyond the
prescribed level of efficiency (*usually 66.67 % of
efficiency).
•Efficiency of each worker is determined by dividing the
standard time by the time taken.
*Efficiency = (Std. Time) x 100

Time Taken
= (8) x 100
12
= 66.67 % 18
Illustration:
For example, a workman takes 6 Hrs to complete the work instead of 8 Hrs.
The efficiency is measures as follows:
Standard Time(S) = 8 Hrs
Bonus:
•10% upto 75% efficiency i.e.,
(8/x) x 100 = 75
800/75 =x
i.e. x = 10.66 Hrs.
•20% upto 100 % efficiency

(8/x) x 100 = 100
800/100 = x
i.e. x = 8 Hrs.
•30% beyond 100 % efficiency
In this case the efficiency level is 8/6 x 100= 133.33%, therefore bonus19at
30% is payable.
Total Wages (W) = (T x R) + (% of bonus x T x R)

= (6 x 20) + (30 x 6 x 20)
100
= 120 + (3600)
100
= 120 + 36
= Rs. 156
20
Worker A: Time taken 12 hrs = Nil

Total Wages = Rs. 160
Worker B: Time taken 11 hrs = 10 x 11 x 20 = Rs. 22

100
Total Wages = Rs. 160 + Rs. 22 = Rs. 182
Worker C: Time taken 8 hrs = 20 x 8 x 20 = Rs. 32

100
Worker D: Time taken 6 hrs = 30 x 6 x 20 = Rs. 36

100
21
Merits:
1. Guaranteed time wage provides a sense of
security to all workers.
2. It is fair as the rate of bonus is related to the level
of efficiency. Wages rise progressively with
increase in efficiency.
3. It encourages healthy competition among workers.
4. Bonus begins at 66.67 % efficiency which is within
the reach of many workers.
22
Demerits:
1. There is little incentive after 100% efficiency level.
2. Employer may fix the standard time at a low level
making it impossible for most of the workers to
earn bonus.
3. The system may create jealousy and disunity
among efficient and inefficient workers.
4. A great deal of clerical work is involved as
efficiency may vary not only from one worker to
another but also from one time period to another.
5. This plan is not very flexible or selective.
23
4. Bedeaux Point Plan:
•Under this plan, standard time for the job is set

scientifically and it is expressed in terms of B.
• For instance, a standard time of 240 B means that the
job should be completed within 240 minutes.
•In determining the Bs, the time of operation and the rest
time both are taken into account.
•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.
•Those who complete the job in less than the standard
time are paid bonus for the time saved.
•Generally, 75% of the wages for the time saved are paid
as bonus to the worker and 25% to the foreman. 24
Illustration: Standard time (S) = 480 Bs (8 Hrs)

Actual time (T) = 360 Bs (6 Hrs)
Rate of wage (R) = Rs 0.35 per B
Time saved = S - T
= 480 - 360 = 120
Total wages = (S x R) + {75% of R x (S - T)}
= (480 x 0.35) + {75 x 0.35 x (480 - 360)}
100
= 168 + {3 x 0.35 x (120)}
4
= 168 + 31.50
= Rs. 199.50
Wage for the workman is Rs. 199.50.
Foreman’s share from this workman is Rs. 25% i.e.
Bonus = {25 x 0.35 x (480 - 360)}
100
= Rs. 10.50 25
Merits:
1. Minimum Wages are guaranteed to all workers.
2. The foreman is motivated to increase
productivity as one fourth of the value of time
saved is paid to him.
3. This plan is suitable in factories wherein a
worker is expected to perform different types of
jobs. All the jobs can be reduced to standard
units called Bs.
4. Efficiency of different sections or workers in the
factory can be compared.
26
Demerits:
1. Workers may resent sharing the bonus with
foreman.
2. Calculations involved are complicated and
workers may not be able to understand them.
3. Much clerical work is involved.
27
B. Based on Output:
1. Taylors’ Differential Piece Rate Plan:
•F.W. Taylor, the father of Scientific Management
devised this plan.
•Under this system, standard task is established
through time and motion study.
•Two piece rates are laid down.
•The lower rate for those workers who fail to complete
the standard task within the allotted time and the
higher rate for those who complete the task within or
less than the allotted time.
•The objective is to provide sufficient incentive to
workers to work hard and achieve the standard. 28
Illustration:
Suppose the standard output is 50 units per day. The piece

rates fixed are Rs. 3 and Rs. 4 per unit. Three workers A, B
and C produce 40, 50, 60 units respectively during a day.
Their total wages will be as follows:
A = 40 x 3 = Rs. 120
B = 50 x 4 = Rs. 200
C = 60 x 4 = Rs. 240
In this way, an inefficient worker is penalized as he gets a lower

rate per unit.
29
Merits:
1. It provides sufficient incentives to efficient workers
to put forth their best efforts.
2. Inefficient workers are penalized but encouraged to
reach the standard.
3. Use of time and motion study help to improve and
standardize work methods.
4. Workers have not to share the reward with the
foreman.
30
Demerits:
1. There is no guarantee of minimum wage to
workers.
2. The plan is harsh to workers who are just below
the standard.
3. It treats the workers as machines rather than as
human beings.
4. The employer may fix a very high standard which
workers may find difficult to achieve.
31
2. Merrick’s Multiple Piece Rate Plan:

•This plan was developed to overcome a drawback in
Taylor’s Plan.
•This drawback relates to an abrupt change in piece
rate.
•Under it, three graded piece rates are prescribed.
Workers producing less than 83% of the standard
output are paid at a basic piece rate.
•Those producing from 83% to 100% of the standard
output are paid 110% of the basic piece rate.
•Workers producing more than the standard output
are paid at 120% of the basic piece rate. 32
Illustration:
Suppose the standard output is 50 units per day. The piece
rates fixed are Rs. 3 per unit for 83% production (basic piece
rate; 42 pieces); Rs. 3.30 per unit for 84%-100% production
(110% of the basic piece rate; 43-50 pieces) and Rs 3.60 per
unit for more than 100% production (120% of the basic piece
rate; more than 50 pieces).
Three workers A, B and C produce 40, 50, 60 units

respectively during a day.
Their total wages will be as follows:

A = 40 x 3.00 = Rs. 120
B = 50 x 3.30 = Rs. 165
C = 60 x 3.60 = Rs. 216
33
Merits:
1. This plan reduces the severity of the Taylor’s plan.
2. It is less harsh to beginners or learners.
3. It is more flexible.
4. It is useful where the performance level is to be
increased to 100%.
Demerits:
1. Minimum wage is not guaranteed to workers.
2. It is liberal for the efficient workers. But all workers
producing from 1% to 82.9% of the standard output
are classified as substandard are paid at the same
piece rate.
34
3. Gantt’s Task and Bonus Plan:
• Under this plan, 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 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.
35
Illustration:
•Suppose the standard time fixed for the job is 8

hours and the time rated is Rs. 20 per hour and the
rate of bonus is 25%.
•A worker who completes the task in 10 hours, he will
be paid Rs. 160 (8 x Rs. 20) only.
•On the other hand, the worker who completes the
task in 6 hours will receive Rs. 200 (Rs. 160 + 25%
of Rs. 160).
36
Merits:
1. Minimum wage is associated to all workers.
2. Wages increase progressively will increase in
efficiency. Therefore, there is sufficient incentive
for efficient workers.
3. Inefficient workers are not penalized severally.
37
II. Group Incentive Plans:

• In some cases, e.g., assembly line industries it is
not possible to determine the performance of an
individual worker.
• This is so because several workers are required to
jointly perform a single operation.
• In such cases it is desirable to introduce a group
incentive scheme.
• Under such a scheme, the bonus is calculated for a
group of workers and the total amount is distributed
among the group members in proportion to the
wages earned by each.
38
Various Types of Group Incentives Plans are:
1. Priestman Bonus Plan

2. Towne’s gain-sharing plan
3. Scanlon Plan
39
1. Priestman Bonus Plan:

• Under this plan, a committee of workers and
management sets the standards of performance.
• A minimum wage is guaranteed to each worker.
• The group gets the bonus when actual output exceeds
the standard.
• The group supervisor also gets a share in the group
bonus.
• The plan is easy and promotes team spirit among
employees.
• But it makes no distinction between efficient and
inefficient workers. 40
2. Towne’s gain-sharing plan:

• Towne’s gain-sharing plan is another system of
group incentive.
• Under this plan, half of the savings in labor cost
as a result of output in excess of the standard is
distributed among workers and the foreman.
• The foreman gets a certain percentages as fixed
in advance. The bonus is paid half yearly.
41
3. Scanlon Plan:
• The Scanlon plan has two basic features.
– First, financial incentives are used to increase
productivity and to reduce costs.
– Secondly, departmental/plant screening committees
are set up to evaluate employee suggestions.
The plan is based on the belief that plant wide
cooperation is essential for increasing productivity.
• Workers, supervisors and managers make suggestions for
improving productivity and cutting costs.
• These suggestions are screened by various screening
committees.
• If a suggestion is implemented successfully, all employees
share the gains in productivity. 42
The Scanlon plan encourages a sense of partnership

among workers. But it can be successful when the
following conditions are satisfied:
a. The number of workers should be small, preferably
less than 1,000.
b. Product line and costs are stable.
c. There should be healthy industrial relations and
good supervision.
d. Management must have a strong commitment to
the plan.
43
Advantages:
1. Individual members of the group who occupy jobs
requiring special care and attention have not to bear
the whole loss of slow speed.
2. Charges of favoritism in the assignment of ‘tough’
and ‘easy’ jobs are not likely to occur.
3. The skilled and experienced workers are motivated
to help and train inexperienced and new members.
4. All these factors create teamwork and cooperative
spirit in the group.
44
Advantages of wage incentive plans:
1. Provide opportunities for hard working and ambitious workers to
earn more.
2. Employees are encouraged to become innovative. They bring to
the notice of Management wasteful practices and problems that
retard productivity.
3. Incentive plans helps to improve discipline and industrial
relations. These plans are useful in minimizing absenteeism,
accidents, and go slow.
4. The costs of supervision are reduced as workers them-selves
are motivated to work hard and improve performance so as to earn
monetary rewards.
5. A spirit of mutual co-operation and team work is created among
workers.
6. Wage incentives are a sound technique of improving
productivity. Workers are likely to work at their best when they are
offered monetary rewards for good performance. 45
Limitations of Incentives Plans:

1. In the absence of ceiling on incentive earnings, some
workers may over work and thereby spoil their health.
2. In order to maximize output, workers may sacrifice quality
unless strict check or inspection is maintained.
3. Once an incentive plan is introduced, management may
face resistance while revising standards and rates due to
changes in technology methods, machinery and materials.
4. Strict vigilance becomes necessary to ensure that workers
do not disregard safety regulations.
5. Whenever production flow is disrupted due to the fault
of management, workers insist on compensation.
6. Jealousy and conflicts among workers may arise when
some workers earn more than others.
46
Thank You
47

Individual and Group Incentive Plans

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Individual and Group Incentive Plans

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Amity Business School

Amity Business School

Essentials of Sound Incentive Plans:

4. Simplicity: The incentive plan should be easy to

7. Prompt Payment: The time gap between actual

11. Grievance machinery: Suitable machinery for

Types of Wage Incentive Plans:

I. Individual Incentive Plans II. Group Incentive Plans

1. Priestman Bonus Plan

2. Towne’s Gain-sharing Plan

3. Gantt’s Task and

I. Individual Incentive plans and types:

•Individual incentives may be based on time or output.

•Under time based plans, standard time is determined

•Under output based plans, a standard output is

Various Types of Individual Incentives Plans are:

1. The plan is simple to understand.

3. Emerson Efficiency Plan:

*Efficiency = (Std. Time) x 100

•20% upto 100 % efficiency

Total Wages (W) = (T x R) + (% of bonus x T x R)

Worker A: Time taken 12 hrs = Nil

Worker B: Time taken 11 hrs = 10 x 11 x 20 = Rs. 22

Worker C: Time taken 8 hrs = 20 x 8 x 20 = Rs. 32

Worker D: Time taken 6 hrs = 30 x 6 x 20 = Rs. 36

4. Bedeaux Point Plan:

•Under this plan, standard time for the job is set

Illustration: Standard time (S) = 480 Bs (8 Hrs)

Suppose the standard output is 50 units per day. The piece

In this way, an inefficient worker is penalized as he gets a lower

2. Merrick’s Multiple Piece Rate Plan:

Three workers A, B and C produce 40, 50, 60 units

Their total wages will be as follows:

3. Gantt’s Task and Bonus Plan:

• Under this plan, standard time for every task is fixed

•Suppose the standard time fixed for the job is 8

II. Group Incentive Plans:

Various Types of Group Incentives Plans are:

1. Priestman Bonus Plan

1. Priestman Bonus Plan:

2. Towne’s gain-sharing plan:

The Scanlon plan encourages a sense of partnership

Limitations of Incentives Plans:

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