INCENTIVES AND FRINGE BENEFITS Meaning of Incentives Incentive plans envisage a basic rate usually on time basis applicable

to all workers and incentive rates payable to the more efficient among them as extra compensation for their meritorious performance in terms of time, costs and quality. The incentive rates may take the form of bonus or premium. Bonus means payment to workers of the entire benefit accruing from savings in costs, time, improvement in quality, etc. Premium means the benefits accruing to the firm as the result of higher output or better quality will be shared equally or on some agreed basis between the management and the workers. Features of Incentive Plans i. ii. iii. iv. v. vi. vii. Guaranteed minimum wages: It must guarantee minimum wages irrespective of the performance of the worker. Simple: It must be simple to operate and easy to understand. Equitable: All workers should get an equal opportunity to earn the incentive pay. Equal pay for equal work should be the rule. Economical: The incentive plan should not be a costly affair. The benefits must exceed the costs. Flexible: It must be reasonably flexible so as to take care of changes in technology, demand for and supply of skills, competitive rates in the industry, etc. Support: The incentive plan should take workers and unions into confidence. It should be implemented after consulting the workers and their union. Motivating: The incentive should be large enough to motivate the worker to superior performance.

Incentive Plans 1. Piece Rate: Taylors Differential Piece Rate System F W Taylor, the father of Scientific Management, originated this system. The main features of this plan are: i. ii. iii. There shall be two piece work rates, one is lower and the other is higher. The standard of efficiency is determined either in terms of time or output based on time and motion study. If a worker finishes work within standard time (or produces more than standard output within time) he will be given high piece rate.

2. Merricks Differential Piece Rate System There are three piece rates under this scheme instead of two, and workers producing below the standard output are not penalised by the low piece rate. Since the earnings increase with increased efficiency, performance above the standard will be rewarded by more than one higher differential piece rate. The basic features of this scheme are: (a) upto 83% of the standard output workers are paid at the ordinary piece rate (b) 83% to 100% at 110% of the ordinary piece rate, and (c) above 100% at 120% of the ordinary piece rate. 3. Standard Hour Plans: Halsey Plan This plan, originated by F A Halsey (an American engineer) recognises individual efficiency and pays bonus on the basis of time saved. If the job is completed in less than the standard time, the worker is paid a bonus of 50% (33 1/3 per cent under Halsey-Weir Plan) of time saved at time rate in addition to his normal time wages. Total Earnings = Time taken Hourly Rate plus Bonus Bonus = 50% of time saved Bonus A bonus is an incentive payment that is given to an employee beyond one's normal standard wage. It is generally given at the end of the year and does not become part of base pay. It is said that bonus is a share of the workers in the prosperity of an organization. The Payment of Bonus Act, 1965 The Act applies in every factory or establishment in which 20 or more persons are employed in an accounting year. An employee is entitled to bonus only when he has worked 30 days in a particular year. The minimum bonus paid has been raised from 4% to 8.33% and is sought to be linked to increase productivity in recent times, maximum payable is 20% under the act. Profit Sharing Profit sharing is a scheme whereby employers undertake to pay a particular portion of net profits to their employees on compliance with certain service conditions and qualifications. The purpose of introducing profit sharing schemes has been mainly to strengthen the loyalty of employees to the firm by offering them an annual bonus (over and above normal wages) provided they are on the service rolls of the firm for a definite period. The share of profit of the worker may be given in cash or in the form of shares in the company. These shares are called bonus shares. In India, the share of the worker is governed by the Payment of Bonus Act.

Employees Stock Ownership Plans Under employee stock option plan, the eligible employees are allotted companys shares below the market price. The term stock option implies the right of an eligible employee to purchase a certain amount of stock in future at an agreed price. The eligibility criteria may include length of service, contribution to the department/division where the employee works, etc. The company may even permit employees to pay the price of the stock allotted to them in installments or even advance money to be recovered from their salary every month. The allotted shares are generally held in trust and transferred to the name of the employee whenever he or she decides to exercise the option. The stock option empowers the employee to participate in the growth of the company as a part owner. It also helps the company to retain talented employees and make them more committed to the job. Employee stock options are welcomed everywhere due to their in-built motivating potential. Some of the powerful benefits offered by ESOP may be catalogued thus: i. Stock options are a tremendous motivator because they directly link performance to the market place. The underlying rationale is to let employees add value to a company and benefit from it on the same terms as any other provider of risk- capital. Employees remain loyal and committed to the company. To become part owners, everyone has to stay for a while, contribute their best and then share the resultant gains according to an agreed criteria. Stock options motivate people to give their best to the company because individual performances will translate into share price increases only if it is part of a larger collective effort. By transforming your employee into a stockholder, stock options foster a long-term bond between the employee and the company. Employees begin to look at themselves as real owners in place of just paid servants of a company.

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