CH:7

INCENTIVE
SCHEMES/PAYMENT BY
RESULTS (PBR)
PREPARED BY:
SHAILEE DANAK
SHIMPPI SHARMA
NITESH SINDHAL
POOJA SINGH
Presentation Outlines :

 Introduction
 Definitions
 Classification of Incentives
 Merits & Demerits of Incentives
 Prerequisites of Effective Incentives Scheme
 Types of Incentive Schemes
 Wage Incentive Plans
INTRODUCTION
• Wage is a fair day’s remuneration for a fair day’s work , i.e.
standard performance.

• A wage incentive scheme is described as, a method of

payment for work of an acceptable quality produced over and
above a specified quantity or standard.

• Payment by Results refers to a method which provides for

the “direct linking of employee’s earnings to a measure of
their performance.”
DEFINITIONS
• Incentives are monetary benefits paid to workers in
recognition of their improved performance. Incentive
Scheme is a plan or programme to motivate individual or
group performance.

• The International Labor Organisation (ILO) refers to

incentives as payment by results. Unlike Wages and
Salaries, which are relatively fixed, incentives generally
vary from individual to individual and from period to period
for the same individual.
CLASSIFICATION OF INCENTIVES
a. Direct Compensation: Includes the basic salary or wages
that the individual is entitled to for his job such as
overtime work and holiday premium, bonus based on
performance etc.

b. Indirect Compensation: Includes protection programmes

(insurance plans, pensions) pay for time not worked,
services and prerequisites.

c. Monetary Incentives: Provides extra financial motivation

like bonus, higher basic wages, fringe benefits,
promotion etc.

d. Non Monetary Incentives: Provides non financial

incentives likes self respect, good human relations, job
satisfaction, improved working conditions etc.
INCENTIVES ARE CLASSIFIED INTO

INDIVIDUAL

GROUP

ORGANISATION-
WIDE
1) Individual Incentive Plan:

• The rewards of incentives are based solely on

individual performance.
• It is the extra compensation paid to an individual over a
specified amount for his production effort.
• The payment is normally on a monthly basis, though in
some cases it may be quarterly or any other convenient
period.
• The standards of performance have been set by a
qualified industrial engineering analyst.
• The rewards under this plan are almost always
immediate, i.e. paid daily or weekly.
2) Group or Area Incentive Scheme:

• It provides the payment for bonus either equally or

proportionately to individuals within a group or area.
• The bonus is related to the output achieved over an
agreed standard or to the time saved on the job- the
difference between allowed time and actual time.
• It can be most appropriate
a) Where people have to work together/teamwork has to
be encouraged
b) Where high level of production depends on the co-
operation existing among a team of workers.
• Group incentives are usually applied to small teams
and the rewards are based on the performance of the
entire group. The bonuses are often much larger than
individual wage incentive.
3) Organisation-wide Incentive System:
• It involves the cooperation and collective effort of the
employees and management in order to accomplish
broader organizational objectives such as:
i. To reduce labor, material and supply costs,
ii. To decrease turnover and absenteeism,
iii. To strengthen employee loyalty to the company,
iv. To promote harmonious labor management relations
• One of the aspect of the scheme is profit sharing- under
which an employee receives a share of profit fixed in
advance under an agreement freely entered into.
MERITS AND DEMERITS
OF INCENTIVES
MERITS

• Reduced supervision
• Better utilization of equipment
• Reduced scrap
• Reduced lost time
• Reduced absenteeism and turnover
• Increased output
 DEMERITS

• Introduction of new machines/methods

• Jealousy among workers
• Setting of piece or bonus rates
• Determining standard performance
PRE-REQUISITES OF EFFECTIVE
INCENTIVE SCHEME:
1) The cooperation of workers in the implementation of
an incentive scheme is essential.
2) The scheme must be based on scientific work
measurement.
3) Indirect workers such as foremen, supervisors,
helpers, canteen staff, and store keepers should also
be covered by the incentive schemes.
4) There should be management commitment to the cost
and time necessary to administer incentive schemes
properly.
5) There is greater need for planning.
 TYPES OF INCENTIVE SCHEMES:
Incomes varying in
the same proportion
to output.

Earnings differing at Earnings varying

different levels of proportionately less
output than output

Earnings varying
proportionately
more than output
1) INCOMES VARYING IN THE SAME
PROPORTION TO OUTPUT:

• The main feature of this scheme is that any gains or

losses resulting directly from a worker’s output accrue
to him or her. In contrast, when the worker is paid by
the hour, day or month, all gains or losses resulting
from charges in his or her output accrue to the
employer.
• The straight piece work and the standard hour system
are the two popular incentive schemes which come
under this category.
A. STRAIGHT PIECE WORK:
• Here the rate per unit of output is fixed and the total
earnings of the worker are arrived at by multiplying the
total output by the rate per unit.

• Example: If the rate per unit is 10 paise and the total

output of an employee is 100 units.

• His or her earnings will be 100*0.10= Rs.10

B. STANDARD HOUR SYSTEM:
• Also called 100 per cent gain sharing, the standard time
is fixed for completion of a job. The rate per hour is then
determined. Workers are paid for a standard time or
less.

• Example: Standard time = 10 hours, Rate per hour = Rs

1
Case 1. Time taken = 8 hours
Earnings = 10*1 = Rs 10
Case 2. Time taken = 12 hours

a) Earnings, if time wages are not guaranteed

=10 * 1 = Rs 10
b) Earnings, if time wages are guaranteed
=12 * 1 = Rs 12
2) EARNINGS VARYING
PROPORTIONATELY LESS THAN
OUTPUT:
• There are four different systems in this group, namely
Halsey, Rowan, Barth and Bedaux.

• The common feature of all these is that time is used as

the measure of output and bonus is paid on the time
saved i.e. the difference between the standard time set
and the actual time taken.

• These systems are often applied in cases where it is not

possible to set standards or to measure the worker’s
output accurately.
1. THE HALSEY SYSTEM:

• This system was developed by F.A Halsey, provides for

the fixation of a standard time for the completion of task.
If the job is completed in less than the standard time, the
worker receives a bonus payment at his time rate for a
specific percentage of the time saved.
• Thus, Bonus = 1/2 x [ of time saved/of time taken] x
Daily wage
2. THE ROWAN SYSTEM:

• This plan is same as Halsey Plan, but differs only in

regard to the determination of bonus. The premium is
calculated on the basis of the proportion which the time
saved bears at standard time.
• Thus, Bonus = Time saved/Time allowed x Time taken x
Hourly Rate
3. THE BEDAUX POINT SYSTEM:

• Under this, the standard time set is divided into a

number of points at the rate of one minute per point. The
bonus is calculated at 75 percent of the points earned in
excess of 60 per hour.
• This system is really more helpful than the ordinary
incentive system, since it enables the management to
record the output of any worker.
3) EARNINGS VARYING
PROPORTIONATELY MORE THAN
OUTPUT:
• This category includes two methods:
I. The high piece rate
II. The high standard hour
• The main feature of these two schemes is that since
labor costs per unit increase for levels of output above
the standard, the worker also shares the earnings in
overhead costs which results from an increased
output.
4) EARNINGS DIFFERING AT
DIFFERENT LEVELS OF OUTPUT:
• This group includes several schemes. These systems
can be best explained by describing how earnings
vary from minimum to maximum at different levels of
output.

• Earnings for one part of the range may vary

proportionately less than output and for another part
proportionately more or more usually in the same
proportion as the output.
A. THE TAYLOR DIFFERENTIAL PIECE
RATE SYSTEM
• This system was introduced by Taylor with two
objectives
1. To give sufficient incentives to workmen to induce them
to produce up to their full capacity
2. To remove the fear of wages cut.
• This system is designed to encourage the efficient
worker with a higher rate of payment and to penalise
the inefficient by a lower rate of payment.
B. THE MERRICK DIFFERENTIAL PIECE
RATE SYSTEM:
• This is a modification of Taylor 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 up to 83 per cent of the

standard output, at which a bonus of 10 per cent of the
time rate is payable.
C. GANTT PREMIUM AND TASK BONUSES:
• It is devised by H.L Gantt and is the only one that pays a
bonus percentage multiplied by the standard time. Under
this system, fixed time rate are guaranteed.

• Workers completing the job within the standard time or in

less time receives wages for a standard time plus bonus,
which ranges from 20-50% of the time allowed and not
time saved.
D. THE EMERSON’S PLAN:
• Under this plan, a standard time is set for each job, and
the efficiency of each worker is determined by dividing
the time taken by the standard time. Up to 67% of
efficiency, the worker is paid by time rate.

• Thereafter, a graduated bonus which amounts to a 20%

bonus at 100% efficiency is paid to workers. Then an
additional bonus of 1% is added for each additional 1%
efficiency.
E. THE ACCELERATED PREMIUM
SYSTEM:
• Under this, the earnings of workers increase with output-
the rate of increase itself rising progressively with the
output. The worker receives a strong incentive to increase
his/her output in order to get increased earnings.
WAGE INCENTIVE PLANS:
• This may be discussed as :

I. Plans for blue collar workers

II. Plans for white collar workers
III. Plans for managerial personnel

• Each of these categories of employees have separate

and distinct needs and hence specific tailor made
incentive plans have to be devised to meet their
requirements.
 1. INCENTIVES PLANS FOR BLUE
COLLAR WORKERS

• Classified into 3 categories

1. Plans under which the rate of extra incentive is in
proportion to the extra output.
2. Plans under which the extra incentive is
proportionately at a lower rate than the increase in
output
3. Plans under which the rate of incentives is
proportionately higher than the rate of increase in
output.
2. INCENTIVES PLANS FOR WHITE
COLLAR EMPLOYEES/ SALESMEN

• The salesmen are usually given incentives in the form

of sales commission.
• This is due to 3 factors
1. The unsupervised nature of most sales work.
2. Tradition in the market.
3. The assumption that incentives are needed to
motivate salesmen.
3. INCENTIVES FOR MANAGEMENT
• The managers are paid bonus.
• 2 types of bonus plans:

Determined by
formula

Determined by
some discretion
used in allocation
of bonus(i.e. paid
on more or less
permanent basis).
3. INCENTIVES FOR MANAGEMENT(CONT.)

• The bulk of bonus is much higher for top level executives

and lower for the lower level executives.
• At Top Management level- incentive payments are
mostly in the form of bonuses which are usually a
percentage of base salary that depends upon the level of
performance and company profit.
• In the Manufacturing and Retailing fields, it is common
for executive and managerial personnel to be
compensated partly in the form of a base salary and
partly in the form of a year-end bonus.
THANK YOU