Types of incentives

Lecture 3
Earnings varying less than proportionately
1. High piece rate
 the earnings of the worker are in proportion to his or
her output, as in straight piece work but the increment
in earnings for each unit of output above the standard
is greater.
The higher rates start applying after the standards
have been reached.
2. High standard hour system-
similar logic applies in this also
Earnings differing at different levels of output
Taylor’s differential piece rate system
Formulated by F. W.Taylor, the father of scientific mgt.
Two piece rates, one lower and another higher.
Standard of efficiency is determined either in terms of
time or output based on a time and motion study.
If a worker finishes the work within the standard time or
produces more than the standard output within the
stipulated time, he will be given a high piece rate.
Slow worker is penalized by getting a low rate because
of low production, and an efficient worker is rewarded
by getting a high rate.
 Merrick’s differential piece rate system
• Three piece rates instead of two.

• Workers producing below the standard output are not penalized by the low
piece rate.

• Since the earnings increase with increased efficiency, performance above the
standard is rewarded by more than one higher differential piece rate.

• Workers producing upto 83% of the standard output are paid at the ordinary
piece rate.

• Workers producing 83% to 100% are paid 110% of the ordinary piece rate, and

• Workers producing above 100% are paid 120% of the ordinary piece rate, and
Gantt task and bonus plan
Combines time, piece, and bonus systems.
Day wages are guaranteed.
A standard time for the task is fixed and time wages as well
as a high rate per piece are determined.
A worker who cannot finish the work within the standard
time is paid on a time basis.
If a worker reaches the standard, he or she is paid a time
wage plus a bonus at a fixed percentage (20%) of the normal
time wage.
If a worker exceeds the standards, he or she is paid a higher
piece rate.
Emerson’s efficiency plan
A standard time is set for each job.
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 the worker.
An additional bonus of 1% is added for each
additional 1% efficiency.
Group incentive plans
Is a system of wage payments under which an
incentive is provided to a group of workers engaged in
a particular task and individuals receive a share of the
bonus according to their relative skill.
Major types of group bonus plan include Priestman
product bonus plan, Rucker or share of production
plan, Scanlon plan and Towne plan.
Scanlon plan
A bonus incentive plan using employee and
management committees to gain cost-reduction
improvements.
Improvements or gains largely come from “working
smarter, not harder.”
Financial incentives under the Scanlon Plan are
ordinarily offered to all employees( a significant
feature of the plan) on the basis of an established
formula.
The Rucker Plan
A bonus incentive plan based on the historic
relationship between the total earnings of hourly
employees and the production value created by the
employees.
Rucker’s share of production plan normally covers just
production workers but may be expanded to cover all
employees.
Uses a far less elaborate participatory structure.
Towne plan
For cost reduction by foremen and workers.
Bonus is paid upon a reduction in labour cost alone.
Standard labour cost per unit is determined.
50% of saving in labour cost is distributed among
workers and foremen in proportion to their wages.
Improshare
Improved productivity through sharing.
Improshare bonuses are based on the overall
productivity of the work team.
The output is measured by the number of finished
products that a work team produces in a given period.
Both production and non production employees are
included in the determination of the bonus.
Enterprise incentive plans
All organizational members participate in the plan’s
compensation payout.
Reward employees on the basis of the success of the
orgn. over an extended time period(one year or more).
Seeks to create a “culture of ownership” by fostering a
philosophy of cooperation and teamwork among all
organizational members.
Includes profit sharing, stock options, and employee
stock ownership plans(ESOPs).
Profit- Sharing Plans
Is any procedure by which an employer pays, or makes
available to all regular employees, special current or
deferred sums based on the organization’s profits.
Represents cash payments made to eligible employees at
designated time periods, as distinct from profit sharing in
the form of contributions to employee pension funds.
Intended to give employees the opportunity to increase
their earnings by contributing to the growth of their
organization’s profits.
Amount share range from 5 to 50% of the net profit.
Implementation of a highly successful profit sharing plan in
Lincoln Electric Company , USA.
Stock Options(ESOP)
Stock option plans grant to employees the right to
purchase a specific number of shares of the company’s
stock at a guaranteed price during a designated time
period.
When stock prices rise, employee stock plans can be
financially rewarding to employees.
Eligibility criteria may include length of service,
contribution to department
Spot bonus
Awarded to a single employee though may be given to
a team.

In recognition of excellent customer service or longer