UNIT-IV

Rewards, Incentives and Pay for Performance Systems

(4 Hours)
(a)Pay for Performance Systems
(b)Types of Rewards
(c)Types of Incentives Plan
 PAY FOR PERFORMANCE SYSTEMS
Pay for Performance (PFP): a programme in which the employee’s pay is at
least in part dependent upon job performance

PFP has a variety of reasons:-

 Powerful motivator for employees

 Many emp. support the pay for performance concept
 Attract and retain talent

Approaches to PFP:

 Merit pay
 Variable pay
 Skill- based pay
 Competency- based pay
“The firm has a relatively educated workforce with both the ability &
the willingness to learn different jobs

The company’s technology & organizational structure change

frequently

Employee participation & teamwork are encouraged throughout the

organization

Opportunities to learn new skills are present

The costs of employee turnover & absenteeism in terms of lost

production are high

Individual-based pay plans are common in manufacturing

environments that rely on continuous- process technologies.”
 1. Merit Pay
 It consists of an increase in base pay, granted once in a year, and is
based on supervisory ratings on performance appraisal.

 Once a merit pay increase is given to emp., it remains as a part of basic

salary for rest of the tenure for that emp.

 Classified into 3 parts:-

 Individual incentives
 Team incentive
 Organization wide incentive
 2. Variable Pay
It consists of single lump-sum amount and it’s a one time pay.
It’s not added to their basic salary.

 Cash incentives or bonus granted to high performers based on their

extraordinary contributions to the org. in relation to specific period.

 The basic pay of the emp. remains unaffected, thus the org. labor cost is
under control (bcoz if the basic pay increases, other benefits like insurance,
retirement benefits etc also increases as these benefits are calculated on the
basic pay)

 E.g. Boeing, Timex, Westinghouse, Shoppers’ stop, Pantaloons, Philips

India etc.

 Similarly vice-versa happens when the performance decreases, the reward

also reduces accordingly.
 3. Skill- based pay
Reward plan that pays emp. on the basis of their work- related skills
i.e. the more skill you acquire, the more you get rewarded.

 This means the emp. will be receive same pay regardless of the
different types of jobs that he may have handled during a particular
period.

 Thus, emp. improvise upon their skill-sets in sync with changes in

the technology and ext. environment. Thus, the emp. converts
himself into an invaluable asset for the org. over a period of time.

 E.g. 3M, Motorola, TRW, Xerox, GE, HP.

 4. Competency based Pay
 It’s a reward plan that pays for the employee’s range, depth, skill and
knowledge etc.

 According to Brown and Armstrong “Competency-based pay can be

defined as paying for the development and application of different skills,
behavior and actions which support high level of individual, team and
organizational performance.”

 THREE CATEGORIES:-
1. Organizational competencies (e.g sony- miniaturisation, intel- microchip)
2. Job- related competencies
3. Personal competencies
Staff development Using a computer
Managing risk Typing a letter
communication Installing an electrical outlet
Customer service Creating ppt.
Problem solving Writing technical reference material
Decision making
 Benefits and Problems of PFP
 Benefits:
 Increase productivity and performance
 Employee retention
 Better cost control:
Deadlines met= decreased overtime
 Increased job satisfaction
 Increase in innovative ideas & solutions
Employees focus more on what they need to do to
improve if performance is directly linked to pay
 Employees are engaged when they are fully involved and
enthusiastic about their jobs and their organizations.
 Motivating top performers
 Effective way of dealing with poor performance
Problems
 Sets up competition between employees
 Impedes teamwork: Co-operation and teamwork can be
hindered
 Focus is on financial reward than developmental needs
It may compromise quality
 Depend on quality of judgement made by reviewing
managers
 Emp. can expect an additional payout year on year. In
recession, chances of high performer to leave
 Extrinsic tangible rewards undermine intrinsic
motivation
 Challenges
• Evidence suggests that compensation committees face a trade-off
between the positive incentive effects afforded by PFP and the
negative side effects, such as:
Accounting Fraud
Decreased Teamwork
Decreased Quality

• Organizations should design a mix of pay programs and consider

extrinsic and intrinsic motivators to be successful.
Link pay and performance appropriately
Build employee trust
Use multiple layers of rewards
Increase employee involvement
Stress the importance of ethical behaviour
Focus attention on non-financial incentives as well
 Rewards
Reward is benefits provided by the employers, usually
money, promotion or benefits and satisfaction derived
from the job itself such as pride in one’s work, a feeling
of accomplishment or being part of a team.
– DeCenzo and Robbins
 EXTRINSIC REWARD  INTRINSIC REWARD

Award that is tangible or Intangible award of recognition, a sense of

physically given to you for achievement, or a conscious satisfaction.
accomplishing something.
extrinsic rewards are more of intrinsic rewards are mostly qualitative in
a quantitative in nature. nature 

Extrinsic rewards are those that Intrinsic rewards are those that originate from
originate from something beyond within the person
the person.
Extrinsic rewards actually fulfils Intrinsic rewards actually fulfils employee’s
employees extrinsic factors or intrinsic factors or motivators and thus motivates
hygiene factors and thus do not let him
him start thinking about leaving Examples include; giving challenging task,
the company.  involving in decision making process, giving a
Examples include; pay rise, higher rank in hierarchy etc.
bonuses, paid leaves, annual All these rewards do not required to have
recreational plans etc. increased salary as well and employee may be
working at higher management rank without an
increase in the salary and still more motivated.
 EXTRINSIC REWARDS
Direct compensation Indirect compensation
 Basic salary or wage  Protection programmes e.g.
 Overtime work Insurance plans, pension
 Holiday premium  Pay for time not worked
 Performance Bonus  Services and perquisites
 Profit sharing
 Stock options

Non financial compensation

Preferred office furnishing
Preferred lunch hours Business cards
Assigned parking spaces Own secretary
Preferred work assignments Impressive job titles
 INTRINSIC REWARDS
 Participation in decision making
 Greater job freedom and direction
 More responsibility
 More interesting work
 Opportunities for personal growth
 Diversity of activities
Is ‘Money’ a Motivator
Always ???
 INCENTIVE SCHEMES
Incentives are monetary benefits paid to workmen in
recognition of their outstanding performance.
An incentive aims at improving the overall performance of an
organization.

Definition:
According to Milton L. Rock, incentives are defined as ‘variable
rewards granted according to variations in the achievement of
specific results’.
According to K. N. Subramaniam, ‘incentive is system of payment
emphasizing the point of motivation, that is, the imparting of
incentives to workers for higher production and productivity’.
 WAGE INCENTIVE PLANS

1. Short-term Incentive Schemes for Blue-collar

Emp.

2. Incentive Schemes for White-collar Emp.

3. Incentive Schemes for Managerial personnel/

Executives
 TYPE #1: INDIVIDUAL INCENTIVE PLAN

Individual employee is paid incentive on the basis of individual

performance or output.

The employers are liable to pay incentives to those employees who

are producing more than the standard output.

Individual incentive plans can be either time based or production

based.
a. Time Based Incentive Plans

 A standard time is determined for doing a job and this standard

time served as a basis for giving incentive.

 A worker is considered as efficient, if he completes his job in

less than standard time.

 Incentives are calculated in the basis of time worked

irrespective of the quality of work done.
The wages are calculated by multiplying the time spent by
predetermined rate of wages.

Wage = Time spent * Rate per unit of time (T * R)

where T = Time spent in hours
R = Rate per hour
I. Halsey Incentive Plan:

Total Wages, W=TR+(S -T) R

2
Where, W=Total Wages
S=Standard time
T=Time taken to complete the job
R=Rate;

For example, if hourly rate is Rs.3, standard time for completion of

job is 10 hours, worker is given an incentive of 50% or (1/2) of time
saved. If a worker completes the job in 8 hours, calculate incentive
amount and total wage that a worker will earn :
Advantages:
a. It is simple.
b. This is beneficial to efficient worker.
c. Causes no harm to new worker, trainee, or slow worker.
d. Management shares benefits of over-achievement by workers.

Disadvantages:
a. Workers get only a percentage of return on their over-
achievement.
b. The quality of production may suffer as workers may do work
in hurry,
c. There may be difficulties in setting standard time for different
jobs.
d. Depends on past performance instead of making new standard
II. Rowan Plan:
It differs only in terms of calculation of incentive for time saved.
Incentive for completing the job in time lesser than standard time is paid
on the basis of a ratio, which is time saved over standard time per unit
standard time.

Incentive is calculated as:

Total wages =T x R+ (S-T) x T x R
S
Where, S=Standard time
T=Time taken to complete the job
R=Rate;

For example, if rate per hour is Rs.3 and standard time for completion
of job is 10 hours. A worker completes the job in 8 hours, his incentive
and total wage will be:
III. Emerson’s Efficiency Plan:

Under this plan, a standard time is established for a standard task.

Payment of bonus/incentive is related to efficiency of the workers.

• Thus, if the period of 8 hours is the standard time for a task and if a
worker performs it in 16 hours, his efficiency is 50%

• If the period of 8 hours is the standard time for a task and if a worker
performs it in 8 hours, his efficiency is 100%, So, at 100% efficiency
incentive is 20% of the day wage.

• For 120% efficiency, a worker receives a bonus of 40%

• For 140% efficiency, a worker receives a bonus of 60%
According to the plan up to 66 2/3 % the guaranteed time wages are
paid to the workers, after this they are paid bonus at stated ratio of
the time wages.

Emerson used 32 empirical bonus percentages for efficiency beyond

66 2/3% i.e. 67%(approx.) Under this plan, the bonus starts from
0.01% above 67% efficiency and increases to 20% at maximum
efficiency. After this point the bonus is 20% above the basic wages
plus 1% for each 1% increase in efficiency
For example, if standard time for a job is 6 hours and hourly
rate is Rs.3. If a worker completes a job in 6 hours, the
efficiency of worker is 100%. His wages will be 6 x 3 + bonus
@20%
= Rs.18 + 20% of 18
= Rs 18 + Rs 3.6
= Rs 21.6
In a manufacturing concern the daily wages guaranteed for
workers is Rs. 5. The standard output for the month is 2000
articles representing 100% efficiency.

Calculate the total earning of A, B, C, and D who have

worked 26 days in a month. A’s output 1000 articles, B’s
output 1800 articles, C’s output 2000 articles and D’s output
2400 articles.
IV. Bedeaux Point Plan:

Bedeaux system also called units or point system, it also guarantees

a minimum base wage.

Under this plan, the standard time and time taken for each job is
reduced to minutes. Each minute is referred to, as B’s (after
Bedeaux) i.e. one hour is the same as 60B’s. The workers who
complete the job within standard time are paid at a normal time
rate.
Those who complete the job in less time are paid bonus. The
bonus paid to the worker is 75% of the wages for time saved.
The formula for calculating wages is:

Total wages ,W=TR+75% (S-T)R

where, S=Standard time
T=Time taken to complete the job
R=Rate;
Bonus is paid on the basis of number of Bedeauax Points saved.

Bonus at 75% of wages of Bedeaux saved is paid to the worker

and 25% is paid to the foreman.

Thus the standard hour would consist of 60 B’s , or a standard day of

8 hours.

Suppose a worker earns 600 B’s in a day and he completes work in

480Bs; if the rate per point is Rs 1, his total earnings would be:

=(Rs 480 x 1 ) + ( 3/4 ) x ( 600 – 480 ) x 1

=Rs 480 + 90
= Rs 570
For example, if standard time for a job is 6 hours that means
6x60B’s i.e 360 B’s and if the wage rate is Rs.3 per hour. If a worker
completes his job in 5 hours i.e 300 B’s, he saves 60B’s.

His total wages will be:

W=5×3+75 %(6-5)x3
=15+75%of 3
=15+2.25
=Rs.17.25

Advantages:
a. Minimum wages are guaranteed.
b. Management also shares some percentage
of bonus.
Disadvantages:
a. Incentive after attaining standard is very low.
b. Workers do not like their bonus to be shared by management.
b. Productivity/ Output Based Individual Incentive
Wage Plans

Under this system, the incentives are paid to a worker on

the basis of output produced by him.

Wages = N * R
where N = no. of unit produced.
R = Rate per unit

The earning of workers depends on the speed of the

work and his own individual skills and efficiency.
I. Taylor’s Differential Piece Rate System:

This system was introduced by Taylor, the father of scientific

management.

Under this plan, a standard task is established by the techniques of

time and motion study

Two piece rates are set up for each job:

A high piece rate is allowed to those who can make equal to higher
than the standard performance; and for others who cannot reach the
standard, a lower piece rate exists.

This method penalize the slow and lazy worker and pays incentive to
efficient workers.
A standard output of 200 units is fixed in an 8 hours time.
A rate of 45% is paid if the output is 200 or more units and
35%, if production is less than 200 units.

Worker A has produced 240 units and B produced 180 units.

The wages to be paid to worker, A will be Rs. 108 i.e. (240 x
0.45) and that to B will be Rs. 63 i.e. (180 x 0.35).

Thus, Taylor’s differential piece rate system works on the

principle that the inefficient worker must be paid at a low piece-
rate for low production such that he is left with no other option
but to leave the organization.
Advantages:
a. Provides incentives to efficient worker.
b. Inefficient worker is penalized.
c. This system is simple and easy to implement.

Disadvantages:
a. Minimum wage is not assured,
b. There are chances that quality of work may suffer,
c. This system is not liked by below average workers, as
they do not get any incentive.
II. Merrick’s Multiple Piece Rate Plan:

Merrick suggested a modified plan in which, three-piece rates are

applied for workers with different levels of performance.

These are:
a. Workers producing less than 83% of the standard output are
paid at basic rate.

b. Workers producing between 83% and 100% of standard

output will be paid 110% of basic piece rate.

c. Those producing more than 100% of the standard output will

be paid 120% of basic piece rate.
Standard Output = 100 units
Piece Rate= Rs. 10

Case 1. Output = 80 units

Efficiency = (80 /100 ) x 100 = 80 %
Earnings : As the efficiency is less than 83% ,only the base pie- rate applies : 80
x 10 = Rs. 800.

Case 2. Output = 90 units

Efficiency = (90 / 100 ) x 100 = 90 % E
arnings : As the efficiency is 83 % but less than 100 % , 110 % the base pie-rate
applies :(90 x 110 /100 ) x 10 = Rs. 990.

Case 3. = 110 units

Efficiency = (110 x 100 / 100 ) = 110 % Earnings : As the efficiency exceeds
100 % , 120 % of the base piece – rate applies : 110 x (120 / 100 ) x 10 = Rs
1320 .

Note: Under Merrick differential piece-rate system the workers are not

penalized for producing below the standard output up to 83%
Advantages:
a. Efficient workers are rewarded handsomely.
b. Minimum wages are guaranteed.

Disadvantages:
a. There is wide gap in slabs of differential wage rate.
b. Over emphasis on high production rate.
III. Gantt’s Task and Bonus Plan: (H.L.GANTT)

It combines time rate, piece rate and bonus.

A standard time is fixed for doing a particular job. Worker’s actual

performance is compared with the standard time and the efficiency is
determined.

If a worker does not complete the job within standard time i.e. he takes
more time than the standard time (efficiency below 100%), he will not
receive any bonus but he is given minimum guaranteed wages for the time
taken by him.

If a worker completes the job within standard time (100% efficiency), he
is given wages for the standard time and bonus of 20% of wages earned.

If the worker completes the job in less than the standard time (i.e.
efficiency more than 100%), highest piece rate is paid but there is no
bonus.
Rate per Hour = Rs 0.5; High piece-rate= 0.10 ; Standard
Output= 100 units; Time Taken = 8 hrs

Case (1): Output = 80 units

Since the output is less than the standard, the worker is
entitled to only time wages, thus,
Earnings = 8 x 0.5 = Rs 4

Case (2): output = 100 units

As the output is equivalent to the standard, the worker is
paid the time wages plus a bonus of 20% on time wages.
Thus,
Earnings:
Time Wages = 8 x 0.5 = Rs 4
Bonus = 20/100 x 4 = Rs 0.8
Total Earnings = Rs 4.8
Case (3): Output = 110 units
Since the output is more than the standard, the worker
shall be paid at a high piece-rate, thus,

Earnings = 110 x 0.10 = Rs 11

Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.
c. Efficient workers can earn more money.

Disadvantage:
a. Emphasis on over speed or high production rate.
Type # 2. GROUP INCENTIVE PLANS

Promote effective teamwork, as the bonus is dependent on the

performance and output of the team as a whole, thus leading to
cohesiveness among team members.

Under group incentive plan, each employee is paid incentive on

the basis of collective performance of his group, so individual
output cannot be measured.

Within the group, each employee gets an equal share of the

incentive.

 Payment to team members may be made in the form of cash

bonus or in form of non-cash reward such as pleasure trip or
luxury gift vouchers etc.
There may be circumstances when individual performance may not
be measurable. A number of persons may be associated in completing
a task. The work of one person may be influenced by the work of the
other. Under such conditions, incentives may be offered for raising
group performance.
1. When individual performance cannot be measured precisely.

2. The workers comprising a group possess the same type of skill

or ability.

3. The completion of the task is linked with the collective efforts of

the group.
1. GAIN SHARING:

A gain sharing plan aims at increasing productivity or decreasing

labour costs and sharing the resultant gains with employees.

There is a baseline of production and when productivity exceeds the

baseline, an agreed-upon savings is shared with employees.

Types of gain sharing plans:

2. Scanlon Plan
3. Rucker Plan
4. Improshare
Scanlon Plan: A gain sharing program in which employees share
in specific cost savings that are due to employee effort.

It's based on the historical ratio of labor cost to sales value of

production. And, because it rewards labor savings, it is most
appropriate for companies that have a "high touch labor"
content.

The philosophy behind the Scanlon Plan is that employees should

offer ideas and suggestions to improve productivity and, in turn,
be rewarded for their constructive efforts. The plan requires good
management, leadership, trust and respect between employees and
managers, and a workforce dedicated to responsible decision
Procedure

Employees provide suggestions to the department level

committee
The department level committees then transfer the
suggestions to a screening committee
The screening committee includes members of the workforce
and the management
The screening committee reviews the suggestions and
designs measures to improve performance
The screening committee periodically reviews performance
& computes the amount of bonus to be paid to workmen as
their share of performance improvements.
 • They are often used in service industries where customer service
focus is essential to success.

Illustration: 

For example, if the company expected to do Rs.100,000 in sales, it

would attempt to keep its labor costs to Rs.10,000.
 If the firm's workforce were able to realize Rs.100,000 in
sales value of production with only Rs. 9,000 in labor costs, the
Rs. 1,000 in savings would be split among the employees and their
firm.
Rucker Plan
This approach is based on the idea that in some industries,
productivity really doesn't vary much, but other variables can
provide meaningful data about how well employees are
performing.

A Rucker plan might measure waste relative to production

volume, rewarding employees for making a larger amount of
finished product out of a particular quantity of raw materials.
Alternately, a Rucker plan might measure the number of
defective items returned and reward workers for lower rates of
returns.
 Rucker Plan
Like Scanlon plans, Rucker plans reward employees for working
well and for saving the company money. They dedicate extra
money to compensating workers for specific outcomes.

An industry that uses a Rucker plan may have processes that are
mechanized enough to ensure reasonably consistent rates of
production while relying on employees to use materials judiciously
or to inspect a finished product to ensure that defective items aren't
packaged and sold.

Scanlon plans and Rucker plans may measure different outcomes,

but they are both geared toward improving sales, making the most
of resources and rewarding employees for doing an outstanding
job.
 Improshare Plans
An Improshare plan is similar to a Scanlon plan in that it rewards
production efficiency. Unlike a Scanlon plan, however, the
Improshare approach measures the number of production hours
rather than the cost of labor.

Performance measures according to a Scanlon plan will vary

relative to whether the work has been performed by high-wage or
low-wage employees because they measure total payroll cost, which
is higher when the work is done by employees who receive higher
hourly pay.

In contrast, Improshare plans treat all employee hours similarly,

whether those employees are the company's top performers or the
lowest.
2. Profit sharing incentive plan

Profit sharing is an organizational incentive plan whereby companies

distribute a portion of their profits to their employees in addition to
prevailing wages.
Forms of Profit Sharing:

1. Cash plans distribute cash or stock to employees at the end

of the year.

2. Deferred plans direct profit shares into a trust fund on

behalf of individual employees and distribute them at a later
date, often at retirement.

3. Combination plans pay part of the profit share out directly in

cash and defer the remainder into a trust fund.
Merits of Profit-Sharing:
(i) The workers are motivated and have a sense of belongingness to the
firm. If the firm earns higher profit, the workers will get higher amount of
bonus.

(ii) The rate of labour turnover is reduced because the workers are
connected with the management.
(iii) Profit-sharing results in equitable distribution of profit among the
employer and the employees of the enterprise.

(iv) Profit-sharing is a step towards industrial democracy as employees

are treated not only as wage earners but also as partners in the progress of
the company.

(v) There is industrial peace in the enterprise. The workers are satisfied as
they get an additional amount over and above their wages. A healthy
atmosphere prevails in the enterprise. There is co-operation between labour
and management as the objectives of both are common, i.e., to increase
productivity.
vi) Profit-sharing acts as a driving force for higher production and
productivity. The workers take more interest and initiative leading
to higher production.

(vii) The share of workers in the profits depends upon the efforts,
initiative and hard work of the employer and employees. This
brings about a team spirit among the workers and employers. The
chances of conflict are reduced.
Limitations of Profit-Sharing:

(i) Distinction is not made between good and bad workers.

(ii) Used during the period of prosperity when profits are high. Profit
sharing is not possible during the lean years of depression.

(iii) Unscrupulous management may manipulate the accounts to the

detriment of the workers. The workers may, therefore, get nothing due to
dishonesty of the management. This will dampen the enthusiasm of the
workers.

(iv) There is a high degree of uncertainty in profit-sharing. The share of

profit will be paid only when the profit exceeds a particular limit. The profit
may not cross a particular limit due to market forces and the workers will
suffer. Thus, profit-sharing does not give full guarantee of extra-payment to
the workers.
(v) As the amount of profit is to be distributed after a specified
period, there is no real incentive to produce more. The incentive
effect of the scheme is completely lost due to remoteness of the
reward.
While gain sharing and profit sharing programs both
provide employees with bonuses, profit-sharing programs
offer rewards based on company profitability, while gain
sharing plans reward employees for achieving specific
performance metrics they can control.
Employee Stock Plans
Stock Option Plan
 A plan that gives employees the right to purchase a
fixed number of shares of company stock at a
specified price for a limited period of time.
 If market price of the stock is above the specified
option price, employees can purchase the stock and sell
it for a profit.
 If the market price of the stock is below the specified

option price, the stock option is “underwater” and is

worthless to employees.

e.g., Nike, Apple provide stock options to employees

Employee Stock Plans
 Employee Stock Ownership Plan (ESOP): the company facilitates
employees owning stock in the company

 Methods of distributing stock to employees:

 As a bonus directly to employees
 Example: for every 2 shares an employee buys, the company gives

the employee 1 share

 Example: employees can buy shares for 85% of the current stock

market price
 Into a trust
 Company contributes shares of stock into the trust

 Shares in the trust are allocated to individual employee accounts

 Employees become vested over time

 When an employee leaves the company (e.g., retirement), they

receive the current market value of their vested shares in the trust
Employee Stock Ownership Plan (ESOP)
Advantages
 Favorable tax treatment for ESOP earnings
 Employees motivated by their ownership stake in the

firm
Disadvantages
 Retirement benefit is tied to the firm’s future
performance
 Risk for employees
 Limited effect on productivity
 Long-run financial difficulties
2. Incentives for White Collar Employees
(1) Straight Salary method:
According to which they receive monthly salary only. Here
there is no linkage of incentive for hard work.

(2) Straight Commission Basis:

Sales personnel receive only commission on sales volume. Here
the salesman will sell those items which are of high value.

(3) Combination of Salary and Commission:

Under this scheme sales personnel are paid a fixed salary and
commission as an incentive based on sales volume.
 3. Incentives for Executives
1. Salary-
 Skill based
 Demands of the job
 Top executives in India paid within range Rs. 20cr.-30 cr.

2. Bonus: Sometimes exceed the basic salary paid, if the CEO is able
to come out with exemplary performance,

3. Various kinds of incentives e.g., ESOP

4. Perquisites
 SOME MODERN CONCEPTS IN
EMPLOYEE BENEFIT SCHEMES
Golden Parachute
 A large payment or other financial compensation guaranteed to
a company executive if they should be dismissed as a result of
a merger or takeover.
 e.g., severance pay, cash bonuses, stock options, or other
benefits.

Cafeteria plan 
 Employee benefit plan that allows staff to choose from a
variety of pre-tax benefits. Employees can contribute a portion
of their gross income before any taxes are calculated and
deducted.
 A cafeteria plan is also referred to as a flexible benefits plan