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Types of Incentive Schemes

Incentives schemes are many and varied. The International Labour Organization (ILO) classifies all the schemes of payment by results into four categories. They are:

Incomes Varying in Proportion to Output

The chief characteristic of the schemes where incomes vary in proportion to output is that any gains or losses resulting directly from a worker’s output accrue to him or her (leaving to the employer any gains or losses in overhead costs per unit of output). In contrast when the worker is paid by the hour, day or month, all gains or losses resulting from changes in his or her output accrue to the employer.

The success of this type of incentive requires that the measurement of standard and individual outputs must be extremely accurate. Inaccuracy in these matters gives rise to inequities and may finally lead to the failure of the schemes due to worker dissatisfaction.

The straight piece-work and the standard hour systems are the two popular incentive schemes which come under the first category. Straight piece-work method is the simplest, oldest and the most commonly used method. Here, the rate per unit of output is fixed, and the total earnings of a worker are arrived at by multiplying the total output (measured in terms of units) by the rate per unit.

Obviously, earnings of the worker directly depend upon his or her performance. For example, if the rate per unit is 50 cents and the total output of an employee is 100 units, his or her earnings will be 100 X 0.50 = 50.00.

Extending the logic of the piece-rate system, a worker has to go without wages if he or she fails to turn out the required goods. For this reason, the system is modified in one respect- the worker’s time-rate is guaranteed. The time-rate is usually at a level which will yield earnings below the expected average earnings on piece-work in average conditions. It is designed to protect the worker against unduly low earnings due to causes beyond his or her control.

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In the standard hour system (also called 100 per cent gains-sharing), standard time in terms of hours is fixed for completion of a job. The rate per hour is then determined. A worker is paid for a standard time at his or her time-rate if he or she completes the job in the standard time or less. He or she is paid the same wages if he or she takes more than the standard time, unless he or she is guaranteed time wages. If time wages are guaranteed, he or she gets paid on the basis of the time taken multiplied by the time-rate.

Earnings Varying Proportionately Less than Output

Four allied but different systems come 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, that is, the difference between the standard time-set for the job and the time actually taken. These schemes are called ‘gain-sharing schemes’ as both the employer as well as the employee share the gains resulting from the saved time. The worker may be paid for half (or any other fraction) of the saved time the employer getting the balance.

These systems are often applied in cases where it is not possible to set standards or to measure the worker’s output accurately. Under some of these schemes, it is possible for a worker to earn more for certain levels of output than he or she would, under piece-work, when production difficulties are encountered. If no such difficulties are confronted and the worker is able to increase his or her output substantially, he or she receives progressively for such output than he or she would if he or she were working on a straight piece-work.

Under the Halsey system, standard time is fixed for the completion of a job and the rate per hour is then determined. If the worker takes the standard time or more to complete the job, he or she gets paid at the time rate. In other words, time wages are guaranteed even if the output of the worker is below standard. Where the work is done in less than the standard time, he or she gets paid for the actual time, at the time-rate plus a bonus which is calculated “at” or “as” a specified percentage of the saved time. The percentage varies from 30-70 percent. The usual share is 50 percent, the remaining going to the employer.

In Rowan Plan, bonus paid to the employee is equal to the proportion of the time saved to the standard time. Under Rowan System too, standard time and rate per hour are fixed. If the time taken to complete the job is equal to or exceeds the standard time, the employee is paid for the time taken at the rate per hour. If the time taken is less than the standard time, the employee is entitled to bonus, in addition to the time wages. The bonus takes the form of a percentage of the worker’s time-rate. This percentage is equal to the proportion of the saved time, to the standard time.

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Under the Bedaux scheme, the standard time for a job is determined. Each minute of the allowed time is called a point or B. Thus, there are 60 Bs in one hour. Each job has a standard number of Bs. The rate per hour is also determined. The worker receives, in addition to his or her hourly rate, a bonus which under the original plan is equal to 75 per cent of the number of points earned, in excess of 60 per hour, multiplied by one-sixtieth of the worker’s hourly rate. If a worker does not reach his or her standard, he or she is paid at the time-rate.

Earnings Varying Proportionately More than Output

This category includes two methods (i) the high piece rate and (ii) the high standard hour system. Under the former, 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. For example, for each one per cent increase in output above the standard, there may be a 4/3 times increase in earnings as compared to one percent increase in earnings under the straight piece-rate system. The higher rates start applying after the standards have been reached. Similar logic applies to the high standard hour system.

The main feature of these two schemes is that since direct labour costs per unit increase for levels of output above the standard, the worker also shares the earnings in overhead costs which result from an increased output. The amount of this share depends on the size of the increments in earnings which are payable at different levels of output. If these increments were large enough and increased progressively with output, the workers obviously could obtain all the savings in overhead costs. This is not, of course, the case where the increment in, earnings remains the same for each successive increase in output.

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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.

The Taylor’s Differential Piece-Rate system, the Merrick Differential Piece-Rate system, the Gantt Task system, the Emerson’s Efficiency system and the Accelerating Premium system fall under the category where earnings differ at different levels of output.

Under the Taylor’s Differential Piece-Rate system (developed by F.W. Taylor in 1880) there is a low rate for output below the standard, and a higher piece-rate for output above the standard with a large bonus of 50 per cent of the time-rate when the standard output is attained.

The Merrick Differential Piece-Rate system is a modification of the 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 upto 83 per cent of the standard output, at which a bonus of 10 per cent of the time-rate is payable, with a further 10 per cent bonus on reaching the standard output. For outputs above the standard, high piece-rates are paid.

Under the Gantt Task s stem, the worker is guaranteed his or her time-rate for output below the standard. On reaching the standard output or task, which is set at a high level, the worker is entitled to a bonus of 20 per cent of the time wages. For outputs above the task, high piece-rates are paid.

Under the Emerson’s 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 per cent of efficiency, the worker is paid by time­ rate. Thereafter, a graduated bonus, which amounts to a 20 per cent bonus at 100 per cent efficiency is paid to the worker. Thereafter, an additional bonus of 1 per cent is added for each additional 1 per cent efficiency.

Under the accelerated Premium system, 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 or her output in order to get increased earnings. But the accelerated premium systems are complicated and are difficult to understand and implement.

About Sonia Kukreja

I am a mother of a lovely kid, and an avid fan technology, computing and management related topics. I hold a degree in MBA from well known management college in India. After completing my post graduation I thought to start a website where I can share management related concepts with rest of the people.