Incentives – Performance linked Pay Part 2

Types of incentive plans

Productivity Based plans Taylors differential Piece rate system Merrick’s Multiple Piece rate plan Gantt’s task and Bonus wage plan

Productivity Based plans Taylors differential Piece rate system –Standard work load for every worker is calculated on the basis of time and motion studies –Rates for a higher and lower productivity are fixed –Encourage workers to be efficient because there is no guarantee of minimum wage payment –Example The piece rate fixed are 1Re & 1.5 Re Standard output 40 units per day Actual out put = 40 units * 1.5 = 60 If Actual out put = 35 units *1.5 = 30

Productivity Based plans Merrick’s Multiple Piece Rate Plan It is an improvement over Taylor s Plan. It gives three grades –Basic piece rate – For workers producing less than 83% of the std output –110% of the basic piece rate - For workers producing between 83% and 100 % of the Std output –120% of the basic piece rate - For workers producing b 100 % above the Std output One major disadvantage associated with this is that there exists a wide gap between the slabs (workers producing 1-82 %of the std output are treated as sub std workers )

Productivity Based plans Gantt’s Task and Bonus wage plan An incentive plan in which high task efficiency is rewarded by providing a percentage bonus as a reward for production in excess of standard. Minimum time wage is guaranteed –For eg :The std time and std hours fixed are 8 /Hr. –If a worker finish his work within six hours he will get Rs 48 plus 25 % of the days wage –= =Rs 60 Hence under this plan,the lesser time he works the greater will be the pay

Bonus An incentive payment beyond ones wages Given at the end of the year Spot bonus: An unplanned bonus given to the employee not related to the performance standards but for the additional efforts put in

MERIT PAY A Merit pay program links an increase in base pay on successful completion of his performance after a period of time Some of the guidelines to be followed are Employee performance (based on the appraisal )  Whether unsatisfactory,average or superior performance exhibited Position in the pay range Time since the last pay was increased

Lumpsum merit pay Program under which employees receive a year –end merit payment which is not added to their base pay Base salaries are freezed,thereby maintaining the annual salary and benefit costs Employees also prefer this type of payment

Sales Incentives Straight Commission Sales Incentive Plans Straight Salary Salary and Commission Combinations

Sales incentives Incentives which motivate them for superior performance as sales personnel are away from the office and does not have a close supervision Types of sales incentives –Straight salary plan- a compensation plan that permits sales people to be paid for performing various duties that are not reflected immediately in their sales volume –Straight commission plan- plan that is based on the percentage of sales –Combined salary and commission plan – plan that include both straight and commission. Usually in 70:30 pattern

Incentives for Professional Employees Profit sharing and stock ownership Double-track wage systems Managerial and Executive Incentives Bonuses and merit increases Performance incentive bonuses Executive perquisites (perks)

Executive Compensation The Executive Pay Package –Base salary –Short-term incentives or bonuses –Long-term incentives or stock plans –Perquisites (perks)

Types of Long-Term Incentive Plans Stock options –Rights granted to executives to buy shares of their organization at an established price for a fixed period of time Stock purchase –Opportunity to purchase shares of their organization's stock valued at full market or discounted price,with the organization providing financial assistance Restricted stock –Grant of stock or stock units at a reduced price with the condition that the stock not be transferred or sold before a specified employment date Performance units : –Grants similar to annual bonuses except that the annual measurement period will be more than one year

The Executive Perks

Group Incentive Plans Team Incentive Plans –Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded. Establishing Team Incentive Payments –Set performance measures upon which incentive payments are based –Determine the size of the incentive bonus. –Create a payout formula and fully explain to employees how payouts will be distributed.

Group Incentive Plans Gainsharing Plans –Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.

Scanlon Plan Rewards come from employee participation in improving productivity and reducing costs. Rucker Plan Shared rewards come from the difference between labor costs and sales value of production. Improshare Gainsharing based on increases in productivity of the standard hour output of work teams. Employee Bonus and Gainsharing Plans Earnings-at- risk Encourages employees to achieve higher output and quality standards by placing a portion of their base salary at risk of loss.

Bonus and Gainsharing Plans Scanlon Plan –Employee and management committees cooperate in cost-reduction improvements. Rucker Plan –Bonus based on the relationship between the total earnings of hourly employees and the production value created by the employees. Improshare –Gainsharing program for bonuses are based upon the overall productivity of the work team.

Earnings-at-Risk Plans Profit Sharing –Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise. Agreement over division of profits between company and employees. Possibility of no payout due to financial condition of company.

Earnings-at-Risk Incentive Plans Employee Stock Ownership Plans (ESOPs) –Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees. Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock.

ESOP ADVANTAGES –retirement benefits –tax benefits –pride of ownership DISADVANTAGES –Liquidity and value at risk ADVANATAGES

References Human Resource Management ;Snell & Bohlander,India Edition Human Resource Management Concepts and Cases ;T N Chabbra