Incentives and Performance-based Pay

Nature of Incentive Payments Incentives are variable rewards granted to employees according to variations in their performance Importance Inducement and Motivation of workers Reduced supervision, better utilisation of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover, and increased output 2

Nature of Incentive Payments (Contd.) Disadvantages There is a tendency for the quality of products to deteriorate unless steps are taken to ensure maintenance of quality through checking and inspection Jealousies may arise among workers because some are able to earn more than others Difficulty also arises in determining the standard performance 3

Prerequisites for an Effective Incentive System The co-operation of workers in the implementation of an incentive scheme is essential The scheme must be based on scientific work measurement Indirect workers should also be covered by incentive schemes There should be management commitment to the cost and time necessary to administer incentive schemes properly There is greater need for planning 4

Types of incentive programmes Individual Differential piece rate Piece rate Time based ranking Group Cost efficiency bonus plan Priestman bonus plan Organization wide incentive plan Profit sharing ESOP (employee stock ownership plan)

Types of incentives schemes Straight Piece rate In direct proposition of their performance. Wage earning = no. of units produced X the piece rate per unit

2. Differential piece rate First fail to motivate and recognize highly efficient employees. sets standards and several piece rate (like rubrics) Example: Std output 60 units Employee 1: 150 then getting Rs.2.5/piece Employee 2: 49 then getting Rs. 2/piece

3. Task and time Bonuses Modified differential based upon time Example: std time 5 hour, regular payment 10rs/hour, bonus Rs. 10/hour Employee 1: completes in 4 hours So, 4x10+10=50Rs. Employee 2: Completes in 5 hours So, 5x10=50

Which can not be measured in terms of production units 4. Merit rating Which can not be measured in terms of production units Setting standard and comparing with actual performance Example for setting std are punctuality, competency, initiative, reliability, safety measures, punctuality, regularity, behavior etc.

Group 1. Cost efficiency bonus plan Std cost - actual cost = saving Certain % of this saving distributed among students

2. Priestman Bonus plan Std set by expert in terms of unit produced in specific time by any group. Comparison with actual If exceed performance then liable to have incentive

Group Incentive Plans Some of the advantages of group incentives are: Better co-operation among workers Less supervision Reduced incidence of absenteeism Reduced clerical work Shorter training time The disadvantages are: An efficient worker may be penalized for the inefficiency of the other members in the group The incentive may not be strong enough to serve its purpose Rivalry among the members of the group defeats the very purpose of team work and co-operation 12

Executive Compensation It is refers to compensation package offered to the managerial personnel of an organization. For attracting and retaining them.

Salary + incentive + managerial benefits (bills) + perks (car, apartments) + bonus (for risk and performance) + managerial commission (profit x rate of commission/100) +

Devising a compensation plan Job description Job evaluation Job hierarchy Pay sy Pay survey Pricing jobs