MEANING AND DEFINITION Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. An incentive scheme is a plan or programmes to motivate individual or group performance. An incentive programme is most frequently built on monetary rewards (incentive pay or monetary bonus), but may also include a variety of non-monetary rewards or prizes. The International Labour Organisation (ILO) refers to incentives as payment by results but it is appropriate to call them incentive systems of payment emphasising the point of motivation that is the imparting of incentives to workers for higher production and productivity. Unlike wages and salaries which are relatively fixed, incentives generally vary from individual to individual, and from period to period for the same individual.
CLASSIFICATION OF INCENTIVES Incentives can be classified into: (i) direct compensation, and (ii) indirect compensation. Direct compensation includes the basic salary or wage that the individual is entitled to for his job, overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options, etc.
Indirect compensation includes protection programmes (insurance plans, pensions), pay for time not worked, services and perquisites. Also incentives may broadly be classified into monetary and non-monetary.
Monetary incentives have an important contribution to make within the total motivation pattern. They provide extra-financial motivation, by rewarding the worker over and above his regular remuneration for performing more than the targeted work.
Some of the financial motivations are overtime wages, higher basic wages, incentive bonus, merit increments, suggestion rewards; various allowances, promotion and fringe benefits.
Some of the non-financial incentives are good human relations, self-respect, recognition, status, sense of belonging, appreciation, higher responsibility, greater authority, job satisfaction, improved working conditions, greater leisure, etc. All these motivate workers to raise their productivity.
ILO classifies incentive schemes into four categories: (i) schemes in which earnings vary in proportion to output, (ii) schemes where earnings vary proportionately less than output, (iii) schemes where earnings vary proportionately more than output, and (iv) schemes where earnings differ at different levels of output.
Incentives have also been classified into individual, group and organisation-wide. In an individual incentive plan, the rewards of incentives are based solely on individual performance. It is the extra compensation paid to an individual over a specified amount for his production effort. Such a system is feasible only where an individual can increase the quantity and quality of his output by his own individual efforts and where his output can be measured. The payment is normally on a monthly basis, though in a few cases it may be quarterly or other convenient periods. The standards of performance have been set by a qualified industrial engineering analyst, using technically sound work measurement procedures. The rewards under this plan are almost always immediate, that is, paid daily or weekly.
The advantages of individual wage incentive plans are relatively obvious and straightforward. First and foremost, the individual incentive plan rewards the individual for his or her production. The more the worker produces, the more the worker earns.
Second, the individual incentives appeal to the basic need for money found in most people. Almost everyone will work harder, up to a point, when there is a justifiable reason to believe that increased productivity will bring about a personal gain. Although individual wage incentives have advantages, there are also limitations. Individual wage incentives work best with jobs that are primarily operator-controlled. They may also lead to labour problems. Incentives, because they reward production levels, can lead to quality problems. Safeguards must be taken to ensure that quality is not sacrificed for quantity. It is the output of the group rather than that of each individual member of the group that can be measured most conveniently or accurately.
Group or area incentive schemes provide for the payment of a bonus either equally or proportionately to individuals within a group or area. The bonus is related to the output achieved over an agreed standard or to the time saved on the job – the difference between allowed time and actual time. Such schemes may be most appropriate: (a) where people have to work together and team work has to be encouraged; and (b) where high levels of production depend a great deal on the co-operation existing among a team of workers as compared with the individual efforts of team members. Group bonuses are calculated on the basis of the output of the team and are divided among the members either equally or in specified proportions, with more being given to skilled employees than to those who are unskilled. Group incentives are usually applied to small teams and the rewards are based on the performance of the entire group. The bonuses are often much larger than individual wage incentives. Group incentive plans, since they evaluate overall performance, are applicable to a wide variety of tasks. Sometimes, however, they are applied to all workers of a department or even of a whole undertaking. One of the disadvantages of group incentive plan is that there is a possibility of ignoring the individual performance as the rewards are based on group performance. In large groups it is often inevitable that there will be slackers who can disrupt the functioning of the whole group.
Some of the advantages of group incentive plans are:
Better co-operation among workers
Reduced incidence of absenteeism
Reduced clerical work
Shorter training time.
The disadvantages of group incentive plans are:
An efficient worker may be penalised 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 cooperation.
The organisation-wide incentive system involves co-operation and collective effort of the employees and management in order to accomplish broader organisational objectives, such as: (i) to reduce labour, material and supply costs; (ii) to decrease turnover and absenteeism; (iii) to strengthen employee loyalty to the company; (iv) to promote harmonious labour management relations. One of the aspects of the scheme is profit-sharing under which an employee receives a share of the profit fixed in advance under an agreement freely entered into.
Some of the advantages of such a scheme are: (i) it inculcates in employees’ a sense of economic discipline as regards wage costs and productivity; (ii) it engenders improved communication and increased sense of participation; (iii) it is relatively simple and its cost of administration is low; and (iv) it is non-inflationary, if properly devised.
MERITS AND DEMERITS Everything has its merits and demerits. In the same way incentive has also some advantages and disadvantages.
MERITS 1. Motivation: – The primary advantage of incentives is the inducement and motivation of workers for higher efficiency and greater output. It may not be difficult to get people for fixed wages and salaries. 2. Removes fear of Insecurity: – With fixed remuneration, it is difficult to motivate workers to give better performance. Fixed remuneration removes fear of insecurity in the minds of employees.
3. Improves Standard of Living: – Earnings of employees would be enhanced due to incentives. There are instances where incentive earnings exceed two to three times that of the time rated wages or salaries. Increased earnings would enable the employees to improve their standard of living.
4. Increase in Productivity: – There will be reduction in the total as well as per unit of cost of production through incentives. Productivity would increase resulting in greater number of units produced for given inputs. This would bring down the total and unit cost of production. The production capacity is also likely to increase.
The other advantages of incentive payments are: reduced supervision, better utilisation of equipment, reduced scrap; reduced lost time, reduced absenteeism and turnover and increased output. Furthermore, systems of payment by results would, if accompanied by organisation and work measurement, enable firms to estimate labour costs more accurately, than under the system of payment by time. This would facilitate the application of cost control techniques like standard costing and budgetary control.
On the other hand, systems of payment by results may have 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. This involves added expenses. Difficulties may arise over the introduction of new machines or methods. Workers may oppose such introduction for fear that new piece of bonus rates set may yield lower earnings; or when new machines or methods are introduced, they may slacken their rate of work. Another disadvantage is that jealousies may arise among workers because some are able to earn more than others.
One of the greatest difficulties with the incentive systems is in the setting of piece or bonus rates. Rate fixing involves delicate problems of judgment in which there is always a risk of error. If rates are set too low, workers are bound to be dissatisfied and will be under pressure to work very hard. If rates are set too high, workers may slacken their efforts at times and employers may not take recourse to revision of rates because the earnings are too high.
Difficulty also arises in determining standard performance. Many organisations follow a safe route to fix the standards – which is usually the average of past years performance. Past performance may not be the ideal basis for fixing production norms.
Most of the problems of financial incentives arise either from the inadequacies of the particular system or from incorrect application and insufficient control. In western countries, as also in India, it has now been realised that economic gain has ceased to be a source of motivation and that greater emphasis should be placed on non- economic factors. Many empirical researchers have shown that monetary incentives alone do not bring about the desired motivation.
PRE-REQUIS1TES OF EFFECTIVE INCENTIVE SCHEME All things considered, it may be concluded that in many industries or undertakings and for a large group of operations, well designed systems of payment by results shall yield advantages to all concerned. Many of these advantages will be realised provided sufficient safeguards are provided. Such pre-requisites are:
The co-operation of workers in the implementation of an incentive scheme is essential. In particular, workers co-operation is necessary wherein: (a) the methods followed in measuring the results or output upon which payment is based; (b) the methods followed in setting wage rates for different classes of work; and (c) appropriate safeguards concerning earnings, job security and settlement of disputes over piece-work rates and allotted time.
The scheme must be based on scientific work measurement. The standards set must be realistic and must motivate workers to put in better performance. Workers must be provided with necessary tools, equipments and materials so as to enable them reach their standards.
Indirect workers, such as foremen, supervisors, charge hands, helpers, crane operators, canteen staff, store keepers, and clerical staff should also be covered by the incentive schemes.
There should be management commitment to the cost and time necessary to administer incentive schemes properly, and these must be carefully assessed before go on an incentive programme.
There is greater need for planning. Many incentive schemes, started hurriedly, planned carelessly, and implemented indifferently have failed and have created more problems for the organisation than they have tried to solve.
INCENTIVE SYSTEMS Some of major incentive systems are as follows:
1. The Halsey System: This system which was developed by F.A. Halsey. He provides this system for the fixation of a standard time for the completion of the task. For the work done in correct time or more, the actual time rate is paid. Thus, the minimum wage is guaranteed even if the output falls below the standard. If the job is completed in less than the standard time, the worker receives a bonus payment at his time rate for a specific percentage of the time saved. This percentage may vary anywhere from 30 percent to 70 percent, but usually it is fixed at 50 percent (the other 50 percent going to the share of employer). Thus, if a worker does the work in 6 hours against that of 10 hours standard, he gets bonus after 6 hours plus 50 percent of 4 hours, i.e., 2 hours, as bonus. The other 50 percent (2 hours) is shared by the employer.
Bonus= ½ of Time Saved/ Time Taken* Daily Wage 2. The Rowan System: Under this system also a standard time is allowed for a job, and bonus is similarly paid for any time saved. This plan differs from the Halsey plan only in regard to the determination of the bonus. In all other respects, the two are the same. The premium is calculated on the basis of the proportion which the time saved bears at standard time. Thus, if a worker does work in 6 hours against the 10-hour standard, the wage payable is 6 hours wages plus 40 percent of the wages as bonus.
Bonus= ½ of Time Saved/ Time Allowed *Time Taken* Hourly Rate 3. The Bedaux Point System: Under this system, the standard time set is divided into a number of points at the rate of one minute per point. The bonus is calculated at 75 percent of the points earned in excess of 60 per hour. Thus, if the standard time is 10 hours and if the worker completes the job in 7 hours and if his hourly rate is 0.96 money units, the standard number of points for completing the job is 600 points. The worker thus earns 600 points in 7 hours. His bonus, therefore, will be 75 percent of 180 x 0.96/60 which is equal to 2.16 money units. If a worker does not reach the standard, he is paid at his time rate. This system is really more than the incentive system, since it enables the management to record the output of any worker of the department in units which show at once if the production is up to the standard the management desires.
4. The Taylor Differential Piece-rate System: This system was introduced by Taylor with two objectives. First, is to give sufficient incentive to workmen to induce them to produce up to their full capacity and Second, to remove the fear of wage cut. There is one rate for those who reach the standard; they are given a higher rate to enable them to get the bonus. The other is the lower rate for those who are below the standard; so that the hope of receiving a higher rate may serve as an incentive to come up to the standard. Workers are expected to do certain units of work within a certain period of time. This standard is determined on the basis of time and motion studies. Such scientific determination assumes that the standard fixed is not unduly high and is within the easy reach of workers. A proper determination of the standard depend the success of the scheme. This system is designed to encourage the especially efficient worker with a higher rate of payment and to penalise the inefficient by a lower rate of payment. In practice, this plan is seldom used now.
5. Premium and Task Bonuses: It has been devised by Gantt and is the only one that pays a bonus percentage multiplied by the standard time. Under this system, fixed time rate are guaranteed. Output standards and time standards are established for the performance of each job. Workers completing the job within the standard time or in less time receive wages for the standard time plus a bonus which ranges from 20 percent to 50 percent of the time allowed and not time saved. When a worker fails to turn out the required quantity of a product, he simply gets his time rate without any bonus. Its fairness and practical value depends on the reasonableness of the standard fixed and the wages which workers of average ability can earn without having to work at excessive speed and becoming unduly fatigued.
6. The Profit-sharing System: The profit-sharing scheme is based on the same principle as the group system where incentive is related to the collective effort of the group. It is a system freely entered into under which an employer gives to his employees a share the net profits of the enterprise, fixed in advance, in addition to their wages. The essential features of profit-sharing are: (a) that the arrangement is voluntary but based on an agreement between employer and employee; (b) that the amount to be distributed amongst the participants depend upon the profits earned by the enterprise; and (c) that the, proportion of the profits to be distributed is determined well in advance. The aims of profit-sharing plans are: (i) to promote increased effort and output; (ii) to share some gains in the productivity of the firm; (iii) to secure employee co-operation and to achieve industrial harmony; and (d) to strengthen unity of interest and employee loyalty to organisational objectives. The profit-sharing scheme is comparatively easy and less expensive to adopt. In some cases, these schemes have become successful resulting in increased production at a lower cost. There are cases where they have not made any significant contribution towards improving the overall efficiency of the company. To be effective, profit-sharing schemes should be based on the considerations of profitability of industrial units, computation of surplus profit for distribution on an average basis, and fair return on capital invested in an enterprise. It should not be treated as a substitute for adequate wages but provide something extra to the participants. Full support and co-operation of the union is to be obtained in implementing such a scheme. Since the Second World War, profit-sharing has generally grown in importance, especially in those countries which have adopted legislative measures promoting or requiring its use. Thus, in the late 1970s, approximately 310,000 profit- sharing plans were in operation in the United States covering about 9 million wage-earners, or roughly 10 percent of the employed labour force. Mandatory profit-sharing schemes have been introduced in a number of developing countries. Some voluntarily introduced profit-sharing schemes have continued in the United Kingdom for 40 or 50 years.
7. The Scanlon Plan: It is a plant-wide incentive scheme developed by Joseph Scanlon of the United Steelworkers of America in 1927. The basic concept underlying the Scanlon Plan is that efficiency depends upon plant-wide co-operation. The purpose of this incentive plan is to develop teamwork. It has two main aspects: (a) adopting a measure for increased productivity; and (b) sharing the gain accrued from that increased productivity. The objective of the plan is to devise the formula which will most adequately reflect the prospective efforts of workers and management as a whole. The bonus formula is devised to fit the particular operating conditions of the plant. Some of the salient features of the plan are: (a) it encourages group work; (b) there is high flexibility in the generation of decisions and execution of the plan; (c) it integrates the company’s objectives with group activity; (d) it involves all the workers in the exercise and they make their maximum personal contribution to the process of production.
Earnest Dale has described four degrees of co-operation between labour and management in the Scanlon Plan, namely: (a) information co-operation by gathering information; (b) advisory co-operation through the process of consultation; (c) constructive co-operation by making suggestions for improvement; and (d) joint union-management decision making. Although there have been remarkable successes with the Scanlon Plan, not all applications have worked. Most of the successful applications have been in relatively small plants, one hundred employees or less. The Scanlon Plan seeks to provide the highest order of incentives to the workers by inviting them to offer suggestions and to share decisions with the management for improving productivity and moulding work incentives.
8. The Rucker Plan: The philosophy of the Rucker Plan is similar to the Scanlon Plan, but the bonus computed is based on a more sophisticated basis. There are two major differences between the two plans. The standard under the Rucker Plan is based upon a careful study of accounting records and is not considered bargainable. While the Scanlon Plan rewards only savings in labour costs, the Rucker Plan offers incentives for savings in other areas as well.
9. Merit Rating: Method may be made of merit rating as a form of wage incentive. It presupposes that the workers in a given grade or occupation differ in their efficiency at work in the undertaking. Merit rating is a method of attempting to give recognition to the best Workers by systematic objective standards. Various qualities are listed, such as skill, efficiency, reliability, initiative, care in avoiding accidents, adaptability, co-operation with other workers, and regularity of attendance. Points or gradings are given for each of these qualities, and workers who reach a high level receive an addition to the normal rate of pay for the job. Rating may be done for each year, and workers who had been receiving merit pay may lose a part or whole of it if they do not maintain their rating. Merit rating is usually applied to time- workers, especially in occupations where opportunities for promotion are less. Merit rating should not be confused with job evaluation. Job evaluation is an attempt to measure the worth of the job, irrespective of who does it, while merit rating is an attempt to measure the performance of the individual.
WAGE INCENTIVE PLANS Wage incentive plans may be discussed as (i) plans for blue-collar workers (ii) plans for white-collar workers and (iii) plans for managerial personnel. Each of these categories of employees have separate and distinct needs and hence specific tailor- made incentive plans have to be devised to meet their requirements. Therefore, correct measurement of performance for the purpose of incentive payment is very important. The four critical performance indices are: (a) the standard index (b) the reference index (c) the base index and (d) the incentive index. Various wage incentive schemes are formulated on the basis of these indices.
1. INCENTIVE PLANS FOR BLUE COLLAR WORKERS: Short-term incentive plans for blue collar workers may be broadly classified into three categories:
(a) Plans under which the rate of extra incentive is in proportion to the extra output;
(b) Plans under which the extra incentive is proportionately at a lower rate than the increase in output;
(c) Plans under which the rate of incentives is proportionately higher than the rate of increase in output.
Every employer wants his workman to do the maximum work they are capable of doing. On the other hand, there is a feeling among the workers that an increasing effort benefits only the employer even when they are employed on a piece-rate basis.
The result is that they never produce to their full capacity, and, in most cases, put in the minimum necessary work. This feeling on the part of workers may be removed either through fear or through expectation of gain, it has been found that fear can never produce the desired effect, but a hope of earning a bonus does induce them to work harder and produce more. Incentive plans are, therefore, known as premium plans because they offer a premium for outstanding performance.
All bonus or premium plans relate to two factors: one, they set a standard time for the completion of a definite output or piece of work for a fixed wage; two, the fixing of rate of percentage by which bonus would be earned by a worker over and above his set wage, if the standard time is saved or the standard output is exceeded. Indirect workers such as crane operators, charge hands, canteen staff, helpers, security staff, employees in purchasing, sales and accounts, and maintenance staff also deserve incentives at par with direct workers. Such payments are desirable to avoid dissatisfaction and dissension among the workers in a plant.
The payment of bonus to indirect workers, however poses a serious problem because the output of many of them cannot be accurately measured. For example, it is extremely difficult to measure the output of maintenance staff, canteen employees, or security personnel, though it is possible to assess the performance of inspectors, sweepers and packers. Much management therefore, prefers to apply a merit rating system to indirect workers, which rewards these workers for other qualities, in addition to their output.
2. INCENTIVE PLANS FOR WHITE COLLAR EMPLOYEES/SALESMEN: The salesmen are usually given incentives in the form of sales commissions. One study reported that almost 75 % of the organisations surveyed paid salesmen on some type of incentive basis. This is due to three factors: (i) the unsupervised nature of most sales work; (ii) tradition in the market; and (iii) the assumption that incentives are needed to motivate salesmen. There are several incentive plans for sales staff each appropriate for different markets, products, but all plans are basically variations of three types of plans: straight salary, straight commission, and combination plans.
The straight salary method is not an incentive plan; the salesman is simply paid on weekly, monthly, or on yearly basis. The advantages of this method are that: (i) the salesmen know in advance what their income will be; and (ii) the expenditure on salesmen is known beforehand. The disadvantages are: (i) this method tend to shift salesman emphasis to just making the sale rather than prospecting and cultivating long-term customer; and (iii) pay is not related to results. This lack of relationship reduces salesmen’s performance.
Under the straight commission, the salesmen are paid on the basis of sales effected i.e., they are paid for results and only for results. Therefore, high performance salesmen are generally attracted. But the disadvantages are: (i) salesmen focus on making a sale on high volume items and as a result cultivating dedicated customers and working to push hard-to-sell items are often neglected; (ii) salesmen tend to .be less company-oriented and more money-oriented, and the company has less control over them; (iii) salesmen’s income generally fluctuates widely.
Under the combination method of salary and commission, salesmen not only get a fixed salary but also a commission in proportion to the sales effected. The advantages of this method are: (i) since salesmen are assured of minimum earnings, they are relieved of financial worries; (ii) the company has more control over its salesmen, as there is sizable salary component in most combination plans. But the main disadvantage is that salary is not related to performance; only incentive value of money is being traded off for its security value.
Incentives for Management Employees: In many organisations, the managers are paid bonus. There are two types of bonus plans: one determined by formula (i.e. some criteria like increased sales) and the other determined by some discretion used in allocation of bonus (i.e., paid on more or less permanent basis). The bonus plans are generally reviewed annually to make them more effective. For top level management, bonuses are generally tied to overall corporate results. The size of bonus is much higher for top level executives and lower for the lower level executives.
At the top management level, incentive payments are mostly in the form of bonuses which are usually a percentage of base salary that depends upon the level of performance and company profits. Mostly bonuses are paid in cash but in some cases the company may use stock plans that offer the executive the company’s stock at a fixed purchase price. Such plans are designed to encourage ownership in the company and indirectly serve as an incentive for good work and represent a form of saving.
In the manufacturing and retailing fields, where year-to-year results are largely a reflection of management performance, it is common for executive and managerial personnel to be compensated partly in the form of a base salary and partly in the form of a year-end bonus. The decision of whether to install an incentive bonus plan for executives and, if so, what kind of plan to install should be made appropriately. On the one hand, a bonus is a more immediate and flexible form of compensation than salary and thus has greater motivational potential. On the other hand, the bonus plan that is poorly conceived or administered can have a negative motivational impact. If a bonus plan seems appropriate, careful attention should be paid to what kind of plan would be most effective.
WORKING OF INCENTIVE SCHEMES Incentive schemes are regarded as beneficial to both employers and workers. They are accepted as a sound technique for the achievement of greater productivity and good performance. The main advantage of any wage incentive scheme is that for a little expenditure of capital, there can be sizable gains in productivity; the gestation period is also small. The workers chase the supervisors for material, tools, etc., instead of supervisors chasing the workers. The experience gained in India and in other countries indicates that wage incentives have resulted in raising productivity, increasing output and earnings, reducing direct labour costs, and curtailing absenteeism.
Despite certain merits of incentive schemes, their actual working is not quite happy. Some critics point out that the output of modern industry does not depend so much on individual human effort as on the capacity of machines and on good organisation. The most effective incentive, they claim, is a combination of good regular wages, good working conditions, and good human relations. There is a tendency for the quality of the products to deteriorate unless steps are taken to ensure the maintenance of quality through a stricter system of checking and inspection. Their application in some cases has not only failed to increase production over a period of time but has caused an actual reduction in employee productivity. One company, for instance, found that a substantial increase in pay through wage incentive systems merely resulted in higher absenteeism, restricted output and lower work standards. Some studie
Finance and Accounting in the Hospitality Industry
Introduction. According to the Barrows