24 Incentives & Fringe Benefit: Introduction

Pragya Dheer

Learning outcome:-

The primary objective of incentive schemes is to attract & retain efficient employees & induce them to work harder in the job.

• Developing on Ownership Interest: Incentive schemes aim at creating a personal interest among the employees in organizational affairs so that this world, in turn, improve the sense of responsibility of these employees.
• Enhancing Employee Motivation: Organisation look at incentives as a value option to increase & then sustain employee motivation through monetary & non-monetary rewards.
• Improving Employee Retention: Incentives aim at controlling the labour turnover arising out of employee dissatisfaction due to the absence of merit recognition & poor pay. Thus, incentives programme aim at enhancing the employee retention rate.
• Facilitating a Greater Role for employees in Pay Determination: Incentives schemes enable to employees to determine their own income by linking their pay with their actual performance. By varying their performance levels, they can earn the required incomes.
• Increasing the performance & productivity: By establishing a link between the pay & the performance, organizations aim at increasing organisational performance & employee productivity to the desired levels.
• Reducing the labour cost: Through productivity- linked schemes, organisations seek to avoid a permanent raise in the pay levels of the employees. This is in contrast to the basic pay & other fixed employee benefits, which permanently commit the organisation to a fixed labour cost, irrespective of its performance & profitability.
• Reducing the time & Cost of supervision: Incentives schemes aim at reducing the supervisory cost & time by enhancing the sense of responsibility of the employee through linking their performance with pay.

    24.1. Introduction:

Hard work pays is the simple philosophy behind incentive programmes. Employees usually get incentives in addition to their base salary in the organisation. Incentives enable an organisation to present challenges & rewards alike to its. Workforce in order to make the employees enjoy their jobs more. The primary purpose of providing wage incentives is to enhance the organisational performance & employee productivity. Understandably, incentives constitute an important HR tools to achieve the desired performance goals within a reasonable cost. Performance-based incentive programmes enable an organisation to keep its employees satisfied without producing any permanent rise in pay & / or benefits. Thus, incentives schemes help an organisation establish a formal relationship between the individual performance & remuneration. Incentives also motivate the employees to work harder in their jobs in order to get recognition in monetary & non-monetary terms.

Source: https://www.linkedin.com/pulse/3-ways-drive-revenue-staff-sales-incentives-prosalesguy-training

However, when the rewards offered as a part of the incentives programme do not fulfil the exact needs of the employees, they cannot be considered as an incentive at all. The incentive programme should be such that they should get and keep employees motivated by fulfilling their exact needs. Generally, incentives are provided to employees when their actual performance meets the performance standards set by the organisation. Although organisations predominantly offer non-monetary rewards to their employees. Finally, an important prerequisite for any effective incentive scheme is the presence of an objective performance evaluation procedure.

24.2. Meaning & Definition:

Source: https://www.amazon.com/corporate-gift-cards/b?ie=UTF8&node=15243182011

Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. They are defined “Variable rewards granted according to variations in the achievement of specific results.” The International Labour office refers to incentives as payment by results. But it is appropriate to call them ‘incentive systems of payment’ emphasizing the point of motivation, that is, the imparting of incentives to workers for higher production & productivity.

‘Incentive Pay’ is based on units produced & provide the closest connection between effort or performance & individual pay. According to Steven Gross & Jeffery Bacher, “Any compensation plan that emphasizes a shared focus on organisational success, broaden opportunities for incentives to non-traditional groups(such as non executives or non managers), and operates outside the base pay increase system.” It is also called ‘variable pay’ or ‘incentive compensation’. Incentive pay or “performance-based rewards” are an attempt to link compensation to performance. Thus, it is a compensation system which is designed around performance. It is linking pay to performance.

According to Ray & Altmansberger ‘pay for performance systems’, also called ‘incentive pay system’, reward employee performance on the basis of the following three assumption:

1.   Individual employees & work teams differ in how much they contribute to the firm-not only in what they do but also in how well they do it.

2.   The firm’s overall performance depends to a large degree on the performance of individual & groups within the firm.

3.   To attract, retain & motivate high performers & to be fair to all employees, a company needs to rewards employees on the basis of their relative performance.

24.3. Importance of Incentive pay:

The importance of incentive pay & performance based reward systems is discussed under the following:

24.3.1. Pay for Performance:

Most workers believe that those who work harder & produce more should be rewarded accordingly. If employees see that pay is not distributed on the bases of merit, they are more likely to lack commitment the organisation, decrease their level of effort & look for employment opportunities elsewhere.

24.3.2. Strategic Importance:

It is hard to underestimate the strategic importance of using variable pay to align compensation with organisational goals & to signal to employees what the major organisational values are.

24.3.3. Motivational Device:

When pay is contingent on performance, individual & group performances are consistently higher. Linking pay to performance provides an increased incentives for top performers to remain with the organisation, a means of reinforcing organisational objectives, and a method of keeping labour costs in line with productivity. It can lead to better employee performance.

24.3.4. Facing Challenges of Global Economy:

E.E.   Lawer States that incentive pay programmes seek to align compensation with organisational goals, values & culture, as well as the challenges of the global economy.

24.3.5. Retention:

Linking pay to performance is likely to help improve work force composition. High performers will tend to gain a larger share of compensation resources & thus be motivated stay with the organisation. Below average performers will become discouraged & will tend to leave the organisation.

24.3.6. Productivity:

When performance is linked to rewards, those capable of doing what will lead to top productivity are motivated to do so. The top performers make the extra effort that will result in productivity when they know they will share in the rewards of their productivity.

24.3.7. Cost Savings:

An obvious benefit of pay for performance is the capability to link compensation costs with productivity results. By basing pay on performance, employers can ensure that compensation costs, typically a major cost of doing business, will be tied to organizational results. When the results are poor & the organisation is less able to pay, compensation costs are lower.

24.3.8. Attainment of Organisational Goals:

Because of their important influence on motivation & satisfaction, reward systems have the ability to communicate organisational objectives. By linking pay to defined performance, it is also possible to ensure that individual objectives. Employees whose efforts are not synchronized with organisational objectives will not enjoy an equal share of the rewards.

24.4. The Incentive Planning Process:

Though each organisation can have its own style of incentive plans to serve the needs of its employees, the incentive planning process shown is figure 24.1. can be adopted by any organization with necessary modification.

Fig 24.1. The Incentive Planning Process

24.4.1. Setting the Objectives:

The first step in the process of installing an incentive plan is the determination of goals for such incentive plans. Organizational objectives usually provide the basis for determining the goals of the incentive programmes. An organisation must decide the specific goals it wants to accomplish through the incentive schemes & how its employees can contribute to those goals. It is only when the employees believe that the performance goals are attainable that they would put in the additional efforts required to accomplish them.

24.4.2. Determining the Nature of Reward & the Mode of Payment:

Having formulated the goals to be accomplished through incentive plans, the next step is the determination of the type of incentives & the mode of its payment. An organisation should first determine the total compensation payable to the employees for reaching specific performance goals. It should also choose between individual & group incentive plans to achieve the proposed incentive goals. Besides, it should decide between monetary & non-monetary rewards for compensating its employees.

24.4.3. Sharing the Goals with the Employees:

In the next step, the organisation should effectively communicate the objectives & nature of the incentives plans to all its employees so that they can understand their role & reward in the incentive plans clearly. All the features of the incentive plans should be explained to them & all their queries clarified. The organisation should ensure that the employees believe that the rewards offered to them are worth the efforts put in by them in the job.

24.4.4. Evaluating the Actual Performance:

At the end of a specified period, the organization must evaluate the employee’s performance to decide whether they attained the performance standards & also the amount of incentives payable to each one them. However, organisations do not evaluate the employees performances only to determine the incentives. Usually, the performance evaluation system keeps incentives fixation as one of its several objectives.

24.4.5. Application of Incentive Plans:

Once the performance of employees has been evaluated, the next stage is the application of appropriate incentive plans to determine the performance rating & pays of the employees. Typically, the employees at this stage get to know what their reward will be. In fact, the process of an incentives scheme begins with goal setting & ends with reward decisions.

24.4.6. Feedback:

Sometimes, the employees may not be satisfied with the incentive plans, the performance evaluation process or the mode of payment of incentives. In such a situation, the incentive schemes may not fail to motivate the employees but also dissatisfy them, causing increased labour turnover & absenteeism. To avoid such a situation, it is necessary for the organization to receive periodic feedback from the employee in order to know their views on the incentive schemes.

24.5. Prerequisites for Good Incentive System:

Only an effective incentive scheme can have a desired impact on the productivity & efficiency of the employees. The installation of a good incentive scheme requires meticulous planning & honest execution. The organisation should also make certain that the incentive schemes proposed to be introduced fulfil the following conditions:

24.5.1. Transperancy:

The foremost requirement for an efficient incentive scheme is its transperancy. The scheme must be comprehensible to all the employees who are part of this scheme. Even uneducated employees must be able to understand the working of the incentive schemes clearly.

24.5.2. Objectivity:

The incentive scheme should keep objectivity in the performance evaluation & incentive computation to the minimum. The greater the objectivity in the incentive schemes, the larger the scope for charges of personal bias & prejudice in the determination of rewards for employees. When the employees suspect unfairness in the distribution of monetary rewards, they might remain indifferent to or even oppose the scheme.

24.5.3. Measurability:

The next important prerequisite for an effective incentive scheme is that the scheme be quantifiable. The incentive scheme must be readily measurable. It should be based on rational and scientific work measurements. Organisational should not attempt to keep abstract terms like attentions, required concentration & stress levels as the basis for determining the incentives.

24.5.4. Attainability:

The performance goals fixed by an organisation for computing the incentives should be practical & achievable. If they are too tough to be achieved by the employees, the latter may not be keen on accomplishing these goals. Eventually, the employees may develop an indifferent attitude towards the incentive schemes of the organisation.

24.5.5. Flexibility:

An effective incentive scheme should be flexible enough to adopt itself to the changes in the internal & external environment. The organisation must be able to effect, changes in the scheme without too much delay. The administrators of the scheme should review its performance periodically & make necessary changes as & when required.

24.5.6. Comprehensiveness:

An effective incentive scheme should have something to offer for all the employees of the organisation. All the sections of the employees from foreman & supervisors to helpers must be covered under the scheme. The total cooperation of the workers, managers & unions must be obtained for the scheme.

24.5.7. Cost-Effectiveness:

A good incentive scheme should not only be efficient but also economical in achieving the goals of the incentive programme. The purpose of linking pay with performance is to achieve cost-effectiveness in the management of the incentive scheme. In contrast, if the cost of maintenance of such schemes is more than the savings made through them, there is no point in continuing with such schemes.

24.5.8. Instantaneous Feedback:

As far as possible, the reward available to the employees must be paid immediately. This would make an incentive scheme more relevant & attractive to those who participate in it. Besides, the employees would be more determined in earning the reward if it is going to benefit them in the immediate future. Thus, an effective incentive scheme should pass on the rewards to the employees as quickly as possible.

24.6. Barriers & Challenges to Incentive system’s success:

24.6.1. Nature of the Task: Very few employees have total control over their own performance. Direct pay for performance incentives should be adopted only when employee skill & effort have a substantial impact on output.

24.6.2. Not fair Measurement of performance: subjective measure of performance creates difficulty in the accurate & fair measurement of employee performance. As a result, individual are likely to feel that their rewards are not related to their effort but instead are a function of the judgement of their particular supervisor.

24.6.3. Amount of Payout: Incentive compensation on average amounts for only 10% of base compensation. Thus the size of the payout is frequently a barrier to the successful linkage of pay and performance.

24.6.4.   Negative   Effects    of   the    spirit    of Cooperation: studies show that incentives compensation may provoke conflict & competition while discouraging cooperation. Internal competition may set off rivalries that lead to quality problems sabotaging a project, spreading rumours or even cheating.

24.6.5. Psychological Contracts: Once implemented, incentive systems create a psychological contract between the employer & the firm. This creates a set of expectations based on prior experience, & it is very resistant to change. Breaking a psychological contract can have damaging results.

24.6.6. Credibility Gap: Employees often do not believe that incentive systems are fair or that they truly reward performance. Studies indicate that as many as 75% of employees question the integrity of incentive plans. If employees do not consider the system legitimate & acceptable, it may have negative rather than positive effects on their behaviour.

24.6.7. Job Dissatisfaction & Stress: Incentive systems may lead to greater productivity but lower job satisfaction. Some research suggests that the more pay is tied to performance, the more the work unit begins to unravel & the more unhappy employees become.

24.6.8. Potential Reduction of Intrinsic Drives: studies show that an organisation that puts too much emphasis on pay in attempting to influence behaviour may reduce employee’s intrinsic drives. It may stifle their talents & creativity.

24.6.9. Effect on Mentality: To avoid subjective judgements & favouritism, incentives systems tend to rely on objective indicators of performance. This creates a “do only what you get paid for” syndrome. This is harmful for increasing the productivity.

24.6.10. Lack of control:   Employees often cannot control all of the factors affecting their performance. Some example of factor beyond an employee’s control are: (a) supervisors; (b) performance of other work group member; (c) the quality of the materials the employee is working with; (d) working condition; (e) the amount of support them from management & (f) the environmental factors.

24.7. Incentive in India:

In a country like India incentives are an important tool for motivating workers, improving productivity & reducing costs per unit. Various five year plans have suggested introduction of incentive schemes to promote more efficient working of industries. The second plan recommended that the earnings beyond the minimum wage should be related to results and that workers should be consulted before a system of payment by results was introduced. The National Commission on labour suggested that “under our condition, a wage incentive is concerned with an effective utilisation of manpower which is the cheapest, quickest & surest means of increasing productivity. The only practicable & self-sustaining means of improving manpower utilisation is to introduce incentive schemes & stimulate human efforts to provide a positive motivation to greater output.”

Source: https://www.slideshare.net/rajnishdeo/ppt-on-tcs

In India, the need for introducing wage incentive plans is greater due to the following reasons:

(i) The average Indian worker is financially poor. Wage incentives will help to improve the earnings of workers.

(ii) The productivity of the Indian workers in low & needs to be increased. Wage incentives can help to improve productivity.

(iii) Technology in Indian Industries needs to be modernised & upgraded. Incentives may help to reduce worker’s resistance to mechanisation & automation.

(iv) Effective application of wage incentive plan is likely to have a beneficial impact in the price level.

(v) Incentive schemes can be applied to all sectors of the economy in the national interest.

The National Productivity Council conducted an All India Survey of wage incentive plans in the country.

The survey revealed that:

(i) Incentive plan are more popular in labour intensive industries

(ii) Group incentive schemes were more common-than plant-wise or individual plans.

(iii) Standards were fixed generally through time study & past experience.

(iv) Incentive plans led to significant (about 40%) rise in average productivity.

(v) More comprehensive plans led to greater savings in cost per unit & overtime working.

(vi) Scientific  techniques  of  work  measurement  are  preferable  in  the setting of standards.

24.8. Fringe Benefits:

The term ‘fringe benefits’ refer to the extra benefits provided to employees in addition to the normal compensation paid in the form of wage or salary. Edurn Flippo writes, “ In the broadest sense such ‘fringes’ includes all expenditures designed to benefit employees over and above regular base pay & direct variable compensation related to output.” Belcher describes these benefits as “any wage cost not directly connected with employees productive effort, performance service or sacrifice.” The Glossary of current Industrial Relation & Wage Terms has defined fringe benefits as “supplements to wages received by workers at a cost of employers. The term encompasses a number of benefits-paid vacation, pension, health & insurance plans etc-which usually add up to something more than a ‘fringe’ & is sometimes applied to a practice that may constitute a dubious benefit for workers.”

Source: http://www.igze.com/what-is-fringe-benefit/

Source: http://www.businessdictionary.com/definition/fringe-benefit.html

The main objectives of fringe benefits are:

1. To promote employee’s welfare & paternalistic attitudes.

2. To create & improve sound industrial relations.

3. To motivate the employees by identifying & satisfying their unsatisfied needs & to improve their morale.

4. To keep in line with the prevailing practices of offering benefits & services which are given by similar concerns.

5. To gain employee’s loyalty & cooperation, encouraging them to greater productive efforts.

6. To provide security to the employees against social risks, like old-age benefits & maternity benefits.

7. To provide health care & safety to the employees.

8. To create a sense of belongingness among employees. Hence, fringe benefits are called “golden handcuffs”.

9. To meet the requirements of various legislation relating to fringe benefits.

10. To improve & furnish the organisational image in the eyes of the public.

11. To recognise the official trade unions bargaining strength, because a strong trade union always compels an employer to adopt a sound fringe benefits programmes for his employees.

Source: http://bankofinfo.com/objectives-of-fringe-benefits/

Summary:

Wage incentives refer to performance linked compensation. It helps to improve industrial relations, employee morale and productivity, work methods and team work. It may cause damage to employee health, quality of work, industrial safety, interpersonal relations etc. Proper climate, workers’ involvement, scientific standards, guaranteed minimum wage, simplicity, equity, economy, flexibility, promptness, provisions for appeal and follow up are the essentials of a sound wage incentive plan. Fringe benefit refers to the benefits like paid holidays, housing etc. in addition to regular wages, salaries.