{"id":476,"date":"2018-10-16T08:42:41","date_gmt":"2018-10-16T08:42:41","guid":{"rendered":"http:\/\/mgmtp01.epgpbooks.inflibnet.ac.in\/?post_type=chapter&p=476"},"modified":"2019-01-03T06:15:01","modified_gmt":"2019-01-03T06:15:01","slug":"types-of-incentives-system","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp01\/chapter\/types-of-incentives-system\/","title":{"rendered":"Types of Incentives system"},"content":{"raw":"
\"epgp<\/a>\r\n<\/span><\/div>\r\n
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Incentives schemes are also known as payment by results. The three factors which favour the payment of Wage incentives to employees are: (i) the employees must be rewarded for their additional efforts in the job; (ii) The payment facilitates the earning of the higher wages as an inducement for additional efforts; (iii)\u00a0\u00a0 It improves productivity & organisational profitability. The fairness of the outcome (reward) of an incentive scheme determine its ability to win the employee\u2019s compensation with the scheme.<\/p>\r\n \r\n

However, the type of scheme is a critical factor in determining the quantum of reward available to the employees. Therefore, an organisation must be prudent in choosing incentive schemes as the nature of a scheme has a direct bearing on its outcome. However, the organisation must invariably ensure that the incentive schemes are classified into three categories.<\/p>\r\n \r\n

25.1. Types of Incentive Compensation<\/strong><\/p>\r\n \r\n

There are various types of incentive systems which can be divided into three categories described below:<\/span><\/p>\r\n\r\n<\/div>\r\n

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Fig. 25.1. Types of Incentive Compensation<\/p>\r\n \r\n\r\n25.1.1. Individual Incentives:<\/em><\/strong>\r\n\r\n \r\n

Individual incentive plan is the oldest form of compensation, in which the employee is paid for units produced. Individual incentive plans pay off for individual performance. When individual productivity is measureable, individual incentives are most successful in boosting performance through a fairly direct link between performance & rewards.<\/p>\r\n \r\n

These include the following:<\/p>\r\n \r\n

25.1.1. Piece Rate system:<\/em><\/p>\r\n \r\n

The piece rate in the oldest & most common incentive plan. The earliest approach was called straight <\/span>piece work. In this approach, a worker was paid per unit of production. It is very common in factories around the world. It is based on paying only for what is actually produced. A simple piece rate approach often results in production variability that can disrupt the flow of product to customers. Piece rate system is easy to understand. It is useful in <\/span>labour incentive industries.<\/span><\/p>\r\n \r\n

The prerequisites for the implementation of this scheme are:<\/span><\/p>\r\n

(i) The skill levels required in production must be similar;<\/span><\/p>\r\n

(ii)\u00a0<\/span>Productvion should be expressible in units or numbers;<\/span><\/p>\r\n

(iii) Production stoppage for which the employee is not responsible should be compensated adequately. The formula for computing the earning is:<\/span><\/p>\r\n \r\n

Wage Earning = no. of units produced x the piece rate per unit<\/span><\/p>\r\n\r\n<\/div>\r\n

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Taylor developed the differential rate system as a response to the variation potential in piece rate systems. Taylor\u2019s differential rate had two piece rates; one for performing below standard & a higher rate for meeting or exceeding the standard, thus encouraging workers to at least meet the standard.<\/p>\r\n \r\n

However, the major limitations of the differential piece rate system are: (i) It may be difficult to set accurate & agreeable standards of production; (ii) This method may result in the employees cutting corners in their bid to produce faster: (iii) It may create tensions & rivalry between the slow & the fast performance; (iv) The employees may complain of unfairness in the standard setting when they are not able to achieve it.<\/p>\r\n \r\n\r\n25.1.1.3. Standard Hourly Rates:<\/em>\r\n\r\n \r\n

Standard hourly rates differ from piece rate systems is that the production standard is expressed in time units. Using job analysis, the standard time for <\/span>given task is established & the <\/span>organisation the sets a fairly hourly wage rate. The standard rate for any task is the wage rate times standard. In some standard hourly plans, the rates <\/span>varies with <\/span>output.<\/span><\/p>\r\n \r\n

25.1.1.4. Production Bonus Systems:<\/em><\/p>\r\n \r\n

Under these <\/span>systems an employee is paid an hourly rate plus a bonus when the employee exceeds the standard. The bonus usually <\/span>equal approximately 50% of <\/span>labour savings. It is also called <\/span>time saving bonus. In Japan, all employees receive semiannual production bonuses in December & June.<\/span><\/p>\r\n \r\n

25.1.1.5. Commissions:<\/em><\/p>\r\n \r\n

This is <\/span>incentive plan is usually found in sales jobs. This reward system allows the salesperson to receive a % of his gross receipt (example, 5% of all sales). About 75% of the salespeople work on a commission paid is typically a percentage of the price of the item. Sometimes a salesman is paid <\/span>small salary & a commission or bonus when he exceeds the budgeted sales goals.<\/span><\/p>\r\n\"\"\r\n\r\n<\/div>\r\n

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