The time rate and the price rate systems are not adequate systems by themselves. Individual performance must receive due attention while implementing a wage system so that difference is maintained between a good worker, an average worker, and a bad worker.
Efficiency of labour saves time and cost. The benefit arising out of such labour efficiency should be shared by both the employer and employee.
Therefore, incentive plans are implemented to compensate the efficient workers for their additional efforts to minimise the time or cost. Under the time rate system, all the gains of the efficient worker and the loss of the inefficient worker go to the employer.
On the other hand, under the piece rate system the case is reverse. The incentive plans are used to remove these defects. Under such plans the said gains or losses are shared by the employer and the workers.
Incentive plans are devised to compensate workers through an additional payment over their guaranteed wages. Such additional payment is known as ‘bonus’ or ‘premium’. Such wage plan is called incentive plan because a worker has the incentive to earn more wage by completing the work in less time.
Under an incentive plan a standard time is fixed to complete a job or operation and the worker is encouraged to complete it within the standard time. He is paid wages for the time taken to do the job at hourly rate and wages for a portion of time saved by way of bonus.
The major objectives of incentive plans are:
(i) Rewarding efficiency.
(ii) Reducing per unit cost of production.
(iii) Increasing overall productivity of the firm.
(iv) Retaining the services of efficient workers.
(v) Establishing better labour-management relations.