Incentive Plans (Bonus or Premium Schemes)

Generally speaking, there are two basic methods of wage payment. One method relates to the hours, the employee is at work, regardless of output. This is known as time rate or day rate system.

The other method is related to the production or output, regardless of the time taken for production. This is known as piece rate system. Each method has its own merits and demerits.

In order to take advantage of the merits and eliminate demerit of both time wage and piece rate systems of wage payment, a third method of wage payment was evolved which is known as incentive wage system or bonus or premium plans of wage payment. Any wage system which induces a worker to produce more is called ‘Incentive Wage System’.

The essence of the so-called incentive wage plans is that they adjust earnings to output or production, thus providing a special financial incentive for increasing effort while guaranteeing the minimum wages.

The incentive wages are given in the form of ‘premium’ or ‘bonus’ calculated on the basis of efficiency of workers, time saved or increased production. For convenience the various methods of remuneration may be divided as under:

1. Time Rate Systems:

(a) At ordinary levels

(b) At high levels

(c) Guaranteed time rates

2. Piece Rate Systems:

(a) Straight piece rate

(b) Piece rate with guaranteed time rate

(c) Differential piece rates:

(i) Taylor differential piece rate system

(ii) Merrick differential piece rate system

(iii) Gantt task bonus system

3. Bonus systems (Incentive wage system or premium plans)

(a) Individual bonus systems:

(1) Halsey Premium plan

(2) Halsey-Weir Premium plan

(3) Rowan system

(4) Barth variable sharing plan

(5) Emerson efficiency bonus

(6) Bedaux point premium system

(7) Accelerating premium plan etc.

4. Indirect Monetary Incentives.

The various schemes and premium bonus plans should combine time wages and piece rates. Brief explanations of them are given below:

1. The Halsey Premium Plan:

This system is also known as Split Bonus Plan or Fifty- fifty Plan. The plan was introduced by F.A. Halsey, an American Engineer. In the plan, the task (standard) time, is decided on the basis of past experience, and scientific studies are set.

Under this plan, a standard time is fixed for the performance of each job, and the worker is paid the agreed rate per hour for the time spent thereon plus a fixed percentage (may be 50%) of the time, he saved on the standard.

2. The Halsey-Weir Scheme:

Here the worker gets a bonus of 30% of the time saved, against 50% in the Halsey Plan, Except for this point, Halsey Plan and Halsey Weir Scheme are similar.

3. Rowan Scheme:

This scheme was introduced in the year 1901 by David Rowan of Glasgow. The guidelines of Halsey Plan have been followed. It is similar to that of

Halsey Plan except in regard to the determination of bonus calculation. Under this plan, the bonus is that proportion of the wages of the time taken which the time saved bears to the standard time allowed.

4. Barth Scheme:

Under this plan, wages are not guaranteed. This system is suitable to beginners and learners. The earning is computed by multiplying the rate per hour by the geometric mean of standard hours and actual hours worked.

5. Emerson Efficiency Bonus Plan:

Under this plan when the efficiency of the worker reaches 67% he gets bonus at the given rate. The rate of bonus increases gradually from 67% to 100% efficiency. Above 100% bonus will be at 20% of the basic rate plus 1% for each 1% increase in efficiency.

6. Bedaux Premium Plan:

It is a combination of time and bonus scheme. Standard time for a job is determined by time study. Standard production per hour is determined and the unit of measurement is minute. An hour is taken as sixty minutes. Each minute of standard time or allowed time is called a point Bedaux point.

The number of points is being determined in respect of each job. If actual time is more than the standard time, the worker is paid on hourly basis.

Excess production is counted in points, for which a bonus of 75% is allowed to the worker and remaining 25% goes to the employer. Thus hourly rate plus 75% of the points saved, multiplied by one-sixtieth of hourly rate is the earnings of a worker.

7. Accelerating Premium Plan:

Under this premium plan, bonus increases at a faster and faster rate as output increases. The plan offers a higher incentive to the workers. The efficiency is determined on the basis of time saved or increased output. The plan is complex one.

The system of wage payment is of two types-time rate system and piece rate system. In the plan of incentive wage payment, both time and piece rate blended together.

Under the time rate system, the worker is not benefitted for the time saved. Under piece rate system, the cost per unit falls, even though labour cost remains constant. This is due to savings in fixed overhead expenses, since the cost of overhead is distributed over all the units.

The purpose of this scheme is to overcome the limitation of both the systems and combine the advantage of both the systems. In order to increase production through encouragement the benefits are shared by the employer and the employee. Before the introduction of incentive plan, the following factors may be taken into consideration:

1. It must be simple and understandable to workers.

2. It must be fair to both employer and employee.

3. The standard should be fixed by time and motion study.

4. Standards once fixed may not be altered.

5. The cost of operating the scheme should be minimum.

6. The work must be repetitive by nature.

7. The workers should not raise objections.

8. The system must be permanent; once introduced should not be discontinued.

9. The system should also benefit the indirect workers.

10. It must reduce labour turnover.

A satisfied employee will give his best service and thus production will be increased, on the other hand, a dissatisfied employee will not give his service beneficially to the firm, thus production will be decreased. When the worker is dissatisfied because of insufficient incentives, he may go away whenever better opportunity arises elsewhere.

When there is no chance of promotion, one may not take initiative to improve him. But when there is a good system of promotion policies on the basis of better performance, naturally one will work hard to come up.

Even today the problem of promotion of workers depends upon the will and pleasure of the management. If favoritism is shown in promotion, it will nurture jealousy, discontentment, etc. It is the duty of the personnel department to see that the right person is awarded suitably in order to cultivate goodwill among the workers.

When one does a job satisfactorily taking less time, he should be remunerated suitably in addition to the salary. Incentives are an encouragement for better work or greater effort in production. The extra payment of remuneration may be in the proportion of additional output or time saved.

Types of Incentives

Incentive may be financial or non-financial.

(a) Financial Incentive:

Financial incentive is in terms of money and it provides higher emoluments for higher efforts or increased output. It includes money payments based on results in addition to wages and salaries.

In this respect, piece rate system of wage payment provides greatest incentive to the workers as in this system remuneration is directly linked to their output.

Similarly, there are many premium bonus systems, like Galsey premium system, Rowan premium bonus system etc. under which basic time wage is guaranteed and a bonus is paid, for achieving a saving in time, in proportion to the time saved.

(b) Non-Financial Incentive:

Under this system, incentives are provided in the form of better facilities, instead of paying cash. The object is to attract the employees and such benefits may be in several ways:

1. Favorable working conditions

2. Free medical facilities to worker and his family

3. Rent free quarter

4. Free education to children

5. Welfare facilities

6. Subsidized canteen

7. Pension schemes

8. Protective clothing, liveries uniforms etc.

9. Opportunity for advancement

10. Subsidized transport facilities

Advantages of Non-Monetary Incentive Schemes:

(a) Reduce labour turnover

(b) Create a sense of loyalty and co-operation in them

(c) Enhance general goodwill of the company

(d) Reduce absenteeism

(e) The best labours are attracted.