Compensation and Incentive Plans

8/14/2019 Compensation and Incentive Plans

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COMPENSATION:Wage and

Salary Administration

Compensation : It

refers to a wide rangeof financial and non-

financial rewards to

employees for their

services rendered tothe organisation.



Compensation

Base Compensation : It involves the

basic compensation an employee getsusually as a wage or salary.

Supplementary Compensation: It

involves benefits offered through

several employee services and benefitwhich is linked directly to

performance accomplishments and as

a part of organisational membership.



Base

Compensation

Supplementary

Compensation

•It denotes payments toworkers in the form of wages

and salaries

•Wages and Salaries are paid in

cash

•Wages and Salaries are paid tocompensate employees for their

services

•Wages and Salaries are

determined by job evaluation,

demand and supply of labour,Org. capacity to pay etc.

•It is over and above wages and salaries

•Fringe benefits are offered in terms of

employee services and benefits like

housing, medical etc.

•Fringe benefits are made to increase the

efficiency of the employees and to retain

them.

•Supplementary compensation is

determined by the history of the

organisation, capacity of the org. to spend

on employees, desire to enhance public

image etc.



Objectives of compensation

planning• Fairness or Equity

• Attracting capable

employees

• Motivating employees for

better performance

• Retaining employees

• New and desired behaviour

• Comply with legal rules



Equity and pay rates

• Job evaluation

• Wage and salary surveys

• Group similar jobs into Pay Grades

• Price each Pay Grade- Wage Curves

• Fine tune pay retes and determine WageStructure





Factors influencing compensation

level• Job needs

• Ability to pay

• Cost of living

• Prevailing wage rates

• Unions• Productivity

• Demand and supply of labour



Types of wages

• Minimum wage

• Fair wage

• Living wage



State regulations of wages

• Minimum wages Act 1948

• Payment of wages Act 1936

• Adjudication of wage disputes

• Wage Boards

• Pay Commissions



Wage and Salary Differentials

Differentials in pay for

various jobs constitutethe core of wage and

salary administration

and structure.



Types of wage differentials

• Interpersonal differential

• Inter-occupational differential

• Inter-area differential

• Inter-firm differential



Terminology

• Wages

• Salary

• Wage Rate

• Wage Scale

• Nominal Wages

• Real wages• Fringe Benefits

• Take Home Pay



Wage and Salary Administration

The control of wage

and salary levels is of

paramount importance,

even though the amount of

control which can be

exerted may vary among

organisations and withinan organisation from time

to time.



Objectives of Wage and Salary

Administration• Control of costs

• Establishment of fair and equitable

remuneration• Utilisation of wages and salary as an

incentive to greater employee productivity

• Maintenance of a satisfactory public relations

image



Wage and Salary Policies

Various forms of wages

and salary policies have been developed like:

• Traditional approach

• Formula approach





Time Wage system

Under this system , the

worker is paid for the

amount of time spent on

the job.The period of timemay be an hour,a day,a

week,a month etc.

Wages = Hours worked xRate per hour





Time Wage system

Disadvantages:

• Inefficiency• Lack of Motivation

• Increased Supervision

• Increases labour cost per

unit



Piece Wage System

Under this system,the

output of work is the basis

of wage payment.A

worker is paid according

to the amount of work

completed or the number

of units turned outirrespective of the time

taken.



Piece Wage System

Advantages:

• Incentive for higher

production

• Fairness

• Costing

• Lesser Supervision

• Reduction in Idle time• Economy



Piece Wage System

Disadvantages:

• Low quality

• Insecurity to workers• Strained industrial

relations

• Difficulty in rate fixation

• More administrative work• Wastage

• Health Hazard





• Incentive wages relate earnings to

productivity and may use premiums,

bonuses or a variety of rates to compensatefor superior performance. Also known as

„payment by result‟.



Kinds of Incentive plans

1)Individual incentive plans

2)Group incentive plans



Individual Incentive Plan

Individual incentive plan is further divided

into two groups-

A) Time based incentive plans

B) Production based incentive plans



Incentive wage plans

(Based on time)

1. Halsey plan2. Rowan plan

3. Emerson‟s Efficiency plan

4. Bedeaux Point plan



a) Halsey Plan

This plan was originated by F.A.Halsey, anAmerican engineer. The main features of this

plan are_

1) Standard time is fixed for each job or operation.

2) A minimum time wage is guaranteed to everyworker.

3) If the job is completed in less then standardtime, a worker is paid a bonus of 50% of timesaved.



Merits

• This plan is very easy to understand & theamount of wages can be calculated easily.

• It guarantees minimum wage & thus security tothe employees.

• The benefit from time saved is shared equally between the employer & the workman.

• It encourages workers to be efficient becausesuch efficiency is rewarded in cash.

• Saving in time reduces both labour cost &overhead expense.



Demerits

• Fixation of standard time for various job is

not easy.

• The worker don‟t secure full benefit oftheir efficiency but only to the extent of

50%.

• Workers may do the work in hurry & thequality of production may suffer.



b) Rowan Plan

This plan was introduced by D.Rowan in

1901. Here, also the bonus is paid on the

basis of time saved. But unlike a fixed percentage in the case of Halsey plan, it

takes into account a proportion as follow:

Time saved/ Time allowed or Standard time



Merits

• It assures minimum wages to every worker.

• The efficient workers get bonus at

diminishing rate if they save more than 50%of the standard time.

Demerits

• The ordinary worker may find the bonuscalculation a bit difficult.

• It discourages very efficient workers.



c) Emerson‟s Efficiency Plan

• Emerson suggested guaranteed wage

payment to all workers on time rate basis &

bonus to those who prove to be efficient.• If efficiency of a worker reaches 66.67% he

get bonus.

• At 100% efficiency bonus would be paid at20% of the basic rate plus 1% for each 1%

increase in efficiency.



Merits

• It gives guarantee to minimum wages to all theworkers.

• There is an incentive for efficient workers in theform of extra payment & the rate of bonus isrelated to efficiency in a rational manner

Demerits• The bonus below 100% efficiency is not

attractive.

• It is not liked by below average workers as theydon‟t get any incentives.



d) Bedeaux Point Plan

• In this plan, the minutes of the time unit describedas the standard minutes & accounted as Bedeaux

point “B”.

• The standard time is fixed for each job afterundertaking time and motion study and expressedin terms of B.

• The standard time for a job is the numbers of B‟s

allowed to complete it.• The bonus paid to the worker is 75% of the wagesfor time saved.

• The remaining 25% goes to the foreman.



Merits

• Minimum wages are guaranteed to the workers.

• Since 1/4th of the wages for time saved goes to

the foreman, so he is motivated to get higher productivity from the workers.

Demerits

• Calculation under this plan are complicatedhence workers are not able to understand.

• The workers don‟t like that foreman should their

bonus.



Production Based Incentive Plans

Under the production based incentive plans,a standard of output is determined on

scientific basis and payment of wages ismade on the basis of number of units produced.

Some important production based incentive plans are:



Incentive wage plans

(Based on productivity)

• Taylor Differential Piece Rate Plan• Merrick Multiple Piece Rate Plan

• Gantt Task and Bonus Wage Plan



A) Taylor‟s Differential Piece Rate

system• This plan was suggested by F.W.Taylor.

• In this plan Taylor did not provide

minimum guarantee wages payment eachworkers.

• The lower rate is given to those who are

average or less efficient and give production below the standard workload fixed and

vice-versa.



Advantages

1) Taylor plan makes distinction between efficient workersinefficient workers.

2) It forces workers to be efficient because there is no

guarantee to minimum wages payment of workers.3) This system of wage payment is popular among efficient

workers as they draw more wages under it.

Disadvantages1) There is no guarantee of minimum wages payment to

workers.

2) It treat worker not as a human being but as a machine.



B) Merrick‟s Multiple Piece Rate Plan

• This plan offer three grade piece rates ratherthan two given by Taylor.

• The workers who produce less than 83% ofstandard output are paid at a basic pay rate.

• Those workers producing from 83-100% are paid 110%of basic piece rate.

• And the workers producing more than110% are paid 120%of the basic piece rate.



C) Gantt task and Bonus Plan

• This plan combines time, piece and bonus

systems.

• Standard time for task is fixed.

• If a worker reaches the standard, he will be

paid time wage plus a bonus at fixed

percentage of days wages (20%)• So the actual rate per hour exceeds



Group or Team based Incentive

Plan• Priestman‟s plan

• Co-partnership

• Scanlon plan

• Towne plan



Organisation Wide Incentive Plan

• Profit sharing : is a scheme whereby employers undertake

to pay a particular portion of net profits to their

employees on compliance with certain service conditions.

(annual bonus)

• Employees Stock Option plan : originated in U.S in early90s. The eligible employees are alloted company‟s shares

below the market price.



Fringe Benefits

• Extra benefits provided to employees in

addition to the normal compensation paid

in the form of wage and salary .(extended asa condition of employment but not directly

related to performance)



Main features

• Supplementary forms of compensation.

• Paid to all employees unlike incentives.

• Usually extended as a condition of

employment.

• May be statutory or voluntary.



Types of Fringe Benefits

• Payment for time not work

• Employee security

• Safety measures

• Workmen‟s compensation

• Health benefits

• Welfare and recreation facilities

• Old age and retirement benefits

Documents

Compensation and Incentive Plans