Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. The primary advantage of incentives is the inducement and motivation of workers for higher efficiency and greater output. It may not be difficult to get people for fixed wages and salaries. But with fixed remuneration, it is difficult to motivate workers to show better performance. Fixed remuneration removes fear of insecurity in the minds of employees. A feeling of secured income fails to evoke positive response. Positive response will surely come when incentives are included as a part of the total remuneration.
Earnings of employees would be enhanced due to incentives. There are instances where incentive earnings exceed to three times the time rated wages or salaries. Increased earnings would enable the employees to improve their standard of living.
There will be reduction in the total as well as per unit cost of production, through incentives. Productivity would increase resulting in a greater number of units produced for given inputs. This would bring down the total and unit cost of production.
Production capacity is also likely to increase. The Bangalore based Wheel and Axis Plant, for example, has a production capacity of 77,000 wheels and 48,000 axles as against the initial capacity of 56,800 wheels and 23,000 axles. The higher capacity has been achieved as a result of the implementation of the recommendations for the adoption of a group incentive scheme carried out by the Rail India technical and Economic Services.
The other advantages of incentive payments are: reduced supervision, better utilization of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover and increased output. Further more, systems of payment by results would, if accompanied by improved organization and work measurement, enable firms to estimate labor costs more accurately, than under the system of payment by time. This would facilitate the application of cost control techniques like standard costing and budgetary control.
Apart from the benefits cited above, incentive packages are a very attractive proposition for management because they do not affect employersâ€™ contribution to the provident fund and other employee retirement benefits.
On the other hand, systems of payment by results may have disadvantages. There is a tendency for the quality of products to deteriorate, unless steps are taken to ensure maintenance of quality through checking and inspection. This involves added expenses. In some cases, it may not be possible or may be too expensive to maintain quality fully and the benefit gained in the form of increased output and lower cost may be offset to a considerable degree by deterioration in the quality of the products.
Difficulties may arise over the introduction of new machines or methods. Workers may oppose such introduction for fear that new piece or bonus rates set, when the job is restudied at intervals of time, may yield lower earnings; or when new machines or methods are introduced; they may slacken their rate of work in order to avoid rising output to a level which would make a restudy of the job necessary. Costs may not, therefore be lowered to the extent that would be necessary if the workers were on time-based work. Most trade unions agree that cuts in piece or bonus rates are justifiable in such circumstances; but individual workers may not share this view, and the output and the level of costs may be affected accordingly.
Workers tend to regard their highest earnings as normal and therefore press for a considerably higher minimum wage when they are paid by results than when they are paid by the hour. Payment by results may, therefore, lead to higher labor costs in certain industries such as paper making and coal mining, where workers experience, for reasons beyond their control, good and bad runs. Their earnings on the days they have good runs are apt to be regarded by them as normal earnings.
One of the greatest difficulties with the incentive systems is in the setting of piece or bonus rates. Rate fixing involves delicate problems of judgment in which there is always a risk of error. If rates are set too low, workers are bound to be dissatisfied and will be under pressure to work very hard. If rates are set too high, workers may slacken their efforts at times so that, their employers may not have reason to ask for a revision of rates because the earnings are too high. Worker sometimes decide approximately how much they feel they wish to earn and are, therefore, not interested in working for that part of the day which remains after they have earned the amount they want.