Incentive Schemes

The basic premise underlying incentive wage schemes is that money can be used to induce effort on the part of the employee. The objective is to improve the productivity and this is expected to be achieved by relating increased wage payment with increased productivity.

Types of Incentive Schemes:

Incentive wage schemes could broadly be classified into Individual, Group and Plant wide/Company-wide incentive schemes. This classification and further sub classification arise from the differences in work situations, the differences in the assumed motivational principles, and from different measures of productivity used.

Individual Incentive Schemes:

The individual incentive scheme has two distinct sub-classifications: (1) Payment by results (PBR) system, and (2) Measured Day Work (or Payment by Time) system.

Payment by results System:

The PBR system continuous relation between money and results (output); therefore, different results would fetch different wages. Although, theoretically the PBR schemes should follow,

Acceptable Productivity Level: The level of output rate or productivity above which the incentive wage payment starts is called the Acceptable Productivity Level (APL). This is the pace of work which is considered as ‘normal’ or ‘fair’ band can be expected from and unmotivated but otherwise conscientious and fit workers. Since there are, so many assumptions of ‘normality’ or ‘fairness’ the APL is generally established jointly by management and labor (or by management alone but with implicit approval of the labor).

Motivated Productivity Level: Management is more interested in the Motivated Productivity Level (MPL) which is the incentive pace which can be maintained day after day without any harmful effect on the worker. As with APL, the worker is a ‘normal’ worker, but he is now ‘financially motivated’.

MPL is a function of human ability and of management’s expectations- about an average worker’s productivity derived there from. With the expenditure of a certain amount of additional money management desires to raise the current productivity level to the practicable motivated productivity level. Since the human work ability has a limit and the extra wage costs also have a limit, MPL is used for establishing the APL (with the concurrence of labor).

Participation Ratio: Depending upon the MPL and APL, therefore, the Participation Ratio (i.e. percent increase in wages for one percent increase in productivity) can be established. Note that MPL and APL are physiological and psychological norms, and therefore, the employees can bargain with management, about these norms. The generally presumed relationship is that MPL is one third more than APL (MPL = 4/3 APL), but management and labor may arrive at a different figure. Similarly, the difference in wages at MPL and APL (which is termed Incentive Expectancy) is generally taken as 33% in a large number of countries.

Example: An illustration is given to clarify some of these concepts: Suppose the management has decided to have one –third (33.3%) incentive Expectancy at the MPL of 100 pieces per hour. If the Participation Ratio is 100%, then the APL works out to be 75 (i.e. 100 x ¾) pieces. If the current production rate is 60 pieces per hour, then, under this plan, the workers will start receiving the incentive benefits only after the production rate goes up from 60 to 75 which is a substantial gap. Such a scheme may not be acceptable to the workers. Therefore, another design of the incentive plan could be APL=60 and Participation Ratio=50% (MPL and Incentive Expectancy remain the same).

Ceilings on Incentive Earnings: The PBR system mentioned so far has incentive payment directly proportional to the increase in productivity. An employee can produce more than the MPL of 100 and earn higher wages. There is, literally no limit to an employee’s earnings. But, this situation, many a time may lead to problems in the administration of the incentive schemes:
1. Employees may surreptitiously bring in changes in the methods and increase the output; where there is no such scope for method changes, that set of employees will be disgruntled.
2. Employees may also employ various other devious methods to increase the incentive earnings by the clever use of the pen.
3. The wide disparity between income levels of individuals may produce tension and conflict amongst employees – potentially not a happy situation for the organization in the long run.
4. The earnings of the individual worker itself may vary over different periods of time. Instability in earnings (although higher) may not be very desirable from the individual’s point of view, from the motivational angle, and from the company’s angle in terms of the wide fluctuations in the production output of different operations at different times (problems of coordination of one operation with the other).