REMUNERATION METHODS AND INCENTIVE SCHEMES

Remuneration is the reward for labour and service while incentives are stimulation for extra effort to perform more efficiently by way of monetary and/or non-monetary inducements. Remuneration includes salaries and wages, commission, various allowances and statutory bonus. Monetary incentives refer to those payments which are made in excess over time-rates and piece-rates, and are related to the output of either an individual or a group. We shall discuss in detail afterwards.

Remuneration systems

Wages are paid either on time basis or on output basis. When employees are paid as per hours worked irrespective of the quantum of output produced, the system is called time-rate. When payment is made on the basis of production or output only, it is called piece-rate. A combination of both time-rate and piece-rate is also used. When incentives and bonus are added, various methods of remuneration may be obtained, which are classified as follows :

(A) Time rates i) Ordinary level ii) High wage level iii) Graduated (B) Piece rates

(C) Combination of time & piece rates

(D) Bonus system

i) Straight piece rate

ii) With guaranteed daily rate. iii) Differential piece rates

— Taylor Plan — Merrick Plan

i) Emerson’s efficiency scheme ii) Gantt task bonus scheme iii) Bedaux scheme

Individual bonus —

i) Halsey scheme ii) Halsey Weir scheme iii) Rowan scheme iv) Barth scheme

(E) Bonus system

(F) Other incentive schemes

Group bonus —

i) Priestman’s production bonus ii) Rucker plan

iii) Scanlon plan

iv) Towne gain sharing plan

Monetary —

i) Profit-sharing ii) Copartnership

The aforesaid methods are discussed hereinafter.

A.(I) Time Rate at Ordinary Level

Under this method, payment is made on the basis of time worked, irrespective of the output. Payment may be made daily, weekly, fortnightly or monthly according to the convention and convenience of the organisation. However, such payment must be in conformity with the existing legislation including Minimum Wages Act. Normal wages are calculated for hours worked multiplied by hourly rate of wages. Any overtime work is paid extra.

Application of time rate system is preferred in the following cases :–

1. Where the work demands high degree of skill and quality of production is of utmost importance.

2. Where services cannot be directly measured, e.g. general helper, supervisory and clerical staff.

3. Where machine performs the job and workers have no control over the output as in process industries.

4. Where work is not repetitive, and

5. Where the unit is small and the work requires close supervision.

Advantages of the system are as follows:

(a) Easy to understand and operate.

(b) Easy to calculate, and hence, less clerical work involved. (c) Easier to negotiate rate with the employees and the unions.

Disadvantages of the system are as follows:

(a) No incentive to increase the output.

(b) No distinction between slow, inefficient, fast and efficient workers. (c) Fails to attract better workers.

Prime Cost

A.(ii) Time Rate at High Wages Level

This method is similar to the earlier one, with the difference that time rates are fixed at a higher level compared to rates prevailing in the industry in the neighbouring areas. Overtime is normally not paid. The object is to attract efficient employees who can meet with higher level of productivity, thereby reducing cost per unit in respect of labour as well as overheads. It is very difficult to maintain high level of efficiency over a long period unless adequate measure is taken to keep a careful watch over performance of individual employees. Alternatively, the management can create a work-culture by which the employees are motivated to maintain a sustained level of high productivity.

A.(iii) Graduated Time Rate

Under this method, time rate consists of two elements, such as basic rate which is fixed with the nature of job, and variable element like dearness allowance which depends on local cost of living index, and merit awards for personal qualities of the employee. Though the scheme is favourable to both employer and employees, the determination of a wage index is difficult. The system is complicated and difficult to administer multiple rates for each class of workers.

B.(i) Straight Piece Rate

Under this system, payment is made on the basis of a fixed amount per unit of output irrespective of time taken. Worker’s earning equals to the number of units produced multiplied by rate per unit. Piece-rate may be fixed on the basis of standard time required to produce one unit. The rate is expressed per standard hour. For example, if rate per straight piece rate is Rs. 2 per unit, and two units can be produced in one standard hour, then standard hour piece rate will be fixed at Rs. 4. Hence, if a worker produces 10 pieces, it will be expressed as 5 standard hours and the worker will earn Rs. 4 × 5 = Rs. 20.

Considerable care and judgment are required for fixing piece-rate, as any loose norm will increase labour cost and too high standard will create discontent and may lead to labour unrest. Again, once norm is fixed low, it is very difficult to change it. Piece-rate should, therefore, be determined after time and motion study followed by trial runs. Another requirement for Piece-rate system is that the jobs should be repetitive and standard type, and there should be sufficient jobs to feed the workers continuously. Daily rate as per Minimum Wages Act may have to be paid whose piece-rate will be less than time-rate.

Advantages of the piece-rate system are as follows :–

a) The system is simple to operate and easy to understand.

b) Workers get payment by results, and hence, shall continue to improve and earn more. c ) Employer is benefited by reduced overhead cost per unit.

Disadvantages of the system are as follows :–

a) There is risk of quality to suffer.

b) Increasing production may lead to more defective and spoilage, loss of material, damage of tools and machines, unless supervision is intensified.

c ) Overstrain on the part of the workers will cause frequent absenteeism and bad health. d) Involves more clerical work and document.

e) Maintenance of discipline for arrival and departure may be a problem.

B. (II) Piece Rate with Guaranteed Daily Rate

Under this system, daily or hourly rate is guaranteed to those workmen who cannot achieve the piece-rate norm, and whose earning remains below minimum wages level prescribed by the payment of Minimum Wages Act. When piece-rate earnings fall below time-rate earnings, his time-rate earnings are paid. An alternative plan is guaranteed wages according to time rate plus a piece-rate payment for units above a required minimum. Such a system can operate with a fair production volume or standard by conscientious workers, who will not push the guaranteed time-rate to a high level and thereby, defeating the purpose of piece-rate.

B.(III) Differential Piece Rate

F.W. Taylor, the father of scientific management, introduced differential piece rates in terms of money — a lower piece rate for those who failed to achieve the standard, and a higher piece rate for those who achieved or excelled the performance standard.

Workers were paid as per rates applicable to their output. The difference between the lower and higher piece rates were kept so wide, that an efficient worker was amply rewarded, while a slow worker was punished. There was no guaranteed minimum wages. This is called Taylor’s Differential Piece Rate System.

The following table illustrates the unit cost and earning relationships of five workers who are paid as per this plan :–

1. Standard production 12 pieces per hour. 2. Normal piece rate @ Re. 1 per piece.

3. Differential to be applied @ 90% when below standard, and @ 110% when at or above standard.

Worker Output Lower Higher Total Hourly Overhead

in 8 hrs. rate rate earning earning per pce.

Pcs. Rs. Rs Rs. Rs. Rs Prime Cost A 90 0.90 1.10 81.00 10.125 2.778 B 95 0.90 1.10 85.50 10.688 2.632 C 96 0.90 1.10 105.60 13.200 2.604 D 100 0.90 1.10 110.00 13.750 2.500 E 110 0.90 1.10 121.00 15.125 2.273

NOTE : If overhead per day is Rs. 250, the overhead cost per unit reduces significantly with

increased output.

Advantages of the system are as follows:

a) Simple to understand and calculate. b) High incentive attracts efficient worker.

c ) Where overheads are high, it is more beneficial as reduction of cost per unit of overheads cost more than compensates increased labour cost.

Disadvantages of the system lies in the fixation of higher and lower piece rate differential as

any error may cause a disastrous effect.

Merrick Multiple Piece Rate plan enlarged the differential into three rates, recognising the

difference between beginners, average workers and superior workers None of the rates are below normal rate. In fact, the first piece-rate is adopted at 83 % of the normal rate as indicated below:

Efficiency level Piece rate applicable

— Upto 83 1/3% Normal

— Beyond 83 1/3% and 10% above normal rate upto 100% — Above 100% 30% above normal rate

Thus, this plan rewards the efficient worker and encourages the less efficient workers to increase their output. This method also does not guarantee day wages.