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 What is a Reward?
Performance-Linked Pay
A reward is a benefit that is provided in recognition of
achievement, service, commendable behavior, etc. A reward
is given to an employee only after he / she has provided
evidence of his /her positive behavior and achievements. The
aim of a reward is to show the employees that their work and
effort are valued, and is given as an appreciation for the work
already completed, as well as a motivation to keep improving
their quality of work. Rewards can be in the form of money
or can even be non-monetary in nature. Monetary rewards
Dr. Urvashi Sharma may be in the form of salary increments, bonuses, etc.
Examples of non-monetary rewards include promotions, paid
time off, flexible work hours, etc.

 What is an Incentive?
What do incentive mean?
Incentives are benefits that are promised to employees to
motivate them to achieve their best and to improve their
behavior, productivity, and output continuously. Incentives
are granted to workers that perform below par, and to
An incentive scheme is a plan or program to
encourage them to achieve the desired level of performance motivate individual or group performance. An
or set goal. An example of an incentive would be, “rewarding incentive program is most frequently built on
a $200 gift certificate to an employee achieving 30% increase monetary rewards (incentive pay or a monetary
in sales for the month.” Examples of other incentives include bonus)
sales commissions, employee stock options, better offices and
work spaces, higher allowances, etc. The aim of an incentive
is to motivate and encourage employees to achieve desired
performance, efficiency, and levels of output.

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WHAT DO YOU MEAN BY FUNDAMENTAL OBJECTIVES OF

INCENTIVE WAGE PLANS? WAGE INCENTIVE PLANs
 Incentive wage systems are considered to be
 A set of well-defined and communicated incentive
incentive management systems.
wage system aims at rewarding the employee more
effectively for his efforts and services rendered to the
 Traditionally, incentive wage plans have been
thought of as payment plans based on the output of firm than the simple base pay system. It aims at
the employee. bringing congruency between the objectives of
management and those of the employees.
 But incentive wage systems of today go far beyond  The objectives of incentive wage systems have been
the simple single objective of payment for output. made clear by McGregor (1960) when he defines
them as “ A FORMAL METHOD PROVIDING AN
 Now-a-days incentive wage systems are so OPPORTUNITY FOR EVERY MEMBER OF THE
designed that the employee feels satisfied ORGANISATION TO CONTRIBUTE HIS BRAIN
intrinsically as well as extrinsically. AND CREATIVITY AS WELL AS HIS PHYSICAL
EFFORT TO THE IMPROVEMENT OF
ORGANISATIONAL EFFECTIVENESS…..”

Benefits
 Incentive wage systems provide the
To business To employees
opportunity for development to each and
every employee by linking pay to efforts for  retain existing employees  enhance the quality of working
development.  increase their motivation, morale life
and loyalty  reward employee efforts
 They aim at increasing the pride of the worker  boost productivity  add value to the employment
in himself and his job.  link individual and business contract
 They also attempt at seeing that each performance
 focus employees on achieving
employee gets paid accurately for what he targets
does, in direct proportion.  build teamwork
 Indirect benefit, e g free health
assessments may reduce absences.

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SYSTEMS OF WAGE PAYMENT INDIVIDUAL INCENTIVES

& INCENTIVES : PLANS:
 Individual payment schemes include
payment by results, piecework and bonuses,
work measurement (including measured day
work) and appraisal and performance related
pay
 Many sectors of employment use pay
systems that contain direct links to
individual performance and results.

HALSEY PREMIUM PLAN :

1. BASED ON TIME:
a) Halsey Plan  The slow worker is paid time wages and efficient worker is
paid some bonus in addition to the time wages ( normally
b) Rowan Plan 50% of wages for the time saved).
 For example:
c) Emerson Plan
d) Bedeaux Plan Standard time(s) = 10 hours
Rate (R) =Rs 4 per hour
Time Taken (T)= 6 hours
Rate of bonus (P)=50% of time saved
TOTAL WAGES = T X R+(S-T)XP X R
=6X4+(10-6) X 50%X4
= Rs 32.00
In halsey plan, the employee gets 33.33% benefit of wages for
the time saved.

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ROWAN BONUS PLAN BEDEAUX PLAN

 It is similar to halsey plan except the calculation of bonus.
Here bonus is calculated by taking proportion of time saved  In this plan, standard time is expressed in minutes
to standard time. and are known as Bs.

 Bonus is paid to the worker at the rate of 75% of

 EARNINGS=HOURS WORKED x RATE PER
the waged for time saved, the rest 25% goes to the
HOUR+(TIME SAVED /STANDARD foreman.
TIME x HOURS WORKED x RATE S= standard time
PER HOUR) T= actual time
R= rate of wages
Total wages (w)= S x R + 75% of value of time
saved

EMERSON PLAN
 A minimum wage is guaranteed to the workers. 2. BASED ON PRODUCTIVITY:
Conditions of work are standardized and a standard output a) TAYLOR PLAN
is fixed which is to be completed within a specified time . b) GANTT TASK & BONUS WAGE PLAN
 The pattern of incentive under this plan is as under:
if workers output is:
# less than 66.7% of the standard, he gets time wages.
# 66.67% to 80% of the standard, bonus payable is 4%.
# more than 80% till 90%, bonus is 10%.
# between 90% to 100% bonus is 20%.

After 100% 1 per cent bonus is given for every additional

1% efficiency.

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GANTT TASK & BONUS WAGE

TAYLOR PLAN PLAN
 Standard task is established. Two piece rates
are laid down.  DEVELOPED BY HENRY L. GANTT.
 The lower rate for those workers who fail to  A worker who fails to complete the task
complete the standard task within the within the standard time receives wage for
allotted time and higher rate for those who actual time spent at the specified rate.
complete the task within or less than the  Workers who achieve or exceed the standard
standard time. get extra bonus varying between 20% to 50%
of the hourly rate for the time allowed for the
task.

Group Incentives Scanlon plan

 It was developed by Joseph Scanlon of the

United Steelworkers of America in 1927.
 It has two main aspects:
 Adopting a measure for increased productivity.
Compensation system which links pay to a  Sharing the gain accrued from that increased
group's combined performance measured by productivity.
reduction in costs, increase in productivity,
progress in attaining firm's objectives, etc.

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There are four degrees of

Scanlon plan today have 4 principles:
cooperation in this plan:

 Identity
 Information cooperation by gathering  Participation
information.
 Equity
 Advisory cooperation through the process of
 Managerial competence
consultation.
 Constructive cooperation by making
suggestions for improvement.
 Joint union-management decision making.

Rucker plan The procedure used is:

 Identify a base period that provides data that will

be valid and useful for establishing standards.
 It was developed by Eddy Rucker Nickels  Generate data
Company.  Sales Value of Production (SVP).
 The philosophical base of this plan is same  Cost of Materials, supplies, services, etc.
that of Scanlon plan but a major difference is (COM).
the base used to establish a measure of  Cost of Labor (COL).
productivity.
 It is the value added by manufacture for each
dollar of input of payroll costs.

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 Using these data, make the following standards: Individual Incentives

 Value added (VA)= SVP-COM.
 Labour Contribution to VA (LCVA)=COL/VA.
 Under a system of individual incentives,
 Economic Productivity Index
(EPI)=1.00/LCVA. all or a portion of an individual’s pay is
 Expected Value of Production tied to their performance.
(EVP)=EPI*COL.
 Labour’s contribution to savings are deposited
in a bonus pool with two-thirds of the bonus
paid to the employees monthly

Team / Group Incentive

Group Incentives
Plans
 Improve Organizational  Gain-Sharing Plans
Performance  Profit Sharing Plans
 Organizational Measures  Earnings-at-Risk Plans
 Measured Periodically

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Principal Pay Strategies How to make PRP effective?

1.Performance-related Pay:-  Integrating with performance management by

 Pay systems where the pay received by the employee is managers who have the willingness and the skill to
varied according to the work output achieved. manage.
 In addition to payment-by-results it also includes  Trust between the manager and employee
merit-based approaches.  Measurable work activity with validity and reliability
 It consists of three sequential stages which are:-
 Systematic assessment of performance.
 Measurement needs
 System of measuring individual employee performance
against those measures
 Assessment of performance

Variable Pay Variable Pay: Incentives for

Performance
A pattern where the employer divides an employee’s
Some people perform better Better performing employees
salary into two parts—fixed and variable, whereby and are more productive than should receive more
the fixed part of the salary is credited to an others compensation

employee every month and the variable aspect

follows as per the goals and targets achieved. Variable
 Variable pay is: Pay Assumptions

 not a part of salary

 not guaranteed Part of compensation should Some jobs contribute more
be tied directly to to organizational success
 based on individual, group, or organizational performance and results than others
performance.
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Successful Variable Pay Plans Common purposes of variable pay include:-

 rewarding individual performance,

Effective Incentive Plans  rewarding group performance (e.g., completing a
project, meeting organizational objectives, reducing
costs),
 encouraging employees to increase productivity, and
 controlling payroll costs.
Plan Rewards the
Plan Fits the Plan effectively
Appropriate
Organization Administered
Actions

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Why Variable Pay Plans Fail Benefits of Variable pay plan

 Encourage team-work
Plan incentives are Plan doesn’t reward
not seen as desirable doing a good job  Promotes open lines of communication
 It aligns rewards with key business priorities

Employees’
 Links compensation with profitability
View of Variable Pay
Plan  Provides job stability
Plan rewards
teams/groups rather Plan doesn’t motivate
than individuals

Plan doesn’t increase

base pay

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Individual Incentives
Types of Variable Pay Plans
• Piece-Rate Systems
–Straight piece-rate system
–Differential piece-rate system
• Bonus
• “Spot” Bonuses
• Special Incentive Programs
–Performance awards
–Recognition awards
–Service awards
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Why Organizations Establish Variable Design of Group/Team

Pay Plans for Groups/Teams Incentive Plans
Group/Team Incentive Plan
Issues
Group/Team-
Based Variable
Pay Plans

Decisions About
Distribution of Timing of
Group/Team
Improve Group/Team Group/Team
Increase Incentive
Improve Tie pay to team customer service
employee Incentives Incentives
productivity performance or production
retention
Amounts
quality

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Group/Team Incentives
Conditions for Successful
• Distributing Rewards Group/Team Incentives
– Same-size reward for each member
– Different-size reward for each member

• Problems with Group/Team Incentives

– Rewards in equal amounts may be perceived as “unfair”
by employees who work harder, have more capabilities, or
perform more difficult jobs.
– Group/team members may be unwilling to handle
incentive decisions for co-workers.
– Many employees still expect to be paid according to
individual performance.

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Organizational Incentives Framework Choices for a Profit-Sharing Plan

Profit Sharing

Primary Objectives Drawbacks

• Increase productivity and • Disclosure of financial

organizational performance information
• Attract or retain employees • Variability of profits from year
• Improve product/service to year
quality • Profit results not strongly tied
• Enhance employee morale to employee efforts

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Employee Stock Plans Employee Stock Plans

• Stock Option Plan
– A plan that gives employees the right to • Employee Stock Ownership Plan (ESOP)
purchase a fixed number of shares of – A plan whereby employees gain significant stock
ownership in the organization for which they work.
company stock at a specified price for a
– Advantages
limited period of time.
• Favorable tax treatment for ESOP earnings
• If market price of the stock is above the • Employees motivated by their ownership stake in
specified option price, employees can the firm
purchase the stock and sell it for a profit. – Disadvantages
• If the market price of the stock is below the • Retirement benefit is tied to the firm’s future
specified option price, the stock option is performance
“underwater” and is worthless to • Management tool to fend off hostile takeover
employees. attempts.
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Executive Compensation Forms of Performance-Linked Reward System

Executive Salaries  Merit pay

 Skill-based pay
Executive Benefits
 Bonus schemes
 Team rewards
Elements of
Executive Perquisites
Executive
 Organization-based schemes
(Perks)
Compensation  Annual bonus
Annual Executive Incentives  Gain-sharing
and Bonuses
 Profit-Sharing
Performance Incentives:  EVA
Long Term vs. Short Term
 Stock Options

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Merit-based Pay or(Individual Performance-related

pay) Skill-based Pay

 It involves the following steps:-  Links pay to the level of schemes used in the job and
– Determination of result-oriented merit rating application of additional skills by the persons
procedures. carrying the job.
– identifying job factors and their relative importance.  It can take two forms :-
– Formulation of a scale of reward.  Conventional
– Communication of the basis of monetary reward  Progressive

Bonus Schemes Individual Incentive Plans

 Advantages  Disadvantages
 Relates the pay or part of the pay received by the
 Rise in productivity  Conflict may arise
employee to the various aspects like-
 Lower production costs  Resistance by the
— number of items they produce or process
 Increases earnings of employees towards new
— Time they take to do a certain amount of work technology
workers
 Types :-  Increased turnover of
— Individual piece work employees
— Work measure schemes
— Measured day work

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Team Rewards Gain-sharing plans

 Advantages  Disadvantages
 Gain-sharing Plans:- a formula-based
a. Enhancement in a. Do not pay more for
organisation or factory-wide bonus plan, which
coordination, better performance
provides for employees to share in the financial
teamwork, and sharing b. Lesser motivation
made by a company as a result of its improved
of knowledge c. Pays bonus even when
performance.
b. Social needs are the is not earning
 It is different from profit-sharing plans. recognised profits
c. Acceptance of change
d. Employees produce
ideas an efforts
e. Focus on cost-saving

Profit-sharing Plan Group Incentive Plans

 Plans which require a designated profit target to be Advantages Disadvantages

met before any payouts occur.
 Positive impact on  Line-of-sight may be
organisation and lessened
individual performance  Increased turnover
 Cooperation is a  Increased
desired behaviour compensation risk
 Increased participation
of employees

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Organization-based Schemes Questions???????

 Annual bonus  Gain-sharing v/s profit-sharing???

 Goal-sharing plan  Variable pay?
 Profit-sharing plan  Inividual piece work?
 ESOP  Merit-Pay – category????
 EVA  Types of variable pay???

THANK YOU

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