PRODUCTIVITY LINKED INCENTIVES IN

SERVICE SECTER
DEFINITION OF PRODUCTIVITY

 Productivity is the amount of output per unit of input.

 Input element in an organization consists of resources
used in the product creation process, such as labor,
material, energy.
 Output consists of a given product, service and the
amount of both.
 In case of service sector the output has two aspects
quantitative and qualitative aspects.
Therefore definition of productivity in service
sector………

Productivity = Quantity of output and quality of

output
Quantity of input and quality of
input

PRODUCTIVITY ASPECTS
Output Measurement

1.Measure of the aggregate value of goods or services sold.

2.Gross Output - Intermediate Outputs
3.Involves using information on the relative prices of the goods and services
as weights.
4.While measuring productivity value measures of output are then
transformed into volume measures using price indices.
5.The main input is labor, and the total hours actually worked (THAW) is
the preferred measure of labor output.
6.Based on the assumption that the mix of different kinds of job is much the
same at different time examined.
7. A possible approach to capture the differences in the productivity is given
by the indicator of THAWCP.
8. The weighting scheme adopted is of simplified method to capture the
quality of input of labor.

TECHNIQUES FOR MEASURING

PRODUCTIVITY
1.Productivity is typically measured relative to some benchmark.
2.Productivity measures include single factor productivity and multifactor
productivity measure.
3.A non- parametric technique.
4.Includes Data Envelopment Analysis.
5.Takes data on organizations outputs and inputs and measures the
efficiency of a particular organization by its distance from the ‘outer
envelope’ of the data
6.The technique relies on the use of extreme observations in

5 WAYS TO IMPROVE PRODUCTIVITY

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PRESENT REMUNERATION SYSTE

The present wage system may be in the form of
1.Salary scale
2. Salary range
3. Minimum and maximum annual increment
4.Collective bargaining

PRODUCTIVITY LINKED INCENTIVES IN

AIRLINES
(INDIAN AIRLINES)
WEAKNESS IN PRESENT REMUNERATION
SYSTEM
1.The general trend of wage increase is rapid and not related to productivity
improvement.
2.Annual increments are pre-determined and are given automatically to all
workers regardless to the level of performance.
3.Remuneration is not related to company performance.
4.Collectively agreements are usually fixed of RA period of three years and
are binding to both parties.
5.Terms in the collective agreement cannot be reduced even when a new
agreement is being concluded.

REASON FOR LINKING PRODUCTIVITY

WITH REMUNERATION
Linking productivity with remuneration make the
following assumptions:

1.Higher wages for worker and higher profits for companies

2.Greater competitiveness for competitors
PRODUCTIVITY LINKED REMUNERATION
SYSTEM
The productivity linked incentive model the wage has
four
Components:

1.Fixed component
2.Basic wage
3.Annual increment
4.Variable component linked with “productivity”&
“performance”.

FORMULATION

T=A+
 P
Where,
T= Wage increase
P=Variable productivity payment.
A=Annual increment

EXAMPLE
If basic wage is equal to Rs.2500 pm, A= 5%, P=4%

Basic wage + A = Rs.2500 + 5% of Rs.2500 = Rs. 2625 per

month

P = 4% of Rs. 2500 12= Rs.1200 per annum

Total increment = Rs. 225 per month.

PROFITABILITY MODEL

In this model, the fixed component includes the basic wage

and an annual increment. The variable component will be
determined using a profit-sharing formula where:
1.The formula is to be agreed upon between the
management and union and reviewed periodically.
2.Wage incentive is paid if profits exceed a pre-determined
or threshold level, which can be calculated, based on
absolute or relative form or average profit earned over a
number of years as follows:

Absolute form:
1.Trading or operating profit
2.Net profit before tax
3.Profit after tax
Relative form:
1.Return on sales
2.Return on equity
3.Return on assets
MEASUREMENT OF INCETIVES:
*Incentive schemes in Public Secto
*Budget based reward system, where the reward is
calculated on the bases of the comparison of objectives and
results.

FACTOR FOR SUCCESSFUL IMPLEMENTATION:

1.Satisfactory labor management relationship.
2.Realistic annual increment.
3.Challenging and equitable variable payment.
Wage system should be:
* Specific
* Measurable
*Achievable
* Realistic.

PRODUCTIVITY LINKED INCENTIVES IN INDIAN AIRLINES

1.Staff of Indian Airlines getting PLI, the increase in its fleet size will
improve the aircraft-employee ratio.
2.Under this scheme employees are paid monthly incentives depending upon
the performance of the airline.
3.Parameters
4.Firstly, timely availability of aircraft for flying.
5.Secondly, time taken by aircraft for major maintenance purposes.
6.Thirdly, number of passengers’ carried and on-time performance.

PRODUCTIVITY MEASURES OF BANK

• *Increase Of Productivity through strategic delivery assessment: -

1. Increase customer satisfaction.
2. Effectively manage production service delivery to exceed customer needs.

Increase of productivity through

Performance improvement:-
1.Identify line-of-business improvement initiatives to increase productivity
and efficiency
2.Compare functional level performance to institutions of similar asset size.
3.Develop industry performance indicators that are specific, actionable and
measurable.
4.Reduce cost and improve income through evaluation of alternative
5.Implement changes and measure their success.
6.Ensure tasks are completed on time and within budget.

Increase of productivity through sales

force development:-

1.Develop measurement-reporting structures to track employee performance.

2.Develop measures; thresholds and weights that clearly indicate expected
performance levels.
3.Balance sales and service.
4.Ensure systems properly reward top performers.
5.Improve and standardize work processes.
6.Balance staffing required and service expected with predictive models
and routines.

Benefits of PLWS:
1.The system will ensure that employees obtain fair share of the gains form
Productivity / Performance improvement
2. Provides motivations or good performance.
3. Provides a more flexible wage structure that is able to withstand economic
uncertainties.
4.Enhances competitiveness in the global economy.
5.Ensures job stability and reduces the likelihood of retrenchment in bad
times.
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CASE EXPERIENCE 1
Profitability-liked bonus
(Extracted from a collective agreement concluded)
Fixed Bonus:
The Company shall pay an annual guaranteed bonus equivalent to one
month of the last drawn basic salary
Variable bonus:
Should be company make a profit of Rs. 4,000,000/= to Rs. 2,500,000/=, the
company shall pay one half (1.5) month of the last drawn basic salary bonus
Profits exceeding Rs. 3, 000,000/=, bonus payment shall be two months of
the last drawn basic salary Notwithstanding the above, the guaranteed bonus
of one month, base on last drawn basic salary, shall continue to be
applicable.
Example 1
Allied Signal is a highly diversified worldwide company that develops and
manufactures components and systems for the aerospace, automo¬tive,
chemical, fibers and plastics industries. As part of their growth and
manufacturing improvement strategy, Allied Signal implemented a program
called: “Winning Together” in order to increase both employees’
productivity and their vested interest in the company. Since its inception, the
“Winning Together” Program has been expanded to many of Allied Signal’s
plants and has generated over $250 million in savings, over 40 times its
costs.

Example 2
Avid Technology revolutionized the entertainment industry by changing the
way motion pictures, commercials, broadcast news and TV shows were
edited. However, internal structure was sacrificed at the expense of extreme
growth until Avid began losing stock value and saw decreased customer and
employee satisfaction. Under new leadership, Avid re-pieced together its
compensation plan, which included a plan based on earnings-per-share, a
profit-sharing program (the former and the later both based on ROIC - return
on invested capital) and a restructured stock option program. In order to
retain critical hardware and software development talent, base salaries and
retention bonuses were adjusted based on the productivity of individual
employees. As a result, turnover fell dramatically and profitability soared,
aptly reflected in the quintupling of Avid’s stock price.

Example 3
Blanchard Training & Development Inc. (BTD) is a management training
and consulting firm located in Escondido, California. Founded in 1979 by
Ken Blanchard, coauthor of The One-Minute Manager (New York: Berkeley
Publishing Group, 1986), and his wife, Margie, BTD employs a particularly
effective form of recognition to keep employees motivated called “Eagle
Awards”, which are presented to individuals who have gone above-and-
beyond their job roles to assist a customer or a co-worker. Though incentives
do not include monetary awards, customer service has become the number 1
priority of BTD as company employees (who have become invested in the
program) have begun to recognize one another for their achievements, which
has led to overall improvement for the company.

Example 4
Burke, Inc. is a leading international business research and consulting firm
helping manufacturing and service companies understand and accurately
predict marketplace behavior. As an incentive to retain its top performers,
Burke decided to develop a performance-focused plan benefiting the senior
consultants who provide a direct link between Burke, Inc. and its customers.
Senior level consultants were provided with the resources to effectively “run
their own business” within the organization. As a result, costs and turnover
have decreased and profitability and management capabilities have
increased.
Example 5
The Coca-Cola Company leads the global beverage industry in volume,
profitability, growth and innovation. The company is managed from an
economic value added (EVA) and economic profit viewpoint to keep profits
high and maintain a high return to investors. Compensation programs were
realigned to give value to stockholders by creating variable pay programs to
focus on economic profit. Two compensation programs were designed. The
annual incentive program provides rewards to high performing divisions,
while the stock option program provides options, based on a percentage
scale, to all employees depending on performance. Both programs have led
to increased profitability for the company and an amplified stock price for
investors.