INCENTIVE PLANS

SUBMITTED BY :
SHAURYA THAKUR
5270
SEC-B
SUBMITTED TO :
DR. SHYAM LAL KAUHAL
 WHAT ARE INCENTIVES ?
An incentive scheme is a plan to motivate individual or
group performance.
An incentive scheme basically involves monetary rewards
but also includes non-monetary rewards.
Incentives are payment for performance or payment by
results.
According to Dale Yoder, “Incentive wages relate earnings
to productivity and may use premiums, bonuses or variety
of rates to compensate for superior performance. Under
incentive plan, employees are encouraged to produce more
and are rewarded accordingly.”
 CHARACTERISICS
Incentives have direct linking to performance.
Incentives induce the employee to move from existing
level of performance to optimum achievable performance.
The timing, accuracy and frequency of incentives are the
very basis of successful incentive plans.
Incentive plan encourages attendance and reduces
absenteeism.
Incentives vary from person to person, depending on their
performance.
 OBJECTIVES
The objectives of an incentive plan include one or
more of the following:
1. To increase productivity of individual as well as group.
2. To reduce per unit cost and increase employee’s earnings.
3. To improve industrial and interpersonal relations,
4. To increase profit of the organisation.
 FINANCIAL INCENTIVES
Financial incentives refer to those incentives which are in
direct monetary form or are measurable in monetary
terms.
Profit sharing
Co-partnership
Commission/Productivity linked wage incentives 
Bonus 
Pay and allowances
Retirement benefits
Perquisities
 NON FINANCIAL INCENTIVES
Incentives which are not measurable in terms of money are
known as non-financial incentives. They tend to satisfy
the psychological, social and emotional needs of a person.
Status
Career advancement opportunity
Organisational climate
Job enrichment/Assignment of challenging jobs
Job security
Employee participation
Employee empowerment
Recognition
 REQUISITES
A sound incentive plan should have the following essentials
or requisites :
Simplicity 
Plan should guarantee minimum wage
Worker’s Participation
Economical 
Equitable 
Clear understanding
Prompt payment
Conducive to workers health and safety
Performance Appraisal
Flexibility
 TYPES OF INCENTIVE PLANS
1. Individual Incentives are offered to reward the effort and
performance of individuals.
2. Group Incentive plans reward team members with
incentive bonus when agreed targets are achieved.
3. Organisation-wide Incentives reward people for the
performance of the entire organisation.
In many organisations, managers are paid incentives based on
individual performance and corporate results. The incentives
are higher for senior manager and lower for executives.
INDIVIDUAL INCENTIVE PLANS
Individual incentive plans are widely used for pay for
performance plans in the organisations. The employee has to
produce more, earn monetary benefits and keep it to himself.
1.) Taylor’s Differential Piece Rate System – F.W. Taylor,
the father of Scientific Management, came out with the
system.
Objectives :
a) To provide incentives to workers to produce more
b) To remove the fear of wage cut
In the system, there are two work rates, one is lower and the
other is higher. Those who reach the standard output are
given a higher piece rate. The lower rate is applicable to
those workers whose output is below standard.
 CONCLUSION
1. The system penalise the slow worker and rewards an
efficient worker.
2. It also provides an opportunity to the slow worker to
increase production and earn higher income.
3. It is easy to understand the system.
4. There are number of minimum wage payment to
employees.
5. It treats employees as machines and not as human
beings.
6. Trade unions do not approve of such payment system.
2.) Merrick’s Multiple Piece Rate System – The system is
also based on the principle of low piece rate for slow
worker and higher piece rate for higher production, but it
offers three grade piece rates instead of two. As per the
scheme, up to 83% of standard output, workers are paid at
the ordinary piece rate, 83% to 100% at 110% of ordinary
piece rate and above 100% at 120% of the ordinary piece
rate.
3.) Halsey Plan (Standard Hour Plan) – The plan developed
by F.S. Halsey recognises individual productivity and pays
incentive on the basis of the time saved. Standard time is
fixed for each job. Time rate is guaranteed and the worker
receives guaranteed wages irrespective of whether he
completes the job in the time allowed.
 If the job is completed in less than the standard time,the
workers are paid incentive of 33 1/3% of time saved in
addition to his normal time wages. The system guarantees
minimum wages and provides incentives to efficient
workmen. The worker may overlook quality of production to
save more time and earn higher incentive. Further, fixation of
standard is not easy.
4.) Rowan Plan – The plan is similar to Halsey plan and only
difference is in the method of determination of incentive. The
time saved is expressed as a percentage of the time allowed
and hourly rate of pay is increased by that percentage so that
the total earnings of the worker are the total number of hours
multiplied by the increased hourly wages.
5.) Gantt Task and Bonus Plan – The plan combines time,
piece and bonus systems. Fixed time rates are guaranteed.
Standard time for task is fixed and both time wages as
well as high rate per piece are determined. A worker who
cannot finish the work within the standard time is paid on
time basis. If the worker reaches the standard he will be
paid time wage plan bonus as fixed percentage of normal
wage rate. If the worker exceeds the standards, he is paid a
higher piece rate.The systems guarantee time wages to
ordinary workers. It makes distinction between efficient
and inefficient workers. Labour cost per unit comes down
with increase in production.
6.) Bedeaux Plan – Under the plan, every job is expressed
in terms of standard minutes known as Bordeaux units.
Upto 100% performance, i.e., upto standard units, a
worker is paid time wages without incentive. If actual
performance exceeds the standard performance in terms of
standard minutes, then 75% of the wages of the time
saved is paid to the worker as bonus and 25% is earned by
foreman.
7.) Haynes’ Manit Plan – The plan is similar to Bordeaux
plan with the difference, i.e., the bonus is only 50% and
out of the remaining 50%, 10% is paid to supervisors and
40% retained by employee.
8.) Emerson’s Efficiency Plan – When the efficiency of the
worker reaches 67%, he gets bonus at the given rate. The rate
of bonus increases gradually from 67% to 100% efficiency.
Above 100% efficiency, the bonus is 20% of the guaranteed
wage.
Bonus:
A bonus is an incentive payment that is given to an employee
beyond one’s normal standard wage. It is generally given at
the end of the year and does not become part of base pay. It is
extra payment to workers, over and above normal wage.In
India, the law relating to profit sharing is known as Payment of
Bonus Act and sharing of profit is not linked to performance
but to the level of profit made by the company. The Bonus Act
defines an employee who is covered by it as one earning basic
salary of 2500/- (effective April 1993) plus dearness
allowance.
 The minimum bonus to be paid has been increased to 8.33 per
cent of salary. The Act applies to every factory or
establishment in which 20 or more are employed in an
accounting year. Even if there is a loss, a minimum bonus
needs to be paid, treating the same as deficit to be carried
forward and set off against profits in subsequent years.
Merit Pay:
Merit pay is a reward based on how well an employee has
done the assigned job. The payment is based on individual
employee’s performance. Rewarding the best performer with
merit pay is a powerful motivation. Merit pay motivates the
employees to work hard and achieve the assigned tasks. Merit
pay may be in the form of lumpsum amount or as a percentage
base pay.
Some of the problems in designing a merit pay scheme
are:
1. It is difficult to measure performance objectively.
2. Employees, very often, fail to understand the
connections between merit pay and performance.
3. Bias in assessing performance.
4. The superior may not be a competent evaluator.
 GROUP INCENTIVE PLANS
The plan rewards all team members equally based an overall
performance of the team members. Performance is evaluated
using an objective standard. Payments to team members may
be made in the form of cash bonus or non-cash rewards such
as luxury goods or pleasure trips. Team based incentives can
motivate the members to work as a team rather than brilliant
individuals. It is relatively easy to measure team performance.
A few of the important team-based incentive plans are
given below:
1.) Production bonus – Under the plan, standard is fixed in
terms of units or points. If the actual output exceeds the
standard, the workers will receive bonus in proportion to the
increase.
2.)If the actual cost of production is lower than the
standard cost, a bonus whose money value is a percentage
of the cost reduction is paid. Here, the workers should be
able to influence such cost reduction by working hard,
saving in materials, fuels, lubricants, etc.
3.) The Scanlon Plan developed by Joseph Scanlon is
designed to involve the workers in making suggestions for
reducing the cost of operations and sharing the gains of
increased productivity. The plan has two components, i.e.,
financial incentive aimed at cutting cost and increasing
efficiency and suggestion scheme. The suggestion received
from employees is screened and evaluated by a committee. If
the suggestion is implemented and successful, the employees
usually share 75% of the savings and the balance is set aside
for the months in which labour costs exceed standard cost.
4.) Reduction in labour cost – The main objective is to
bring about cost reduction by supervisors and workers.
Bonus is paid upon reduction in labour cost alone.
 ORGANISATION WIDE
INCENTIVE PLANS
The employees are rewarded on the basis of the success of
the organisation over a specified time period. Those plans
develop a sense of belongingness, co-operation,
understanding and teamwork among employees.
There are three types of incentive plans :
1. Profit Sharing
2. Gain Sharing
3. Employee Stock Ownership Scheme
1.) Profit Sharing :
According to ILO, “Profit sharing is a method of industrial
remuneration under which an employer undertakes to pay
to his employees, a share in the net profit of the enterprise
in addition to their regular wages”.
According to Henry Seager, “Profit sharing is an
arrangement freely entered into by which the employee
receives a share fixed in advance of the profits”.
Features :
1. The proportion of the profits to be distributed is
determined in advance.
2. The amount to be distributed depends upon the profits
earned by the enterprise and is computed on the basis of
agreed formula.
3. The employee should have some qualifications such as
length of service to become eligible for the financial
benefit.
4. Profit sharing is reward for collective efforts of
employees and is over and above wages.
5. That are paid regularly.
6. The extra payment is generally paid in cash. However, it
can be in kind such as equity shares,
7. Profit sharing may be on industry basis, locality, unit,
department or individual basis also.
Objectives of profit sharing :
1. To develop employer-employee relations and
employee morale.
2. To improve efficiency of operations by reducing costs
and increasing output.
3. To eliminate waste in the use of materials and
equipments.
4. To supplement the regular income of the workers.
5. To provide group incentive for higher output.
6. To provide for employee security in the case of death,
retirement or physical disability.
Limitations of profit sharing :
1. The payment is made only when the profit exceeds a
particular limit and therefore the scheme does not
guarantee payment to workers.
2. During period of depression, it may not be possible
for its management to make payment to worker.
3. It gives equal benefit to all workers and there is no
distinction between good and bad performance.
4. Trade unions and workers feel that bonus payment is
better compared to profit sharing.
2.) Gain Sharing :
Gain Sharing aims at increasing productivity or decreasing
labour cost and sharing the gains with employees. When
productivity exceeds the baseline, an agreed savings is
shared with employees. Gain sharing plan increases co-
operation and understanding among workers and teams
and they work for achievement of common
goals. Example- Scanlon plan aims at cost cutting and
increasing efficiency of operations and sharing the gains
with employees. It also includes suggestion scheme for
cost-cutting.
3.)  Employee Stock Plans :
 Employee Stock Plan is one of the important pay for
performance devices to attract and retain promising
employees. It commands employee loyalty. Stock options are
tremendous motivators because they directly link
performance to the marketplace. The principle of stock
option is to let employee add value to the company and
benefit from it.
It is a form of compensation which enables the employees to
purchase shares of their company and gain from possible
rises. Under the scheme, employees who are eligible for
receiving the award are they offered specified number of
shares. They gain when the share prices go up. Stock options
create wealth for employees without involving large cash
flow to the company.
Types of employee stock plans :
1.) Employee stock option scheme – The Company grants
an option to its employees to acquire shares at a future
date. The options are offered at a predetermined price.
2.) Employee stock purchase plan is followed in listed
companies – The employees are given the right to acquire
share of the company immediately after they earn them
based on length of service/performance, normally at a
price lower than market price. Shares issued will be
subject to lock-in period during which the employee
cannot sell them.
3.) Restricted stock plan – The employee need not put in
money. However, shares are subjected to some
restrictions. The employee has to continue to work in the
company for a specific period, otherwise shares may be
forfeited.
4.) Phantom stock is a special type of stock option scheme
that protects the holder against any depreciation in the
value of stocks
Advantages of Stock Plan:
1. Employee remains loyal and committed to the company.
2. Develops long-term relations between employer and
employee. The employees feel that they are owners of
the company and not just paid servants.
3. Develops teamwork among employees.
4. Reduces employee turnover.
5. The companies are able to attract and retain employees.
6. The scheme links compensation to performance.
Limitations of stock plan :
1. The scheme can be implemented only by profit-making
companies.
2. Falling share prices lead to losses.
3. Employees are forced to continue employment with the
company for availing the scheme.
 REFERENCES
https://www.economicsdiscussion.net/human-resour
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https://astronsolutions.net/incentive-plans/#:~:text=
What%20is%20an%20incentive%20plan,for%20the%
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