Performance Related Pay

Employee performance = f (S,K,M)

where:
S = Skill and ability to perform task
K = Knowledge of facts, rules, principles, and
procedures
M = Motivation to perform

Behavior = f(M, A, E)
Where, M = Motivation, A = Ability, E = Environment
Efficiency

Equity/Fairness

Compliance
 Performance Related pay
Performance-related pay (PRP) is a method of
remuneration that links pay progression to an
assessment of individual performance, usually
measured against pre-agreed objectives.

Performance pay schemes link pay to a measure of

individual, group or organizational performance.
The objectives of PRP systems
1. Encouraging high performance levels by linking performance
to pay - The use of PRP can act as an important lever for wider
organizational change by motivating employees to perform
better.

2. Embedding an entrepreneurial or high-performance culture

across an organization - While PRP can help to send out a
message in this respect, there are other (non-monetary) ways of
communicating the need for high performance.
 
3. The notion of equity or fairness - There is more widespread
acceptance of the effectiveness of PRP in this respect – that it is
right and proper that employees who perform better at work
should be rewarded more highly.
1. Individual performance related pay
Individual incentives may be of two types:
 
A. Specific pay for performance plans : short term

B. Individual incentives plans

 A typical merit pay scheme

Well Well
Above Below
Above Average Below
Average Average
  Average Average

Performance rating 5 4 3 2 1

Merit pay increase 15% 10% 5% 3% 0%

 Mr. X gets INR 15000.00, as monthly gross salary.

 If his performance rating is 5, then 15% increase will be in his salary.

 Therefore, his gross monthly salary will be INR 15000.00+15% of INR

15000.00 = INR 17250.00

Or

 If the company considers the increase of 15% in basic, then, for

example, earlier basic was INR 4000.00, after increase it becomes INR
4600.00
Lump-Sum Bonuses
 
Based on employee or company performance, employees
receive an end-of-year bonus that does not build into
base pay.

Since employees must earn this increase every year, it is

viewed as less of an entitlement than merit pay.

Lump-sum bonuses can be considerably less expensive

than merit pay in the long run, for an inconsistent
performer.
 Individual incentive plans
A Straight Piecework Plan: employees are paid based on the
number of the units produced , at a given rate per unit.

Piece rate standard (determined from time study): 20 units/hour    

Guaranteed minimum wage (even if standard is not fully met):
INR 50 / hour      
Incentive rate (for each unit, if over 20 units, per hour): INR 2.5 /
unit      
                 
Worker Output   Wage          
       
20 units or less / hr INR 50 / hour (as guaranteed)
       
Standard hour plan

It is a generic term for plan setting the incentive rate based

on completion of a task in some expected time period.
Example:

A job needs 4 hours to finish. The employee cost per hour is INR 100.
therefore, the cost of the job is INR 400. If the employee finishes the job
before 4 hours, the cost saved (surplus from what the customer paid) will
be split between the company and the employee.
 Bedeaux plan (modified Standard Hour Plan):

It divides the task into simple actions. Standard time fixed for performing each job
component is expressed in terms of Bedaux point or ‘B’. The employee is paid for
the time of actual hours worked, and 75% of the wages for the time saved, as bonus.

Example:
A task consists of total 2 components. Component X needs to be accomplished by 15
hours. Component Y needs to be accomplished by 5 hours. If the labor cost per hour
for component X & Y INR 23 and 11 respectively, then the total cost will be: INR 23 x
15 +INR 11 x 5 = INR 400.
Therefore, Standard time = 20 hours. Avg. payment per hour = INR 20.00

An employee has taken 16 hours . The worker has saved 4 hours. Standard payment for
time saved = INR 80 . Bonus = 75% of INR 80/- = INR 60
So his total earnings=
Actual time taken @ INR 20 per hour + Bonus 75% of 4hrs wages = INR. 320 + INR 60
= INR 380
A task consists of total 3 components. Component X needs to be
accomplished by 5 hours. Component Y needs to be accomplished by
5 hours, component Z needs to be accomplished by 2 hours . The
labor cost per hour for component X , Y , and Z are INR 25, 15, and 10
respectively.

An employee has taken total 8 hours to finish the task. Calculate his
total earning, as per Bedeaux Plan.
 Taylor Plan
Under this system, two piece rates are applicable on the basis of
standard of performance established. Accordingly one is higher
rate and the other one is lower rate. Thus higher piece rate is
applicable for standard and above the standard performance. Lower
piece rate for those workers with below the standard performance.

Standard production 50 units per hour. Piece Rate per unit = Rs.
2.00. Per day, standard production = 8 x 50 = 400.
80% of Piece rate for below standard. 120% of Piece rate at or
above standard.
In a day of 8 hours, A produced 300 units and B produced 450 units.

For A , earning = 80% of Rs. 2.00 x 300 = Rs. 480.00

For B, earning = 120% of Rs. 2.00 x 450 = Rs. 1080.00
 The Merrick Plan

The Merrick system operates in 3 piecework rates: (1) high-for production exceeding
100 percent of standard; (2) medium-for production between 83 and 100 percent of
standard; and (3) low-for production less than 83 percent of standard.

Less than 83% performance = Basic Piece Rate (generally lower than the market
rate)
From 83% to 100% performance = 110% of Basic Piece Rate
More than 100% performance = 120% of Basic Piece Rate

Example:
Basic rate Rs. 5 per unit, Standard production per hour 10 units, therefore, per day = 80 units

In an 8 hours a day:
A produced 70 units (87.5%)
B produced 90 units (112.5%)
C produced 65 units (81.25%)

A’s earning = 110%(Units Produced x Normal Piece Rate) = Rs. 385.00

B’s earning = 120%(Units Produced x Normal Piece Rate) = Rs. 540.00
C’s earning = 100%(Units Produced x Normal Piece Rate) = Rs. 325.00
In a day of 8 working hours, Mr. X produced 75 units
and Mr. Y produced 100 units.

Standard production = 10 units per hour

Piece rate = Rs. 10 per unit

Calculate the earning of Mr. X & Mr. Y, as per (i) the

straight piece rate (ii) Taylor’s differential piece rate
(80% wage- below standard, 120% wage -above
standard).
Calculate the earnings of Mr. X, Y, & Z, under Merrick
differential piece rate system, based on the following
information:

Standard sale per hour = 12 units

basic comp. rate per unit = INR 6.00

Mr. X sold 64 units in a day

Mr. Y sold 84 units in a day
Mr. Z sold 100 units in a day
 Halsey 50-50 method
Total Earning=Guaranteed Time Wages for the time taken+ Bonus of 50% of
wage on time Saved
Example:
A particular task generally requires 5 hours to be accomplished.
Hourly rate = INR 150 /per hour
An employee finishes the same task in 3 hours.
The saving of time = 2 hours
The saving of INR 150 x 2 = INR 300 will be 50 – 50 split between the
company and the employee.
Therefore, the employee will get for finishing the same task in 3 hours:
INR 150 x 3 + 50% INR 300 = INR 600
Following the Halsey Premium Plan (50-50), calculate
the earning of employee A :

Time allowed for job = 20 hours

Time taken = 15 hours
Comp. Rate per hour = INR 1.50
 Rowan plan
Bonus is that proportion of the wages of the time taken which the time saved
to the standard time allowed .
Bonus = (Time Saved/Standard Time) x Time taken x hourly rate
Total earning = (Time Taken x Hourly Rate ) + (Time Saved/Standard Time) x
Time taken x hourly rate
Example:
Hourly wage rate=Rs10.00, Standard time or allowed time = 6 hours
Actual time taken to complete the job = 4 hours

Earning = 4 x 10 + (6-4 / 6 ) x10 x 4 = 40 + 13.3 = Rs. 53.3

As per Rowan Plan, calculate the earning of MR. Z:

Standard time = 20 hours

Time taken = 16 hours
Hourly comp. rate = INR 2.00
 Gantt plan
Output Below Standard = Time Rate (Guaranteed)
Output at Standard = Wages of Time Rate plus Bonus of 20% of the
Time Rate
Output at Above Standard= High Piece Rate on worker's total output
(generally 120%)

Example:
Standard output per day = 1000 units. Guaranteed payment = Rs 350.00, per
unit = Rs .35

A produces 850 units, so he will get Rs 350.00 (the guaranteed wages)

B produces 1000 units. So he will get Rs 350.00 plus 20% bonus pertaining to

standard rate = Rs. 350.00 + 20% of Rs. 350.00 = Rs. 420.00

C produces 1100 units (above standard). He will get 120% on total units
produced = 120% of (1100 x .35) = 462.00
Calculate the earnings, as per Gantt plan:

Standard output per day = 500 units. Guaranteed payment = Rs 270.00 per day

A produces 450 units

B produces 650 units
C produces 500 units
Advantages of Individualized Incentive Plans:
 Substantial raise in productivity and increased
earnings of workers.
 Less direct supervision is required

 Helps in costing and budgetary control

Disadvantages of Individualized Incentive Plans:

 Employees may try to increase the quantity by
ignoring the quality
 Advanced technology may be resisted by employees
concerned about the impact on production standards.
 Poorly maintained machines may hinder employee
efforts to earn larger incentives
2. Team performance related pay
Gain sharing plans
Employees earn bonuses tied to unit-wide performance as
measured by a predetermined, gainsharing formula

Profit sharing plans

 Focus is on the measure that matters most to the most people: a
predetermined index of profitability. When pay-offs are linked to such
measures, employees spend more time learning about financial
measures and the business factors that influence them.

ESOP
 ESOP is another way to link employee performance with the
success or failure of a company, which makes the employees of
company owners of stock in that company
 Major problems

Complexity
Control
Communication
 Issues and key elements in
Gain Sharing Plans
Strength of reinforcement
Productivity standard
Sharing the gain split between management and
employees
Scope of formula (what is rewarded : producivity,
customer complaints, product damage, cost, etc)
Perceived fairness of formula
Ease of administration
Production variability
 Gain sharing plans

SCANLON PLAN

Scanlon Plans are designed to lower labor costs

without lowering the level of a firm’s activity.
Incentives are derived as a function of the ratio
between labor costs and sales value of production
(SVOP). The SVOP includes sales revenue and the
value of goods in inventory
2010 Data (base year) for XYZ Ltd.          

SVOP = INR10,00,000        
Total Wage Bill = INR 2,00,000        

Total Wage Bill

SVOP = 2,00,000÷ 10,00,000 = 0.2 = 20%
Operating year, 2017            
SVOP = INR 9,00,000        
Allowable wage bill = .20(INR 9,00,000) = INR 1,80,000
Actual wage bill = INR 1,30,000        
Savings = INR 50,000        

Therefore, INR 50,000 available for distribution as a bonus

(depending on the gain split).        
2007 Data (base year) for XYZ Ltd.          

SVOP = INR40,00,000        
Total Wage Bill = INR 5,00,000        

Operating year, 2012            

SVOP = INR 85,00,000        

Actual wage bill = INR 9,60,000        

Calculate the available amount
to be distributed as bonus.
       

       
RUCKER PLAN

A ratio is calculated that expresses the value of

production required for each INR of total wage bill.

Based on the above, the bonus is calculated.

 RUCKER PLAN
ABC Ltd. spends INR .60 worth of electricity materials, supplies, and so on, to produce INR
1.00 worth of product. The production value added is INR .40 for each INR 1.00 of sales
value.
Assume, 45% of the production value added was attributable to labor.
Therefore, Productivity Ratio (PR) × .40×.45 = 1
Therefore, PR = 5.56.
If the wage bill equals INR 25,000, the expected production value is the wage bill(25,000) x
PR (5.56) =INR 1,39,000.
If actual production value is INR 5,80,000 , then the savings (actual production value -
expected production value) is INR 4,41,000.
Since the labor contribution to the value added is 45%, the bonus to the work force should
be .45× INR 441,000 = INR 198,450.
The savings are distributed as an incentive bonus according to a formula - 75 percent of the
bonus is distributed to workers immediately and 25 percent is kept as an emergency fund to
cover poor months. Any excess in the emergency fund at the end of the year is then
distributed to workers.
ABC Ltd. spends INR 40 worth of electricity materials, supplies,
and so on, to produce INR 100 worth of product.
Assume, 50% of the production value added was attributable
to labor.
The wage bill equals INR 35,000.00
Actual production value equals INR 2,50,000.00
Calculate the SAVING.
Calculate the total amount of bonus to be distributed among
employees.
Team incentive plans : Advantages and Disadvantages
 
Advantages:
 
Positive impact on organization and individual performance
Easier to develop performance measures
Teamwork is encouraged
Employee participation is enhanced
 
Disadvantages
 
Employees may be unable to see how individual performance
affects their incentive outcome.
May lead to increased turnover among the top performers since
they may be unwilling to share their contribution with the
lesser performers