Incentive Plans for Remunerating Workers | Cost Accounting

The following points highlight the ten main incentive plans introduced for remunerating workers. The incentive plans are: 1. Halsey Premium Plan 2. Rowan Premium Plan 3. Taylor’s Differential Piece Rate System 4. Merrick’s Differential Piece Rate System 5. Gantt’s Premium Plan 6. Emerson’s Efficiency Plan 7. Bedaux Plan 8. Profit Sharing Scheme 9. Co-Partnership Scheme 10. Collective Bonus Plan.

1. Halsey Premium Plan:

This plan was introduced by F.A. Halsey in 1981. It is a simple combination of time and piece rate system.

The main features of this plan are as follows:

i. Workers are paid at a rate per hour for the actual time taken by them.

ii. A standard time is set for each piece of work, job or operation.

iii. If a worker takes standard time or more than standard time to complete his work, he is paid wages for the actual time taken by him at the time rate. In other words, under this method time wages are guaranteed.

iv. If a worker takes less than standard time, he is paid a bonus equal to 50% of the time saved at the time rate fixed. Thus, under this system, total earnings of a worker are equal to wages for the actual time taken by him plus a bonus.

The formula for calculating bonus and total earnings is as follows:

(a) Bonus = 50% of [Time saved x Time rate]

(b) Total Earnings = Time rate x Time taken + 50% of [Time Saved x Time rate]

Advantages:

i. It is easy to understand and easy to work.

ii. Under this system efficiency is not penalised.

iii. It records efficiency so it is more profitable for efficient workers.

iv. As bonus is given only for the time saved, incentive is given to workers to save time.

v. The saving in time results in reduction in labour cost per unit and fixed overhead cost per unit.

vi. This scheme is beneficial for both employer and employee.

Disadvantages:

The main disadvantages of this method are:

i. Extra efficiency of a worker is not fully rewarded.

ii. Fixation of standard time is really a difficult task.

iii. If standard time is not correctly fixed, there may be disputes between the employer and the employee.

iv. Workers do not like the employer to share the benefit of time saved by them.

v. Under this method the quality of the product is deteriorated.

2. Rowan Premium Plan:

This plan is also similar to Halsey plan except in the calculation of bonus.

The main features of Rowan Plan are as follows:

i. Wages are paid on time basis for the actual time worked by the workers.

ii. A standard time is determined for each piece of work.

iii. If a worker completes his work in standard time or in more than the standard time, he is paid wages for the time actually taken by him.

iv. If a worker completes his work in less than the standard time, he is entitled to a bonus.

v. Bonus is that proportion of wages of actual time taken which the time saved bears to the standard time.

Its formula is:

(a) Bonus = (Time Saved/Time allowed) x Time taken x Time rate

(b) Earnings = (Time taken x Rate) + Bonus

Advantages:

i. Like Halsey plan, it provides guaranteed minimum wage to workers. That means, inefficiency is not penalised.

ii. It provides quarter incentive (bonus) than Halsey plan up to 50% of the time saved.

iii. It protects the employer against loose rate setting, i.e., against errors in the setting up of standards.

iv. The gain arising from the time saved by the worker is shared by both employer and employee.

v. It results in reduction in labour, cost per unit.

vi. It contributes to reduction in fixed overheads cost per unit.

vii. It acts as a check on over-earnings.

Disadvantages:

The main disadvantages of this system are:

i. This system cannot be easily understood by the workers.

ii. This method of incentive wage payment is not easy to operate.

iii. This system encourages inaccuracies in rate fixing.

iv. The incentive given to workers, under this method, is low at higher levels of efficiency. That means the incentive given to a more efficient worker is very low.

v. The sharing of the gain arising from the time saved by both the employer and the workers, provided for under this method is resented to by the workers.

Difference between Halsey and Rowan Method:

The main differences between these two schemes are:

i. Halsey scheme is simple to understand and execute, whereas Rowan plan is difficult to understand and execute.

ii. Under the Halsey scheme, the gains arising from the time saved is shared by employer and employees equally but under Rowan scheme it not shared equally.

iii. Under Halsey plan, bonus is given for 50% of the time saved at the hourly rate. But under the Rowan plan, bonus is given for that portion of the time taken which time saved bears to the standard time at the hourly rate.

iv. Under the Halsey plan, bonus increases steadily with rise in efficiency. But under the Rowan plan, bonus increases rapidly up to a saving of 50% of the standard time and thereafter it decreases.

v. When the work is completed less than half of the standard time, Halsey plan provides more bonus than Rowan plan. On the other hand, when the work is completed in more than 50% of standard time, Rowan plan provides more bonus than Halsey plan.

vi. The labour cost p.u. under the Rowan plan is more than that under the Halsey plan upto a saving of 50% of the standard time. But beyond 50% of the saving of the standard time, the labour cost p.u. under the Halsey plan is more than that under the Rowan plan.

3. Taylor’s Differential Piece Rate System:

This system was introduced by F.W. Taylor, the father of scientific management.

The main features of this incentive plan are as follows:

i. Day wages are not guaranteed, i.e., it does not assure any minimum amount of wages to workers.

ii. A standard time for each job is set very carefully after time and motion studies.

iii. Two piece rates are set for each job, i.e., the lower rate and higher rate. The lower piece rate is payable where a worker takes a longer time than the standard time to complete the work. Higher rate is payable when a worker completes the work within the standard time. Usually these rates are 83% of the piece work rate for inefficient workers and 175% of the piece work rate for efficient workers.

Advantages:

This plan provides strong incentive to efficient workers. The calculation of wages is also not difficult and can be understood by the workers.

Disadvantages:

However, this system suffers from the following shortcomings:

i. It severely penalises the workers who produce slightly less than standard output.

ii. It does not guarantee minimum wages.

iii. It makes wide discrimination between efficient and inefficient workers and thus creates rivalry. This may weaken their unity.

4. Merrick’s Differential Piece Rate System:

This is a modification of Taylor’s plan. While Taylor prescribed two rates, Merrick’s plan lays down three rates. The lowest rate is for the beginners, the middle rate is for the developing workers and the highest rate is for the highly efficient workers. Efficiency of the workers is determined in terms of percentages.

Thus the rates of remuneration are:

Like Taylor’s plan, this method also does not guarantee minimum wages. The general criticism levelled against Taylor’s plan also applies to it except that it lessens or minimises the punitive character of Taylor’s plan.

5. Gantt’s Premium Plan:

This system was introduced by H.L. Gantt. This plan is the mixed form of Halsey and Taylor’s plan.

The main features of this plan are:

i. Day wages on time basis are guaranteed to all workers.

ii. This plan is a combination of time rate differential piece rate and bonus.

iii. A standard is set and remuneration is calculated as follows:

(a) When output is below standard—Payment at time rate.

(b) When output is at standard—Payment at time rate + 20% Bonus.

(c) When output is above standard—Payment at a high piece rate.

6. Emerson’s Efficiency Plan:

This scheme is designed to give encouragement to the slow workers to perform better than before. Under this method, time wage is guaranteed. The standard output in this plan is fixed to represent 100% efficiency. A bonus is paid to a worker whose efficiency exceeds 67%.

As efficiency increases, the bonus also increases gradually in steps at a stated rate so that at 100% efficiency, bonus would rise to 20% of wages. Beyond 100% the bonus increases at 1% of the basic rate for each 1% increase in efficiency.

It can thus, be shown as below in a tabular form:

Advantages:

i. It guarantees minimum time wages.

ii. It is easy to understand and simple to operate.

iii. It provides an incentive to beginners and even to those who are less proficient.

Disadvantages:

The incentive offered is considered too inadequate to motivate efficient and ambitious workers.

7. Bedaux Plan:

Under this plan, standard time of each job is determined in minutes known as Bedaux points or B’s one B unit represents the amount of work which an average worker can do under ordinary conditions in one minute. The standard time, is determined by work study and each job is assigned the number of B’s.

Under this system, the worker receives his daily or hourly rate plus (+) 75% of the points saved, multiplied by one sixtieth of his hourly rate. The remaining balance of 25% is paid to supervisors and indirect workers. Thus –

Earnings = (Hours worked x Hourly rate) + Bonus

Advantages:

Following are the advantages of this method:

i. It guarantees minimum wage to all workers.

ii. Output of workers is measured in terms of common unit known as B’s. This makes easier the task of recording production of workers and comparing it with standard. Suitable data for production control becomes easily available.

iii. As the benefit of 25% of time saved is given to supervisors and indirect workers, Bedaux plan may be extended to the department as a whole including indirect workers.

Disadvantages:

i. Detailed calculation of ‘B’ units increases of clerical works. This system is thus comparatively costly.

ii. This system is generally not preferred by workers because they do not get the full benefit of the time saved by them.

Other Plans:

8. Profit Sharing Scheme:

Under this system, the employer agrees to pay a certain pre-determined amount of profit in addition to the usual salary payable to employees. Profit sharing scheme differs from factory to factory. In some factories, it is restricted only to executives, while in others it is applicable to all employees.

Again in some factories, it is paid for the year during which profit is earned while in others, the payment of profit is deferred. This is to enable the employees to get a seizeable fund at the time of retirement, disability or separation. The method of distributing profit also differs from factory to factory. In some factories, the length of service is taken as the basis for determining the percentage of profit. In others, a fixed percentage of the total wages or merit rating of the employees constitutes the basis.

Advantages:

Following are the advantages of this method:

i. It reduces excess labour turnover.

ii. It increases production due to increased efforts of workers with a view to earn profit.

iii. It eliminates conflicts between the employer and the employees.

iv. It leads to better co-operation, team spirit and increased efficiency of workers.

v. It boosts up labour morale which is responsible for industrial peace.

vi. Workers get a chance to participate in management. This creates a sense of belonging to the factory. As a result, materials and machineries will be handled with care, minimising losses and wastages.

Disadvantages:

Following are the drawbacks of this system:

i. Usually the worker has no control over profit and it is not directly related to his effort.

ii. Unless merit rating is considered as the basis, both efficient and inefficient workers get profit at the same rate.

iii. Payment of profit is at long intervals, usually once a year and the share received by employees is negligible.

iv. Employees share only the profit but not the losses.

v. When workers are habituated to the payment of profit on a regular basis, non-payment of profit in any particular year will discourage the employees.

9. Co-Partnership Scheme:

Co-partnership confers upon employees the opportunity to share in the capital of the factory and to receive a part of the profit that accrue to their share of ownership.

Co-partnership differs from profit sharing in two respects:

Difference between Profit Sharing and Co-Partnership Scheme:

i. In co-partnership, employees invest capital in the factory, whereas in profit sharing scheme, the employees do not contribute to capital.

ii. In co-partnership the employees share profit and loss, if there is any, whereas in profit sharing scheme, the workers receive only a share in the profit but they are not called upon to bear the losses.

10. Collective Bonus Plan:

In the schemes discussed so far, the bonus to be paid has been calculated on the basis of individual worker’s performance. But there are certain jobs which are required to be done collectively by a group of workers. In continuous production for example – work flows in a sequence or in assembly work for televisions, radios, scooters, etc. a team of workers is engaged on various operations.

As such, it becomes necessary to introduce bonus schemes for collective efficiency of the group as a whole the intention is to create a collective interest in the work. The total bonus determined is distributed among the members of the group on an equitable basis.

The following bases of distribution are commonly used:

i. Equal distribution, if skill and grade of workers in the group is uniform.

ii. On the basis of time wages of each worker.

iii. In proportion to the time rate of each worker, where each worker has devoted equal time.

iv. In a fixed ratio determined in advance on the basis of merit rating.

Suitability:

Collective bonus schemes may be usefully employed in the following circumstances:

i. Where it is not possible to measure the performance of each individual worker.

ii. Where the workers constituting a collective possess the same or equal skill and efficiency.

iii. Where the number of workers constituting a group is not very large.

iv. Where production is dependent on the collective effort of a group of workers as a whole.

Advantages:

The main advantages of collective bonus schemes are as follows:

i. It encourages co-operation and team work among the workers.

ii. It reduces absenteeism because an absent member weakens the group and most of the workers do not like to let down their team.

iii. The calculation of wages requires less clerical work as it involves recording of the output of the group and not individual workers.

iv. Supervision work is reduced because less efficient workers are taken care of by the efficient ones.

v. Indirect workers can also be include in the scheme by allocating such workers to the groups.

Disadvantages:

The main disadvantages of this system are:

i. Collective bonus scheme is unfair to efficient and hardworking workers of the group because an efficient worker is penalised for inefficiency of other workers in the group.

ii. There may be difficulties regarding fixing the amount of bonus and the basis of its distribution among workers in the group.

iii. There may be some discontentment when workers in the group are of widely varying skills and efficiencies.

Incentive Plans for Indirect Workers:

As it is difficult to measure the productivity of indirect workers, they are generally excluded from the incentive plans. But indirect workers are as much essential for production as direct workers and as such full increase in production cannot be obtained without the full co-operation of the indirect workers.

Therefore, incentive may be introduced for indirect workers either to achieve the efficiency of the services they provide to direct workers or to induce foremen or supervisors to increase departmental efficiency and thus, reduce costs. Also payment of bonus to indirect workers, when it is being paid to direct workers will prevent labour unrest.

Reasons for Paying Incentives to Indirect Workers:

1. To reduce the cost of operating various departments by means of increasing their efficiency.

2. To avoid discrimination between direct and indirect workers.

3. To create team spirit and co-operative attitude.

4. To eliminate labour unrest and dissatisfaction among employees and reduction in labour turnover.

5. To encourage efficient indirect workers by rewarding them.

6. To enable them to improve their skill so that losses and wastages arising out of materials can be avoided.

7. To provide better service by indirect employees to direct employees.

Bases of Payment of Incentives:

The indirect workers may be paid a bonus on any one of the following bases:

1. Where indirect workers serve a group of direct workers, they may be paid a bonus on the basis of performance of the group of direct workers whom they serve.

2. When indirect workers provide general services, bonus may be paid on the basis of output of whole factory.

3. On the basis of job evaluation and merit rating of indirect workers.

4. On some arbitrary basis, like enhanced day rate so as to include an element of bonus in the rate itself.

Non-Monetary Incentives:

Non-monetary incentives are offered with a view to attract better employees, to encourage loyalty, reduce labour turnover, promote better health and reduced absenteeism so as to build up a happy and contented staff. Non-monetary incentives are sometimes provided free of cost while in some other cases, it may be subsidised.

This usually takes the following forms:

1. Educational facilities for training the employees or to educate children of employees.

2. Financial assistance in respect of housing.

3. Medical facilities

4. Transport facilities

5. Recreational facilities

6. Co-operative societies

7. Leave travel concession

8. Contribution to P.F. gratuity etc.,

9. Free uniforms.