Objectives of Wage Incentive Schemes

Wage incentive refers to performance linked compensation paid to
improve motivation and productivity. It is the monetary inducements

offered to employees to make them perform beyond the acceptance
standards.
Objectives of Wage Incentive Schemes:

(i) To use wage incentives as a useful tool for securing a better
utilisation of manpower, better productivity scheduling and
performance control, and a more effective personnel policy.
(ii) To improve the profit of a firm through a reduction in the unit

costs of labour and materials or both.
(iii) To increase a worker’s earning without dragging the firm into a

higher wage rate structure regardless of productivity.
(iv) To avoid additional capital investment for the expansions of

production capacity.
Principles of a Good Wage and Salary Administration:

a. Simple and easy to understand.
b. Union management agreement.
c. Time standard must be fixed.
d. Reward must be proportional to the effort.
e. Complaints and grievances must be properly attended to.
f. The plans should not change frequently and must be tried out
continuously for some length of time.
g. Equity and fairness.
h. Workers must be made to understand the plan.
i. Method study must precede time standard.

j. There must be a min guaranteed payment.
Types of Wage Incentive Plans:

Following are the types of wage incentive plans.
They can be diagrammatically represented as below:

1. Straight Piece Rate Plan:
Under the straight piece rate plan workers are paid based on their
output. For example, if the piece rate is Rs. 4 per piece of the product,
then a worker who turns out 40 pieces/day earns Rs. 160 (Rs. 4 x 40)
as his wage for that day. Whereas another employee who produces 32
pieces/ day earns Rs. 128 (Rs. 4 x 32 pieces). Hence a fast worker
earns more compared to the slow worker.
Advantages:
i. Motivates the workers to increase their output.
ii. Simple and easy to understand.
iii. improve productivity.
Disadvantages:
i. No guaranteed minimum wage. This makes workers insecure.
ii. Great disparity of earning between slow and fast workers.
iii. Wastage might increase.
iv. Quality of production may suffer as the workers concentrate on

quantity.
v. Interpersonal relationship suffers due to jealousy and competition

to earn more.
vi. Enforced idleness like electricity failure or machine breakdown,

adversely affect earning of workers.
2. Standard Piece Rate with Guaranteed Minimum Wage:

Here the minimum guaranteed wage is fixed on hourly basis. A worker
gets the minimum fixed wage/day plus the incentive for the number of
pieces produced. To illustrate this, assume that there is 8 hour’s shift
the piece rate is Rs 4 and a minimum fixed wage of Rs 16/ hours (Rs
16 x 8 hours = Rs. 128 per day). The standard time/piece is 15 min.
Now, there are two workers A and B. (If worker A produces 25

pieces/day then he earns: Rs. 128 (min. guaranteed wage) + Rs. 100
(Rs. 4 x 25 pcs) = Rs. 228/ day
If worker B produces 40 pieces / day then he earns Rs. 128 (min.

guaranteed wage) + Rs. 160 (40 pieces x Rs. 4) = Rs. 288/ day)
Advantages:
i. Min. guarantee improves sense of security.
ii. Disparity between slow and faster workers is reduced.
Disadvantages:
i. Demotivate faster worker.
ii. Slow workers get higher piece rate viz Rs. 5.12 (128/ 25).
Differential Piece Rates:

The shortcoming of the above mentioned incentive plans have given
way Differential piece rates. The differential piece rates are classified
under two heads viz. Individual incentive plans and Group incentive
plans.
Individual Incentive Plans:

The different plans here are discussed below:
(a) Halsey Plan:
The features of this plan are:
a. Min. wage is guaranteed.
b. Additional bonus is provided to workers who

Wage and Salary Administration 147 complete the job in less than the
“standard time”. Bonus is a certain proportion to the time saved. This
proportion is fixed at 50% in this plan.
The total wage is calculated as:

T x R + 50% (S – J) x R
Where J – time taken
R – Rate of wage
S – Standard time
50% – The bonus percentage.
Illustration:
Std time = 10 hours, Act time = 8 hours; Rate = Rs. 5 / Hr; Bonus =
50%
Φ = (8 x 5)+ .5 ((10 – 8) x 5)
Φ = Rs. 45.
Advantages:
i. Guaranteed min. wage exists.
ii. Simple and easy.
iii. Dispensed with time consuming and costly process of work study.
iv. Management share a part of bonus on time saved.
Disadvantages:
i. Workers get only half of the benefit of their efficiency.
ii. If the worker’s rush through the job to save time, the quality may
suffer.
iii. Workers object management in sharing bonus on time saved.

iv. Sufficient incentive is not provided to fast workers.
(b) Rowan Plan:

This is a modified form of Halsey Plan, developed by James Rowen of
England. The Rowan Plan pays more than the Halsey Plan. This is
possible if a worker completes the task in half the standard time of the
task. If more than 50% time is saved then the bonus, he earns
decreases.
Therefore, Total wage = J x R + [J x R x (Time saved/std. time)]
Illustration:
S = 10 hours; J = 8 hours; R = Rs. 5 / hrs.
Φ =8 x 5 + [(8 x5)(2/10)]
Φ = Rs. 48
Advantages:
i. Minimum guaranteed wage exists.
ii. Both the employees and the workers share the benefits of time
saved.
iii. The efficient workers get bonus at diminishing rate if they save
more than 50% of the standard time. This checks over-speeding.
Disadvantages:
i. Incentive provided for fast worker is not sufficient.
ii. Workers dislike management sharing bonus of time saved.
(c) Gantt plan:

This plan was developed by Henry L. Gantt. Here standard time for
every task is fixed through time and motion study. Minimum time
wage is guaranteed to all workers.
A worker who fails to complete the task within the standard time
receives wages for actual time spent at the specified rate. Workers who
achieve or exceed the standard get extra bonus varying between 20%
to 50% of the hourly rate for the time allowed for the task.
Illustration:
(S) Suppose the standard time fixed for the job is 8 hours and (T) time
rate is Rs. 10 per hour and the rate of bonus is 25%, then a worker who
completes the job in 10 hours will be paid Rs. 10 x 8 = Rs. 80. On the
other hand the worker who completes the job in 6 hours will be paid
Rs 100 (Rs. 80 + 25% of Rs. 80).
Advantages:
i. Minimum guarantee exists.
ii. Fast worker is paid bonus at higher rate proportional to their

output.
iii. Standard worker is paid 20% bonus.
iv. Part of bonus is shared by the organisation.
Disadvantages:
i. Sharing of bonus by organisation is resentment.
ii. Disunity among the slow and the fast workers.
(d) Bedeaux Plan:

This plan is developed by Charles E. Bedeaux in 1911. Here the
minimum time wage is guaranteed to all workers. The workers who
complete the job within or more than the standard time are paid at the
normal time rate.
Workers who complete the job in less than the standard time are paid
bonus, generally 75% of the wage for the time saved and 25% to the
foreman.
The wage rate is calculated as:

S x R + 75% of R (S – T)
Illustration:
S = 10 hrs; R = Rs. 5 / hrs; T = 8 hrs.
Then:
Φ = 10 x 5+ 75% (5) x (10-8)
= 50 + (3.75 x 2)
= 50 + 7.50
Φ = Rs. 57.50
Advantages:
i. Min. wage is guaranteed to all the workers.
ii. The foreman is motivated to the productivity as 25% of time saved is

paid to him.
iii. This plan is suitable in factories wherein a worker is expected to

perform different types of jobs.
Disadvantages:
i. Workers may resent sharing the bonus with foreman.
ii. Workers may find it difficult to understand the complete calculation

involved in this method.
(e) Emerson’s Efficiency Plan:

This plan was developed by Harrington Emerson. Here minimum
wage is guaranteed. Workers are paid different bonus rates as per their
efficiency level. Bonus is given at an increasing percentage beyond the
prescribed level of efficiency (usually 66.67%). Efficiency is measured
by comparing the actual time taken with the standard time.
Illustration:
Std = 10 hrs, Act = 8 hrs, Rate = Rs. 5 / hr.
Bonus = 10% upto 75 % efficiency
20% for 75%- 100%
30% beyond 100%
Φ = (T x R) + (percentage of bonus x T x R)
Efficiency level: std time/act time
In this case, the efficiency level in (10/8) x 100 = 125% and,
Bonus at 30% is payable.
Total wage = 8 x 5 + .3 (8 x 5)
= 40+12
=Rs. 52
If worker A takes 16 hrs, then his bonus is nil.
If worker B takes 14 hrs, his bonus is (1/10) x 14 x 5.
If worker C takes 10 hrs, his bonus is (2/10) x 10 x 5.
If worker D takes 8 hrs, his bonus is (3/10) x 8 x 5.
Advantages:
i. Guaranteed time wage provides a sense of security to all the workers.
ii. It encourages healthy competition among workers.
iii. Bonus begins at 66.67% efficiency which is within the reach of

many workers.
Disadvantages:
i. There is little incentive after 100% efficiency level.
ii. The plan is not very flexible or selective.
iii. Employer may fix the standard time at a low level making it
impossible for most of the workers to earn bonus.
Group Incentive Plan:

In some cases like an assembly line production it is not possible to
determine the performance of an individual worker as several workers
jointly perform a single operation. In such cases it is desirable to
introduce a group incentive scheme. Here the bonus is calculated for a
group of workers and the total amount is distributed among the group
members in proportion to the wage earned by each.
(a) The Scalar Plan:

This is a group plan where the productivity of the entire work force is
taken into account. In this plan bonus is paid at the rate of 1 % for
every 1% rise in productivity. Workers are not paid the full amount of
bonus earned by them in the same month.
A certain percentage is set aside as a “Resource Fund” to take care of

fluctuation. At the end of the year, the balance remaining in the
“Reserve Fund” is also distributed.
(b) Priest Man Bonus Plan:

Here a committee of workers and management set the standard of
performance. A minimum wage is guaranteed to each worker. The
group gets bonus when actual output exceeds the standard. The group
supervisor also gets a share on the group bonus. This plan promotes
team spirit among employees.
Other Forms of Incentives:

Apart from the above mentioned incentive plans; there are also other
forms of incentives, especially for the white collared workers. They are
briefly discussed below.
Employee Stock Option Plan:

This is popularly known as ESOP. This is a form of incentive where the
employees are allotted the company share at a price below the market
price. When the company achieve better results, the market price of its
shares and the value of the employees’ shareholding rise.
This form of incentive plan is relatively new in India and is becoming

popular of late. IT is motivating to the employee, as (it enhances a
sense of belongingness to the organisation) shareholders are the
owners of the organisation.
Profit Sharing:
Prof. Seager defines profit sharing as “an arrangement by which
employees receive a share, fixed in advance of the profits”. Profit
sharing usually involves the determination of an organisation profits
at the end of the fiscal, year and the distribution of a percentage of the
profits to the workers qualified to share in the earnings. The main
objectives of profits sharing are to create unity of interest and the
spirit of co-operation.
The theory behind profit sharing is that management should feel its
workers will fulfill their responsibilities more diligently if they realize
that their efforts may result in higher profits which will be returned to
the workers through profit sharing.
In India this incentive scheme is not well received by both the

management and the workers. Committee appointed by the Govt. of
India suggested profit sharing as a method of ensuring industrial
peace and a step towards workers’ participation in management and
also suggested that 50% of the profit be shared among the workers.
Both the employers and the trade unions rejected this. The trade
unions prefer bonus to profits sharing as bonus is payable irrespective
of profit or loss under the Bonus Act 1965.
Fringe Benefits:
ILO describes fringe benefits as wages are often augmented by special
cash benefits, by the provision of medical and other services or by
payment in kind that form part of the cost for expenditure on the
goods in services.
In addition workers commonly receive such benefits as holidays with

pay low cost meals, low rent housing etc. such additions to the wage
proper are sometimes referred to as fringe benefits.
Fringe benefits involve a labour cost for the employer and are not
meant directly to improve efficiency. These add to the workers
standard of living. Hence benefits may be statutory or voluntary.
They improve motivation and morale of workers by satisfying their

needs and develops a sense of belonging and loyalty among workers.

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Wage incentive refers to performance linked compensation paid to

improve motivation and productivity. It is the monetary inducements

Objectives of Wage Incentive Schemes:

(ii) To improve the profit of a firm through a reduction in the unit

(iii) To increase a worker’s earning without dragging the firm into a

(iv) To avoid additional capital investment for the expansions of

Principles of a Good Wage and Salary Administration:

b. Union management agreement.

c. Time standard must be fixed.

d. Reward must be proportional to the effort.

e. Complaints and grievances must be properly attended to.

g. Equity and fairness.

h. Workers must be made to understand the plan.

i. Method study must precede time standard.

Types of Wage Incentive Plans:

They can be diagrammatically represented as below:

ii. Simple and easy to understand.

iii. improve productivity.

ii. Great disparity of earning between slow and fast workers.

iii. Wastage might increase.

iv. Quality of production may suffer as the workers concentrate on

v. Interpersonal relationship suffers due to jealousy and competition

vi. Enforced idleness like electricity failure or machine breakdown,

2. Standard Piece Rate with Guaranteed Minimum Wage:

Now, there are two workers A and B. (If worker A produces 25

If worker B produces 40 pieces / day then he earns Rs. 128 (min.

ii. Disparity between slow and faster workers is reduced.

Differential Piece Rates:

Individual Incentive Plans:

b. Additional bonus is provided to workers who

The total wage is calculated as:

Where J – time taken

50% – The bonus percentage.

ii. Simple and easy.

iv. Management share a part of bonus on time saved.

iii. Workers object management in sharing bonus on time saved.

(b) Rowan Plan:

ii. Workers dislike management sharing bonus of time saved.

(c) Gantt plan:

ii. Fast worker is paid bonus at higher rate proportional to their

iii. Standard worker is paid 20% bonus.

iv. Part of bonus is shared by the organisation.

ii. Disunity among the slow and the fast workers.

(d) Bedeaux Plan:

The wage rate is calculated as:

Φ = 10 x 5+ 75% (5) x (10-8)

ii. The foreman is motivated to the productivity as 25% of time saved is

iii. This plan is suitable in factories wherein a worker is expected to

ii. Workers may find it difficult to understand the complete calculation

(e) Emerson’s Efficiency Plan:

20% for 75%- 100%

30% beyond 100%

Efficiency level: std time/act time

In this case, the efficiency level in (10/8) x 100 = 125% and,

Bonus at 30% is payable.

If worker A takes 16 hrs, then his bonus is nil.

If worker B takes 14 hrs, his bonus is (1/10) x 14 x 5.

If worker C takes 10 hrs, his bonus is (2/10) x 10 x 5.

If worker D takes 8 hrs, his bonus is (3/10) x 8 x 5.