Reward System, Incentives

and Pay Restructuring

UNIT 14 INCENTIVES FOR BLUE AND
WHITE COLLARS
Objectives
After going through this unit, you should be able to understand:
the classification of incentives,



different incentive systems,
working of incentive schemes, and
wage incentive plans for different categories of employees.
Structure
14.1 Introduction
14.2 Meaning and Definition
14.3 Classification of Incentives
14.4 Merits and Demerits
14.5 Pre-requisites of Effective Incentive Scheme
14.6 Incentive Systems
14.7 Wage Incentive Plans
14.8 Working of Incentive Schemes
14.9 Summary
14.10 Review Questions
14.11 Further Readings
14.1 INTRODUCTION
The term iincentivei has been used both in the restricted sense of participation and in
the widest sense of financial motivation. The concept of incentive implies increased
willingness or motivation to work and not the capacity to work. It refers to all the
plans that provide extra pay for extra performance in addition to regular wages for a
job. Under this programme, the income of an individual, a small group, a plant work-
force or all the employees of a firm are partially or wholly related to some measure of
productive output. Wage incentives are extra financial motivation. They are designed
to stimulate human effort by rewarding the person, over and above the time-rated
remuneration, for -improvements in the present or targeted results. Basically, the
wage incentive implies a system of payment under which the amount payable to a
person is linked with his output. Such a payment may also be called payment by
results.
14.2 MEANING AND DEFINITION
Incentives are monetary benefits paid to workmen in recognition of their outstanding
performance. An incentive scheme is a plan or programme to motivate individual or
group performance. An incentive programme is most frequently built on monetary
rewards (incentive pay or monetary bonus), but may also include a variety of non-
monetary rewards or prizes. The International Labour Organisation (ILO) refers to
incentives as payment by results But it is appropriate to call them iincentive systems
of payment emphasising the point of motivation, that is the imparting of incentives to
workers for higher production and productivity. Unlike wages and salaries which are
relatively fixed, incentives generally vary from individual to individual, and from
period to period for the same individual.
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Incentives for Blue and White
14.3 CLASSIFICATION OF INCENTIVES
21
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Incentives can be classified into: (i) direct compensation, and (ii) indirect
compensation. Direct compensation includes the basic salary or wage that the
individual is entitled to for his job, overtime-work and holiday premium, bonuses
based on performance, profit sharing and opportunities to purchase stock options, etc.
Indirect compensation includes protection programmes (insurance plans, pensions),
pay for time not worked, services and perquisites.
Also incentives may broadly be classified into monetary and non-monetary.
Monetary incentives have an important contribution to make within the total
motivation pattern. They provide extra-financial motivation, by rewarding the worker
over and above his regular remuneration for performing more than the targeted work.
Some of the financial motivations are overtime wages, higher basic wages, incentive
bonus, merit increments, suggestion rewards; various allowances, promotion and
fringe benefits.
Some of the non-financial incentives are good human relations, self-respect,
recognition, status, sense of belonging, appreciation, higher responsibility, greater
authority, job satisfaction, improved working conditions, greater leisure, etc. All
these motivate workers to raise their productivity.
ILO classifies incentive schemes into four categories: (i) schemes in which earnings
vary in proportion to output, (ii) schemes where earnings vary proportionately less than
output, (iii) schemes where earnings vary proportionately more than output, and (iv)
schemes where earnings differ at different levels of output.
Incentives have also been classified into individual, group and organisation-wide. In
an individual incentive plan, the rewards of incentives are based solely on individual
performance. It is the extra compensation paid to an individual over a specified
amount for his production effort. Such a system is feasible only where an individual
can increase the quantity and quality of his output by his own individual efforts and
where his output can be measured. The payment is normally on a monthly basis,
though in a few cases it may be quarterly or other convenient periods. The standards
of performance have been set by a qualified industrial engineering analyst, using
technically sound work measurement procedures. The rewards under this plan are
almost always immediate, that is, paid daily or weekly.
The advantages of individual wage incentive plans are relatively obvious and
straightforward. First and foremost, the individual incentive plan rewards the individual
for his or her production. The more the worker produces, the more
,
the worker earns.
Second, the individual incentives appeal to the basic need for money found in most
people. Almost everyone will work harder, up to a point, when there is a justifiable
reason to believe that increased productivity will bring about a personal gain. Although
individual wage incentives have advantages, there are also limitations. Individual wage
incentives work best with jobs that are primarily operator-controlled. They may also
lead to labour problems. Incentives, because they reward production levels, can lead to
quality problems. Safeguards must be taken to ensure that quality is not sacrificed for
quantity. It is the output of the group rather than that of each individual member of the
group that can be measured most conveniently or accurately.
Group or area incentive schemes provide for the payment of a bonus either equally or
proportionately to individuals within a group or area. The bonus is related to the output
achieved over an agreed standard or to the time saved on the job - the difference
between allowed time and actual time. Such schemes may be most appropriate: (a)
where people have to work together and team work has to be encouraged; and (b)
where high levels of production depend a great deal on the co-operation existing among
a team of workers as compared with the individual efforts of team members. Group
bonuses are calculated on the basis of the output of the team and are divided among the
members either equally or in specified proportions, with more being given to skilled
employees than to those who are unskilled. Group incentives are usually applied to
small teams and the rewards are based on the performance of the entire group. The
bonuses are often much larger than individual wage incentives. Group incentive plans,
since they evaluate overall performance, are applicable to a wide variety of tasks.
Sometimes, however, they are applied to all workers of a department or even of a
whole undertaking. One of the


Reward System, Incentives
22
and Pay Restructuring


(i)
(ii)
(iii)
(iv)
(v)
(i)
(ii)
(iii)
disadvantages of group incentive plan is that there is a possibility of ignoring the
individual performance as the rewards are based on group performance. In large
groups it is often inevitable that there will be slackers who can disrupt the
functioning of the whole group.
Some of the advantages of group incentive plans are:
Better co-operation among workers
Less supervision
Reduced incidence of absenteeism
Reduced clerical work
Shorter training time.
The disadvantages of group incentive plans are:
An efficient worker may be penalised for the inefficiency of the other members
in the group
The incentive may not be strong enough to serve its purpose
Rivalry among the members of the group defeats the very purpose of team work
and co-operation.
The organisation-wide incentive system involves co-operation and collective effort of
the employees and management in order to accomplish broader organisational
objectives, such as: (i) to reduce labour, material and supply costs; (ii) to decrease
turnover and absenteeism; (iii) to strengthen employee loyalty to the company; (iv) to
promote harmonious labour management relations. One of the aspects of the scheme
is profit-sharing under which an employee receives a share of the profit fixed in
advance under an agreement freely entered into. Some of the advantages of such a
scheme are: (i) it inculcates in employees' a sense of economic discipline as regards
wage costs and productivity; (ii) it engenders improved communication and increased
sense of participation; (iii) it is relatively simple and its cost of administration is low;
and (iv) it is non-inflationary, if properly devised.
14.4 MERITS AND DEMERITS
The primary advantage of incentives is the inducement and motivation of workers for
higher efficiency and greater output. It may not be difficult to get people for fixed
wages and salaries. But with fixed remuneration, it is difficult to motivate workers to
give better performance. Fixed remuneration removes fear of insecurity in the minds
of employees.
Earnings of employees would be enhanced due to incentives. There are instances
where incentive earnings exceed two to three times that of the time rated wages or
salaries. Increased earnings would enable the employees to improve their standard of
living.
There will be reduction in the total as well as per unit of cost of production through
incentives. Productivity would increase resulting in greater number of units produced
for given inputs. This would bring down the total and unit cost of production. The
production capacity is also likely to increase.
The other advantages of incentive payments are: reduced supervision, better
utilisation of equipment, reduced scrap; reduced lost time, reduced absenteeism and
turnover and increased output. Furthermore, systems of payment by results would, if
accompanied by organisation and work measurement, enable firms to estimate labour
costs more accurately, than under the system of payment by time. This would
facilitate the application of cost control techniques like standard costing and
budgetary control
On the other hand, systems of payment by results may have disadvantages. There is a
tendency for the quality of products to deteriorate unless steps are taken to ensure
maintenance of quality through checking and inspection. This involves added
expenses:
Difficulties may arise over the introduction of new machines or methods. Workers
may oppose such introduction for fear that new piece of bonus rates set may yield
lower earnings; or when new machines or methods are introduced, they may slacken
their rate


Incentives for Blue and White
of work.
23
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Another disadvantage is that jealousies may arise among workers because some are
able to earn more than others.
One of the greatest difficulties with the incentive systems is in the setting of piece or
bonus rates. Rate fixing involves delicate problems of judgment in which there is
always a risk of error. If rates are set too low, workers are bound to be dissatisfied
and will be under pressure to work very hard. If rates are set too high, workers may
slacken their efforts at times and employers may not take recourse to revision of rates
because the earnings are too high.
Difficulty also arises in determining standard performance. Many organisations
follow a safe route to fix the standards - which is usually the average of past years
performance. Past performance may not be the ideal basis for fixing production
norms.
Most of the problems of financial incentives arise either from the inadequacies of the
particular system or from incorrect application and insufficient control. In western
countries, as also in India, it has now been realised that economic gain has ceased to
be a source of motivation and that greater emphasis should be placed on non-
economic factors. Many empirical researchers have shown that monetary incentives
alone do not bring about the desired motivation.
14.5 PRE-REQUIS1TES OF EFFECTIVE INCENTIVE
SCHEME
All things considered, it may be concluded that in many industries or undertakings
and for a large group of operations, well designed systems of payment by results
shall yield advantages to all concerned. Many of these advantages will be realised
provided sufficient safeguards are provided. Such pre-requisites are:
The co-operation of workers in the implementation of an incentive scheme is
essential. In particular, workers co-operation is necessary wherein: (a) the methods
followed in measuring the results or output upon which payment is based; (b) the
methods followed in setting wage rates for different classes of work; and (c)
appropriate safeguards concerning earnings, job security and settlement of disputes
over piece-work rates and allotted time.
The scheme must be based on scientific work measurement. The standards set must
be realistic and must motivate workers to put in better performance. Workers must be
provided with necessary tools, equipments and materials so as to enable them reach
their standards.
3 Indirect workers, such as foremen, supervisors, charge hands, helpers, crane
operators, canteen staff, store keepers, and clerical staff should also be covered by the
incentive schemes.
There should be management commitment to the cost and time necessary to
administer incentive schemes properly, and these must be carefully assessed before
embarking on an incentive programme.
There is greater need for planning. Many incentive schemes, started hurriedly,
planned carelessly, and implemented indifferently have failed and have created more
problems for the organisation than they have tried to solve.
14.6 INCENTIVE SYSTEMS
The chief incentive systems are as follows:
(i) The Halsey System: This system which was developed by F.A. Halsey, provides
for the fixation of a standard time for the completion of the task. For the work
done in correct time or more, the actual time rate is paid, Thus, the minimum
wage is guaranteed even if the output falls below the standard. If the job is
completed in less than the standard time, the worker receives a bonus payment at
his time rate for a specific percentage of the time saved. This percentage


Reward System, Incentives
may vary anywhere from 30 percent to 70 percent, but usually it is fixed at 50
percent (the other 50 percent going to the share of employer). Thus, if a worker
does the work in 6 hours against that of 10 hours standard, he gets bonus after 6
hours plus 50 percent of 4 hours, i.e., 2 hours, as bonus. The other 50 percent (2
hours) is shared by the employer (Given Formula at below).
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and Pay Restructuring



(ii) The Rowan System: Under this system also a standard time is allowed for a job,
and bonus is similarly paid for any time saved. This plan differs from the Halsey
plan only in regard to the determination of the bonus. In all other respects, the
two are the same. The premium is calculated on the basis of the proportion which
the time saved bears at standard time. Thus, if a worker does work in 6 hours
against the 10-hour standaid, the wage payable is 6 hours wages plus 40 percent
of the wages as. bonus (See Formula).

(iii)
(iv)
(v)
(vi)
The Bedaux Point System: Under this system, the standard time set is divided
into a number of points at the rate of one minute per point. The bonus is
calculated at 75 percent of the points earned in excess of 60 per hour. Thus, if
the standard time is 10 hours and if the worker completes the job in 7 hours and
if his hourly rate is 0.96 money units, the standard number of points for
completing the job is 600 points. The worker thus earns 600 points in 7 hours.
His bonus, therefore, will be 75 percent of 180 x 0.96/60 which is equal to 2.16
money units. If a worker does not reach the standard, he is paid at his time rate.
This system is really more than the incentive system, since it enables the
management to record the output of any worker of the department in units which
show at once if the production is up to the standard the management desires.
The Taylor Differential Piece-rate System:
'
This system was introduced by
.Taylor with two objectives. First, to give sufficient incentive to workmen to
induce them to produce up to their full capacity, and second, to remove the fear.
of wage cut. There is one rate for those who reach the standard; they are given a
higher rate to enable them to get the bonus. The other is the lower rate for those
who are below the standard; so that the hope of receiving a higher rate may
serve as an incentive to come up to the standard. Workers, are expected to do
certain units of work within a certain period of time. This standard is determined
on the basis of time and motion.atudiest Such scientific determination assumes
that the standard fixed is not unduly high and is within the easy reach of
workers. On a proper determination of the standard depends the success of the
scheme. This system is designed to encourage the specially efficient worker with
a higher rate of payment and to penalise the inefficient by a lower rate of
payment. In practice, this plan is seldom used now.
Premium and Task Bonuses: It has been devised by Gantt and is the only one
that pays a bonus percentage multiplied by the standard time. Under this system,
fixed time rate are guaranteed. Output standards and time standards are
established for the performance of each job. Workers completing the job Within
the standard time or in less time receive wages for the standard time plus a
bonus which ranges from 20 percent to 50 percent of the time allowed and not
time saved. When a worker fails to turn out the required quantity of a product,
he simply gets his time rate without any bonus. Its fairness and practical value
depends on the reasonableness of the standard fixed and the wages which
workers of average ability can earn without having to work at excessive speed
and becoming unduly fatigued.
The Profit-sharing System: The profit-sharing scheme is based on the same
principle as the group system where incentive is related to the collective effort
of the group. It is an anangement freely entered into under which an employer
gives to his employees a share the net profits of the enterprise, fixed in


Incentives for Blue and White
25
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(vii)
(viii)
(ix)
advance, in addition to their wages. The essential features of profit-sharing are:
(a) that the arrangement is voluntary but based on an agreement between
employer and employee; (b) that the amount to be distributed amongst the
participants depend upon the profits earned by the enterprise; and (c) that the
,

proportion of the profits to be distributed is determined well in advance. The
aims of profit-sharing plans are: (i) to promote increased effort and output; (ii)
to share some gains in the productivity of the firm; (iii) to secure employee co-
operation and to achieve industrial harmony; and (d) to strengthen unity of
interest and employee loyalty to organisational objectives. The profit-sharing
scheme is comparatively easy and less expensive to adopt. In some cases, these
schemes have become successful resulting in increased production at a lower
cost. There are cases where they have not made any significant contribution
towards improving the overall efficiency of the company. To be effective,
profit-sharing schemes should be based on the considerations of profitability of
industrial units, computation of surplus profit for distribution on an average
basis, and fair return on capital invested in an enterprise. It should not be treated
as a substitute for adequate wages but provide something extra to the
participants. Full support and co-operation of the union is to be obtained in
implementing such a scheme.
Since the Second World War, profit-sharing has generally grown in importance,
especially in those countries which have adopted legislative measures promoting
or requiring its use. Thus, in the late 1970s, approximately 310,000 profit-
sharing plans were in operation in the United States covering about 9 million
wage-earners, or roughly 10 percent of the employed labour force. Mandatory
profit-sharing schemes have been introduced in a number of developing
countries. Some voluntarily introduced profit-sharing schemes have continued in
the United Kingdom for 40 or 50 years.
The Scanlon Plan: It is a plant-wide incentive scheme developed by Joseph
Scanlon of the United Steelworkers of America in 1927. The basic concept
underlying the Scanlon Plan is that efficiency depends upon plant-wide co-
operation. The purpose of this incentive plan is to develop teamwork. It has two
main aspects: (a) adopting a measure for increased productivity; and (b) sharing
the gain accrued from that increased productivity. The objective of the plan is to
devise the formula which will most adequately reflect the prospective efforts of
workers and management as a whole. The bonus formula is devised to fit the
particular operating conditions of the plant. Some of the salient features of the
plan are: (a) it encourages group work; (b) there is high flexibility in the
generation of decisions and execution of the plan; (c) it integrates the companys
objectives with group activity; (d) it involves all the workers in the exercise and
they make their maximum personal contribution to the process of production.
Earnest Dale has described four degrees of co-operation between labour and
management in the Scanlon Plan, namely: (a) information co-operation by
gathering information; (b) advisory co-operation through the process of
consultation; (c) constructive co-operation by making suggestions for
improvement; and (d) joint union-management decision making.
Although there have been remarkable successes with the Scanlon Plan, not all
applications have worked. Most of the successful applications have been in
relatively small plants, one hundred employees or less. The Scanlon Plan seeks
to provide the highest order of incentives to the workers by inviting them to
offer suggestions and to share decisions with the management for improving
productivity and moulding work incentives.
The Rucker Plan: The philosophy of the Rucker Plan is similar to the
Scanlon Plan, but the bonus computed is based on a more sophisticated basis.
There are two major differences between the two plans. The standard under the
Rucker Plan is based upon a careful study of accounting records and is not
considered bargainable. While the Scanlon Plan rewards only savings in labour
costs, the Rucker Plan offers incentives for savings in other areas as well.
Merit Rating: Mention may be made of merit rating as a form of wage incentive.
It presupposes that the workers in a given grade or occupation differ


Reward System, Incentives
in their efficiency at work in the undertaking. Merit rating is a method of
attempting to give recognition to the best
26
and Pay Restructuring


Workers by systematic objective standards. Various qualities are listed, such as
skill, efficiency, reliability, initiative, care in avoiding accidents, adaptability,
co-operation with other workers, and regularity of attendance. Points or gradings
are given for each of these qualities, and workers who reach a high level receive
an addition to the normal rate of pay for the job. Rating may be done for each
year, and workers who had been receiving merit pay may lose a part or whole of
it if they do not maintain their rating. Merit rating is usually applied to time-
workers, specially in occupations where opportunities for promotion are less.
Merit rating should not be confused with job evaluation. Job evaluation is an
attempt to measure the worth of the job, irrespective of who does it, while merit
rating is an attempt to measure the performance of the individual.
14.7 WAGE INCENTIVE PLANS
Wage incentive plans may be discussed as (i) plans for blue-collar workers; (ii) plans
for white-collar workers; and (iii) plans for managerial personnel. Each of these
categories of employees have separate and distinct needs and hence specific tailor-
made incentive plans have to be devised to meet their requirements. Therefore,
correct measurement of performance for the purpose of incentive payment is very
important. The four critical performance indices are: (a) the standard index; (b) the
reference index; (c) the base index; and (d) the incentive index. Various wage
incentive schemes are formulated on the basis of these indices.
1. Incentive Plans for Blue Collar Workers: Short-term incentive plans for blue
collar workers may be broadly classified into three categories:
(a) plans under which the rate of extra incentive is in proportion to the extra
output;
(b) plans under which the extra incentive is proportionately at a lower rate than
the increase in output; and
(c) plans under which the rate of incentives is proportionately higher than the
rate of increase in output.
Every employer wants his workman to do the maximum work they are capable of
doing. On the other hand, there is a feeling among the workers that an increasing
effort benefits only the employer even when they are employed on a piece-rate basis.
The result is that they never produce to their full capacity, and, in most cases, put in
the minimum necessary work. This feeling on the part of workers may be removed
either through fear or through expectation of gain, It has been found that fear can
never produce the desired effect; but a hope of earning a bonus does induce them to
work harder and produce more. Incentive plans are, therefore, known as premium
plans because they offer a premium for outstanding performance.
All bonus or premium plans relate to two factors: one, they set a standard time for the
completion of a definite output or piece of work for a fixed wage; two, the fixing of
rate of percentage by which bonus would be earned by a worker over and above his
set wage, if the standard time is saved or the standard output is exceeded. Indirect
workers such as crane operators, charge hands, canteen staff, helpers, security staff,
employees in purchasing, sales and accounts, and maintenance staff also deserve
incentives at par with direct workers. Such payments are desirable to avoid
dissatisfaction and dissension among the workers in a plant.
The payment of bonus to indirect workers, however poses a serious problem because
the output of many of them cannot be accurately measured. For example, it is
extremely difficult to measure the output of maintenance staff, canteen employees, or
security personnel, though it is possible to assess the performance of inspectors,
sweepers and packers. Many managements, therefore, prefer to apply a merit rating
system to indirect workers, which rewards these workers for other qualities, in
addition to their output.


Incentives for Blue and White
2. Incentive Plans for White Collar Employees/Salesmen: The salesmen are usually
given incentives in the form of sales commissions. One study reported that
almost 75 % of the organisations surveyed paid salesmen on some type of
incentive basis. This is due to three factors: (i) the unsupervised nature of most
sales work; (ii) tradition in the market; and (iii) the assumption that incentives are
needed to motivate salesmen.
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There are several incentive plans for sales staff each appropriate for different
markets, products, but all plans are basically variations of three types of plans:
straight salary, straight commission, and combination plans.
The straight salary method is not an incentive plan; the salesman is simply paid on
weekly, monthly, or on yearly basis. The advantages of this method are that: (i) the
salesmen know in advance what their income will be; and (ii) the expenditure on
salesmen is known beforehand. The disadvantages are: (i) this method tends to shift
salesmanis emphasis to just making the sale rather than prospecting and cultivating
long-term customer; and (iii) pay is not related to results. This lack of relationship
reduces salesmens performance.
Under the straight commission, the salesmen are paid on the basis of sales effected,
i.e., they are paid for results and only for results. Therefore, high performance
salesmen are generally attracted. But the disadvantages are: (i) salesmen focus on
making a sale on high volume items and as a result cultivating dedicated customers
and working to push hard-to-sell items are often neglected; (ii) salesmen tend to .be
less company-oriented and more money-oriented, and the company has less control
over them; (iii) salesmens income generally fluctuates widely.
Under the combination method of salary and commission, salesmen not only get a
fixed salary but also a commission in proportion to the sales effected. The advantages
of this method are: (i) since salesmen are assured of minimum earnings, they are
relieved of financial worries; (ii) the company has more control over its salesmen, as
there is sizable salary component in most combination plans. But the main
disadvantage is that salary is not related to performance; only incentive value of
money is being traded off for its security value.
Incentives for Management Employees: In many organisations, the managers are
paid bonus. There are two types of bonus plans: one determined by formula (i.e.,
some criteria like increased sales) and the other determined by some discretion used
in allocation of bonus (i.e., paid on more or less permanent basis). The bonus plans
are generally reviewed annually to make them more effective. For top level
management, bonuses are generally tied to overall corporate results. The size of
bonus is much higher for top level executives and lower for the lower level
executives.
At the top management level, incentive payments are mostly in the form of bonuses
which are usually a percentage of base salary that depends upon the level of
performance and company profits. Mostly bonuses are paid in cash but in some cases
the company may use stock plans that offer the executive the companys stock at a
fixed purchase price. Such plans are designed to encourage ownership in the
company and indirectly serve as an incentive for good work and represent a form of
saving.
In the manufacturing and retailing fields, where year-to-year results are largely a
reflection of management performance, it is common for executive and managerial
personnel to be compensated partly in the form of a base salary and partly in the form
of a year-end bonus. The decision of whether to install an incentive bonus plan for
executives and, if so, what kind of plan to install should be made appropriately. On
the one hand, a bonus is a more immediate and flexible form of compensation than
salary and thus has greater motivational potential. On the other hand, the bonus plan
that is poorly conceived or administered can have a negative motivational impact. If a
bonus plan seems appropriate, careful attention should be paid to what kind of plan
would be most effective.
14.8 WORKING OF INCENTIVE SCHEMES
Incentive schemes are regarded as beneficial to both employers and workers. They are
accepted as a sound technique for the achievement of greater productivity and good


Reward System, Incentives
performance. The main advantage of any wage incentive scheme is that for a little
expenditure of capital, there can be sizable gains in productivity; the gestation period
is also small. The role of supervisors changes to that of managers of 1machines and
materials from that of being 1watchdogsi. The workers chase the supervisors for
material, tools, etc., instead of supervisors chasing the workers. The experience
gained in India and in other countries indicates that wage incentives have resulted in
raising productivity, increasing output and earnings, reducing direct labour costs, and
curtailing absenteeism. The NCL has reached the conclusion that, under our
conditions, wage incentive is the cheapest, quickest and surest means of increasing
productivity.
28
and Pay Restructuring


Despite certain merits of incentive schemes, their actual working is not quite happy.
Some critics point out that the output of modern industry does not depend so much
on individual human effort as on the capacity of machines and on good organisation.
The most effective incentive, they claim, is a combination of good regular wages,
good working conditions, and good human relations. There is a tendency for the
quality of the products to deteriorate unless steps are taken to ensure the maintenance
of quality through a stricter system of checking and inspection. Their application in
some cases has not only failed to increase production over a period of time but has
caused an actual reduction in employee productivity. One company, for instance,
found that a substantial increase in pay through wage incentive systems merely
resulted in higher absenteeism, restricted output and lower work standards. Some
studies indicate that incentive schemes have a dubious value for increasing output. It
may generate tensions among the different parts of an organisation. Such tensions
often create difficult managerial problems; increase administrative costs, and may
eventually affect employer-employee relations and output.
14.9 SUMMARY
Employees are paid incentives in addition to wages and salaries. Incentives are linked
to performance. This leads to better motivation of employees. Reduced cost, reduced
supervision, reduced wastage and the like are other benefits of incentives. There are
problems, nevertheless. Quality of the products is likely to decline. In many cases
management of an incentive scheme is also difficult. However, problems associated
with incentive schemes may be overcome and the plans may be made more effective
for improving productivity. Productivity-linked incentive schemes are to be
encouraged in the interest of the workers, employers and the society. Any incentive
scheme, however, has to be adapted to the conditions of each industry and even
within similar industry from plant to plant.
14.10 REVIEW QUESTIONS
1. Define `incentives'. Bring out their advantages and limitations.
2. What are the pre-requisites for the success of incentive schemes?
3. Explain briefly the various individual and group incentive plans and their
respective merits and demerits.
4. Explain the different types of incentive systems.
5. Bring out the salient features of the incentive schemes followed in the Indian
industries.
14.11 FURTHER READINGS
Armstrong, Michael, A Handbook of Human Resource Management, Kogan Page
Ltd., London, 1984.
Aswathappa, K, Human Resources and Personnel Management, Tata McGraw-Hill
Publishing Co. Ltd., New Delhi, 1997.
Backman, Jules, Wage Administration: An Analysis of Wage Criteria, D. Van
Nostrand Co. Ltd., New York, 1959.



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Incentives for Blue and White
Collars


ILO, Payment by Results, Oxford and IBH Publishing Co., New Delhi, 1951.
Ministry of Labour, Government of India, Report of the National Commission on
Labour, 1969
Srivastava, S.C., Wages, Profits and Productivity in Selected Industries of India,
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