CHAPTER I INCENTIVES SYSYTEMS AND WAGES The Basis of remuneration for work in industry is mainly carried out under

two methods that is (i) payment by time, and (ii) payment by output. In the former case, a worker is paid a predetermined amount for a specified time period which may range from an hour, a day, a week, or a month. Under this scheme, there is no direct control on the amount of work done by the workers except perhaps to a certain extent through supervision so long as he is engaged on tasks specified by the employer. In the latter arrangement, the worker is remunerated according to his output or the output of the group to which he belongs. This may be of varying forms such as differential piece work wherein rates of remuneration per unit of output may be either progressive or regressive.[3] Basis for linking productivity and wages: According to the efficiency wage theory, high wage rate leads to more efficiency which in turn increases the productivity. A relationship between productivity and wage rate may arise through two routes, firstly, where a wage increase raises efficiency of workers and secondly, a wage increase improves efficiency of management.[4] Though in conventional labour markets, reward depends on absolute performance in other markets it is said that it is relative and not absolute, performance which is rewarded. The relative contribution of each unit of labour differs from the other to the extent the human capital is embodied in the labour. This is similar to the neo-classical approach which links reward with productivity because a worker with more capital embodiment will be paid higher due to his higher productivity and contribution.[5] Productivity plays a very crucial role in the process of economic development and ultimately determines the standard of living of the people in a country. While on one hand an increase in productivity facilitates an increase in the wage rate, an increase in wage rate leads to increase in productivity. Changes in productivity have a wide ranging impact on the economy affecting costs, prices, profits, output, employment and investment.[6] It has been argued that in theory, the relationship between wages and productivity is plausible. In practice however productivity plays a limited role in wage determination. Presence of largescale unemployment and imperfect market conditions and absence of strong trade unions further limit the role of productivity in determination of wages. In India, there are several forms of wage fixation like adjudication, official committees, wage boards and collective bargaining. So productivity has not really been an important factor while fixing wages.[7] Incentive systems of payment Incentive is a stimulus for productive action.[8] In incentive payments, wages are directly linked to output. The aim of an incentive system is to motivate towards higher productivity. A standard of performance is established for each job in the case of individual incentives or interlocking groups of jobs in case of group incentives. The workers wages vary in accordance

with some established formula that relates either individual or group performance to the standard. It should have a combination of time-rate system of payment for certain standard output and an extra incentive rate for production over and above the standard. The term incentive is used in industrial relations terminology to signify inducements offered to employees to put forth their best in order to maximize production results. There can be individual incentive wages and organization-wide incentive systems. The individual incentive wage is the extra compensation paid to an individual over a specified amount for his production effort. These are based upon certain measurement techniques like past performance, bargaining between union and management, time study, standard data, work sampling etc.[9] The four types of individual incentive wage systems are: (i) (ii) (iii)

measured day-work- Under this system an individual receives his regular hourly piece-work standard- This system forms the most simple and frequently used group plans- Groups plans embody a guaranteed base rate to the workers and

rate of pay, irrespective of his performance. incentive wage. In this, the individuals earnings are direct and proportionate to output. relate to pay plan in which the performance over standard is rewarded by a proportionate premium over base pay. (iv)

gains-sharing plan- this involves a disproportionate increase in monetary rewards

for increasing output beyond a pre-determined standard. As the gains are shared with the entrepreneurs, the worker gets less than 1% increment in wages for every 1% increment in output. Organisation-wide incentive systems involve cooperation among employees and the management with an aim to accomplish heightened industrial objectives such as to reduce labour, material and supply costs, to strengthen employee loyalty to the employer, to promote harmonious labour-management relations, to decrease turnover and absenteeism. Profit-

sharing is one such system where the employee receives a share in profits fixed in advance
under an agreement freely entered into. The system should not be treated as a substitute for adequate wages, but should provide something extra to those willing to participate.[10] Coming to the productivity-linked incentives, these are of varied types[11]: (i) Systems under which the rate of extra payment is just in proportion to the extra

output (as under straight piece work and standard hours system); (ii) Systems under which the extra payment if proportionately at a lower rate than the

increase in output; (iii) Systems under which the rate of payment is proportionately higher than the rate of

increase in output; (iv) Systems under which the rate of incentive is in proportions which differ at different

levels of output. Incentive Schemes involving productivity-linked wages:

There are various plans or schemes through which productivity-linked wages can be brought about. The Premium Bonus System is one such method. Under this, a standard output is assented to and for any additional output progressive piece rates are paid. Secondly, there is a scheme known as theHasley Plan. Here a certain quality of work is fixed as a standard output which is to be completed within a prescribed time. If a worker completes the work before that time he receives a portion of the wages for the time saved in addition to his usual daily wages. This scheme combines the merits of the time and piece rate systems.[12] Another system is where a worker is guaranteed a minimum wage on the time basis. This is called theRowan Plan. Once a wage is determined, then a standard time is fixed for the completion of every work and if the worker completes the work in less time he is given a bonus of the time actually saved in proportion to the total time. Schemes maybe adopted which can be applied to teamwork in an organization. Under the Task

Bonus System each worker has his work assigned to him in the form of a task to be done by a
prescribed method, with definite appliances and within a certain time. The workers earn much better pay if they succeed in achieving the standard task than if they fail to do so. Lastly, a possible scheme is one of Progress Bonus. This results in more than proportionate increase in wages for increase in output beyond a certain minimum or standard output rate. This is a system of differential piece-rates under which actual piece-rate per unit of output is raised as the output rises and vice versa. An efficient worker is doubly benefited because he is paid far more for increased output and is paid a higher rate for the whole output while a slow worker is doubly penalized by paying a lower rate for the whole output. Piece Rate System The Straight Piece-Work Rate System is a common incentive system of payment which might be offered either to individuals or to groups of workers. The worker is paid at a uniform specified rate for every unit of output. The direct labour costs per unit of output remains constant, but the fixed and semi variable costs decrease. Unless capital is increased or decreased, the total fixed overhead charges remain the same irrespective of the output.[13] Homeworkers, that is, persons who carry out work for remuneration in premises of their own choice, other than the workplace of the employer, resulting in a product or service as specified by the employer, irrespective of who provided the equipment, material or inputs used are almost always paid piece-rate wages. In the absence of direct supervision by the employer to ensure the high productivity of labour, this is the best method of payment. Manufacturing activities such as garment, kite and hair band making, beedi and agarbatti rolling etc are usually engaged in by homeworkers.[14] Piece-rate is what is paid based on the results or output of work. There is greater consideration to quantity in fixing piece-rates in some particular types of work in some industries with a guaranteed minimum. The same standard may not be appropriate in all types of piece-work. Factors such as the importance of labour rather than the machine employed, correlation of piece-rates with time-rates of same or similar class of workers, special skills of the worker with or without a machine, the time factor in work and payment of a guaranteed minimum will have to be considered. There should be a standard and if the piece-rate worker produces anything

beyond that, he should be entitled to be paid for the excess at a higher rate. However, the laying down of such a rate for production should not lead to disparity between total earnings of an average piece-rate worker and of a time-rate worker working over the same period of time.[15] Such a situation could lead to dissatisfaction and subsequently agitation within the industry. The straight piece-rate system cannot work where the finished product is the result of the cooperative effort of a large number of workers each doing a small part which contributes to the result. In such cases, productivity-linked wages by tonnage may be given.[16] There is a base or standard above which extra payment is made for extra production in addition to the basic wage. Such a plan typically guarantees time-wage up to the time represented by standard performance and gives workers a share in the savings represented by superior performance. The payment in effect is an extra emolument for extra effort put in by workmen over the standard that may be fixed. Piece-rate system takes productivity into account while fixing wages. Wages are paid by results or output of the work. The same standard may not be applicable in all types of piece work. The contribution of the worker to the job, the nature of the work, the part played by the machine, the incentive to work, special skills of employees etc have to be considered. In industrial adjudication, the tribunal will have to see that piece-rates do not drive workers to fatigue or to the limit of exhaustion and therefore will take time factor into account. At the same time, a guaranteed minimum will have to be provided so that a diligent worker does not lose out. The wages of piece-rated workers have to be kept in line with the wages of the time-rated workers.[17] If wages are paid on a piece-rate basis rather than a time-rate basis, there is an incentive for the worker to increase efficiency. It is also argued that this system does away with the need of supervision because a target has already been set and the worker only has to work towards it. It is necessary for the employers to keep their end of the bargain and not indulge in rate cutting or speed ups. Rate cutting is the reduction at which piece-rate is paid after the workers have been induced to increase their speed of work. Speed up is a system where piece workers are induced to accelerate their work to such a rate that their health is affected and their working life span may be reduced.[18] The incentive for increase lies in the piece-rate system. A general increase in the existing wages if not commensurate with production will throw the industry out of existence.[19] The Minimum Wages Act, 1948 also talks of a piece-rate system, though there is no statute dealing with productivity- linked wages, the Minimum Wages Act allows wage fixation on that basis. However several problems arise with it. The Standard Hour System This is similar to the piece-rate system. It rewards workers in direct proportion to their output. Under this system, a standard time is allowed for completing a particular task. If the worker completes the task in standard time or less, he is paid for the standard time at his time rate.

This scheme has the advantage that it facilitates the adjustment of wages from time to time since only the hourly time rate of the worker has to be changed, while under the straight piecerate system whole schedules of rates have to be changed. The amount of work expected from each worker, however, is unresolved.[20]