2012

Assignment on Incentive Scheme

Submitted to, Prof. Lata Ma am

Submitted By, Moumita (42) Rituparna (69)

INCENTIVE SCHEMES Introducing an effective system of incentives can help organization to recruit and retain valuable staff, reward performance and productivity. It can also help organization to get the best output of their employees. Incentives are rewards relating to certain goals. Incentives can be financial or non-financial. It can also be individual and group or team incentives. There are some reasons for introducing an incentive scheme. They are y y y y y y y Increase in earnings for employees Increase in output Improvement in quality More efficient methods of working Reduction in absenteeism Reduction in labour turnover Reduction in overtime working

Financial incentives can help improve performance and be self-financing. Examples include:
y y y

profit-related and share option schemes bonuses commission

Non-financial and non-pay incentives include:

y y y y y

formal recognition/awards vouchers extra holidays gifts company cars

Incentives can be classified according to the different ways in which they motivate agents to take a particular course of action. One common and useful taxonomy divides incentives into different classes:

Class

Definition

Remunerative incentives Are said to exist where an agent can expect some form of material reward especially money in exchange for acting in a particular way. financial incentives

are said to exist where a particular choice is widely regarded as the right thing to do, or as particularly admirable, or where the failure to act in a certain way is condemned as indecent. A person acting on a moral incentive Moral incentives can expect a sense of self-esteem, and approval or even admiration from his community; a person acting against a moral incentive can expect a sense of guilt, and condemnation or even ostracism from the community.

Coercive incentives

are said to exist where a person can expect that the failure to act in a particular way will result in physical force being used against them (or their loved ones) by others in the community for example, by inflicting pain in punishment, or by imprisonment, or by confiscating or destroying their possessions.

Personal incentives

motivate an individual person through their tastes, desires, sense of duty, pride, personal drives to artistic creation or to achieve remarkable feats, and so on

Social incentive

analysis has to take into account the situation faced by any individual in a given position within a given society

This type of employee incentive provides the opportunity for an employee to buy extra leave time. It can work well as many employees value extra Extra Leave Time time to balance their work and home lives. It is also very tax advantageous for the employer. Incentive

Though organization is benefitted by the incentive schemes still there are lots of controversies regarding the scheme implementation. Most of the schemes would unable to meet their objectives because of their designing process. For example organization might want to encourage teamwork or motivate the employees, for that they provide financial incentive but employees would not be always motivated by financial incentives, so it should understand the employees motivational factor. Organization should know what would be the most important principles for the design of monetary staff incentive schemes, once the decision has been taken to implement such a scheme. The following section presents several critical design issues for incentive schemes. If incentive schemes are to be effective, they must be accepted by those who will be affected by them, for this transparency required. The transparency requirement means that: y y y y Staff members are affected by a bonus scheme should easily be able to understand the mechanics of the calculation, i.e. the system should not be overly complex; The scheme should contain as many objective factors and as few subjective variables as possible; The rules of the game should be made known to everyone and should not be changed at random basis Procedural fairness: What is the process that was used in order to decide how much they receive

In order to comply with the fairness requirement: y The goals (or reference standards) set out by the scheme must be attainable (for the average performer and at least in the medium term); y Better performers must indeed be rewarded with higher salaries (and this must be perceived by all staff members); y Everyone must be able to achieve a higher compensation by working better and harder. Factors Influencing the Choice of Incentive System When deliberating what would be an appropriate system of incentives for a particular organization, it may be useful to analyze the following factors: y Technology: Are that tasks interdependent or independent from each other? Can the tasks (and thus the performance of individual employees) be measured? For example, according to this criteria, there are substantial differences between the delivery of credit under an individual lending technology (mostly independent and measurable tasks) and the provision of deposit facilities in a branch setting (tasks may be interdependent and difficult to measure). y Composition of Workforce: What is the occupational mix of the workforce (i.e. what levels of education and professional training)? What is the demographic composition? How long has the staff members served in the organization? For instance, university

graduates may be motivated by different factors than staff members with only a basic education. Young, unmarried staff members may seek different rewards than older staff members who have to take care of children. Culture: What is the value that is placed on openness and transparency? Do staff members enjoy self- management? What is the importance of money? Some cultures may place a very high value on money while its prominence may be reduced in others. Again, this may have consequences for the choice of compensation and incentive system. External Environment: Examples are the levels of unionization, social norms, and a host of other legal issues, including labor laws and worker co-determination. For example, some Latin American MFIs have introduced profit sharing schemes for their employees not because they wanted to provide special incentives to their staff members but because they were legally forced to do so.4 System of Governance and Strategy: Finally, it is important to study the system of governance in the particular organization as well as the institutional strategy. Who defines the mission and direction? What is the degree of decentralization?

Careful analysis of the above items will most likely help to prevent costly mistakes and unnecessary revisions of incentive schemes.
Typology of Incentive Schemes

Individual Incentive Schemes Under an individual incentive mechanism, there is a direct link between individual performance and remuneration. A simple example would be a monthly bonus that loan officers can receive based on their lending performance
Team-Based Incentives (Group Incentive Schemes) The goal of group-based incentive schemes is to increase the social cohesiveness of the staff and to foster good cooperation and team effort.

Profit Sharing and Gain sharing Schemes Profit sharing has a long tradition (a profit sharing scheme was introduced by the U.S. American firm Procter & Gamble in 1887) and is institutionalized in some Latin American countries. Positive effects of profit sharing schemes can be an increase in the sense of identification with the organization, and a reduction of the barriers between employees (us) and owners (them).

Some Common Reasons for Failure When talking to practitioners, one is regularly confronted with stories where an incentive scheme either did not work properly (i.e. did not produce the intended effects to the extent expected) or produced severely adverse side effects. y y y y y y Failure to incorporate the organizational culture and history, and the social fabric (what is keeping the place together?); Divergence between the effects produced by the incentive scheme and the MFIs strategic goals; Incentive schemes are inflexible and not equipped to deal with external contingencies; Failure to calibrate the incentive scheme to the nature of the work; Use of purely algorithmic pay systems when the quality of the work is important; Letting outsiders (and compensation consultants) do all the work the design team must include insiders