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How to design a
Universal Incentive
Scheme
For a manufacturing company
Contents
 Incentive Theory
 Quantity vs. Quality
 Setting an Incentive Scheme: Stepping Stones
 Incentive System Types...
Incentive Theory
 Let’s consider an example:
 Production Capacity: 100 units
 Production Target: 80 units (i.e. 80% of ...
Incentive Theory4
0 units 80 units 100 units
Ascending Incentive
Rate
5 5 5 5
Quantity vs. Quality
 Incentive is given based on increased quantity.
 With increased quantity, there is a possible chan...
Focus on Quality
 So, while giving incentive to motivate our work-force
for increased quantity…….
 We need to keep “Qual...
Setting an Incentive
Scheme: Stepping Stones
Set the
incentive
system
Set the
Approach
Set the
incentive
slabs
Set the
inc...
Set the incentive system
8
Incentive System Types:9
Name of System Method of Rate
Determination
Major
Characteristics
Straight piecework
system
Units...
Set the Approach
10
Incentive Approach Types:
 Approach:
 Individual incentive approach
 Ex: Goods produced by a single individual
 Team i...
Set the incentive slabs
12
Incentive Slabbing: Linear &
Logarithmic
 Equal units in each slab
 Differential rate should be introduced
 E.g. incent...
Incentive Slabbing: Linear &
Logarithmic
 Differential units in each slab
 Equal/Differential rate should be introduced
...
Incentive Plan: Example
 Let’s consider an incentive plan for a shop floor
consisting 30 associates working in 3 shifts h...
Incentive Slabs: Example
 Incentive Slabs according to team approach
 Type: Linear
16
Slab No Units of good
produced per...
Set the incentive index
&
Fix the incentive rate17
Introduction to…
“Incentive Index”
 “Incentive Index” is the highest monetary value a
company is willing to pay to its re...
Divisional Index: Example
 Lets consider that management has decided to give
highest 10,000 BDT as incentive to a specifi...
Divisional Index: Example
 Highest monetary value: 10,000
 Number of working days in a month: 20
 Divisional index: 100...
Divisional Index: Incentive
Rate Fixing Example
21
0 units 80 units 100 units
Ascending Incentive
Rate
5 5 5 5
Divisional Index: Incentive
Rate Fixing Example
Divisional
Index
% of
Index
BDT Incentive
Slabs
Extra
units
produce
d
Ince...
Divisional Index: From Time
frame to Time period
Days Units Produced Extra units after
entitlement
Incentives
earned, BDT
...
Divisional Index: From Time
frame to Time period
 For simplification, lets consider that the next 15 days for
this shift ...
Incentive Plan: Example
 Let’s consider an incentive plan for a shop floor
consisting 30 associates working in 3 shifts h...
Multiplicative Index:
Example
 Lets consider that management has decided to give
highest 1,000 BDT to each individual of ...
Multiplicative Index:
Example
 Highest monetary value: 1,000
 Number of working days in a month: 20
 Multiplicative ind...
Multiplicative Index: Incentive
Rate Fixing Example
28
0 units 80 units 100 units
Ascending Incentive
Rate
5 5 5 5
Multiplicative Index: Incentive
Rate Fixing Example
Multiplica
tive Index
% of
Index
BDT Incentive
Slabs
Extra units
produ...
Multiplicative Index: From
Time frame to Time period
Days Units Produced Extra units after
entitlement
Incentives
earned, ...
Multiplicative Index: From
Time frame to Time period
 For simplification, lets consider that the next 15 days for
that sh...
Divisional vs. Multiplicative:
Head to Head
Divisional Index Multiplicative Index
Favorable for teams with equal
members &...
Incentive vs. Penalty
 In order to motivate production, incentives are
rewarded for increased quantity.
 Likewise, in or...
Penalty Plan
 Penalty can be imposed in two ways:
 Active Penalty:
 Incentive is given on extra 155 units after entitle...
Penalty Plan
 Penalty can be imposed in two ways:
 Passive Penalty:
 Incentive is given on the good units only i.e. 115...
Thank You.
36
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How to design a universal incentive system for a manufacturing company

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Detailed stepping stones for designing a universal incentive scheme across the mainstream & supportive departments to maintain a balance

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How to design a universal incentive system for a manufacturing company

  1. 1. How to design a Universal Incentive Scheme For a manufacturing company
  2. 2. Contents  Incentive Theory  Quantity vs. Quality  Setting an Incentive Scheme: Stepping Stones  Incentive System Types  Incentive Approach Types  Incentive Slabbing: Linear & Logarithmic  Introduction to “Incentive Index”  Divisional Index  Multiplicative Index  Divisional vs. Multiplicative: Head to Head  Incentive vs. Penalty  Penalty Plan 2
  3. 3. Incentive Theory  Let’s consider an example:  Production Capacity: 100 units  Production Target: 80 units (i.e. 80% of Capacity) 3 0 units 80 units 100 unitsEntitlement for Incentive 0 units 80 units 100 units 5 5 5 5 Incentive given for these extra units
  4. 4. Incentive Theory4 0 units 80 units 100 units Ascending Incentive Rate 5 5 5 5
  5. 5. Quantity vs. Quality  Incentive is given based on increased quantity.  With increased quantity, there is a possible chance to trade-off quality. 5
  6. 6. Focus on Quality  So, while giving incentive to motivate our work-force for increased quantity…….  We need to keep “Quality” also in our mind 6
  7. 7. Setting an Incentive Scheme: Stepping Stones Set the incentive system Set the Approach Set the incentive slabs Set the incentive index Fix the incentive rate 7
  8. 8. Set the incentive system 8
  9. 9. Incentive System Types:9 Name of System Method of Rate Determination Major Characteristics Straight piecework system Units of production per time frame Straight rate after entitlement Taylor Differential piece rate system Units of production per time frame Differential rate at each slabs after entitlement Standard hour system Time frame per unit production Rate fixed if time of production is less than expectation Halsey 50-50 system Time frame per unit production Profit shared on 50- 50 basis for saving time in production
  10. 10. Set the Approach 10
  11. 11. Incentive Approach Types:  Approach:  Individual incentive approach  Ex: Goods produced by a single individual  Team incentive approach  Ex: Goods produced by a group of individuals 11
  12. 12. Set the incentive slabs 12
  13. 13. Incentive Slabbing: Linear & Logarithmic  Equal units in each slab  Differential rate should be introduced  E.g. incentive entitlement is 1000 units/shift & capacity is 1500 units/shift.  Linear slabbing for 5 slabs will be: 13 Slabs Units Produced Slab 1 100 Slab 2 100 Slab 3 100 Slab 4 100 Slab 5 100 0 500 1000 1500 2000 Linear Slabbing Linear Slabbing
  14. 14. Incentive Slabbing: Linear & Logarithmic  Differential units in each slab  Equal/Differential rate should be introduced  E.g. incentive entitlement is 1000 units/shift & capacity is 1500 units/shift.  Linear slabbing for 5 slabs will be: 14 Slabs Units Produced Slab 1 193 Slab 2 114 Slab 3 80 Slab 4 62 Slab 5 51 0 500 1000 1500 2000 Logarithmic Slabbing Logarithmic Slabbing
  15. 15. Incentive Plan: Example  Let’s consider an incentive plan for a shop floor consisting 30 associates working in 3 shifts having 10 individuals in each shift.  The parameters are as follows:  Number of individuals: 10 persons  Number of work-days in a month for a shift: 20 days  Incentive system: Taylor differential piece rate system  Approach: Team Approach (Single Shift) 15
  16. 16. Incentive Slabs: Example  Incentive Slabs according to team approach  Type: Linear 16 Slab No Units of good produced per shift Entitlement 1000 Slab 1 1100 Slab 2 1200 Slab 3 1300 Slab 4 1400 Slab 5 1500
  17. 17. Set the incentive index & Fix the incentive rate17
  18. 18. Introduction to… “Incentive Index”  “Incentive Index” is the highest monetary value a company is willing to pay to its receptor team or individual for a given time period (e.g. a month) based on the performance of a given time frame.  For team incentive plan:  When the receptor is a team, it’s called “Divisional Index”  When the receptor is an individual, it’s called “Multiplicative Index” 18
  19. 19. Divisional Index: Example  Lets consider that management has decided to give highest 10,000 BDT as incentive to a specific shift for a month based on the performance of each work-day  Here,  Receptor type: Team  Time period: 1 month  Time frame: Single Work-day  Highest monetary value: 10,000 BDT  As the receptor is a team, the incentive index in this case will be “Divisional Index” 19
  20. 20. Divisional Index: Example  Highest monetary value: 10,000  Number of working days in a month: 20  Divisional index: 10000/20 =500  So, highest 500 BDT will given as incentive to an entire shift for a single working day 20
  21. 21. Divisional Index: Incentive Rate Fixing Example 21 0 units 80 units 100 units Ascending Incentive Rate 5 5 5 5
  22. 22. Divisional Index: Incentive Rate Fixing Example Divisional Index % of Index BDT Incentive Slabs Extra units produce d Incentive Rate, BDT/unit produce d 1000 500 10% 50 1100 100 0.5 15% 75 1200 100 0.75 20% 100 1300 100 1 25% 125 1400 100 1.25 30% 150 1500 100 1.5 22
  23. 23. Divisional Index: From Time frame to Time period Days Units Produced Extra units after entitlement Incentives earned, BDT Day 1 1155 155 91.25 Day 2 920 0 0 Day 3 1455 455 432.5 Day 4 1305 305 231.25 Day 5 1275 275 200 23 For day 1, Extra units produced after entitlement = 155 units Incentive earned = 100 x 0.5 + 55 x 0.75 = 91.25 BDT Total incentive earned in first 5 days = 955 BDT Slab No Rate Slab 1 0.5 Slab 2 0.75 Slab 3 1 Slab 4 1.25 Slab 5 1.5
  24. 24. Divisional Index: From Time frame to Time period  For simplification, lets consider that the next 15 days for this shift goes just like the first 5 days  Therefore, total incentive earned by this shift for a total of 20 days ( a time period) will be = 955 x 4 = 3820 BDT  From previous slides, Number of individuals in this shift = 10  Therefore, Incentive earned by a single person of this shift for a time period = 3820/10 = 382 BDT 24
  25. 25. Incentive Plan: Example  Let’s consider an incentive plan for a shop floor consisting 30 associates working in 3 shifts having 10 individuals in each shift.  The parameters are as follows:  Number of individuals: 10 persons  Number of work-days in a month for a shift: 20 days  Incentive system: Taylor differential piece rate system  Approach: Team Approach (Single Shift) 25
  26. 26. Multiplicative Index: Example  Lets consider that management has decided to give highest 1,000 BDT to each individual of a specific shift for a month based on the performance of that shift of each work-day  Here,  Receptor type: Individual  Time period: 1 month  Time frame: Single Work-day  Highest monetary value: 1,000 BDT  As the receptor is an individual, the incentive index in this case will be “Multiplicative Index” 26
  27. 27. Multiplicative Index: Example  Highest monetary value: 1,000  Number of working days in a month: 20  Multiplicative index: 1000/20 = 50  So, highest 50 BDT will given as incentive to each individual of that shift for a single working day 27
  28. 28. Multiplicative Index: Incentive Rate Fixing Example 28 0 units 80 units 100 units Ascending Incentive Rate 5 5 5 5
  29. 29. Multiplicative Index: Incentive Rate Fixing Example Multiplica tive Index % of Index BDT Incentive Slabs Extra units produced Incentive Rate, BDT/unit produced 1000 50 10% 5 1100 100 0.05 15% 7.5 1200 100 0.075 20% 10 1300 100 0.1 25% 12.5 1400 100 0.125 30% 15 1500 100 0.15 29
  30. 30. Multiplicative Index: From Time frame to Time period Days Units Produced Extra units after entitlement Incentives earned, BDT Day 1 1155 155 9.125 Day 2 920 0 0 Day 3 1455 455 43.25 Day 4 1305 305 23.125 Day 5 1275 275 20 30 For day 1, Extra units produced after entitlement = 155 units Incentive earned = 100 x 0.05 + 55 x 0.075 = 9.125 BDT Total incentive earned in first 5 days = 95.5 BDT Slab No Rate Slab 1 0.05 Slab 2 0.075 Slab 3 0.1 Slab 4 0.125 Slab 5 0.15
  31. 31. Multiplicative Index: From Time frame to Time period  For simplification, lets consider that the next 15 days for that shift goes just like the first 5 days  Therefore, total incentive earned by each individual of that shift for a total of 20 days ( a time period) will be = 95.5 x 4 = 382 BDT  For reconciliation, total amount given to that shift for a month= 382 x 10 = 3820 BDT 31
  32. 32. Divisional vs. Multiplicative: Head to Head Divisional Index Multiplicative Index Favorable for teams with equal members & equal capacity within same dept. & not prone to sudden change in number of members Favorable when setting a universal incentive scheme across shifts of different departments. As the receptor is a team, individual earning from incentive is hard to control As the receptor is an individual, earning of every individual can be controlled With a change in capacity & personnel, both slabs & index should be changed With a change in capacity & personnel, only slabs need to be changed Different index for diff. departments. Therefore, so many indices. Hard to be documented bcoz of changing. A single index for all the departments & shifts. 32
  33. 33. Incentive vs. Penalty  In order to motivate production, incentives are rewarded for increased quantity.  Likewise, in order to maintain quality benchmark, penalties are imposed on defects.  Example:  Lets consider entitlement is on 1000 units/shift.  Production in a certain shift is 1155 units.  Of these units, 20 is defective. 33
  34. 34. Penalty Plan  Penalty can be imposed in two ways:  Active Penalty:  Incentive is given on extra 155 units after entitlement. For the 20 defectives, defective rate is determined. For that defective rate, penalty rate is introduced.  So, 95.5 BDT is the incentive gain per person on that day (155 units extra production)  Defective rate: 20/1155 = 0.0173  Defective rate slabs are introduced.  Penalty rates are introduced.  Penalty loss is being calculated.  Ultimate gain = Absolute of (Incentive gain – Penalty loss) 34
  35. 35. Penalty Plan  Penalty can be imposed in two ways:  Passive Penalty:  Incentive is given on the good units only i.e. 1155 - 20 =1135 units  There is not direct penalty.  Therefore, there will be either 0 or (+)ve gain in ultimate.  Actually, there is no penalty!!! 35
  36. 36. Thank You. 36

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