This is regarding the various incentive plans and benefits provided to employees.

1. INCENTIVES, BENEFITS
& SERVICES
Unit 3
By
Dr. Gandhali V. Kharge

2. Incentives
■ The term INCENTIVE means, something which encourage a person
for better performance or ‘extra financial reward’.
■ Incentive is the performance- linked reward to improve efficiency of
employees.
■ Incentive includes all that provide extra pay for extra performance.
■ According to National Commission on Labour, “Wage incentives are
extra financial motivation. They are designed to stimulate human
effort by person, over and above the time related remuneration for
improvements in the present or targeted results”.
■ Psychologists have also defined incentive as spurring force
introduced as a means of accomplishing a goal or an outwards
stimulus, which activates a need or brings the motive to work.
■ Incentive wages relate earnings to productivity and may use
premiums, bonuses or a variety of rates to compensate for superior
performance.
- Dale Yoder

3. Characteristics of Incentives:
■ Incentives have direct linking to performance.
■ Incentives induce the employee to move from existing level
of performance to optimum achievable performance.
■ It helps to improve level of technology and thus increases
productivity.
■ Incentives are measurable in monetary terms.
■ The timing, accuracy and frequency of incentives or the
very basis of successful incentive plans.
■ Incentive plan encourages attendance and reduces
absenteeism.
■ Incentives very from person to person, depending on their
performance.
■ Minimum wages are guaranteed to all workers.

4. Benefits of Incentive Plans:
■ Incentives are beneficial to both employer and employees. They help to
attract and retain employees in the organisation and improve employer-
employee relations.
■ It helps to reduce employee absenteeism.
■ The amount paid in incentive scheme is linked with output helps in
rewarding employees for higher performance.
■ Incentive motivates people to work more and thus creates culture of
efficient and motivated workforce.
■ Incentives are also desired from the standpoint of equity theory. Explicitly,
individual working better receives greater rewards.
■ This system provides a desirable outcome (pay), which tend to
reinforcement appropriate behaviour positively.
■ Wage incentive is concerned with an effective utilisation of manpower,
which is the cheapest, quickest and surest means of increasing
productivity.
■ A spirit of mutual co- operation and teamwork is created among workers
and therefore, morale of the employees are increased.

5. Types of Wage Incentive Plans
Incentives
Individual
Incentives
Time Based
1. Halsey Plan
2. Rowan Plan
3. Emerson Plan
4. Bedeaux Plan
Production
Based
1. Tylor Plan
2. Merrick Plan
3. Gnatt Plan
Group
Incentives
1. Gain Sharing
Plans
a) Rucker Plan
b) Scanlon Plan
2. Kaiser – Worker
Plan
3. Profit Sharing
Plan
4. Co- partnership
Plan
5. Priestman Plan

6. Halsey Plan
■ This plan was designed by F. A. Halsey and Rand Dell Co. Canada.
■ Features of this plans are:
1. Standard time is fixed for each job or operation.
2. A Minimum time wage is guaranteed to every worker.
3. Time rate is guaranteed and the workers receive the guaranteed
wages, irrespective of whether he completes the work in the time
allotted or more time is required to do the same.
4. The payment for time saved varies from 33.333% to 66.666%, but
generally wage wages are paid at one half of time saved.
Total Earning= Time taken X Hourly Rate + Bonus
𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 = 𝑇 × 𝑅 +
(𝑆 − 𝑇)
2
× 𝑅
(Bonus= 50% of time saved)

7. Halsey Plan (contd.)
■ Merits:
■ It is simple to operate and
easy to understand.
■ It guarantees minimum
wages to all workers, whether
efficient or inefficient.
■ It provides incentive to
efficient and competent
employees.
■ Both the employer and
employee gets the benefit of
time saved.
■ There is no need to Detroit
quality as incentive is based
on time saved rather than
production.
■ Demerits:
■ The system lacks fixing of
standard time for fixing a job.
■ It depends on past
performance instead of
making new standards.
■ It does not provide sufficient
incentives to highly competent
employees as it involves
sharing of the benefit with
employers.
■ Difficulty in maintaining
record of time saved of each
worker.

8. Rowan Plan
■ This plan differs from Halsey Plan only in regards to the bonus.
■ Bonus is calculated as
𝐵𝑜𝑛𝑢𝑠 =
𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑 × 𝑇𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛 × 𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑎𝑡𝑒
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑡𝑖𝑚𝑒 𝑜𝑟 𝑡𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑
𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 = 𝑇𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛 × 𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑎𝑡𝑒 + 𝐵𝑜𝑛𝑢𝑠

9. Rowen Plan (Contd.)
■ Merits:
1. It assures minimum
guaranteed wage and is
more liberal than Halsey
Plan, as it provides incentive
to work and extra
remuneration.
2. It gives more bonus than the
Halsey Plan as a worker gets
his maximum bonus, when
he completes the task in half
the standard time allowed.
3. Both the employer and
employees are benefited by
this plan.
4. The increase in production
will reduce overhead cost per
unit.
■ Demerits:
1. It is associated with complex
method of premium
calculation for ordinary
worker.
2. This method is not fare to
potential workers, as bonus is
paid at decreasing rete.
3. Labour cost is generally
higher in this method.

10. Emerson Plan
■ Under this system, a standard time is established for a standard task.
There is no sudden rise in wages on achieving standard performance.
■ Efficiency determined by the ratio between the standard time fixed for
a performance and time actually taken by worker.
■ A worker reaching unto 66.66% of efficiency is paid only minimum
wages and bonus is paid when worker cross this limits.
■ This bonus goes on increasing till, when worker achieves 100%
efficiency, the bonus comes to 20% of guaranteed wage.
■ Efficiency of workers is well acknowledged in this system.

11. Emerson Plan (Contd.)
■ Merits:
1. This method is simple and
easily understood by
workers.
2. It gives minimum
guaranteed wage to all
workers.
3. It is a good source of
motivation, as the rate of
bonus is directly related to
efficiency in a rational
manner.
4. It helps to reduce job
turnover and
dissatisfaction and helps to
increase the efficiency of
workers.
■ Demerits:
1. It is not a good source of
encouragement for every
efficient worker, as benefit
id nominal above the
standard level.
2. It is difficult to maintain a
separate record of workers
of different categories.

12. Bedeaux Plan
■ This plan was devised by Charles E. Bedeaux in 1911.
■ Under this plan, every operation or job is expressed in terms of so
many standard minutes, which are called ‘Bedeaux points’ or ‘Bs’.
Such Bs representing one minute through time and motion study.
■ If a particular job is rated at 60 Bs (or 1 B hour), the worker is
allowed one hour for its completion and receives a bonus of 75% for
the number of Bs i.e. time saved. This means Bonus is paid when
actual performance exceeds standard persormance.

13. Bedeaux Plan (Contd.)
■ Merits:
1. It is applicable for all kind of
job.
2. It ensures minimum wage
to workers.
3. It is suitable for plants
where workers are assigned
diverse kind of jobs.
4. The method is simple and
easily understood.
5. Since ¼ of wages for time
saved go to supervisor, they
feel motivated to get higher
productivity from the
workers.
■ Demerits:
1. The process is complicated
in terms of calculation.
2. Workers’ avoid sharing their
efforts with supervisors.
3. The speedy job of the
workers to save time may
affect, quality of product.

14. Taylor Plan
■ F. W. Tylor, father of scientific management initiated this plan under
which an efficient employee is rewarded and one who inefficient is
penalised.
■ He suggested differential piece rate plan where standard workload
for every worker is calculated on the basis of time and motion study.
■ If worker completes the task in standard time, he is paid at high rate
and low rate is paid if more than standard time is taken.
■ No minimum are guaranteed.
■ The system is designed to encourage the efficient workforce by
providing higher rate of payment and induce them to produce up to
their full capacity.

15. Tylor Plan (Contd.)
■ Merits:
1. There is clear demarcation
of efficient and inefficient
employees.
2. Easy to understand and
calculate.
3. It helps to motivate efficient
employees and induce them
to utilise their maximum
potential.
4. It helps to remove inefficient
workers from the
organisation.
■ Demerits:
1. No minimum wage is
guaranteed.
2. The feeling of jealousy and
conflict get generated among
slow workers.
3. It adversely affects the health
of workers because of over-
exertion for achieving the
standard output.
4. It causes serve punishment to
low or inefficient workers.

16. Merrick Plan
■ This is similar Taylor’s Plan, except there are three rates are established.
1. High for production exceeding 100% standard.
2. Medium for production between 83 and 100% of standard.
3. Low for production less than 83% of standard.
■ This system is improvement over the Tylor’s plan as it reduces the
severity of the Tylor’s plan.
■ Such a system is usually introduced in an organisation where the
performance level is already high and management is aiming at 100%
efficiency.
■ Merits:
1. It is liberal for the efficient workers.
2. It reduces the severity of Tylor’s plan and is an improvement to it.
■ Demerits:
1. No minimum wage is guaranteed.
2. A feeling of insecurity develops among low performers due to wide gap
in slabs.

17. The Gantt Task and Bonus Plan
■ This plan introduced by H. L. Gantt.
■ Minimum wage is guaranteed to every worker, taking standard time
or more.
■ This is the only plan that pays a bonus percentage multiplied by the
value of standard time.
■ If a worker achieves standard performance, he gets extra wages
varying between 25% to 50% of the hourly rate for the allowed task.
But if he fails to complete the task within standard time, he receives
only the wages for actual time spent at specified rate.

18. The Gantt Task and Bonus Plan
(Contd.)
■ Merits:
1. Minimum wage is assured to
every worker.
2. The worker’s with low
efficiency are not punished as
in Tylor’s plan.
3. This plan is a motivating factor
for employees to increase their
efficiency as it is directly
related to incentive.
4. This plan is most profitable for
workers where efficiency is
very high as the bonus is paid
on the increased wage.
■ Demerits:
1. Since minimum wage is
guaranteed, workers reluctant
to achieve the target and
increase their efficiency.
2. There is wide gap between
wages of efficient and
inefficient workers, which
increases feeling of jealousy
and conflicts among them.
3. It increases labour cost for low
production.
4. Adequate attention is paid in
fixing the guaranteed time rate
and determination of standard
output, as any error creates
disturbance among workers.

19. Gain Sharing Plans:
■ It is an incentive plan that engages many or all employees in a
common objective.
■ These plans focus on cost components associated with an
organisations income and identify savings over which employees have
impact i.e. reduce scrap, lower labour costs, reduced utility cost, etc.
■ Key issues in designing Gain Sharing Plan
1. Strength of reinforcement
2. Productivity standards
3. Sharing the gain (split between management & workers)
4. Scope of formula
5. Perceived fairness of formula
6. Ease of administration
7. Production variability
8. Developing involvement system

20. Features of Gain Sharing Plans
■ Employees earn bonuses based upon a predetermined Gain sharing
formula
■ Initially intended to focus attention on costs.
■ Formula is tied to group or departmental performance measures.
■ It is based upon factors controllable by group.
■ It typically targets specific target area and directs employee interest
to the area or issue.
■ It reinforce the performance – reward link.

21. a) Scanlon Plan
■ The plan devised by Joseph N. Scanlon to accomplish widespread
employee participation, industrial harmony and increased productivity.
■ It involves a wage formula where incentives are derived as a function of
the ratio between labour costs and sales value of production.
■ It includes sales revenue and value of goods inventory.
■ Basic features of plan:
1. Both employees and managers can participate in the plan by
submitting their suggestions for cost cutting methods.
2. Financial incentives aimed at cutting the cost and thereby increasing
efficiency are installed. This plan essentially a suggestion scheme
where both quality and quantity of decision are higher as compared to
the usual suggestions.
■ If suggestion is implemented and successful, all employees usually
share in 75% of savings and develop a sense of partnership among
employees and increase motivation level.

22. Scanlon Plan (Contd.)
■ Merits:
1. It encourages a sense of
partnership and sharing among
workers.
2. It increases sense of
motivation among employee.
3. this plan enhances productivity
and profits, improves union
management relations and
increases inter- group and
superior – subordinate
cooperation.
4. It demands a high level of
competence from employee at
all levels.
5. Good supervision and healthy
labour relations.
6. It encourage involvement at
departmental level and
executive level.
7. There is assurance of fair and
balanced return to customers,
owners and employees.
■ Demerits:
1. The biggest criticism is that
incentive benefits being similar
to all group members, the best
performer may lose incentive.
2. The plan is failure where market
condition is too difficult to sell
increased output and thus,
enhanced productivity cause
unemployment to numerous
individuals.

23. b) Rucker Plan
■ It involves a more complex formula than Scanlon plan for
determining incentive bonus.
■ It ties incentives to a wide variety of savings.
■ The ratio is calculated that expresses the value of production
required for each unit of currency of total wage bill.
■ More attention is focused on organisation behaviour variables.

24. Profit Sharing Plan
■ Most popular because the focus is on a predetermined profitability.
■ It’s an agreement by which an employee receives a share fixed in
advance of profit.
■ It is distribution of profit percentage from net profit to workers who are
qualified to share in the earnings.
■ Features:
1. The profit to the worker is on the basis of certain percentage of ones’
monthly wages.
2. The payment is based on seniority for wages of the workers.
3. It enhances employee security and provides a group incentive to the
participants.
4. Both employer and employee mutually accept the agreement of Profit
Sharing Plan.
5. Amount of distribution is computed on the basis of some agreed
formula, which can be applied in all conditions.

25. Types of Profit Sharing
■ Current Profit Sharing: Profit paid to the employees in cash or in
the form of stock option immediately after the determination of
profit.
■ Deferred Profit Sharing: Profits are credited to employee’s
accounts to be paid at the time of retirement or in circumstances
like death, disability, etc.
■ Combination Profit Sharing: In this, a part of the profit is paid in
cash and a part is deferred and placed in employee’s account in a
trust fund.

26. Profit Sharing Plan
■ Merits:
1. It strengthen the unity of
interest and encourages the
spirit of co-operation among
employees.
2. It enhances employee security.
3. Attract and retain competent
resources.
4. It develops a sense of
partnership and commonality
of interests.
5. It motivate for better work,
which increases profit of the
firm.
6. It reduces employee turnover
and maintain cordial relation
between employee & employer.
■ Demerits:
1. There is always uncertainty of
profit due to which in turn
effect employees’ share.
2. These scheme are not
supported by TUs.
3. It demotivates efficient
employees as all the workers
without considering their
contribution shares profits in
specific ratio.
4. Profit sharing being long term
scheme does not work as
incentive due to absence of
immediate feedback about the
efforts and rewards.

27. ESOP (Employee Stock Option Plan)
■ An ESOP is defined contribution employee benefit plan that allows
employees to become owners of stock in the company they work for.
■ It is equity based deferred compensation plan.
■ Employee receive regular reports on the value of their stock and when
they leave the organisation, they may sell the stock to the organisation
or (if it is publicly traded organisation) on open market.
■ It is required by the law to invest primarily in the securities of the
sponsoring employer.

28. How does ESOP work?
1. The ESOP operates through a trust, set up by the organisation the accepts
tax deducible contributions from the organisation to purchase
organisation’s stock.
2. The contribution made by the organisation are distributed to individual
employee’s account within trust.
3. The amount of stock each individual received may vary according to pre-
established formula based on salary, designation and service.
4. The employee can cash out after vesting in the programme or when they
leave the company. The amount they may cash out, may depend on the
vesting requirements.
5. When an ESOP employee who has at least 10 years of participation in ESOP
reaches the age 55, he or she must be given the option of diversifying
his/her ESOP account up to 25% of the value. This option continues until
the age of 60, at which time the employee has a one time option to diversify
up to 50% of his/her account. This requirement is applicable to ESOP
shares allocated to employees’ account after December 31st, 1986.
6. Employees receive the vested portion of their account at termination,
disability, death or retirement. These distributions may be made in lumpsum
or in instalments over a period of years. If employees become disabled or
die, they or their beneficiaries receive the vested portion of their ESOP.

29. Advantages of ESOP:
■ Capital Appreciation: Companies sell some or all of their equity to
employees and by doing so, converts corporate and personal taxes into
tax- free capital appreciation. This allows the owner to sell 100% of
his/ her company to get money out tax- free and still maintain control
of company.
■ Incentive Based Retirement: it provides a cost- effective plan to
motivate employees.
■ Tax Advantage: it enables tax advantage purchasing of stock of retiring
company owner. With this purpose, a company owner may sell their
share to ESOP and incur no taxable gain on the sale. A company owner
can sell all or some of the company to the employees cost free. It has
been founded that owners who sell 30% or more their company to an
ESOP are allowed to ‘Roll- over’ and proceed into their securities and
defer taxation.
■ Reduction in Tax Liability: A company can reduce to corporate income
taxes and increase its cash flow and networth by simply issuing
treasury stock or newly issued stock to its ESOP.

30. Disadvantages of ESOP:
■ Defection: if the ESOP is used to finance the companies’ growth, the
cash flow benefits must be weighed against the rate of dilution.
■ Fiduciary liability: The committee members of the plan are deemed to
be fiduciaries and can be held liable if they knowingly participate in
improper transactions.
■ Liquidity: If the value of the stock appreciates substantially, the ESOP
and/ or the company may not have sufficient funds to repurchase
stock, upon employees’ retirement.
■ Stock Performance: If the value of the company does not increase, the
employees may feel that the ESOP less attractive than a Profit Sharing
plan. In extreme case, if the company fails, the employees will lose
their benefits to the extent that the ESOP is not diversified in other
investments.

31. Employee Benefits/ Fringe Benefits
■ Fringe benefits are those monetary and non monatory benefits given
to the employees during and post employment period, which are
connected with employment but not to the employees contribution to
the organisation.
■ According to US Chamber of Commerce include 5 categories of
services to fringe benefits viz., Legally required payments, pension and
group insurance, paid rest periods, waste – up time, lunch time,
payment for not worked, Christmas bonus.
■ According to Glossary of Current Industrial Relations and Wages-
Supplements to wages received by workers at a cost to employers. The
term encompasses a number of benefits- paid vacation, pension,
health insurance plan, etc.- which usually add up to something more
than a ‘fringe’ and is something applied to a practice that may
constitute a dubious benefit for workers.

32. Need for Fringe Benefits:
■ Employee demands
■ Trade union demands
■ Employers’ preference
■ As social security
■ To improve human relations
■ To retain employees
■ Skill storage
■ Hazards of Industrial Life

33. Policy Issues in benefits
■ Employee security
■ Workmen’s compensation
■ Voluntary arrangements (hospital, canteen, free meal,
accommodation, etc.)
■ Safety & Health Benefits
■ Old Age Benefits (PF, Gratuity)
■ Medical Benefits (Maternity Benefits, ESI)
■ Welfare & Recreational Facilities (Canteens, consumer societies,
housing, legal aid, employee counselling, welfare organisation,
educational facilities, transportation, parties & picnics, etc.)
■ Payment for Time not worked (hours of work, paid holidays i.e. weekly
off, shift premium, holiday pay, paid vacation)

34. Benefits
■ Voluntary Benefits
1. Pension plan premiums
2. Payment for holidays
3. Sick leave
4. Recreational bonus
5. Profit sharing
6. Death benefits
7. Free meals
8. Employee education
refund
9. Discount on property or
services
■ Government Mandate
Benefits
1. Social security
2. Medical care
3. Unemployment
compensation
4. Workmen’s
compensation