4.4 wage and wage incentive plans

WAGES AND WAGE INCENTIVE PLANS
By: Mudit M. Saxena
Dept. of Mech. Engg.

WAGE AND INCENTIVES
INTRODUCTION
 The study of work measurement leads to wage payments.
 Theoretically the wages that worker gets is proportional to the
amount of work he does.
 Wages are supposed to increase effective motivation to work hard
and better.
 Wages constitute the principle source of income for the workers for
the service rendered.
 A rational wage policy is essential to compensate the workers for
their efforts rendered.
The compensation to the employees involves the following
issues:
 Determination of wage structure/levels for different positions in the
organisation.
 Determining wage for each individual employee occupying the
position.
 Determining the method of wage payment.
By: Mudit M. Saxena, M. Tech. (indl. Engg.)

DEFINITIONS
Wages: These are the payments made by the employer to the
efforts put in by the workers towards production.
 A wage determines the standard of living and it should
represent a fair return for the effort of the worker and also
wages should be able to satisfy the primary and secondary
needs of the workers. They should be enough to provide him
a reasonable standard of living.
Nominal wages: It is the amount of money paid to the worker
in cash for the efforts of the worker towards production and
no other benefits are given to the worker. This is called
money wage. The rates of wages vary from one place to
another depending upon the de-mand and supply of labour
and the necessities of life.

DEFINITIONS
 Real wages: It represents the amount of necessaries, comforts, luxuries and
cash payment a worker gets in return for his efforts. Some organisations
provide their employees certain essential commodities, housing with free
electric and water charges, uniforms and other such facilities in addition to
the money in cash. If all these amounts are considered for wages, it
becomes the real wage.
 Living wage: When the wage rates are such that they are going to fulfill
some of the requirements of a family like foods, cloths, education and
insurance against misfortune along with other basic necessities, they are
referred to as living wages.
 Fair wage: It is a wage which is to be considered as a fair amount of return
for the efforts of the employees and should be able to cover the other
necessities of life, apart from basic necessities like food, clothes and shelter
for his family. The rate for the fair wage lies between real wage and
minimum wage.

DEFINITIONS
 Minimum wage:
Minimum wage may be defined as the wage, which not only provides for basic
subsistence but something more than this. It should be able to keep the
employees motivated and it should provide for some measure of education
medical facilities and other essential requirements. It should also consider the
cost of living.
MINIMUM WAGE
 Wage cannot be paid beyond the paying capacity of the industries or factories.
 The minimum wage is fixed taking into consideration the factors such as cost of
living, maintaining the efficiency of the workforce, keeping them motivated and
paying capacity of the industries.
 Main objectives of the minimum wages:
 To protect the sections of working population whose wages are very low.
 To prevent exploitation of the workers.
 To improve general standard of life.
 Satisfactory compensation towards efforts expended by the worker.

NEED FOR A RATIONAL WAGE
POLICY
 A sound wage policy should be aimed at social justice and
the workers should get their due share for their efforts.
The rational wage policy should consider the following aspects:
 Fixing minimum wages.
 Fixing ceilings on wages.
 Wage structure.
 Price stability and price index.
 The rationalised wage policy should aim at reducing the
relative propensity and improve the living conditions of
working class.

FACTORS INFLUENCING WAGE
SYSTEM
It is very much complex to arrive at a wage which may be
considered satisfactory for both workers and management.
The various factors that determine the wage level:
 Labour market, i.e., demand and supply of labour.
 Legal and statutory restrictions. (Minimum Wage Act, Payment of
Bonus Act 1965, Em-ployees Provident Fund, Family Pension
Fund Act 1952, Factory Act 1948, Employees State Insurance Act
1948, Payment of Gratuity Act 1992).
 Organisation's ability and willingness to pay.
 Bargaining capacity of the employer and the employees.
 Prevailing wage structure in the specific sector or industry.
 Workers skill, knowledge and experience.
 Wage levels in the specific sector or industry.
 Cost of living.

CHARACTERISTICS OF A GOOD
WAGE SYSTEM
A good wage system should be acceptable to both employees
and management.
 It should guarantee a minimum wage to the employee.
 To should be able to keep the worker motivated.
 It should provide a scope for employees to get reward for
their additional or extra effort (incentives).
 It should be consistent and should not be altered frequently.
 Should believe in equal work and equal pay.
 The system should be simple and understood by all
concerned.
 Proper encouragement should be given to utilise the full
potential of employees.
 Should make the work challenging and interesting.

TYPES OF WAGE PAYMENTS
There are two basic methods of wage payments:
 I. Wage payment on time basis.
 2. Wage payment un output basis.

 1. Wage payment on time basis: Under this
method, wages are paid to the employee based
on the time for which he works. The wage rates
are predetermined in terms of Rs. per month,
Rs./day or Rs./hour of employment. In this
system the workers are paid on time they work
irrespective of output produced.
 This system is applicable where output is not
quantifiable and it is not the criteria of
payment, where work is of not repetitive type.

WAGE PAYMENT ON TIME BASIS:
 Advantages
 System is easy to understand and simple to operate.
 Reduces the problems of industrial relations.
 The quality of the work is maintained as employees are not in a hurry to
increase quantity.
 The workman can show his efficiency and workmanship without loss to
himself.
 There is a scope for improvement in work methods.
 Disadvantages
 Does not provide any incentive to ambitious and more efficient employees.
 The output will be lowered in the absence of strict supervision.
 The basis for wage is time and not the output or efficiency. So it happens
that less efficient workers are paid equal to efficient workers.
 Employer will gain or loose by increase or decrease in output.
By: Mudit M. Saxena, M. Tech. (indl.
Engg.)

 2. Wage payment on the basis of output (piece rate system): In this system, wages are paid to
the employees in relation to the output produced. This method is very convenient where each
individual worker is capable of performing his work without any dependence on the other
individual and the output produced will be quantifiable.
 This method can be applied where output is standardised. The work is of repetitive nature.
Advantages
 It provides incentives to efficieet workers.
 Cost of supervision is low compared to time based system.
 Higher speed increases the production rate and hence reduces the cost per unit.
 Increases the utilisation of production facilities.
 Workers innovates new ways and methods of doing the work in order to reduce the time per
unit.
 Motivates workers to produce more.
 Disadvantages
 Workers in order to increase their wages through faster working, may neglect the quality.
 Because of speed, worker may be prone to accident as it is possible that he may neglect
precautions and safety measures.
 The security for the workers is low and this may seriously punish the aged and inefficient
workers.

INCENTIVE SCHEMES
Incentive schemes are intended to increase workers
motivation by allowing them to earn proportionately
higher returns from greater efforts.
 American Society of Mechanical Engineers (ASME)
defines awage incentive plan as "a method of payment
which directly relates earning to production. A system
which enables workmen to increase their earning by
maintaining or exceeding an established standard of
performance."
 These are the tools of the management to stimulate the
production by encouraging workers to produce more
than average in accordance with their productivity.

INCENTIVE SCHEMES
Incentive plans are of two basic types:
 Financial incentives: These are the rewards paid to the employees
efforts in cash.
 Non-financial incentives: These are non-monetary incentives (other
than cash). These may include gift items, discount coupons, special
holidays, etc.
Some of the non-financial incentives are:
 Management may create a climate of competition amongst the
employees to contribute constructively towards the organisation.
 This incentive promotes creativity and idea generation.
 The incentive include provision for good housing, with all modem
amenities, recreation facilities, medical facilities, etc.
 Promotion to employees and facilities for personal growth.
 Foreign business or educational trips.

INCENTIVE SCHEMES
 INDIVIDUAL AND GROUP INCENTIVE SCHEMES
 Under individual incentive scheme, individual employee is paid incentive on the basis of
the individual performance or output. This incentive is regardless of the output or
performance of the department or organisation. The employers are liable to pay incentive
to those employees who are producing more than the standard output.
 Under group incentive scheme, each employee is paid incentive on the basis of collective
performance of his group to which he belongs. This group incentive scheme is preferred
by the management as in turn they are getting an output from the group. Within the group,
each employee is going to get equal share of the incentive. Highly competent or productive
employees are not in favour of this scheme.
 CHARACTERISTICS OF A GOOD INCENTIVE SYSTEM
 The plan should be simple to understand and easy to operate. The employee should be
able to calculate his earnings.
 The incentive scheme should be consistent. Once installed, the incentive scheme should
not be alterated to often.
 The incentive scheme should be such that it should motivate the employee to produce
more.
 There should be direct relation between the effort and the reward.
 The incentive system should not create disharmony amongst the employees.

INCENTIVE PLANS
(a)Differential piece rate system
 (i) Taylor's Differential piece rate system.
 (ii) Merrick's Differential piece rate system.
(b) Time and piece rate system
 Gantt task and bonus scheme.
(c) Premium bonus schemes
 Halsey plan.
 Rowan plan.
 Bedaux plan.
(d) Efficiency based plans
 Emerson's efficiency plan.
(e) Group incentive schemes

INCENTIVE PLANS
 1. Taylor's Differential Piece Rate System
 This plan was developed by F.W. Taylor, father of scientific management.
 Under this system, a standard output for the day is fixed based upon the
accurate time and method study. The employee's who achieve this standard
or produce more than the standard are given higher rates than those who
fail to reach the standard. It considers both time and output, the differential
rates are paid based upon the quantity produced.
 Characteristics of this system
 The day's wage or earning is not guaranteed.
 Two piece rates are applicable to lower piece rate for output below standard
output and higher piece rate for output exceeding the standard output.
 Lower piece rate is considered for below standard performance workers and
higher piece rate for standard and above standard performance.

INCENTIVE PLANS
 Advantages of Taylor's Differential Piece Rate System
 Worker is paid as per his efficiency and he is paid only for production time
and not for the idle time.
 Clerical work is kept at minimum and worker knows how much he should
produce to get the required wage.
 Reduce the supervision to the minimum.
 Encourage the worker to produce more to earn more.
 It ensures better utilisation of the resource.
 Disadvantages of Taylor's Differential Piece Rate System
 Workers in order to earn more will not care much for quality of the work.
Hence more wastages and rejections.
 Quantity orientation makes the worker to work fast, in due.. course he may
neglect safety measures.
 The decrease in demand may have an adverse effect on the employees

INCENTIVE PLANS
Merrick's Differential Piece Rate System
 This system is similar to Taylor's differential piece rate system. It
provides three piece rates as compared to two piece rates given by
Taylor.
Characteristics of the System
 Minimum wage is not guaranteed.
 Standard rate is established after a through analysis of each job.
 It encourages the workers to produce more and if they come up to
83% of standard per-formance, they are going to get the piece rate
above standard piece rate.

INCENTIVE PLANS
Gantt Task and Bonus Scheme
 This scheme was proposed by Henry Gantt.
 In this system a minimum wage is guaranteed for those workers who cannot
reach bonus level. The standard output is fixed based upon the careful study. If
the worker achieves the standard output or produces more than the standard
output, he is provided with an extra allowance between 25% to 50% of the
hourly rates.
Characteristics of the System
 Minimum day's wage is guaranteed irrespective of the performance of the
worker.
 The actual output of the worker is compared with the standard output to
calculate effi-ciency.
 Time wages without bonus are paid below standard performance.
 Time wages plus an increase in wage rate is considered at standard
performance.
 A high piece rate is considered in place of time wages above standard
performance.

INCENTIVE PLANS
Halsey Premium Plan
 It is a gain sharing plan. In this plan, standard times are established
based upon the past experience. The plan guarantees to worker a
certain base rate and in addition a certain percentage of time he has
saved on the job.
 Earnings in this scheme are computed as follows:

INCENTIVE PLANS
Advantages of Halsey Premium Plan
 It guarantees the fixed wage to slow workers and at the same
time additional payment to efficient workers.
 Production cost saving.
 Simple in operation and worker can compute his days earning
without any difficulty.
 Disadvantages
 The plan does not give the bonus on the time saved but it gives
bonus only on a percentage of time saved.
 Any mistake in computing standard time affects the workers
earnings.
 Incentive is not much attractive to workers.

INCENTIVE PLANS
Rowan Premium Plan
 This plan was devised by James Rowan of Glasgow in the year
1901.
 The plan provides each workman a guaranteed minimum wage
plus bonus for certain portion of the time saved, the proportion of
time payable for incentive being the ratio of actual time taken
 to the standard time.
 Earnings under this scheme are,

INCENTIVE PLANS
Advantages of Rowan Premium Plan
 Encouragement to slow workers and trainees.
 Employer will get the partial benefit of increased output.
 A good protection against loose standards.
Disadvantages of Rowan Premium Plan
 It is more complex compared to other incentives
schemes.
 The sharing concept is not favoured by workers and so
unpopular amongst workers.

INCENTIVE PLANS
 6. Bedaux Point Premium Plan
 This system is applicable when the manufacturing involves variety of short cycle
jobs of varying work contents.
 Characteristics of this system
 Based upon the work measurement study, the standard time is established for
each job in
terms of points. One point equals one minute, i.e., a standard hour consists of
60 points.
 Guaranteed wage rate is paid up to standard performance.
 Guaranteed wage rate plus incentive bonus is paid for above std. performance.
 The incentive bonus is paid at the fixed proportion for the time saved. As per this
plan, 75% of the points saved multiplied by one sixtieth (1/60th) of the workers
hourly rate is paid as incentive.
 Advantages
 Plan is simple in design and easy to operate.
 It really gives incentive to higher production.
 This brings in a competitive spirit amongst the workers to produce more.

INCENTIVE PLANS
Emerson's Efficiency Plan
Under this plan,
 Days wages irrespective of the output performance is guaranteed.
 A standard output based on past performance is taken as 100%
efficiency.
 Actual output of the worker is compared with standard output to
calculate the efficiency.

INCENTIVE PLANS
Emerson's Efficiency Plan

INCENTIVE PLANS
Scanlon Plan
 This is group incentive plan applicable to labour intensive firms.
Characteristics of this system are:
 This is applicable to employees throughout the organisation.
 All employees recieve a guaranteed time wages.
 Ratio of labour cost to total sales value is set as an index of total labour
effectiveness.
 Actual labour cost to the total sales is calculated for the assessment period.
 An incentive bonus, equivalent to % reduction in labour to sales ratio is paid
to each em-ployee.

INCENTIVE PLANS
Scanlon Plan

INCENTIVE PLANS
Priestman Production Bonus
This is also a group incentive plan. The important features of this plan
are:
 All employees are paid guaranteed time wages.
 A standard output to be achieved (by factory or deptt.) is agreed
upon by employer and union representative. Output is expressed
in units. In case of single product and points in case of multiple
products.
 To determine standard output, number of workers in employment
is taken into account.
 Actual output is compared with standard output. If actual output
exceeds the standard output, each employee is paid production
bonus in proportion to increase in output per worker.

COMPUTATION OF BONUS
Priestman Production Bonus

ASSIGNMENT - 18
 1. Explain the factors that influence payment of wages to the employees.
 2. What are the two basic methods of payment of wages? Explain the merits and demerits of the
two methods.
 3. What is incentive? What are the different types of incentives?
 4. Explain the characteristics of a good wage system.
 5. Explain the various incentive plans.
 6. How does the Taylor's differential piece rate system differ from the Merrick's differential piece
rate system?
 7. Compare the various premium bonus schemes.
 8. Write short notes. on:
 Minimum wage policy,
 Financial and non-financial incentives,
 Individual and group incentives,
 Halsey premium plan,
 Non-financial incentives.
 9. What are the salient features of the following incentive plans? How earnings are computed in
these plans:
 Emerson's efficiency plan,
 Scanlon plan,
 Priestman production plan
 Badaux plan.

4.4 wage and wage incentive plans

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