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

1. How to design a
Universal Incentive
Scheme
For a manufacturing company

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
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3. Incentive Theory
 Let’s consider an example:
 Production Capacity: 100 units
 Production Target: 80 units (i.e. 80% of Capacity)
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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. Incentive Theory4
0 units 80 units 100 units
Ascending Incentive
Rate
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.
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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
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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
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8. Set the incentive system
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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. Set the Approach
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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
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12. Set the incentive slabs
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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:
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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. 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:
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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. 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)
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16. Incentive Slabs: Example
 Incentive Slabs according to team approach
 Type: Linear
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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. Set the incentive index
&
Fix the incentive rate17

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”
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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”
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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
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21. Divisional Index: Incentive
Rate Fixing Example
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0 units 80 units 100 units
Ascending Incentive
Rate
5 5 5 5

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
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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
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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. 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
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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)
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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”
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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
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28. Multiplicative Index: Incentive
Rate Fixing Example
28
0 units 80 units 100 units
Ascending Incentive
Rate
5 5 5 5

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
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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. 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
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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.
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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.
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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)
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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!!!
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36. Thank You.
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