Remuneration method

 Introduction
 Characteristics of a sound Remuneration
system
 Classification of Remuneration Methods
> Meaning
> Examples
> Usage

The employees working in any organization
are compensated by way of salaries, wages
and other benefits in return of services
rendered.
These services could be:
Engaging in the process of transformation of
raw material into finished product
Supporting the process of transformation by
doing other functions.

Remuneration-
 It is the salaries, wages and statutory benefits put
together.
 It is always individual based
Incentives-
 Payments and benefits given to stimulate better
performance or paid in return for a better
performance
 Could be in monetary as well as non-monetary
terms.
 It could be based on group performance.

a) It should be easy to understand for everyone and easy to
implement.
b) It should provide for a reward for good work and penalty for
bad workmanship
c) It should help keeping labour turnover within stable limits
d) It should be able to attract talent and retain them
e) It should minimize absenteeism
f) It should reflect a fair return to employees in consistence with
efforts put in by them
g) It should boost productivity and performance
h) It should be flexible enough to factor in effects of changes in
cost of living, and systems of similar companies in the
same industry.

The payments could be broadly classified
into:
 - Those paid on the basis of time spent
by an employee irrespective of output
produced by him, called Time Rate.
 - Those paid on the basis of output given
by the employee irrespective of the time
spent by him, called Piece Rate

1) Time based
 Flat time rate
 High Wage System
 Graduated time
2) Results based
 Straight piece rates
 Standard hours piece rates
 Differential piece rates-Taylor & Merrick
plans

3) Combined time and piece rates
 Emerson’s efficiency
 Gantt task plan
 Points system
4) Bonus Systems
 Halsey – plan
 Halsey – Weir
 Rowan plan
 Barth plan
 Accelerating premium plans

Payment is made on time basis like daily, weekly or monthly irrespective
of the results achieved during the time period. These payments are in
conformity with the applicable laws such as Minimum Wages Act.
Useful in following situations:
a. Where output is not distinguishable and measurable. In other
words, it’s useful when there’s no relationship between effort
and output.
b. Where a high level of skill and quality are required.
c. Where supervision is go odd. Where work is not repetitive
 Easy to understand and operate, so less clerical work is involved.
 Does not motivate increased output.
 Advance estimation of labor cost per unit becomes difficult.
 Does not distinguish between efficient and non-efficient workers.

The variants of time rate are discussed below.
a) There is no incentive to produce more within the same time as
workers do not get additional remuneration for increased
output.
b) If overtime is paid for, there is a tendency among workers
to go slow during normal time and earn more by working over-time.
There is a likelihood of output getting suffered.
c) Standards are difficult to set and operate under this method.
Workers get paid for the time clocked (i.e. entry and exit to
work place) and not as per time booked on actual work. This
may lead to idle time which ultimately will increase cost of
production.

The rates and time are fixed in advance
per day, week or month. If worker work
overtime, they are compensated at one
and half or two times the ordinary rate.
The earning therefore will vary as per the
time worked. If a time rate is fixed as Rs
100 per day of 8 hours, and the worker
works for four hours; he will get Rs 50

 This method is similar to the above except
the fact that the time rate is fixed at
a higher level compared to the rates
prevailing in the industry. This is done to
attract efficient and high performance
workers and also to induce them to improve
productivity as they would be satisfied with
high level of earnings. However, the level of
performance cannot be guaranteed over
a longer period and it also may not be
possible to keep wages always at higher
level compared to industry.

Under this method, payment consists of two portions –
one based on regular time base payments and the
other is linked to cost of living (e.g. dearness
allowance) and merit awards. As the cost of living is
taken care of, the system has an advantage. It’s
further enhanced by the fact that the method
rewards individual merits. However, merit rating is
highly subjective and thus the method is difficult to
implement. It is difficult to calculate the cost of the
cost unit. I t is generally observed that trade unions
prefer time based payments as they do not have to
guarantee output. The variations in the time based
payments do not really bring in any additional benefits
and they are difficult to sustain in the longer run

 These methods are based on the output linked payments to workers. The
payments are fixed per unit of output irrespective of the time taken by the
worker to produce a unit. The payment is simply calculated as rate per unit
x units produced. These payments may be released for a period e.g. day,
week or a month. The output produced by the workers during that period is
multiplied by the pre-fixed rate per unit. The objective here is to induce workers
to produce more and thereby increase sales. As workers get more money, they
tend to produce more. Some-times under such systems, the benefits
of increased output are shared between workers and the business.
This method is simple to understand and easy to operate. The workers also
prefer it as they can earn more by producing more. The labor cost per unit is
known in advance and hence it helps in fixation of overhead rates based on
direct wages and therefore estimation of cost per unit is easy. If benefits are
shared with employees, they are motivated to put in their best efforts.
 However, fixing a piece rate itself is not a simple job. Considerable amount of
engineering estimations, time and motion study and assessment of physical
efforts needed to perform a job are needed to arrive at a piece rate per
unit. The nature of job should be standard and repetitive for piece rate system
to be successful. It cannot be applied if the jobs are non-standard, and the
specifications change for every order received. Further, in the quest of
increasing the earnings workers may compromise quality. It may increase
supervision and cost of rework as well. It also may add to fatigue and increase
absenteeism.

 This is the simplest form of payment by
results.
 Under this a predetermined rate per unit
of output is applied.
Eg) In a laundry, a worker may get Rs0.50
for pressing one shirt. If on a day he
presses 100 shirts, he will get (100x0.50)
i.e. Rs50. If he presses 200 shirts he will get
Rs 100 and so on.

This is the result based payment with a time dimension
factored into it. We have seen that time and motion
study and other engineering methods are used to
determine time based piece rate per unit. In addition,
a standard time is set up per unit of product. Workers
are supposed to complete production of one unit
within this allotted time. The rate is fixed per hour (or
any other time unit). If the worker completes the job
within the standard time, he is paid for the 77time he
worked plus also for the time saved based on the time
rate. If he spends more than standard time per unit
of output, he is paid at this time rate for the time
actually spent on the job. Thus this takes care of time
performance as well. The formula to work out the
earnings as per this method is:

 When production is in excess of standard
performance;
Earnings = (Actual hours worked x
hourly rate per day) + Hourly rate per day
x (standard hours produced – Actual hours
worked)
 When production is at or below standard
performance;
Earnings = Actual hours worked x hourly rate
per day

 This system is simple to understand
and operate. It can be applied for
group installation type of job and also
where the jobs are of non-repetitive & non-standard
nature. It takes into account the
individual performances. Almost all
disadvantages of straight piece rate system
are removed by this method. However, a
great care needs to be taken for fixation of
time per unit of output. Also, there has to be
close monitoring of quality of the
performance. It has to be ensured that the
worker does not compromise quality in
order to show time saved.

This system is based on the logic that workers
should be rewarded for higher efficiency. The
earning method offers a motivation for
increasing productivity. These systems are
however difficult for workers to understand.
There are two variants of this system.
One was developed by F. W. Taylor (the father
of scientific management in the early era of
industrial revolution) and
the other by another expert Merrick. This
method tries to penalize workers when they do
not perform as per standard by applying
differential rates.

 The payment scheme is based on fixing two
or more pieces rates –
 a base level piece rate is used for workers
who do not perform as per standard and
 a higher piece rate is used for workers who
perform as per standard.
The difference between these two rates is
deliberately kept so wide that the award for
efficient worker is really goods
and simultaneously, punishment for
inefficient worker is severe.

question) Consider a factory operates an 8 hour day. The
standard output is 100 units per hour and normal wage is Rs 50 per hour.
The company operates Taylor plan as 80% of piece rate for workers
performing below standard and 120% of piece rate for performance at or
above standard.
Hourly rate paid = Rs 50
Standard output per hour = 100 units
Normal piece rate = (50 / 100) = Rs 0.50 per unit
For performance below standard,
the piece rate will be = 80% of Rs 0.50 i.e. Rs 0.40 perunit &
For performance at or above standard,
it will be = 120% of Rs 0.50 i.e. Rs. 0.60 per unit.
It can be found that there is a differential of Rs 0.20 between the two
piece rates. This will induce an ambitious worker to increase efficiency
and earn more.
On the other hand, inefficient worker gets penalized for not achieving
minimum standards. It will reduce fixed overheads per unit as it induces
more production.
The success of this plan depends highly on setting a standard. Any error
in fixation of the differential rates could be disastrous. Also, this system
does not guarantee any mini-mum wages. Further the piece rates and
standard are to be fixed in such a way that the earnings won’t fall below
minimum wages as per the law in force.

 The punitive element under Taylor plan was
quite severe. It tends to discourage
and attract average workers.
 Merrick modified this differential system by
introducing more slabs and by removing
the punitive element. He advocated that
performance up to a certain level
(although below standard level) should be
rewarded at normal piece rate and then
progressive slabs are provided to recognize
above standard performance.

 He worked out the following formula for
differential payments:
Up to 83 & 1/ 3% - at normal piece rate
Above 83 & 1/ 3rdup to 100% -
10% above normal piece rate
Above 100% - 20% over normal piece rate
In the above example,
the normal piece rate was fixed as Rs 0.50 per piece.
A worker under Merrick plan will guarantee this earning if
he achieve efficiency level of 83 1/ 3%. The worker, who
performs above this and up to 100% mark, will get
paid at Rs 0.55 per piece which is 10% above the
normal level. A worker giving in performance above
100% will get paid at Rs 0.60 i.e. 20% above normal
piece rate.

 DISADVANTAGE OF DIFFERNETIAL PIECE
RATE:
 Both these plans however put a cap on
maximum earnings. So the worker will just
ensure to perform at 100% or slightly
above and then does not improve
further as there is no additional incentive
for him to do so.

 The combination of time based and piece based
methods of remuneration aim at combining the
benefits and removing the deficiencies of both specific
time based and specific piece rate systems.
 Basically this method has a combo offering for the
workers – a time rate, a piece rate and a bonus.
-> Essentially for workers who do not perform as per
standards, there is a guaranteed time rate payment.
-> For workers performing above standard there are piece
rates with bonuses applicable for higher rewards.
 Variants of this system:
1) Emerson’s efficiency
2) Gantt task plan
3) Points system

 The main features are guarantee of daily wages regardless of
performance. A standard time is set for per unit of output or a
volume of output per unit of time is taken as standard.
 The following differential rates apply:
>Below 66 2/ 3rd% - Time rate without any bonus
>Above 66 2/ 3rd% up to 100% - Bonus varies between 1% to 20%*
(*At 100% efficiency the bonus percentage will be 20%)
>Above 100% performance - Bonus of 20% of basic wages plus 1% for
every 1% increase in efficiency.
 The efficiency for this purpose is calculated as:
On time basis:
Percentage efficiency = (Standard time allowed / Actual time) x 100
On output basis:
Percentage efficiency = (Actual Production / Standard
production) x 100
 Total Bonus = New bonus%*(hours worked *rate per hour)

 The efficiency for this purpose is
calculated as:
On time basis:
Percentage efficiency = (Standard time
allowed / Actual time) x 100
On output basis:
Percentage efficiency = (Actual
Production / Standard production) x 100
 Total Bonus = New bonus%*(hours
worked *rate per hour)

 The system is certainly more worker
centric than Taylor and Merrick plans.
They have an element of efficiency
based payment so as to motivate
workers. Also, a worker is kept interested
to improve even beyond 100% level as it
includes additional bonus even above
100% level. It is however complicated to
calculate and involves a lot of clerical
work in keeping records of efficiency
levels of different workers. It is difficult to
adopt this for group jobs

Q) Standard output in 10 hours is 240 units; actual output in
10 hours is 264 units. Wages rate is Rs.10 per hour.
Calculate the amount of bonus and total wages under
Emerson Plan.
Sol)
Efficiency percentage = 264/240*100= 110%
As per Emerson plan, in case of above 100% efficiency
bonus of 20% of basic wages plus 1%
for each 1% increase in efficiency is admissible.
So, new bonus percentage = 20 + (110 – 100) = 30
Total Bonus = 30/100*(hours worked *rate per hour)
= 30/ 100* (10*10) = Rs.30
Total wages = Rs. (10 * 10) + 30 = Rs. 130

 As per this system a higher standard is set and payment
is made at time rate to a worker for production below
the standard. If the standards are achieved or
exceeded, the payment is made at a higher piece
rate. The piece rate fixed also includes an element of
bonus to the extent of 20%. Bonus is calculated over
the time rate.
 The computation is usually done as follows:
>For output below standard level
-guaranteed time rate payment
>Output at standard -
Time rate plus Bonus of 20% of time rate
>Output above standard -
Bonus of 120% of normal piece rate

Q) In a factory the output produced by workers in 8 hours is A- 8 units, B- 10
units and C- 15 units.
Standard production in 8 hours is 10 units. Daily wages guaranteed are
Rs 2 per hour. Bonus rate on time rate is 20%.Standard output per day is
10 units. So ‘A’ has performed below standard, ‘B’ has achieved the
standard and ‘C’ has performed above standard.
Sol) Under Gantt Task plan the earnings will be:
A will get only time rate payment i.e. Rs 16 (8 x2)
B will get time rate + bonus @ 20% of time rate i.e. Rs 16 + 20% of Rs 16 =
Rs 19.20
C will get piece rate payment which is 120% of normal piece rate.
The normal piece rate here is ((8*2)/ 10) i.e. Rs 1.60 per unit.
120% of this is Rs 1.92 per unit.
C produced 15units, so he will get Rs 28.80
See how the earnings increase with increase in productivity. The impact
on per unit cost is worth noticing. For ‘A’ producing 8 units and getting
Rs 16 the unit cost is Rs 2. For ‘B’ producing 10 units and getting Rs 19.20,
the unit cost is Rs 1.92 and for ‘C’ producing 15 units and getting Rs
28.80, the unit cost is Rs 1.92.

 Under this method, the performance is
measured in terms of ‘points saved’ by the
workers.
 Standards are also fixed in terms of points
and workers are paid bonus based on the
points saved, either in full or a portion thereof.
 There are two variants of the points system.
The “Bs” are fixed based on a rigorous time
and motion study with time for actual work
plus a reasonable allowance for rest.

 The points are called as “Bs”.
 Hence a standard performance one hour is expressed as “60
Bs”.
 A standard number of points are specified for a job. The
worker gets a time rate payment and a bonus. When the
scheme was originally formed bonus was calculated at 75% of
points saved. Later it was modified to 100% of points saved.
 The formula is:
Time rate payment + (75% or 100%) of (points saved/ 60) x
hourly rate
Example: The standard time is 320 Bs and the worker consumes
240 Bs to complete a job. The hourly rate is Rs 10 per hour for
an 8 hour day. Here the worker has saved 80Bs.
Hence the payment based on75% bonus will be:
(10 * 8) + 75% (80/ 60)*10 = Rs 90

 This is similar to that of Bedaux.
 The standard unit of time is called a Manit. Bonus
is calculated on the basis of:
Manits saved multiplied by the value of one
Manit
 When the system was fixed originally, the bonus
due to Manits saved was shared as
-> 50% to workers,
-> 10% to Supervisors and
-> 40% was retained by the company.
At present, the entire 100% is given to the workers.

 These are also referred to as premium bonus
plans that guarantee a minimum wages per
hour plus a premium for output in excess of
stipulated norms. Here as in many of the above
schemes, a standard time is determined for a job
or operation.
 There are many variants of this method. They are
given below.
1)Halsey – plan
2) Halsey – Weir
3) Rowan plan
4) Barth plan
5) Accelerating premium plans

 This was developed by Mr. F. A. Halsey.
 Under this method the payment for work done is
related to time taken to do a job.
-> If the time taken is equal to or more than the
standard time, the worker is paid at time rate
based payment.
-> If actual time is less than the standard time, then
the worker gets a bonus @ 50% of the time
saved. The balance 50% is retained by the
business.
 The formula is:
Total earnings = (Hourly rate x Time taken) + (50%
x Time Saved x Hourly rate)

 It was developed as a modified version
of Halsey plan. The bonus percentage
was modified to 33 1/3% instead of 50%.
 The other computations are same.
 This was developed by G & J Weir ltd.
Glasgow.
 The reduction in the bonus percentage
makes this plan unpopular.

 Under this method, a standard time is fixed.
 The worker gets time rated pay as per time worked. The
bonus shared is in proportion of time saved to standard
time applied to the time rated earnings.
 In other words, the percentage time saved is applied to
time taken a payment is done for time actually taken
plus the proportion of time saved.
 The formula for the labour cost is:
(Hourly rate x Time taken) + (Time Saved x Time Taken) x
Hourly Rate/ Time Allowed
For bonus is:
(Time saved / Standard time) * Actual hours * hourly
rate

Q) The firm employs 5 workers at an early rate of 2. During the week, they worked
for 4 days for a total period of 40 hours each and completed a job for which
the standard time was 48 hours for each worker. Calculate the labour cost
under the Halsey method and Rowan method of incentive plan payments.
Sol) hourly rate= 5*2= 10
standard time= 48 hours
actual time taken= 40 hours
time saved= std.time- actual time taken= 48-40= 8 hours
 Halsey Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate)
= (10 x 40) + (0.5 x 8 x 10)
= 440
 Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x
Hourly Rate/ Time Allowed
= (10 x 40) + (8 x 40) x 10/ 48
= 467

This is also a time based payment scheme. But it
does not guarantee any time rate payment.
The earning is determined as follows:
Hourly rate x √Standard time x √ Actual time
Example: Time allowed to perform a job is 5 hours
and the hourly rate is Rs 2. If the actual time taken
by A, B and C are 6, 5, and 4 respectively, the
payment under Barth system will be calculated as:
For A = 2 x ( √5 x √ 6) = Rs 10.95
For B = 2 x (√ 5 x √ 5) = Rs 10
For C = 2 x (√5 x √ 4) = Rs 8.95
It can be seen that when efficiency goes above
100%, this scheme is not that attractive.

 For low and average levels of output, the
incentives are small, but for above average
output, the incentives are paid at
accelerated rates.
 This plan may not be suitable for machine
operators as they may want to increase
output for earning incentives. It may be useful
for supervisors.
 The most popular scheme is the equation
given as below:
y= 0.8 x sq.
where x denotes efficiency and y denotes
earnings.

Remuneration method

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