INCENTIVES

Meaning
Incentive may be defined as any reward or benefit
given to the employee over and above his wage or
salary with a view to motivate him to excel in his
work. Incentives include both monetary as well as
non-monetary rewards. A scheme of incentive is a
plan to motivate individual or group performance.
Definitions
The following are some of the definitions of the term
Incentive:
1. Wage incentives are extra financial motivation.
They are designed to stimulate human effort by
rewarding the person, over and above the time rated
remuneration, for improvements in the present or
targeted results The National Commission on
Labour.
2. It refers to all the plans that provide extra pay for
extra performance in addition to regular wages for a
job Hummel and Nickerson.
3. It is any formal and announced programme under
which the income of an individual, a small group, a
plant work force or all the employees of a firm are
partially or wholly related to some measure of
productivity output Scott.

Need for incentive

It is true that monetary compensation does
constitute very important reason for the working of
an employee. But this compensation alone cannot
bring job satisfaction to the workers. One cannot
expect effective performance from a worker who is
dissatisfied with his job, even if he is well paid.
Sociologists and industrial psychologists also view
that the financial aspect is not the only dominant
motivating force. Confidence in the management,
pride in the job and in firm and concern for the
overall good cannot be brought by a bonus. Hence
the modern authorities on management science have
recognized the need for the provision of incentives to
build up good morale.
Incentives for work
Incentives can take any form. According to Z. Clark
Dickinson the important incentives for work can be
listed as follows:
1. Desire for livelihood and fear of want.
2. Desire for approval of master and fear of
punishment.
3. Desire for praise and fear of being dismissed.
4. Impulse to activity or joy in work and dislike of
inactivity.
5. The moral command and fear of conscience.

Robert E. Salton has mentioned the following nine

factors as the Motives for work.
1. Doing something worthwhile (Good).
2. Trust in leadership.
3. Doing my share (Participation)
4. I count for something (Recognition).
5. A decent living (Fair Wages).
6. A chance to get somewhere (Opportunity).
7. A safe future (Security).
8. Know whats going on (Communication).
9. Conditions at work (Environment)
CLASSIFICATION OF INCENTIVES
All forms of incentives can be broadly classified into
two kinds namely,
(i)
Financial Incentives, and
(ii)
Non-financial Incentives
These incentives can be further sub-divided into
various kinds. These kinds can be explained as
below:
Types of Incentives
Financial or Pecuniary Incentives
Incentives

1.
2.
3.
4.

Wages
Salary
Premium
Bonus

Non-financial

1. Job Security
2. Recognition
3. Participation
4. Pride in Job
5.
Delegation
Responsibility
6. Quick Promotion

of

7.
Facilities
Development
8.
Labour
Amenities

for
Welfare

Now we shall briefly discuss the various kinds of

incentives.
1.Financial Incentives
Financial incentives or pecuniary incentives are the
most original of all the incentives. It is given in the
form of money. The financial incentives still form the
most important influencing and motivating factor up
to a certain limit. Because it is only by virtue of the
monetary compensation that the workers can satisfy
their fundamental needs such as food, clothing,
shelter etc. The financial incentives may be either
direct or indirect. Direct incentives include wages,
bonus and other incentives directly given to the
workers in the form of cash. Indirect financial
incentives include subsistence allowance expenses,
medical expense etc.
2.Non-financial Incentives
Non-financial or non-pecuniary incentives include all
other influences planned or unplanned, which
stimulate exertion. Mere monetary incentive cannot
help the management in solving all the problems of
industrial unrest.
Further additional cash wage may also tempt the
workers to misuse the money in vices like gambling,
drinking etc. Under such circumstances, the

nonfinancial incentives have a significant role to play.

Such incentives create a healthy atmosphere and
change the mental outlook of the workers. They
make the working class more stabilized and
economically sound. Thus, in short, the workers by
virtue of the non-financial incentives are enabled to
enjoy a richer and fuller life. Experiences in foreign
countries particularly countries like Britain, America
and Japan have shown that there is a high degree of
positive correlation between non-financial benefit
schemes and labour productivity.
Examples of Non-Financial Incentives
Non-Financial Incentives can take a variety of forms.
Some of the popular ones are given below:
1.

Job Security: The management must try its

best to create a sense of job security. There
should be no risk of retrenchment, demotion and
termination. Experiences have also shown that
the productivity is less in those concerns where
workers have no feeling of safe and secure. But
it is high in those concerns where they have a
feeling of job security.

2.

Recognition: Recognition of work is the

essence of securing good work. Efficient people
would naturally like to get recognition for their
skill and excellence in their work. Such
recognition can do many things that what a cash
reward cant do. Of course it is not practicable
for the superiors to praise everybody for

everything done by them. But the technique of

praise must be practiced as far as possible.
3.

Participation: Workers feel more satisfied when

they are given an opportunity to raise their voice
in handling the affairs of the enterprise. Since
they actually take part in the decision-making
their co-operation is assured.

4.

Sincere
Interest
in
Subordinates
as
Individual Persons: Morale of employees is
enhanced when their superiors take genuine
interest in the subordinates and value them as
individuals as well.

5.

Pride in job: The workers must be made to feel

pride in their job. Various techniques can be
employed to develop pride to work. Dynamic
leadership, fair treatment, ethical conduct etc.
can effectively stimulate the workers pride in
their job and in the firm.

6.

Delegation of Responsibility: Delegation of

rights and responsibilities to execute a given
task often proves to be a strong motivating
factor. By delegation the superior trusts his
workers and stimulates them to show better
results.

7. Other Incentives: Other incentives like quick

promotion, provisions of facilities for development
and training, provision of labour welfare amenities
etc. also have a significant role to play in motivating
the employees.

Merits of Incentives
The following are the advantages
providing incentives to employees:

derived

by

1. Higher output: By providing incentives to his

employees, the employer is able to induce them
to work better. This leads to higher output.
2. Greater profits: Needless to say, higher output
results in greater profits for the business. This
happens in two ways. First, the cost per unit
becomes less and second, the enterprise is able
to keep the selling price low and this results in
greater sales.
3. No problem of idle time: In an organisation
where no proper incentives are available for the
workers, the tendency will be to while away the
time. When suitable incentives are available, the
workers become time conscious. They begin to
see every minute in terms of money.
4. Supervision does not pose any problem:
When suitable incentives are available, the
workers become duty conscious. The need for
close supervision, thus, does not arise.
5. Efficient workers are able to earn more:
Those workers who are highly efficient are able

to earn more by way of performance bonus,

higher commission and so on.
6. Possible to identify inefficient and dull
workers: If, in spite of the incentive schemes,
some workers are able to earn only their normal
wage, it should mean that they are basically
dull. The employer, therefore, has to decide
whether to retain them or subject them to
rigorous training.
7. Rate of labour turnover is bound to be low: If
adequate incentives are available to the
workers, they may not have a feeling of
dissatisfaction. Such workers are sure to have
greater work commitment and therefore may not
leave the organisation. The rate of labour
turnover, as a result, is bound to be low.
8. Reduction in complaints and grievances: As
the
organization
makes
available
suitable
incentives to the workers, they may not have
anything to complain about. This leads to reduction
in complaints and grievances.
Problems arising out of incentives
The following problems are bound to arise while
implementing an incentive plan:
1. Quality of work may suffer: The workers, those in
the production department in particular, may

give undue importance to the quantity of output

produced neglecting the quality of output. Such
a problem can be overcome only if the
organization has a perfect system of quality
control.
2. Inter-personnel relationships may suffer: Only
those employees who are really efficient will be
benefited out of incentives. This may promote ill
feelings
among
the
employees
of
an
organization.
3. Wear and tear of machines may be more: As the
employees are keen on increasing the output all
the time, they may handle the machines
carelessly. This increases the wear and tear of
machines.
4. Health of the workers may get affected: Some
workers tend to overwork in order to earn more
and this may affect their health.
5. Increase in accidents: There is always a
preference to step up output disregarding even
safety regulations and this may increase the rate
of accidents in the workplace.
6. Increase in paper work: Proper administration of
any incentive scheme involves lot of paper work. It
necessitates the maintenance of proper records
and books.

Requirements of a sound incentive plan

A good incentive plan shall fulfill the following
requirements:
1. Trust and confidence The success of any
incentive plan depends on the existence of an
atmosphere of trust and confidence between the
workers and the management. In the absence of
such an atmosphere, the workers may resist any
such proposal by the management.
2. Consensus required The management should
not take a unilateral decision while evolving an
incentive scheme. Consensus between the workers
and the management is necessary for the success of
the plan.
3. Assured minimum wage Payment to any
worker should not be totally related to his
performance. Every worker should be assured of a
minimum wage notwithstanding performance. Only
then the workers would have a sense of security.
4. No scope for bias or favouritism - The
standards set under the incentive plan should be
based on objective analysis. It should not expect too
much out of the employee nor should it give scope
for bias or favouritism.
5. Simple to operate - The incentive plan should
not involve tedious calculations. It should be so
simple that the worker will be in a position to work
out his total earnings himself.
6. Beneficial to both the workers and the
management - The incentive plan should be
beneficial to both the workers and the management.
From the management's point of view, it should be
cost effective. From the workers' point of view, it

should offer return, at a rate higher than the normal

rate of wages, for the extra efforts made by them.
7. Sound system of evaluation - A perfect system
of evaluating the employees .performance should be
created in the organisation. The results of evaluation
should be made known to the employees at the
earliest.
8. Redressing grievances - Grievances and
complaints are bound to arise whenever any
incentive plan is in vogue in the organisation. Proper
machinery should be installed for the quick handling
of all such complaints.
9. Review - The progress of the incentive scheme
should be periodically reviewed. Only then it would
be possible to notice and remove defects, if any, in
the plan.
Categories of Incentive Plans
Incentive plans fall under two categories:
(i) Individual incentive plans and
(ii) Group incentive plans
In the case of individual incentive plans, an individual
worker is rewarded for achieving a certain level of
performance. Such plans may be further divided into:
(i) Time-based incentive plans and
(ii) Output-based incentive plans
In the case of time-based plans, a standard time is
determined for the job and the worker gets his
incentive only when he completes the work in less
than the standard time. Under the output-based

plans, standard output is determined and the worker

gets his incentive only when he produces more than
the standard output. Under the group incentive
plans, incentive is determined based on the
collective output of a group of workers whose work is
inter-dependent. Such an amount is apportioned
among the group members on an agreed basis.
The following chart explains the various individual
and group incentive plans.

Various Individual and Group Incentive Plans

Incentive Plans

Individual Incentive Plans

Incentive Plans

Group
1. Priestmans Plan
2. Scanlon's Plan

Time- based Plans

1. Hasley's Plan
Piece
2. Rowan's Plan Rate Plan
3. Emerson's Plan

Output-based Plans
1.

Taylor's

Differential

2. Merrick's Multiple Piece

4. Bedeaux's Plan Rate Plan

3. Gnatt's Task Plan

Time-based Individual Incentive Plans

Halsey's Plan
F.A.Halsey, an American engineer, introduced this
plan. Under this plan, standard time is determined
for each job. A worker who completes the job by
taking the standard time or even exceeding it is paid
normal wages calculated at the time rate. In case, he
completes the job in less than the standard time, he
is given bonus equal to 50% of the money value of
the time saved. The bonus payable to the worker and
his total earnings, under the Halsey's plan, are
calculated as follows:
Bonus = 50% (Time Saved x Time Rate)
Total Earnings = Time Rate x Time Taken + Bonus
Merits of Halsey's Plan
The following are the plus points of Halsey's plan:
1. It is simple to understand.
2 The workers are assured of a minimum wage.
3. The employer and the worker share equally the
benefit resulting from savings in time.
4. The plan encourages workers to be more efficient
in their work.
Demerits

Halsey's plan, however, suffers from the following

limitations:
1. The efficiency of the worker is rewarded to the
extent of 50% only.
2. The time saved is wholly due to the efficiency of
the worker but the management grabs 50% of the
resulting benefit.
3. The plan does not say anything about, the quality
of the work done.
Rowan's Plan
Under Rowan's plan, the manner of calculating bonus
is slightly different from that under the Halsey's plan.
Bonus, under Rowan's plan is calculated as follows:
Bonus =
Standard Time

% of Timesaved x Time WageX

Total Earnings of the worker = Time Wage + Bonus

Merits
The following are the positive aspects of Rowan's
plan:
1. Minimum wage is guaranteed to all workers.
2. When compared with Halsey's plan, bonus under
Rowan's plan is more although the basic time wage is
the same under both the plans.
3. The plan provides a check against over-speeding
by workers. As the worker saves more time, his
bonus and total earnings only begin to decline. In the
above illustration, suppose, the worker completes his
task within one hour, i.e. he saves 4 hours, his bonus
will only be Rs.16. He earns the same bonus of Rs.16

by completing the task in 4 hours, saving just one

hour.
Demerits
The drawbacks of Rowan's plan are given below:
1. It is not as easy as Halsey's plan is.
2. The earnings of the worker become less as he
saves more time. This discourages efficient workers.
Emerson's Efficiency Plan
Under Emerson's plan too minimum wage is
guaranteed to all workers. Payment of bonus,
however, is related to the efficiency of the workers.
Efficiency is determined by the ratio of time taken to
standard time. Usually, a worker is given bonus only
when his level of efficiency, in terms of percentage,
is above 66.67%.
Merits
The following are the advantages of Emerson's
efficiency plan:
1. Minimum wage is guaranteed.
2. It pays bonus to workers based on their level of
efficiency.
3. The 66.67% or two-third efficiency criterion is
within the reach of many workers.
Demerits
The disadvantages of the plan are as follows:
1. It is not a straight-forward approach to
determining bonus.
2. If the standard time allowed itself is low, it may
not be possible for many workers to fulfil the
efficiency criterion laid down under the plan. .

Bedeaux's Plan
Under this plan, the standard time and time taken for
each job is reduced to minutes, and each minute is
referred to as "B", i.e., one hour is the same as 60
B's. The bonus and total earnings of the worker,
under the plan, are calculated as follows:
Bonus = 75% (Standard Time - Time Taken) x Time
Rate
Total Earnings = Time Wage + Bonus
Merits
The benefits of Bedeaux's plan are:
1. It guarantees minimum wages to the workers.
2. It enables efficient workers to earn more.
3. The benefit of three-fourth of the time saved is
given to the worker.
Demerits
The weaknesses of the plan may be stated as
follows:
1. The unit name of 'B' in place of the 'minute' does
not make the plan altogether different.
2.The entire benefit of time saved by the worker is
not passed on to him.
OUTPUT-BASED INDIVIDUAL INCENTIVE PLANS
Taylor's Differential Piece Rate Plan

F. W.Taylor, who is known as the Father of Scientific

Management, developed the differential piece rate
plan. Under the plan, two piece rates are laid down
(i) A lower rate for those workers who are not able to
attain the standard output within the standard time;
and
(ii) A higher rate for those who are in a position to
produce the standard output within or less than the
standard time.
Under the plan, minimum daily wage is not
guaranteed. Taylor's differential piece rate plan has
the following components:
(i) Standard Output.
(ii) Standard Time
(iii) A Lower Piece Rate and
(iv) A higher Piece Rate
Merits
The following are the merits of Taylor's differential
piece rate plan:
l. It is easy to understand and simple to operate.
2. It enables efficient workers to earn more.
3. Workers not reaching the standard are paid at a
lower rate. Such people, thus, are punished for their
inefficiency. This protects the interests of the
organisation.
Demerits
The limitations of Taylor's plan are given below:
l. It does not guarantee minimum wage. This creates
a sense of insecurity for the workers. .
2. There may be ill-feelings among workers in view of
the differential piece rates.

3. The quality of the output is ignored.

Merrick's Multiple Piece Rate Plan

Under this plan too a standard task is set for the
workers. But unlike Taylor's plan that provides for two
differential rates, Merrick's plan contemplates three
rates as shown below:
(i) Workers producing less than 83% of the standard
output are paid at a basic rate.
(ii) Workers producing between 83 % and 100% of
the standard output will be paid 110% of the basic
piece rate.
(iii) Those producing more than the standard output
will be paid at 120% of the basic piece rate.
Merits
The merits of the plan may be stated as follows:
1. It is an improvement over Taylor's plan.
2. It has greater flexibility.
3. It offers greater scope for efficient workers to earn
more.
Demerits
The following are, probably, the drawbacks of the
plan:
1. It is a complicated plan.
2. Even a worker achieving 83% target is branded as
a poor performer.
Gantt's Task Plan

This plan guarantees minimum daily wage. Its special

feature is that it combines time rate, piece rate and
bonus. A worker who is unable to produce the
standard output receives only the time wage. He
becomes eligible for bonus only when he attains or
exceeds the standard output within the standard
time. The rate of bonus varies between 20% to 50%
of his wages.
Merits
The plus points of Gantt's task plan are:
1. It has, as mentioned above, time wage, piece rate
and bonus. It is, therefore, a three-in-one scheme.
2 It guarantees daily minimum wage.
3. It provides enough opportunities for efficient
workers to earn more.
Demerits
The weaknesses of the plan are:
1. It is not easy to understand.
2. The fluctuations in the output levels, of different
workers not attaining the standard, are ignored and
they all receive the same daily minimum wage. In the
illustration given above, if two workers produce 6
units and 8 units respectively (against standard
output of 10), each is assured a daily wage of Rs.50.
GROUP INCENTIVE PLANS
Profit sharing
Profit sharing is the most popular method rewarding
the employees. Under it, the employees are paid in

addition to the regular wage, a particular share of the

net profits of the business as incentive.
Characteristics of Profit Sharing
The key features of profit sharing may be stated as
follows:
1. It is based on an agreement between the employer
and the employees.
2. It is a payment made after ascertaining the net
profits of the business. It is not therefore, a charge on
profits.
3. The amount paid to the employees is over and
above their normal pay.
4. The amount to the paid is determined based on
some agreed formulas.
5. The payments based on seniority and wage level
of individual workers.
Merits of Profit Sharing
The advantages are profit sharing are as follows:
1. Better employer-employee relations - This is
possible, as the employer is ready to share the
profits of the enterprise with his employees.
2. Increase in productivity -The employees make
every possible effort to increase productivity because
they know very well that higher profits for the
enterprise would mean higher bonus for them.
3. Better living standards - It helps to increase the
living standards of the employees as the amount
received is in addition to the usual wages.
4. Reduced costs of supervision - The workers
themselves are duty conscious and, therefore, they
need no close supervision. Thus, costs of supervision
are reduced.

5. Promotion of team spirit - The employees know

the importance of teamwork, as only such an effort
would result in higher output.
Limitations of Profit Sharing
The limitations of profit sharing are as follows:
1. Regular income not assured: Payment to
workers, by way of profit sharing, at a particular rate
depends upon the profits of the enterprise. If the
enterprise makes low profits or incurs losses, it will
not be in a position to pay bonus as agreed.
2. Suppression of profits: Attempts may also be
made to suppress true profits so that the employees
need not be paid their share. This is done by
manipulating accounts.
3. No inducement: Payment under the profit
sharing scheme will be made to the employees once
or twice a year when accounts are closed. Such
payments at longer intervals may not really motivate
employees. Daily or weekly incentive payments are
far more superior to profit sharing.
4. All workers paid alike: Payment to workers
under profit sharing is made without considering
their relative level of efficiency. This amounts to
doing injustice to those who have really made target
attainment possible.