Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. “Variable rewards granted according to variations in the achievement of specific results”
Financial Incentives:-
Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. “Variable rewards granted according to variations in the achievement of specific results”. OR Financial rewards paid to workers whose production exceeds some predetermined standard.
Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. “Variable rewards granted according to variations in the achievement of specific results”. OR Financial rewards paid to workers whose production exceeds some predetermined standard.
Motivation & Incentives:-
Different people react to different incentives in different ways. Not everyone react to a reward in the same way & not all rewards are suited to all situations. Hence Incentive plans have to be carefully drawn.
Different people react to different incentives in different ways. Not everyone react to a reward in the same way & not all rewards are suited to all situations. Hence Incentive plans have to be carefully drawn.
Employee Preference for Non-Cash Incentives:-
- Easily understandable, equitable, and powerful incentives since rewards are proportionate to performance.
- Employee resistance to changes in standards or work processes affecting output.
- Quality problems caused by an overriding output focus.
2. Merit Pay as an Incentive: A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.
- Frederick Herzberg:-
Frederick Herzberg said the best way to motivate someone is to organize the job so that doing it provides the feedback & challenge that helps satisfy the persons “higher-level” needs for things like accomplishment & recognition. Herzberg says the factors “hygiene” that satisfy lower-level needs are different from “motivators” that satisfy or partially satisfy higher-level needs.
Frederick Herzberg said the best way to motivate someone is to organize the job so that doing it provides the feedback & challenge that helps satisfy the persons “higher-level” needs for things like accomplishment & recognition. Herzberg says the factors “hygiene” that satisfy lower-level needs are different from “motivators” that satisfy or partially satisfy higher-level needs.
- Victor Vroom:-
Victor says a persons motivation to exert some level of effort depends on 3 things:-
Expectancy ( A persons expectation that his or her effort will lead to performance)
Instrumentality ( The perceived relationships between successful performance & obtaining the reward)
Valence ( The perceived value a person attaches to the reward)
Motivation= (E*I*V)
Victor says a persons motivation to exert some level of effort depends on 3 things:-
Expectancy ( A persons expectation that his or her effort will lead to performance)
Instrumentality ( The perceived relationships between successful performance & obtaining the reward)
Valence ( The perceived value a person attaches to the reward)
Motivation= (E*I*V)
Importance of Incentives:-
- Inducement & Motivation of workers for higher efficiency & greater output;
- Earnings of employees would be enhanced due to incentives;
- Reduction in the total as well as unit cost of production;
- Reduced Supervision, Better Utilization of equipment, Reduced Scrap, Reduced Absenteeism & Increased Output.
- Inducement & Motivation of workers for higher efficiency & greater output;
- Earnings of employees would be enhanced due to incentives;
- Reduction in the total as well as unit cost of production;
- Reduced Supervision, Better Utilization of equipment, Reduced Scrap, Reduced Absenteeism & Increased Output.
Disadvantages:-
- There is a tendency for the quality of products to deteriorate unless steps are taken to ensure maintenance of quality through checking & inspection;
- Jealous may arise among workers.
- There is a tendency for the quality of products to deteriorate unless steps are taken to ensure maintenance of quality through checking & inspection;
- Jealous may arise among workers.
Types of Incentives:-
I. Individual Employee Incentives:-
1. Piecework Plans: Piecework is the oldest individual incentive plan & is still the most widely used. Here the worker will be paid a sum i.e. piece rate for each unit he or she produces.
a. Straight Piecework:- Here the rate per unit of output is fixed, & the total earnings of a worker are arrived at by multiplying the total output by the rate per unit. E.g. If the rate per unit is 10Rs & the total output of an employee is 100 units, his earnings will be 100*10=.
b. Standard Hour Plan:- Standard time in terms of hours is fixed for completion of a job. The rate per hour is then determined. The worker gets a premium equal to the % by which his or her performance exceeds the standard.
Pros & Cons of Piecework:-a. Straight Piecework:- Here the rate per unit of output is fixed, & the total earnings of a worker are arrived at by multiplying the total output by the rate per unit. E.g. If the rate per unit is 10Rs & the total output of an employee is 100 units, his earnings will be 100*10=.
b. Standard Hour Plan:- Standard time in terms of hours is fixed for completion of a job. The rate per hour is then determined. The worker gets a premium equal to the % by which his or her performance exceeds the standard.
- Easily understandable, equitable, and powerful incentives since rewards are proportionate to performance.
- Employee resistance to changes in standards or work processes affecting output.
- Quality problems caused by an overriding output focus.
2. Merit Pay as an Incentive: A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.
II. Incentives for Salespeople:-
Salespeople get straight salaries, & most receive a combination of salary & commissions. Some firms pay sales people fixed salaries perhaps with occasional incentives in the form of bonuses, sales contest prizes, & the like. Commission plans pay salespeople for results, & only for results. Commission plans tend to attract high performing salespeople who see that effort clearly produces rewards. Most companies pay salespeople a combination of salary & commissions, usually with a sizable salary component.
Salespeople get straight salaries, & most receive a combination of salary & commissions. Some firms pay sales people fixed salaries perhaps with occasional incentives in the form of bonuses, sales contest prizes, & the like. Commission plans pay salespeople for results, & only for results. Commission plans tend to attract high performing salespeople who see that effort clearly produces rewards. Most companies pay salespeople a combination of salary & commissions, usually with a sizable salary component.
III. Team/Group Incentive Plans:-
Firms increasingly rely on teams to manage their work. They therefore need incentive plans that encourage teamwork & focus team members attention on performance. A Team incentive plan “ Is a plan in which a production standard is set for a specific work group, & its members are paid incentives if the group exceeds the production standard”. OR Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.
E.g. Grinding & Welding works in the electrical industry, New-product development team, Assembly teams assemble cars etc.
Firms increasingly rely on teams to manage their work. They therefore need incentive plans that encourage teamwork & focus team members attention on performance. A Team incentive plan “ Is a plan in which a production standard is set for a specific work group, & its members are paid incentives if the group exceeds the production standard”. OR Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.
E.g. Grinding & Welding works in the electrical industry, New-product development team, Assembly teams assemble cars etc.
Pros:-
- Better Co-operation among workers;
- Less Supervision;
- Team incentives support group planning and problem solving, thereby building a team culture;
- Cross-training and the acquiring of new interpersonal competencies;
- Reduced incidence of absenteeism.
Cons:-
- An efficient worker may be penalized for the inefficiency of the other members in the group;
- Workers pay may not be proportionate to his or her personal efforts; - “Free-ride” effect may raise;
- Better Co-operation among workers;
- Less Supervision;
- Team incentives support group planning and problem solving, thereby building a team culture;
- Cross-training and the acquiring of new interpersonal competencies;
- Reduced incidence of absenteeism.
Cons:-
- An efficient worker may be penalized for the inefficiency of the other members in the group;
- Workers pay may not be proportionate to his or her personal efforts; - “Free-ride” effect may raise;
- Rivalry among the members of the group defeats the purpose of team work & co-operation.
IV. Organization wide Incentive Plans:-
Incentive plans in which all or most employees can participate. These plans include profit sharing, employee stock ownership & Scanlon/gain sharing plans. Profit sharing are plans in which all or most employees receive a share of the firms annual profits. It brings employee and company goals together. The idea is that, if the employees work hard to make the company profitable, their profit sharing bonus is bigger. ( In cash plans the firms simply distributes a % of profits usually 15%-20% as profit shares to employees at regular intervals ) Employee Stock Ownership Plan are the company wide plan in which a corporation contributes shares of its own stock to a trust established to purchase shares of the firm’s stock for employees. The trust distributes the stock to employees on retirement or separation from service, assuming the person has worked long enough to earn ownership of the stock.Pros of ESOP’s:-
- The Company gets a tax deduction equal to the fair market value of the shares that are transferred to the trustee, & can also claim an income tax deduction for dividends paid on ESOP-owned stock;
- ESOP’s do encourage employees to develop a sense of ownership in & commitment to the firm.
Employee Stock Options is granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.
Scanlon plan- It is often the ratio of labour cost to total sales value, which is evaluated for calculating incentive.
Rucker plan- Here employees earnings are related to the value added by them. It considers savings not only of labour but also of material & overhead.
Most firms have annual bonus plans aimed at motivating managers & executives short-term performance. There are 3 basic issues to be considered when awarding short-term incentives:- Eligibility, Fund Size, & Individual Awards.
a. Eligibility: Most firms include both top & lower-level managers & mainly decide who’s eligible in several ways. Most base eligibility on a combination of factors, including job level/title, base salary, discretionary considerations etc.
- Long Term Incentives:
- Other Executive Incentives:-
Companies also provide various incentives to persuade executives to remain with the firm. This is especially important when there is reason to believe the firm is being taken by another company that wants to buy it. The target company might then install ‘Golden Parachute’ incentives. Golden Parachute are extraordinary payments companies make to executives in connection with a change in ownership or control of a Company. Golden parachutes make it easier to hire and retain executives, especially in industries more prone to mergers. They help an executive to remain objective about the company during the takeover process.
- ESOP’s do encourage employees to develop a sense of ownership in & commitment to the firm.
Employee Stock Options is granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.
E.g. Apple , yahoo, coca cola, Nike etc.
Gainsharing Plans is an incentive plan that engages many or all employees in a common effort to achieve a company’s productivity objectives, with any resulting cost-savings gains shared among employees & the company. This is a program under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.Scanlon plan- It is often the ratio of labour cost to total sales value, which is evaluated for calculating incentive.
Rucker plan- Here employees earnings are related to the value added by them. It considers savings not only of labour but also of material & overhead.
At-Risk Variable Pay Plans are plans that put some portion of the employee’s weekly, monthly or yearly pay at risk. Then, if employees meet or exceed their goals, they earn back not only the portion of their pay that was at risk, but also an incentive. If they fail to meet their goals, they forego some of the pay they would normally have earned.
Incentives for Managers & Executives:-
- Short-Term Incentives:Most firms have annual bonus plans aimed at motivating managers & executives short-term performance. There are 3 basic issues to be considered when awarding short-term incentives:- Eligibility, Fund Size, & Individual Awards.
a. Eligibility: Most firms include both top & lower-level managers & mainly decide who’s eligible in several ways. Most base eligibility on a combination of factors, including job level/title, base salary, discretionary considerations etc.
b. Fund Size: The employer must also decide the total amount of bonus money to make available. Some companies use a straight % i.e. usually of the company’s net income to create short-term incentive fund. Some firms don’t use a formula at all, but make the decision on discretionary basis.
c. Individual Awards: The 3rd task is deciding the actual individual awards. One question is whether managers will receive bonuses based on individual performance, corporate performance or both. Firms usually tie top-level executive bonuses mostly to overall corporate or divisional results. But for the lower cadre, corporate profits become less accurate gauge of a manager’s contribution. E.g. Supervisors or Heads of the Departments, it often makes more sense to tie the bonus more closely to individual performance.- Long Term Incentives:
Employers use long-term incentives to inject a long-term perspective into their executives decisions. Long-term incentives are also ‘Golden Handcuffs’ – they motivate executives to stay with the company, by letting them accumulate capital ( usually options to buy company stock) that they can only cash in after certain number of years. E.g. Stock Options, Phantom Stock etc
- Other Executive Incentives:-
Companies also provide various incentives to persuade executives to remain with the firm. This is especially important when there is reason to believe the firm is being taken by another company that wants to buy it. The target company might then install ‘Golden Parachute’ incentives. Golden Parachute are extraordinary payments companies make to executives in connection with a change in ownership or control of a Company. Golden parachutes make it easier to hire and retain executives, especially in industries more prone to mergers. They help an executive to remain objective about the company during the takeover process.
Why Incentive Plans Fail ?
• Performance pay can’t replace good management;
• You get what you pay for;
• “Pay is not a motivator”;
• Rewards punish;
• Rewards rupture relationships;
• Rewards can have unintended consequences.
• Performance pay can’t replace good management;
• You get what you pay for;
• “Pay is not a motivator”;
• Rewards punish;
• Rewards rupture relationships;
• Rewards can have unintended consequences.
Implementing Effective Incentive Plans:-
• Link the incentive with your strategy;
• Make sure the program is motivational;
• Make the plan easy for employees to understand;
• Set effective standards;
• Get employees’ support for the plan.
Employee Benefits & Services:-
This includes any benefits that the employee receives in addition to direct remuneration. Benefits & services are indirect compensation because they are usually extended as a condition of employment & are not directly related to performance. Fringe benefits covers bonus, social security measures, retirement benefits like PF, Gratuity, Pension, Housing, Medical, canteen, educational facilities & so on.
• Link the incentive with your strategy;
• Make sure the program is motivational;
• Make the plan easy for employees to understand;
• Set effective standards;
• Get employees’ support for the plan.
• Use good measurement systems.
This includes any benefits that the employee receives in addition to direct remuneration. Benefits & services are indirect compensation because they are usually extended as a condition of employment & are not directly related to performance. Fringe benefits covers bonus, social security measures, retirement benefits like PF, Gratuity, Pension, Housing, Medical, canteen, educational facilities & so on.
Objectives of Fringe Benefits:-
- To create & improve sound Industrial Relations;
- To boost up employee morale;
- To motivate the employees by identifying & satisfying their unsatisfied needs;
- To provide security to the employees against social risks like old age benefits & maternity benefits;
- To create a sense of belongingness among employees & to retain them;
Need for Extending Benefits to Employees:-
- Rising prices & cost of living has brought about incessant demand for provision of extra benefits to the employees;
- Employers have found that fringe benefits present attractive areas of negotiation when large wage & salary increases are not feasible;
- Recognition that fringe benefits are non-taxable rewards has been a major stimulus to their expansion;
- The growing volume of labour legislation, social security legislation made it imperative for employers to share equally with their employees the cost of old age, disability benefit etc;
- The growth & strength of trade unions;
- Paid Holidays: According to Factories Act, 1948, an adult worker shall have a weekly paid holiday, preferably Sunday. When a worker is deprived of weekly holidays, he is eligible for compensatory holidays.
- Shift Premium: Companies operating 2nd & 3rd Shifts, pay a premium to the workers who are required to work during the odd hours.
- Holiday Pay: Generally organizations offer double the normal rate of the salary to those workers, who work on paid holidays.
- Paid Vacation: Workers in manufacturing, mining who worked for 240 days during a calendar year are eligible for paid vacation at the rate of 1 day for every 20 days of worked in case of adult workers.
- To create & improve sound Industrial Relations;
- To boost up employee morale;
- To motivate the employees by identifying & satisfying their unsatisfied needs;
- To provide security to the employees against social risks like old age benefits & maternity benefits;
- To create a sense of belongingness among employees & to retain them;
- To provide qualitative work environment & work life.
- Rising prices & cost of living has brought about incessant demand for provision of extra benefits to the employees;
- Employers have found that fringe benefits present attractive areas of negotiation when large wage & salary increases are not feasible;
- Recognition that fringe benefits are non-taxable rewards has been a major stimulus to their expansion;
- The growing volume of labour legislation, social security legislation made it imperative for employers to share equally with their employees the cost of old age, disability benefit etc;
- The growth & strength of trade unions;
- Labour scarcity & competition for qualified personnel has led to the initiation & implementation of these benefits, not only that it increases productivity of employees.
Types of Fringe Benefits:-
1. Payment for Time Not Worked:-- Paid Holidays: According to Factories Act, 1948, an adult worker shall have a weekly paid holiday, preferably Sunday. When a worker is deprived of weekly holidays, he is eligible for compensatory holidays.
- Shift Premium: Companies operating 2nd & 3rd Shifts, pay a premium to the workers who are required to work during the odd hours.
- Holiday Pay: Generally organizations offer double the normal rate of the salary to those workers, who work on paid holidays.
- Paid Vacation: Workers in manufacturing, mining who worked for 240 days during a calendar year are eligible for paid vacation at the rate of 1 day for every 20 days of worked in case of adult workers.
2. Employee Security:-
- Retrenchment Compensation: The ID Act provides for the payment of compensation in case of lay-off & retrenchment. The non-seasonal Industrial establishments employing 50 or more workers have to give 1 month’s notice or 1 month’s wages to all the workers who are retrenched after 1 year’s continuous service. Severance Pay- One time payment when terminating an employee.
- Lay-off Compensation: In case of Lay-off, employees are entitled to lay-off compensation at the rate of 50% of the basic wage & DA for the period of lay-off.
- Retrenchment Compensation: The ID Act provides for the payment of compensation in case of lay-off & retrenchment. The non-seasonal Industrial establishments employing 50 or more workers have to give 1 month’s notice or 1 month’s wages to all the workers who are retrenched after 1 year’s continuous service. Severance Pay- One time payment when terminating an employee.
- Lay-off Compensation: In case of Lay-off, employees are entitled to lay-off compensation at the rate of 50% of the basic wage & DA for the period of lay-off.
3. Safety & Health:-
- Safety Measures: Employee’s safety and health should be taken care of in order to protect the employee against accidents, unhealthy working conditions and to protect worker’s capacity.
- Health Benefits: Today various medical services like hospital, clinical & dispensary facilities are provided by organizations not only to employees but also to their family members. ( Sickness Benefits, Maternity Benefits, Disablement Benefits etc)
4. Welfare & Recreational Facilities:-
These Include ( Canteens, Consumer Societies, Housing, Legal Aids, Employee Counseling, Educational Facilities, Transportation, Holiday Homes etc)
5. Old Age & Retirement Benefits:-
These Include ( Provident Fund, Medical Benefit, Pension, Gratuity etc)
- Health Benefits: Today various medical services like hospital, clinical & dispensary facilities are provided by organizations not only to employees but also to their family members. ( Sickness Benefits, Maternity Benefits, Disablement Benefits etc)
4. Welfare & Recreational Facilities:-
These Include ( Canteens, Consumer Societies, Housing, Legal Aids, Employee Counseling, Educational Facilities, Transportation, Holiday Homes etc)
5. Old Age & Retirement Benefits:-
These Include ( Provident Fund, Medical Benefit, Pension, Gratuity etc)
- Health Benefits: Today various medical services like hospital, clinical & dispensary facilities are provided by organizations not only to employees but also to their family members. ( Sickness Benefits, Maternity Benefits, Disablement Benefits etc)
4. Welfare & Recreational Facilities:-
These Include ( Canteens, Consumer Societies, Housing, Legal Aids, Employee Counseling, Educational Facilities, Transportation, Holiday Homes etc)
5. Old Age & Retirement Benefits:-
These Include ( Provident Fund, Medical Benefit, Pension, Gratuity etc)
- Safety Measures: Employee’s safety and health should be taken care of in order to protect the employee against accidents, unhealthy working conditions and to protect worker’s capacity.
- Health Benefits: Today various medical services like hospital, clinical & dispensary facilities are provided by organizations not only to employees but also to their family members. ( Sickness Benefits, Maternity Benefits, Disablement Benefits etc)
4. Welfare & Recreational Facilities:-
These Include ( Canteens, Consumer Societies, Housing, Legal Aids, Employee Counseling, Educational Facilities, Transportation, Holiday Homes etc)
5. Old Age & Retirement Benefits:-
These Include ( Provident Fund, Medical Benefit, Pension, Gratuity etc)
- Health Benefits: Today various medical services like hospital, clinical & dispensary facilities are provided by organizations not only to employees but also to their family members. ( Sickness Benefits, Maternity Benefits, Disablement Benefits etc)
4. Welfare & Recreational Facilities:-
These Include ( Canteens, Consumer Societies, Housing, Legal Aids, Employee Counseling, Educational Facilities, Transportation, Holiday Homes etc)
5. Old Age & Retirement Benefits:-
These Include ( Provident Fund, Medical Benefit, Pension, Gratuity etc)
- Health Benefits: Today various medical services like hospital, clinical & dispensary facilities are provided by organizations not only to employees but also to their family members. ( Sickness Benefits, Maternity Benefits, Disablement Benefits etc)
4. Welfare & Recreational Facilities:-
These Include ( Canteens, Consumer Societies, Housing, Legal Aids, Employee Counseling, Educational Facilities, Transportation, Holiday Homes etc)
5. Old Age & Retirement Benefits:-
These Include ( Provident Fund, Medical Benefit, Pension, Gratuity etc)
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