Incentive Plans

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

What are Incentive Plans? – definition

Incentive Plans are the techniques in which an organization keeps its employees motivated to perform their specific tasks with more effort and efficiency and pay several incentives to complete those tasks.

Advantages of Incentives

Generally, the following advantages result from the introduction of incentive plans in a factory:

  • Rate of production per unit of time is increased. If fixed overheads are high, this may result in considerable saving per unit of the production.
  • Both employers and employees benefit from the incentive plans.
  • Appropriate incentive scheme reduce absenteeism and labor turnover.
  • It keeps the management alert.

Setting up Incentive Plans

While setting up an incentive Plan, following steps should be carefully taken:

  • The basis of payment should be carefully decided.
  • The plan must be considered in the light of its impact on productivity, cost reduction per unit of product, provision of real inducement and the practicable incentive bonus earnings.
  • The plan should be discussed with the shop foremen and workers union.
  • The incentive plan should be introduced with maximum clarification to the workers.
  • For a period of three or four months after the introduction of the incentive plan, results achieved must be evaluated to ensure that: (a). Productivity has actually increased. (b). labor cost and overhead of production per unit has decreased and, (c). overall wages of workers are increased and that they are happy as a result of the inventive plans.

Basic Principles of Incentive Plans

Following Principles must apply to all incentive plans.

  • The plans must result in higher productivity and increased wages to workers by working for the same number of hours as before. The incentive plans should thus be fair both to the workers as well as employers.
  • Bonus payment must relate as closely as possible to worker’s efforts.
  • The standard production must be within easy reach of an average worker.
  • Payment should not be delayed and should be immediately made on completion of work.
  • Plan should be simple so that the workers may be able to calculate their own earnings easily. It should be finished with the approval of the unions if any.

Types of Incentive Plans

There are different types of incentive plans. These are:

  1. Premium bonus plan
  2. Profit-sharing and co-ownership
  3. Group incentives
  4. Indirect incentive plans

These plans are discussed below:

1. Premium Bonus Plan

Under premium bonus plans time for a job is fixed by careful time study. If the worker performs that job in less time, he is paid a bonus for the time saved in production. Thus in a premium bonus method of incentives, a time allowance (TA) is given, the time taken is recorded and a bonus is paid on the basis of time saved (TS). It is important to remember that this method relates to bonus (extra payment) and employees basic pay and allowances remain undisturbed. The formula therefore, for the employees total remuneration is:
Normal wages + Bonus based on time saved
If no time is saved no bonus is earned by the worker and he is entitled only to normal wages.

Different methods for calculation premium bonus:

There are different methods for calculating the payment of bonus to workers for time saved. Formula of these methods are given below:
(a). Halsey Premium Plan:
Under this plan half to full amount for time saved is paid to the worker. If hald time saved is allowed bonus will be:
Bonus = 1/2 time saved x hourly rate of wages
(b). Halsey Weir Plan:
In this plan, the bonus is restricted only to one-third of the time saved i.e.,
Bonus = 1/3 time saved x hourly rate of wages
(c). Rowan Plan:
Under this plan, the amount of bonus payable to the worker is determined by the following formula:
Bonus = (Time taken / Time allowed) x Time saved x hourly rate of wages

2. Profit-Sharing and Co-Ownership

Profit-sharing is the payment to the employees of a prescribed proportion of the company’s trading profits. Co-Ownership relates to the plan under which employees may own shares in the company. Both the profit-sharing plan and Co-Ownership aim at making the employees partner in the enterprise. The workers have to decide whether they want to be well-paid risk-free labor or as risk-sharing partners.

3. Group Incentives

Some production works cannot be done by one worker and a group of workers is required to work on it. Hence, group incentive plans are chalked out and members of the group deice between themselves how to share the bonus. In such plans teamwork is very essential. Generally in such plans group piece-rate is offered with guaranteed monthly or weekly wages.

 4. Indirect Incentive Plans

Besides direct incentives plans which induce workers to put in greater effort to produce larger number of units during the same time, there are also indirect incentives which make service in a company attractive. These indirect plans include:
(1). Supervisory incentive plans based on departmental or shop output and cost-saving etc.
(2). Pension, gratuity and provident fund schemes.
(3). Annual bonus paid after close of the financial year of a company.
(4). Group insurance schemes.
(5). Assisted travel, housing facilities, prospects of promotion, training, etc.
(6). Participation in profits.

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