Employee Compensation SystemByJatinder Kumar JhaSubmitted byName: Nitin JacobSID: RH18030PGCHRM-251. Monetary or Financial IncentivesThe reward or incentive which can be calculated in terms of money is known as monetary incentive. These incentives are offered to employees who have more physiological, social and security need active in them. The common monetary incentives are:Pay and allowances. Regular increments in salary every year and grant of allowance act as good motivators. . To get increment and allowance employees perform to their best ability.Profits sharing. The organization offer share in the profits to the employees as a common incentive for encouraging the employees for working efficiently. Under profits sharing schemes the companies fix a percentage of profits, and if the profits exceed that percentage then the surplus profits is distributed among the employees. It encourages the employees to work efficiently to increase the profits of the company so that they can get share in the profits.Co-partnership/stock option. Sharing the profit does not give ownership right to the employees.
Many companies offer share in management or participation in management along with share in profit to its employees as an incentive to get efficient working form the employees. The co-partnership is offered by issue of shares on exceeding a fixed target.Bonus. Bonus is a onetime extra reward offered to the employee for sharing high performance. Generally when the employees reach their target or exceed the target then they are paid extra amount called bonus.Commission. Commission is the common incentive offered to employees working under sales department. Generally the sales personal get the basic salary and also with this efforts put in by them. More orders mean more commission..Productivity linked with wage incentives. These are wage rate plans which offer higher wages for more productivity. Under differential piece wage system efficient workers are paid higher wages as compared to inefficient workers. To get higher wages workers perform efficiently.Retirement benefits. Some organizations offer retirement benefits such as pension, provident fund, gratuity etc. to motivate people. These incentives are suitable for employees who have security and safety need.Perks/ HYPERLINK ” o “The Concept of Fringe Benefits” fringe Benefits/ perquisites. If refers to special benefits such as medical facility, free education for children, housing facility etc. these benefits are over and above salary. These extra benefits are related with the performance of the employees.2. Non-Monetary/Non-Financial IncentivesMoney is not the only motivator, the employees who have more of esteem and self actualization need active in them get satisfied with the non-monetary incentives only. The incentives which cannot be calculated in terms of money are known as non-monetary incentives. Generally people working at high job position or at high rank get satisfied with non-monetary incentives. The common means or ways of non-monetary incentives are:Status. Status refers to rank, authority, responsibility, recognition and prestige related to job. By offering higher status or rank in the organization managers can HYPERLINK ” o “Theories of Motivation: Abraham Maslow’s Need Hierarchy Model” motivate employees having esteem and self- actualization need active in them.Organizational climate. It refers to relations between superior/ subordinates. These are the characteristics which describe and organization. These characteristics have direct influence over the behavior of a member. A positive approach adapted by manager creates better HYPERLINK ” o “Concept of Organizational Climate” organizational climate whereas negative approach may spoil the climate, Employees are always motivated in the healthy HYPERLINK ” o “Concept of Organizational Climate” organizational climate.Career advancement. Managers must provide promotional opportunities to employees. Whenever there are promotional opportunities employees improve their skill and efficiency with the hope that they will be promoted to high level. Promotion is a very big stimulator or motivator which induces people to perform to their best level.Job enrichment/ assignment of challenging job. Employees get bored by performing routine job. They enjoy doing jobs which offer them variety and opportunity to show their skill. By offering challenging jobs, autonomy to perform job, employees get satisfied and they are motivated. Interesting, enriched and challenging job itself is a very good motivator or stimulator.Employee’s recognition. Recognition means giving special regard or respect which satisfies the ego of the subordinates. Ego-satisfaction is a very good motivator. Whenever the good efforts or the positive attitudes are show by the subordinates then it must be recognized by the superior in public or in presence of other employees.. Examples of employee’s recognition are congratulating employee for good performance, displaying the achievement of employee, giving certificate of achievement, distributing mementos, gifts etc.Job security. Job security means life time bonding between employees and organization. Job security means giving permanent or confirmation letter. Job security ensures safety and security need but it may have negative impact. Once the employees get job secured they lose interest in job. Of example government employees do not perform efficiently as they have no fare of losing job. Job security must be given with some terms and conditions.Employee’s participation. It means HYPERLINK ” o “Workers Participation In Management” involving employee in decision making especially when decisions are related to workers. Employees follow the decision more sincerely when these are taken in consultation with them for example if target production is fixed by consulting employee then he will try to achieve the target more sincerely.Autonomy/ employee empowerment. It means giving more freedom to subordinates. This empowerment develops confidence in employees. They use positive skill to prove that they are performing to the best when freedom is given to them.The various incentive plans can be classified into two groups: 1. Individual Incentive Plans 2. Group Incentive Plans.Type # 1. Individual Incentive Plans:In this individual employee is paid incentive on the basis of individual performance or output. The employers are liable to pay incentives to those employees who are producing more than the standard output. Individual incentive plans can be either time based or production based.In case of time based incentive plans, a standard time is determined for doing a job and this standard time served as a basis for giving incentive. A worker is considered as efficient, if he completes his job in less than standard time. The worker is awarded for his efficiency by giving incentive under some incentive plans.Some of the time based incentive plans are:I. Halsey Incentive Plan.II. Rowan Incentive Plan.III. Emerson Efficiency Plan.IV. Bedeaux Incentive Plan.In case of production based incentive plans, a standard of output is determined and wages are paid on the basis of number of units produced.Some of the production based incentive plans are:I. Taylor’s differential piece rate system.II. Merrick’s multiple piece rate plan.III. Gantt’s task and bonus wage plan.Time-Based Plans:I. Halsey Incentive Plan:In this plan, a standard time is fixed for the completion of the job. A minimum base-wage is guaranteed to every worker. If a worker completes his job in just the standard time, he will not be given any incentive. If a worker performs his job in less than standard time, he is given incentive. The incentive will be equal to 50% of the time saved by the worker.Advantages:a. It is simple.b. Each worker is guaranteed a minium wage.c. This is beneficial to efficient worker.d. Causes no harm to new worker, trainee, or slow worker.e. Management shares benefits of over-achievement by workers.Disadvantages:a. Workers get only a percentage of return on their over-achievement.b. The quality of production may suffer as workers may do work in hurry,c. There may be difficulties in setting standard time for different jobs.II. Rowan Plan:This plan is quite similar to Halsey plan. It differs only in terms of calculation of incentive for time saved. The worker gets the guaranteed minimum wages. The incentive for completing the job in time lesser than standard time is paid on the basis of a ratio, which is time saved over standard time per unit standard time.Incentive is calculated as:Incentive or Bonus=S-1/SX T x RTotal wages=T x R+ incentive=T x R(S-T)/S x T x RWhere, W=Total wagesS=Standard timeT=Time taken to complete the jobR=Rate;Advantages:a. This system checks over-speeding and overstrain by worker.b. Each worker is guaranteed a minimum wage.c. Efficiency is rewarded.Disadvantages:a. The workers find it difficult to understand.b. Discourages workers to over-achieve.c. Workers may not like sharing of profit for over-achievement.III. Emerson’s Efficiency Plan:In this plan, a minimum wage is guaranteed to every worker on time basis and incentive is given on the basis of efficiency. Efficiency is determined by the ratio of time taken to standard time. Payment of bonus/incentive is related to efficiency of the workers. Incentive will be given to those workers who attains more than 2/3rd i.e. 66.67% of efficiency. No incentive will be given at 66.67% efficiency. At 100% efficiency incentive is 20% of the hourly rate. For efficiency exceeding 100%, 1% incentive/bonus is paid for every 1% increase in efficiency.Advantages:a. Minimum wages are guaranteed.b. It is simple to understand.Disadvantages:i. Incentive after attaining standard is very low.IV. Bedeaux Point Plan:Bedeaux system also called units or point system also guarantees a minimum base wage. Under this plan, the standard time and time taken for each job is reduced to minutes. Each minute is referred to, as B’ i.e. one hour is the same as 60B’s. The workers who complete the job within standard time are paid at a normal time rate.Those who complete the job in less time are paid bonus. The bonus paid to the worker is 75% of the wages for time saved. The time saved is divided between workers and management.The formula for calculating wages is_W=TR+75% (S-T)Rwhere, w= Total wagesS=Standard timeT=Time taken to complete the jobR=Rate;Advantages:a. Minimum wages are guaranteed.b. Management also shares some percentage of bonus.Disadvantages:a. Incentive after attaining standard is very low.b. Workers do not like their bonus to be shared by management.Output-Based Plans:I. Taylor’s Differential Piece Rate System:This system was introduced by Taylor, the father of scientific management. The main characteristics of this system are that two rates of wage one lower and one higher are fixed. A lower rate for those workers who are not able to attain the standard output within the standard time; and a higher rate for those who are in a position to produce the standard output within or less than the standard time.For example, if standard production in 8 hours is fixed at 10 units. The lower piece rate is Rs.3 and higher piece rate is Rs.3.5. If a worker produces 9 units, his wages = 9 x 3 = Rs.27. In case a worker produces 10 units, his wages = 10 x 3.5 = Rs.35.Advantages:a. Provides incentives to efficient worker.b. Inefficient worker is penalized.c. This system is simple and easy to implement.Disadvantages:a. Minimum wage is not assured,b. There are chances that quality of work may suffer,c. This system is not liked by below average workers, as they do not get any incentive.II. Merrick’s Multiple Piece Rate Plan:To overcome the limitations of Taylor’s differential piece rate system, Merrick suggested a modified plan in which, three-piece rates are applied for workers with different levels of performance.These are:a. Workers producing less than 83% of the standard output are paid at basic rate.b. Workers producing between 83% and 100% of standard output will be paid 110% of basic piece rate.c. Those producing more than 100% of the standard output will be paid 120% of basic piece rate.Advantages:a. Efficient workers are rewarded handsomely.b. Minimum wages are guaranteed.Disadvantages:a. There is wide gap in slabs of differential wage rate.b. Over emphasis on high production rate.III. Gantt’s Task and Bonus Plan:This plan is based on careful study of a job. The main feature of this plan is that it combines time rate, piece rate and bonus. A standard time is fixed for doing a particular job. Worker’s actual performance is compared with the standard time and his efficiency is determined.If a worker does not complete the job within standard time i.e. he takes more time than the standard time (efficiency below 100%), he will not receive any bonus but he is given wages for the time taken by him.If a worker completes the job within standard time (100% efficiency), he is given wages for the standard time and bonus of 20% of wages earned.If the worker completes the job in less than the standard time (i.e. efficiency more than 100%), wages are paid according to piece rate.Advantages:a. Minimum wages are guaranteed.b. It is simple to understand.c. Efficient workers can earn more money.Disadvantage:a. Emphasis on over speed or high production rate.Type # 2. Group Incentive Plans:A group incentive plan scheme is designed to promote effective teamwork, as the bonus is dependent on the performance and output of the team as a whole. Under group incentive plan, each employee is paid incentive on the basis of collective performance of his group to which he belongs. Within the group, each employee gets an equal share of the incentive.Some of the group incentive plans are:I. Priestman’s Plan.II. Scanlon’s Plan.I. Priestman’s Plan:In this plan workers are not considered individually but collectively. It considers the productivity of all workers as a whole. Bonus is paid in proportion in excess of standard output per week. If in a year, the output increases either above the standard output or the output of the previous year, the wages are increased in the same ratio.II. Scanlon’s Plan:A Scanlon plan is a type of gain sharing plan that pays a bonus to employees when they improve their performance or productivity by a certain amount as measured against a previously established standard. A typical Scanlon plan includes an employee suggestion program, a committee system, and a formula-based bonus system. A Scanlon plan focuses attention on the variables over which the organization and its employees have some control.