Factors
Technology : Faster, More Accessible
Computerization, initially viewed as a tool which enhanced productivity has changed organizational structure. Information flows freely all over the organization without any regard for the organizational hierarchy or structure. Jobs get eliminated, the fewer employees do more work and are more valuable.
Global Economics : Expanding the impact and limiting the cost of labour
Less employees provide more productivity and have to be paid so much more.
Competencies and Capabilities : More important than products
A good product alone is not enough to ensure success. In the future every company is required to change, to adapt, so as to make the most of constantly evolving markets. Therefore the employee’s technical know-how, skills, traits, motives, etc become very important.
People : Greater diversity, More value, Less loyalty
Performance of a company’s “human assets” can make the difference between success and failure. The workforce is no more “mechanized”, it is “intellectualized”. Therefore empowering these employees is critical. This coupled with lower loyalty makes it imperative for a company to properly compensate their employees.
This makes the employee a valuable and irreplaceable asset to the company. Retention, motivation and satisfaction become critical to these companies.
Existing work on employee incentives has been primarily focused on production industries and on improving employee productivity. However these conditions don’t always apply in service industries.
Add to that, the fact that it is a complex procedure to calculate the productivity, of say a Petrol Pump attendant.
All this drives home one clear point. Pay and related incentives for the employee is a critical tool in the hands of the employers to increase quality and customer satisfaction.
Development Issues
While designing any wage incentive scheme, we should keep the following questions in mind –
- Should rewards be paid to individual employees for individual performance?
- Should larger groups be the unit of focus?
- What should be the standard that triggers incentives?
- What should be the form (frequency of incentives)?
Of course, combinations of these plans are also possible. One of the most popular is to measure performance at the plant or total organization level but to distribute rewards at the individual level, based on some supervisory evaluation of individual performance. A key ingredient in this type of relationship is trust. There must be a good superior/subordinate relationship to allay any fears of bias in evaluation of individuals and subsequent distribution of rewards.
Group or individual plans? Level of aggregation
Level of aggregation refers to the size of the work unit for which performance is measured (e. g. Individual, work group, department, plant, organization) and to which rewards are distributed. The issue is important for two reasons. First, contrasting motivational forces are unleashed by an organization's decision to aggregate. On one side, as increasing numbers of people are aggregated to measure performance, individual performance becomes less relevant to the reward received. The perceived connection between pay and performance is lessened. Counterbalancing this, there is frequently an increase in cooperation and joint effort among employees working for a shared reward based on aggregate performance.
Level of aggregation is also important because the choice frequently influences the objectivity of the performance standards and, consequently, the type of pay system that evolves. If the existing information system can provide only very subjective supervisory ratings at the individual level of performance, it may be appropriate to focus on a higher-level measure. Moving to higher levels of aggregation yields performance measures with a more objective base (profit, cost effectiveness). And, as noted earlier, these objective performance measures allow implementation of compensation sys. terns directly tied to (group) output.
Form of incentive
Incentive and gain-sharing plans can involve three forms of payment: Commission, Bonus and Base Pay. Base Pay if used at all in an incentive scheme, is a guaranteed form of payment irrespective of output. Typically this base pay compensates for such activities as handling customer returns, fielding complaints, and waiting for machines to be repaired. All these examples restrict employee production, which is typically tied to incentive payments. Consequently this alternative compensation may be considered appropriate.
A commission is any form of payment tied directly to achievement of performance standards. Any salesperson is typically on a commission base, for example. Commissions are especially desirable because wage payments are directly tied to some form of profits index (sales, production level). Employee costs, then, rise and fall in line with revenues. When firms can least afford high labor costs (recession) employees have the lowest sales level and the smallest commissions.
Perhaps the form of incentive increasing in popularity fast rapidly is the bonus pay. Bonus is a lump sum payment to an employee in recognition of goal achievement. Typically the goal is not expressed in standard output but represents a major step toward achievement of organizational goals. Herein lies a distinct advantage. Performance goals can be changed yearly to reflect the changing nature of organizational objectives, upon completion, a previously agreed upon bonus is owed the employee (frequently a percentage of base pay)
Frequency of incentives
Instrumental-conditioning experiments indicate that rewards work best when administered immediately after task completion. This conjures up images of monkeys pressing bars and immediately receiving bananas from a chute. Obviously, this kind of compensation system would not be very popular or practical with humans. The most frequent concession is to pay incentives on standard time schedules: weekly, monthly, quarterly, and yearly. Unfortunately, though, task cycles are not conveniently equivalent to calendar cycles. Employees end up receiving incentives at times far removed from the accomplishments triggering the rewards. A more viable strategy would adopt a performance contract mechanism. Upon completion of agreed-upon work at an agreed-upon date, an incentive will be paid. If the time frame is too short to make payment practical, regular feedback about incentive accumulations should be provided until payment can be made
Types of incentive plans
Individual Incentive Plans
The essential features of any individual scheme are: -
- The reward is based solely on individual performance
- Such schemes possible only where the quantity and quality are in the hands of the individual worker
- Where the output can be measured easily
- Qualified industrial engineers have set the standard of performance.
ADVANTAGES
- Rewards can be given immediately
- It rewards the individual directly
- Creates high motivation for improved performance
DISADVANTAGES
- The quality of service may decrease in the desire for increasing output
- These kind of schemes cannot be applied to all jobs.
- There may be emerge situation where there is a lot of resentment among workers.
Group Incentive Plans
- Such schemes provide for payment of a bonus either equally or proportionately to individuals within a group
- It is related to output achieved by the group
- The quantum of bonus is larger than under the individual scheme
ADVANTAGES
- Simple to calculate
- Easy to distribute
- Can be applied to variety of tasks where measurement of individual performance is difficult
DISADVANTAGES
- Non performers also get rewarded
- Individual contributions may get ignored
- Slackers may disrupt group results
Under such scheme, all the employees share in the gains achieved by the organization through
- Higher profits
- High production & productivity
- Reduced cost
- Reduced absenteeism
Design of two sample incentive schemes
Sample ESOP Proposal
Eligibility Criteria
Prerequisites:
1. Employee should have worked with the company for a minimum of one year.
2. The employee should also be a confirmed employee.
3. The performance rating of the employee for the last one year should be "Exceptional"(L I) or "Very Good"(L2).
Those who satisfy the above mentioned prerequisites need to be further screened along these lines:
1. The employee should be in a key position in the company.
2. The employees who belong to the "must retain" category.
3. Consistently outstanding performance by the employee.
The decision to award stock options to the employee will be taken by the management.
Note:
1. Employees who were promised certain number of shares at certain periods, at the time of their recruitment, in their offer letters are also eligible as per the terms laid out in their offer letters. In future if any employee is recruited and is offered stock option in the company on terms & conditions which are different then those given in this scheme, then the terms and conditions as given in his offer letter will apply to him and this ESOP scheme will not be applicable for him.
2. If there are employees who are confirmed and who have completed one year in the group but have not completed one year in the company, such employees will be eligible for ESOP. For the purpose of their performance eligibility, their current year performance in the company will be taken into account.
PERFORMANCE ELIGIBILITY MATRIX
This matrix is to be used to find out what performance level would make people at various levels eligible for the ESOP at various periods of time.
Assumption: The percentage of people in various performance levels would be as follows:
L1 - TOP 25% OF EMPLOYEES.
L2 - NEXT 45% OF EMPLOYEES.
NOTE:
1. The eligibility criteria is more relaxed in the beginning (except for VPs & AVPs).
2. For Sr. Managers, DGMs, GMs, Managers & Executives, the eligibility criteria gets tougher over years as the Company becomes more & more established.
MULTIPLYING FACTORS
Performance Multiplying Factor (P)
Ll Performance (Top 25%) -- 1
L2 Performance (Next45%) -- 0.5
FOR OLD TIMERS
Time of joining the Co. Multiplying Factor (T)
0 - 3 Months of inception -- 1.3
3 - 6 Months of inception -- 1.2
6 - 12 Months of inception -- 1.1
12 months onwards -- 1.0
TIME FRAMES (IST JANUARY 2000 OFFER LETTERS)
1 st January 2001 -- Right for one third of shares accrues
1 st January 2002 -- Right for one third of shares accrues
I st January 2003 -- Right for one third of shares accrues
We do not want a lock-in period initially built into the scheme as the scheme is already spread over a period of 4 years and lock-in is inherent in it. We feel that any other lock-in provision will cause the scheme to lose its attraction to the employees.
ASSUMPTIONS:
Gift tax will not be applicable when the shares are transferred to the employee, as the transfer will take place when the company will become a widely held company from a closely held company. No effect of right issue bonus issues that need to be reserved for the kitty has been taken into account. Penetration of ESOP would be 70% for categories other than VP/ AVP in the first year.
LEVEL NUMBER OF SHARES (3 Years Period)
V.P. / A.V.P. A
GM / DGM / Sr. Manager B
MANAGER C
EXECUTIVES D
CALCULATION TABLE:
The Operation Of the Scheme
1.. The offer letters will be issued by 1 st January, 2000. This will contain the number of shares the employee will get at various dates during the three-year period.
2. If by January 1, 2000, the employee is not eligible for ESOP, then he will be considered again in January 1, 2001 and so on. The employee who becomes eligible in 2003 will get his last installment of shares in 2007.
3. The shares will be allotted to the employee via the offer letter for a block of 3 years and will be split into three installments.
4. The exact number of shares will be decided on the basis of last year's performance and the length of service from the inception of the company.
5. The shares will be given @ Rs 10/-(for example).
6. During the time the scheme is in operation, all the employees covered by this scheme will also be eligible to receive bonus shares if any. The bonus shares will be kept in an escrow and will be given to the employee only when the original lot of shares is transferred to him.
7. If there is a rights issue, the employee covered under the ESOP will be eligible to subscribe to the rights issue at the issue price. There will be no lock in period for such shares and the employee can sell these shares immediately.
8. The scheme will be applicable only if the employee remains in the same company or in any other company of the group. If an employee resigns from the company during the time he is covered by the scheme, he will
a.. Not get any share if he leaves before January 1, 2001
b. Will get 1/3 of his shares if he resigns after January I, 2001 but before January 1, 2002.
c. Will get 2/3 of his shares if resigns after January 1, 2002 but before January l, 2003.
The shares will be transferred to him after the lock in period.
Sample Sales Incentive Scheme
INTRODUCTION
1. This is a short-term incentive scheme valid for all orders booked between Oct. 2000 and June 2001.
2. The scheme is based on quarterly order booking targets and is transparent to cumulative performance / targets.
3. Incentives are payable quarterly on order booking (linked to targets) and collection (not linked to targets).
4. Order booking and collection incentives are independent of each other.
5. For all subsequent formulas:
N = 1 for Account Managers
N = No. Of Account Managers reporting to him for RM's (RM stands for Regional Manager)
If no. Of Account Managers reporting to a RM is 1, and then RM will be paid incentive as 50% of incentive earned by the Account Manager.
6. This new incentive scheme makes all previous incentive schemes void.
7. For all disputes GM (Sales) decision is final.
ORDER BOOKING INCENTIVE
1. All sales staff on quota can choose quarterly order booking target of either 90 x N lacs or 120 x N lacs. He can choose different targets for different quarters but targets for all quarters must be decided now. In case RM's do not send their targets, default target would be 90 x N.
2. All orders dated for the quarter and received at H.O. latest by 3rd of the first month of the next quarter will be treated as order booking for the quarter subject to order acceptance by H.O. Normally order will be accepted by H.O. if:
(i) Order is received with minimum of 25% of equipment price as advance.
OR
Formal P.0 is received from Govt. Organizations / departments or PSU'S.
AND
(ii) Other commercial terms and conditions are as per our standard norms.
AND
(iii) No technical over commitments are made.
3. Order value will include: (i) Equipment price (ii) One time charges (iii) First year fixed recurring charges payable annually in advance.
4. Quarterly order booking incentive will be as follows as percentages of order booking value in staircase manner. (Percentages indicated are applicable on the amount in that slab).
Achievements vs. Incentive payable for few specific quarterly (achievement) value are given below:
6. Incentive amount will be paid along with salary of the first month of next quarter after adjustment of amount for order cancellation (if any) for which incentive was paid earlier.
7. Incentive earned by all sales staff (Account Managers / RM's) will be split as follows: ( (i) 75% of Incentive Paid to the sales staff
(ii) 15% of Incentive Accumulated in Regional Fund
(iii) 1 0% of Incentive Accumulated in National Fund.
8. Amounts accumulated in Regional and National Funds will be apportioned to Pre-sales support staff as follows:
- Regional Fund Amongst the regional Pre-sales support staff
- National Fund Amongst all Pre-sales support staff.
9. All Pre-sales support staff will be categorized in three categories (depending on knowledge, experience and past contribution) namely A, B and C. Incentive amount will be apportioned in the following ratios:
A 50%
B 35%
C 15%
10. A Pre-sales support staff will be entitled for incentives (if any) for a quarter only if he has worked in that position for at least 45 days in that quarter.
COLLECTION INCENTIVE
1. Collection incentive is payable on collection irrespective of target or achievement.
2. Collection incentive will be paid as follows:
(i) Advance : 0.6% / N of amount collected
(ii) Within 11 days of date of invoice : 0.6% / N of amount collected
(iii) Within 21 days of date of invoice : 0.4% / N of amount collected.
(iv) Beyond 21 days of date of invoice : - 0.2% / N of amount outstanding to be deducted from collection incentive for the quarter, if positive. Negative collection incentive will not be adjusted with order booking incentive.
(v) Beyond 45 days of date of invoice : -0.4% / N of amount outstanding to be deducted from collection incentive for the quarter, if positive. Negative collection incentive will not be adjusted with order booking incentive.
3. There will be no collection incentive (neither positive nor negative) for orders through other group companies.
4. Incentive amount will be paid along with salary of the first month of next quarter after adjustment of amount for order cancellation (if any) for which incentive was paid earlier.
5. Incentive earned by all sales staff (Account Managers / RM's) will be split as follows:
- 75% of Incentive Paid to the sales staff
- 25% of Incentive Accumulated in a Fund/Funds
TOTAL INCENTIVE EARNING PER QUARTER (ACCOUNT MANAGERS)
MAXIMUM INCENTIVE PAYABLE PER QUARTER FOR ORDER BOOKING AND COLLECTION INCENTIVE (applicable to Account Managers as well as RMs):
- Order booking incentive: 160 K
- Collection Incentive: 140 K
A comparative study of existing incentive schemes in three sectors
Statistics about IT Services and IT Enabled Services
The IT and ITES companies are where the greatest need for incentive schemes is felt in today’s economic scenario. Companies in these sectors are faced with high and rising attrition rates as the monotonous, and sometimes unpleasant, work drives people to constantly be on the lookout for higher salaries. This worldwide trend is more visible in India, where both these sectors are experiencing rapid growth.
Companies strive to retain their existing employees, recruit bright new people, and lure away high-performing employees of other companies. Apart from that, companies have to constantly drive their employees to raise levels of productivity and keep them high. As a result of these pressing needs, a variety of incentive schemes are employed, some more successful than the others.
We will explore the incentive schemes of a few companies in the following pages.
IT sector
Birla Soft Ltd
This company has both individual and group based schemes, but no organization based schemes. A short overview of both:
Individual incentive schemes:
Based on an employee’s performance, there are three levels of rewards:
- Star Employee of the month
- Star Employee of every quarter
- Star Employee of the year
All employees selected for these rewards receive cash awards along with, with the highest cash award being for star employee of the year, and the lowest for star employee of the month.
The criteria for selection is the feedback given by higher level managers, like team leaders, or project leaders.
Group Based Incentive schemes:
Apart from individual rewards, there are also project based awards, which work in the following manner:
The company has SLAs (Service Level Agreements) with all its clients, and based on the percentage of SLAs that the team was able to achieve, the members of the team can either get cash rewards, or may even have penalties imposed on them.
This scheme is totally objective in nature. An illustrative example is given below:
Say the total SLA target was 70-80%,
No. of SLAs met by the team = 65 %
- Failed SLAs ---- > Penalty MAY be imposed by client (BSL pays x% of invoice to client)
No. of SLAs met by the team= 73 %
- Met SLAs ------> No rewards
No. of SLAs met by the team = 86 %
- Exceeded SLAs ------> Reward given to BS, which will be distributed amongst the members of the team, with some part retained by BSL.
These Incentives take the form of fixed percentage of project invoice amount (penalty or reward).
Source: Ex employee
TCS
This company has Individual Incentive schemes as well as group incentive schemes.
Individual incentive schemes:
- Recognition of star performers / high fliers — to recognize outstanding talent
- Nomination to coveted training programs — to encourage self-development.
- Spot awards — to ensure real-time recognition of employees
- Performance-based annual increments — to recognize high performers.
- Long-service awards — to build organizational loyalty
- EVA-based increments — to ensure performance-based salaries
The criteria followed for evaluation is EVA (Economic Value Added) based evaluation of employee performance.
How it works:
The performance of an employee – which is ascertained by his contribution to the team, and the revenue that his work generates for the company – is weighed against the CTC (cost to company) of the employee.
Typically, an employee will fetch more revenue than his CTC, and based on this objective criteria, the top performers are given the various incentives listed above.
The group incentive scheme
This consists of the award of “best project” to a particular project, which entails a fixed cash payment to the team members. Typically, more than one team works on a project, and this award is designed such that it fosters team work and cooperation.
However, the precise evaluation and implementation details are unavailable.
Source: Company PR Profile
WIPRO
Individual incentive schemes:
The individual incentives awarded are salary hikes and (or) ESOPs.
Salary hikes range between Rs 2,000 to Rs 7,500
Criteria for evaluation:
Each employee has to set goals for himself in each appraisal, and in the subsequent appraisal, stock is taken of how many goals he was able to meet.
This is then measured against the relevance of that employee’s goals to the company, in terms of the benefit the company derived from them.
This is done according to the following matrix
Y
X
Y Axis = Relevance of work to organisation.
X Axis = Personal goals achieved.
According to the position of the employee in the matrix, his salary hike and the ESOPs awarded are decided, with 1 being the highest rating, and 5 being the lowest.
The group incentive scheme
Apart from individual incentives, Wipro has group based incentive schemes on the following lines.
There is a Quarterly Salary pool awarded to teams based on the performance of teams. Along with that, each vertical within the company growth as well as performance targets, and for exceeding these targets, the members of these teams received exponential rewards. Eg, if they exceed their target requirements by 2%, the rewards might be of the order of 10-15% of their normal pay.
This scheme is followed for all employees, including junior level managers.
Source: Ex employee
Comparative study of the schemes
* Wipro’s individual incentive evaluation differs slightly from that of the other two companies, insofar as the fact that an employee’s performance is not the sole criteria.
As we can see, all companies have different evaluation criteria, and their schemes differ in terms of rewards as well. Of the three companies under study here, TCS has the most objective and transparent criteria for evaluation of rewards for individuals.
Amongst the group based schemes, BSL has the most objective and transparent criteria.
These schemes have been successful in increasing employee productivity since their inception, but their success in employee retention is meager, to say the least. A major reason for that is that such schemes now exist in almost all companies, and while employees might be motivated by such schemes to work harder, they know that this hard work will be rewarded across all companies fairly equally.
ITES sector
General Electric Capital International Services
GE is widely considered the leader in the ITES across the world, and this success is reflected in the success of their incentive schemes. GE’s incentive schemes have formed the basis for a lot of incentive schemes followed in other companies.
The individual incentive scheme:
An employee’s compensation consists of regular pay, and VIC – Variable Income Component. This VIC is calculated on the basis of the performance (call time ,customer satisfaction, TAT *). On this basis, the employees are categorized into the 20-70-10 groups
1) Top 20% performers - Receive larger bonus
2) 70% High performers – Receive lower bonus
3) 10% Under performers – Receive no bonus
* TAT – Turn around time. The time that an employee takes to get back to a customer with the solution asked for.
However, for certain processes, where each team member is CTQ (critical to quality), even if he takes one unscheduled leave per month (even for illness), the employee is not eligible for VIC, irrespective of his performance on the other days.
The respective cash awards for each performance group are:
- Top 20% :Outstanding performance [OS] - Rs. 5100 (approx.)
- Medium level performers (70%): On exceeding performance [EE] -Rs. 4250 (approx.)
On meeting targets [HM] - Rs.1875 (approx.)
- Bottom 10% : On not meeting [NI] - Rs.0
Additionally, the bottom 10% are sometimes sent for re-training, based on the feedback of their immediate superiors, and if an employee is persistently found in the bottom 10%, he is asked to leave the company. In India, specifically, the company is more lenient in this, and an employee is usually given two to three chances before he is asked to leave the company.
Retention schemes :
The various processes are classified in clusters: P1 (least skill requirements) to P4 (highest skill, training requirement). A P4 employee has max CTC (in terms of training and recruiting).
To retain employees working in P4 and P3 clusters, GE follows a DIP – a deferred income plan, wherein a lump sum of money paid after a stipulated time period (as agreed to in the service agreement), If the employee stays in the company.
For certain process, DIP is as high as 8 lacs for over 3 years of continuous service for band 5 employees.
The criteria for evaluation is the No. of years that employee has worked in the company., and is not performance based.
Source: HR executive in GE.
ICS Club Marketing INDIA Ltd.
The individual incentives:
Employee gets a certain cash reward proportional to the no. of units sold above the base limit. These rewards are given weekly.
Apart from weekly rewards, there are also daily incentives of Rs.500 to Rs. 1000 decided on the employee’s performance which is judged by feedback given by his sales manager.
Being a smaller organization, ICS has a short time period for award of incentives
Source: Present employees.
EXL
In EXL, incentives are frequently 20% of total compensation, i.e. around 4k per month.
For employees below manager level:
The evaluation of an employee’s performance is done on the basis of Call time, FTR (First time resolution), target achieved, call quality. However, to be eligible for such incentives, the employee has to put in a minimum of 25 days/month and 9hrs a day.
During each appraisal period, an employee has targets set, and so do groups. Apart from the above mentioned criteria, if the group that the employee is working in achieves its targets as well, the employee gets a higher performance incentive. This is an indirect group incentive scheme as there is no direct link between the group’s performance and the employee’s rewards received.
Managers get bonus based on company performance
Apart from performance based incentives, EXL also has retention plans, to reduce the attrition rate.
If an employee stays in the company for 3 years, he’s given a cash reward of 50,000rs. This is applicable to employees working at the customer executive level, as well as Team Leaders.
There are also some other incentives followed that are individual in nature, though still different from individual incentive schemes in general:
Employees are asked to give suggestions which they feel will improve the performance of the company. If the scheme is implemented and is successful (ie, results in increased profit to the company), the employee gets a cut of money saved.
A specific example of this scheme is : Based on an employee’s suggestion for a specific vertical, Insurance, EXL implemented the following scheme. The Team Leader and individual employees were given money based on money recovered, to the tune of Rs. 30 per cheque. The gains to individual employees were not that large, but Team Leaders gained tremendously as they typically have a lot of individuals working under them. As a result, the Team Leaders worked extra hard, and drove the people under them to achieve better results, and this scheme resulted in a significant gain for the company.
Source: Ex – employees
Comparative study of the schemes
*FTR – First time resolution. Whether the employee was able to resolve the customer’s problem the first time.
The retention schemes of GE have been especially successful, primarily because the clauses were mentioned specifically in the Service agreements between the employees and the company. The specific process that the HR executive we spoke with was working in, saw only two people leaving in the last year, while attrition rates of 20-30% are common throughout the industry.
At EXL, the attrition rate is around 34%, which is very high, but this is also due to the fact that EXL is not thought to have as bright a future as some other ITES companies, and hence ESOPs were not considered very attractive by the employees.
AIRLINES
Indian Airlines
IA followed organization based incentive schemes, but did not achieve any significant measure of success. Indeed, it would not be assert that the incentive schemes in IA were failures.
IA followed, what it called, PLI – Productivity Linked Incentive Schemes. An employees productivity was measured by Available Tonne Kilometer (ATKm) per employee. Based on whether the ATKm per employee had risen or fallen, and the extent of the change, the wages of employees are increased, and this was hoped to be an incentive for employees to increase their own productivity.
The benefits of PLI ranged from 61 per cent to 1165 per cent of average wages, and as a result, wages eat up a significant portion of IA’s revenues.
The corresponding productivity increase per employee in six-year period was 7.51 per cent compared to increase in wages per employee at 207 per cent. Obviously, IA employees gained far more than IA as a result of this PLI scheme.
The ATKm per employee of IA for the last 6 years is given below
Source : CAG Report, 2000
Air India
AI also went in for PLI – Productivity Linked Incentive Schemes.
However, instead of just one parameter, as was the case with IA, the increase in productivity levels was measured by
- Availability, Dispatch Reliability, PAX per employee and Revenue Per ATKm are uncapped parameters, i.e. PLI payments on these parameters continue beyond 100% payment level.
- Only in case of Equipment Serviceability, the Management has capped the PLI at 93% performance level.
Failure of PLI
- Base levels for PLI were pegged at average level not at above average levels.
- PLI was used not as a productivity or performance benefit but as a measure to increase wages
- Result was an incentive for average productivity.
- The performance on the ‘aircraft availability’ could be translated into revenue for higher aircraft utilization which did not happen.
PAX = Passengers Carried
Source : CAG Report, 2000
Continental Airlines
Incentive : Group incentive scheme.
- $65 paid to hourly employees
Evaluation :
- Bonus paid in every month that Continental’s on-time performance ranked among the top five in the industry.
- The rankings were based on the proportion of flights arriving on time (within 15 minutes of schedule) as reported by the Department of Transportation (DOT).
Airline ranking according to on time arrivals.
Source : Firm-Wide Incentives... at Continental Airlines - Marc Knez & Duncan Simester
NOTE : Continental Airlines is the only firm that has been studied in this survey which is not Indian. This was due to the lack of relevant data in any Indian organisation.
Comparative study of the various schemes
Air India and Indian Airlines have apparently attempted to appease the strong labour unions in using the wage incentive schemes as a tool to increase wages instead of its right position as a motivational tool to increase productivity and performance.
The failure of this individual incentive scheme is in sharp contrast to the simple group incentive scheme applied at continental airlines.
Conclusions
We have completed a study and comparison the wage incentives schemes followed in the service sector, in summation we can list out the following points as the learnings from our study.
- There is a need for proper documentation introducing incentive schemes (Sample documentation Performa is given below).
- The advantages and disadvantages of introducing a wage incentive scheme.
- The problems, challenges and issues faced while implementing wage incentive schemes.
Documents Introducing Incentive Schemes
The documentation associated with financial incentive schemes based on Work Measurement is of the greatest importance. If all conditions are not clearly specified and agreed by all concerned when the scheme is introduced, misunderstandings are very likely to be encountered when (as almost inevitably occurs) changes arise after the scheme has been installed. Given below is a sample procedure about the documents considered necessary –
-
A Report, which recommends management to introduce the scheme.
- An Incentive Scheme or Schemes. Here are set out the conditions under which the scheme or schemes will operate.
- A Work Specification-recording the methods and equipment and the build-up of Work Values at the time of the introduction of the scheme or schemes.
-
A Reference Period and Savings Memorandum. This records details of performance, production, etc., in a representative period prior to the introduction of the scheme and forecasts the results expected from its introduction
The Report
The Report could be a normal works document issued in the customary way and numbered in accordance with an established system. The authors should be the Manager of the section or department. It would usually detail the objectives to be achieved, the reasons for recommending the particular scheme, how the scheme would operate, and the results expected. The Report would be circulated as may be customary to all management, operational and functional, likely to be concerned. It should be bound within covers with the following:
- The Incentive Scheme or Schemes recommended in the Report.
- The Work Specification.
- The Reference Period and Savings Memorandum.
The Incentive Scheme
This would describe in adequate detail the work covered by the Incentive Scheme, the employees involved in it, the basis of payment, bonus base rates, conditions, and all the other facts relevant to its operation. The Incentive Scheme should be available for lending to the employees concerned in the scheme during negotiations and also for transmission to the permanent officials of their trade unions.
The Work Specification
This would describe the work performed in all the detail necessary to ensure real understanding. It would usually detail the Work Values of the elements of that work and so illustrate clearly how, and under what conditions, the Work Values quoted in the Incentive Scheme itself had been derived. It would also contain information regarding the materials, methods, and equipment and working conditions, which applied when the scheme was introduced. Unlike the 'Incentive Scheme' described above, the circulation of the Work Specification would have to be restricted because, in describing the work in adequate detail, it might well contain technical information, which must remain confidential. One copy of the document could be in possession of the local manager for consultation on request to him.
The Reference Period and Savings Memorandum
For most schemes, brief details of performance and labour costs in the Reference Period along with the results expected would be given in the Report. The Reference Period and Savings Memorandum would give the supporting data.
Suggested paragraph headings for documents
The following list gives suggested paragraph headings for the various documents, which are normally required in the presentation of financial incentive schemes. The actual content of each paragraph will of course depend upon the circumstances of the particular scheme.
- Summary
- Recommendations
- Introduction
- Basis of Bonus Payments
- How work has been measured
- How performance will be calculated
- How payment is related to performance, etc.
- Suggestions for Method Improvements
- Reference Period
- Savings Expected
- Quality and Safety
- Documents Appended
- Date of Application
- Workers concerned
- Number of Workers
- Basis of Bonus Payments
- Bonus Base Rate
- Bonus Earnings
- Work Values
- Guarantee
- Other Factors (if required)
- Quality and Safety
- Allowances
- Waiting Time (if applicable)
- Unmeasured Work (if applicable)
- Production Count
- Weekly Work Sheet
- Plant Discipline
- Review of Scheme
- Modification and Withdrawal
- Description of Work (general)
- Work Values in detail
- Allowances
- Machinery and Equipment
- Product Specifications
- Plant Discipline
- Guarantee
- The Reference Period and Savings Memorandum
- Reference Period (the dates)
- Performance
- Direct Labor Costs (per 1,000 Standard Minutes)
- Labor Cost per Ton
- Rates of Pay
- Bonus Base Rate
- Bonus at Standard Performance
- Unit Labour Cost
- Standard Labour Cost per Ton
- Potential Savings
Advantages and Disadvantages of Incentive Schemes
- Advantages of an Incentive (Payment by Results) System
- Payment by results systems can make a substantial contribution to a rise in productivity, to lower production costs, and to increased earnings of workers.
- In general, less direct supervision is required to maintain reasonable levels of output than under payment by time.
- Workers are encouraged to pay more attention to reducing lost time and to make more effective use of their equipment.
- In most cases, systems of payment by results, if accompanied by improved organizational and work measurement, enable labor costs to be estimated more accurately than under payment by time and so facilitate the application of modem systems of standard costing and budgetary control.
- Generally, introduction of a payment-by-results system leads to a deterioration in the quality of the product. Additional expense is involved in the application of an adequate system of quality control.
- If the task is set too high or there is a low guaranteed minimum wage, the health, efficiency, and morale of the workers may be adversely affected.
- The risk of accidents may be increased.
- Inaccurate rate setting under an incentive scheme or wide differences in the ability or capacity of workers working in close proximity may lead to large differences in earnings and ill-feelings between the workers.
- Additional expense involved in employing the personnel required installing and administering a system of payment of results; in some cases this expense might be out of proportion to the potential savings in costs.
- Workers may tend to oppose the introduction of new machinery or methods, or other changes in conditions of production, which would necessitate a restudy of the job.
Source: Pinhas Schwinger, Wage Incentive Systems (New York: Halsted, 1975).
Challenges, Problems and Issues Involved with Wage Incentive Plans:
- What incentive should be offered to encourage higher productivity ?
- Can non-financial rewards encourage desired performance ? If leadership style shifts towards praise and recognition for superior performance, will the reward be adequate in the long run if profits increase ?
- How will productivity and quality be measured ?
- Will cooperation and productive relationships among workers and groups be threatened by reward system
- How will traditional pay differential between supervisors and employees be affected if employees can earn extra pay for producing more ?
- Is there sufficient trust between management and workers to implement an incentive system ? Will the plan be viewed positively by employees, or will they perceive it as a pressure to work harder without a corresponding increase in compensation ?
- If not monitored carefully, it slips into an annual increment exercise.
- Criteria need to be restructured every couple of years.
- Schemes must be transparent enough.
- It should be merged with the annual increment exercise.
- Avoid nominal incentives.
- It should have scope for review.
- It should not generate suspicion among workers.
- It should not be used as a compensation for low wages.
A GOOD INCENTIVE PLAN MUST PROTECT ORGANIZATIONAL INTERESTS.
References
- FINANCIAL INCENTIVES based on Work Measurement
Currie, RM
- Compensation
Milkovich, George T.
- Performance Measurement, Evaluation and Incentives
Bruns, Jr., William J.
- Paying for contribution
Henderson, Richard I.
- Compensation Management
Brown, Duncan ; Armstrong, Michael
- People, Performance and Pay
Flannery, Thomas P ; Hofrichter, David A ; Platten, Paul E - The Hay Group
- Compensation
Sibson, Robert E
- TCS – Public Relations Document
- PSU review 2000
Comptroller Auditor General of India
- “Employee Stock Ownership and Corporate Performance among Public Companies.” Industrial and Labor Relations Review 50 (October 1996)
Blasi, Joseph; Conte, Michael; and Kruse, Douglas
- Firm-Wide Incentives and Mutual Monitoring at Continental Airlines
Marc Knez, Lexecon Strategy Group Duncan Simester, Massachusetts Institute of Technology
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Human Links – www.humanlinks.com
A Comparative Study Of Wage Incentive Schemes in Service Industries
