Suggestion Schemes: Wage Incentive Plan

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POWERPOINT SLIDES DISCUSSED DURING CLASS

Suggestion Scheme: Wage Incentive Plans

(http://www.headscratchingnotes.net/wp-content/uploads/2012/02/lecture-8.ppt)

Suggestion schemes are management tools in an organisation directed towards employees. Employees do the real and given work in accordance to certain processes existing in an organisation. However, these processes are identified and changed on the basis of the creative minds and talents of the employees who also provide ideas for improvements and innovation in an organisation. Accordingly, suggestion schemes can be defined as a management tool, which encourages employees to contribute ideas for improvement and innovation in the organisation [1]. It is based on the rationale that creative talent exists in each employee and that they have the necessary abilities and are well placed to make suggestions to improve their way of working.

The main objective of adopting suggestion schemes in the perspective of an organisation is to [2]:

  • Plan product or service that sustains in the market and job creation.
  • Create long-term profits in order sustain in the market
  • Review the processes and systems within the organisation that enables ease in accomplishing the organisation’s goals and objectives
  • Avoid opportunities for employees to leave the organisation (job hopping) and reduce job attrition
  • Be aware, alert and use visible figures and known or unknown information. Accounting tools play an important role for understanding known (balance sheets, cash flow, etc.) and unknown information (descriptive notes to the financial information)
  • Control medical costs by providing good working environment and opportunities for employees to maintain health (For example, paid-vacations, sick leaves, fitness centres, healthy food in canteen, medical reimbursements, etc.)
  • Maintain costs of liability for not complying with regulatory norms or requirements. For example, a manufacturing plant having no safety procedures can be questioned or sued if there were any injuries or deaths in the plant. (Hint: Bhopal gas tragedy)

Correspondingly, employees can also identify with the organisation in terms of availability of meaningful and interesting jobs where their talents and skills can be applied effectively. The benefits of suggestion schemes are summarised below [3]:

  • Foster two-way communication between employer and employees
  • Lead to improvement of working relations and working environment further leading to employees’ satisfaction
  • Enables employees to voice their opinions and ideas also leading to employee empowerment
  • Reduces the tendency to resist possible changes within the organisation
  • Builds employee morale and self-esteem further assisting in creation of positive attitude towards work

One of the suggestion schemes critical for every organisation is the plan or methods considered to provide returns to employees for their services in the form of wages. The plan also provides basis for incentives offered by organisations to ensure increase in productivity, job satisfaction and loyalty from employees.

WAGE INCENTIVE PLANS

Wage incentive plan is a system that provides additional pay or bonus (in addition to wages) for qualitative and quantitative performance which exceeds standard or normal levels. The main purpose of a good wage-incentive plan is to motivate workers to produce more by allowing them to earn more. These plans are accordingly directed towards: – Building good relations between employers and employee; Increasing productivity; Boosting employee morale, motivation and regularity; Controlling costs for production; Improving quality of life; Allocating resources optimally and; Bringing about flexibility in changing business conditions.

Wage incentive plans can be broadly categorised into – Time-Rate System and Piece-Rate System (Refer to the figure below).

In time-rate system, wages are provided on the basis of the minimum time spent by the employees whereas in piece-rate system wages are provided in accordance to the number of pieces or units of output produced. The basic difference between time-rate system and piece-rate system is that time-based wages offered under time-rate system are provided irrespective of the number of units produced in that time as compared to the piece-based wages offered under piece-rate system. The description of time-rate system and piece-rate system are summarised below:

Piece-Rate System

Piece-rate system is also known as payments by result system, which implies that the employees receive a particular amount per piece or per finished product. This system is particularly useful for contractual, self-employed or freelancing individuals who mostly work from home or own a workshop. Such individuals mostly earn a subsistence level income though with credibility and favourable economic conditions can grow into becoming small-scale to medium-scale businesses. These individuals themselves design and produce their products/services or produce in accordance to the designs defined by businesses offering sub-contractual work. For example, a big company like Pantaloons contracts a small-scale entrepreneur to manufacture 1000 leather belts with Pantaloons’ brand name on it (Pantaloons specifies leather quality and provides dyes, brand name, etc. to this entrepreneur). There are various types of piece-rate systems but we will study only two commonly known and practised piece- rate systems – Straight Piece Rate and Straight Piece with minimum guarantee.

Straight-Piece Rate: Straight piece rate is the amount a worker obtains for each finished product produced. For example, if a worker produces 325 pieces per day and he is paid Rs 10 per piece, then his daily wage is Rs 3250 (325 pieces * Rs 10). The most significant advantage of straight piece rate is achieving satisfaction and efficiency in producing the products. The most significant disadvantage in the system is that there is always fear of losing business especially during a recession or slowdown and may have work at rates lower than the minimum rate. Accordingly, workers usually have to bear the costs of any breakdowns or sickness and they are not compensated for the same. The focus of straight-piece rate is mostly on quantity due to which the quality could be compromised. Also, straight-piece rate is offered to workers who have experience and do not require supervision (Please refer to advantages and disadvantages in PowerPoint slides titled “lecture 8”)

Straight-Piece Rate with minimum guarantee: This rate is the same as the straight piece-rate except that a base wage is provided in addition to piece-based wage if the total output produced is more than the expected output. For example, if a workshop produces 325 pieces while the expected output is 200 pieces, the minimum daily wage is Rs 3250 and the (extra) rate per piece is Rs 10, then the daily wage for the workshop will be 3250 + (325-200)*10 = Rs 3500. The advantages and disadvantages for wages under straight-piece with minimum guarantee are the same as the wages under straight piece (without minimum guarantee) except that wages under straight-piece with minimum guarantee offer a minimum guarantee even if output produced is equal or less than the expected output. (Please refer to advantages and disadvantages in PowerPoint slides titled “lecture 8”)

Note: Workers will generally not produce less than the expected for obtaining continuous business from their clients.

Time-Rate System

Time-rate systems are very commonly used in businesses that wish to employ staff in general roles like, in administration, maintenance, financial management, etc., where employee productivity is not easy to measure. Time-rate systems are easy for a business to calculate and administer. This system is easy to understand from an employee’s perspective, which implies that, an employee can budget his/her personal finance with some certainty. It also makes it easier for a business to plan and budget for employee costs since the payroll (salary) costs are dependent upon the number of individuals employed. Time-rate system also has some disadvantages. Because wages are offered on the basis of the (minimum) working time there is minimal incentive to achieve greater output. Also, time-rate systems tend to add to the costs of a business especially through inflationary changes on wages (higher the inflation, higher the wages) and through employee promotions (, which are one of the kind of incentives considered for increasing production). There are various kinds of plans within the time-rate system such as Halsey plan, Rowan plan, Emerson plan, Bedeax plan, etc. (Halsey plan and Rowan plan will be the only plans studied this semester)

Halsey Plan: Under this plan if time taken (T) is less than or equal the standard time (S) then the total wage at a particular wage rate (R) equals S*R + S*Bonus rate. However, when T is greater than S, then the total wage at R equals S*R + R *(S-T)/100. According to this plan if the employee saves on time then the employee is paid wages in terms of the time saved plus a bonus on the wages. However, if employee does not save on time he is paid a wage relatively less than wage with time saved. For example, if the standard time to produce units was 250 hours, but the actual time taken is 220 hours and the profit percentage were 50% then under the Halsey plan where the standard rate were Rs 4 per hour will be 240*4+240*4*0.5 = 1440. In this example the standard rate equals the wage rate (which is Rs 4). However, if the actual time to work were 240 hours, then based on the formula, the wages fall drastically to Rs 959.20. The example clearly suggests that the plan focuses on saving time to produce output and providing more incentives to over-achieving employees such that employees are discouraged from working at a standard time. Accordingly, the advantages and disadvantages are summarised in PowerPoint slides discussed in class titled “lecture 8”. In summary, though the plan is simple and does not create a distinction between employees in terms of skill-level, the plan encourages the organisation to focus on saving time and thus saving costs of production. The plan may also discourage the organisation to focus on quality of the products/services, which may not help in boosting employee morale and satisfaction.

Rowan Plan: Like the Hasley Plan, if time taken (T) is less than or equal the standard time (S) then the total wage at a particular wage rate (R) equals S*R but no bonus or incentive is provided. Incentives are provide to improve on time taken to do a job if T>S. Under this condition, total wages = S * R + [(S – T)/S] * R. The Rowan plan is quite different from the Halsey plan. It guarantees a standard wage (Standard time * wage rate) and also provides a bonus/incentive if the time taken is less than the standard time. However, the incentive is based on the percentage difference between standard time and time taken. Thus, this implies that if an employee does not attempt to save on time he is only offered a standard wage. However, when the employee saves on time, he/she is offered the standard wage plus the bonus/incentive for saving time. For example, if the standard time to complete a job is 240 hours but a worker takes 250 hours, assuming the standard rate and wage rate equals Rs 4 per hour, the worker’s wage according to Rowan plan will be Rs 959.67. If the worker saves time then he/she will receive Rs 960.  Wages under Rowan plan are relatively higher than wages under Halsey plan.

The significant characteristic of wages under Rowan plan in comparison to the wages Halsey plan is that the incentives/bonus for saving time does not motivate employees to overachieve. The wages under Rowan plan offers favourable opportunity to improve and accordingly save time to earn the bonus. Until the employee earns the bonus, the organisation offers a guaranteed standard wage (standard time * wage rate) thus reducing overstrain by employees. Nonetheless, there might be employees who would prefer to overachieve and may not be liked by other workers who receive standard wages and not bonuses like the overachieving workers. This may lead to discontent and demotivation among employees though may enable competition among them (Please refer to advantages and disadvantages mentioned in PowerPoint slides titled, “lecture 8”).


[1] Suggestion Schemes by Wayne Marshall, Immigration Department. Accessed at http://www.reform.gov.bb/page/newspdf/archive/The%20Suggestion%20Scheme.pdf

[3] Suggestion Schemes by Wayne Marshall, Immigration Department. Accessed at http://www.reform.gov.bb/page/newspdf/archive/The%20Suggestion%20Scheme.pdf