There are two basic methods of wages payment: (1) Time Wages System and (2) Piece Wage System. Under time wage system, wages are paid on the basis of time spent on the job irrespective of the amount of work done. This is known as Time Rate or Day Wage System. The unit of time may be a day, a week, a fortnight or a month. Under piece wage system, remuneration is based on the amount of work done or output of a worker. This is known as “Piece Rate System” or “Payment by Result.” Thus, a workman is paid in direct proportion to his output. A variety of bonus and premium plans have been designed to overcome the drawbacks of two basic methods of wage payments. A system of incentive plans also takes into consideration the primary principles of these two basic plans known as Incentive or Bonus or Premium Plan.
The following are the important methods of remuneration which may be grouped into:
1) Time Rate Systems
2) Piece Rate Systems
3) Bonus System (or) Incentives Schemes
4) Indirect Monetary Incentives.
These may be further classified as under:
1) Time Rate System:
a) At Ordinary Levels
b) At High Wage Levels
c) Guaranteed Time Rates.
2) Piece Rate System:
a) Straight Piece Rate
b) Piece Rates with Guaranted Time Rate
c) Differential Piece Rates :
i) Taylor’s Differential Piece Rate System
ii) Merrick Differential Piece Rate System
iii) Gantt Task and Bonus Plan.
3) Bonus System or Incentive Schemes :
a) Halsey Premium Plan
b) Halsey-Weir Premium Plan
c) Rowam Plan
d) Barth Variable Sharing Plan
e) Emerson Efficiency Plan
f) Bedaux Point Premium System
g) Accelerating Premium Plan
h) Group or Collective Bonus Plans.
4) Indirect Monetary Incentives
a) profit- Sharing
5) Non-Monetary Incentives:
1) TIME RATE SYSTEM:
a) Time Rate at Ordinary Levels : This is also termed as “Day Wage System” or “Flat Rate System”. Under this system, wages are paid to the workers on the basis of time spent on the job irrespective of the quantity of work produced by the workers. Payment can be made at a rate per day or a week, a fortnight or a month. The formula for calculation of payment of time rate of ordinary levels is as follows :
Remuneration or Earnings = Hours Worked × Rate Per Hour
Time wage system is suitable under the following conditions :
1) Where the units of output are difficult to measurable, e.g. watchman.
2) Where the quality of work is more important e.g., artistic furniture, fine jewellery, carving etc.
3) Where machinery and materials used are very sophisticated and expensive.
4) Where supervision is effective and close supervision is possible.
5) Where the workers are new and learning the job.
6) Where the work is of a highly varied nature and standard of performance cannot be established.
1) It is simple and easy to calculate.
2) Earning of workers are regular and fixed.
3) Time rate system is accepted by trade unions.
4) Quality of the work is not affected.
5) This method also avoids inefficient handling of materials and tools.
1) No distinction between efficient and inefficient worker is made and hence they get the same remuneration.
2) Cost of supervision are high due to strict supervision used for high productivity of labour.
3) Labour cost is difficult to control due to more payment may be made for the lesser amount of work.
4) No incentive is given to efficient workers. It will depress the efficient workers.
5) There are no specific standards for evaluating the merit of different employees for promotions.
b) Time Rate at High Levels: Under this system, efficient workers are paid higher wages in order to increase production. The main object of this method designed to remove the drawbacks of time rate at ordinary levels. This system is simple and easily understandable. When higher rate of wages are paid, it not only reduces labour turnover but also increases production and efficiency.
c) Guaranteed Time Rates: Under this method the wage rate is calculated by considering to changes in cost of living index. Accordingly, the wage rate is varied for each worker according to the change in cost of living index. This system is suitable during the period of raising prices.
2) PIECE RATE SYSTEM:
This is also known as “Piece Wage System” or “Payment By Result.” Under this system, wages of a worker are calculated on the basis of amount of work done or output of a worker. Accordingly, a worker is paid in direct proportion to his output.
1) It facilitates direct relation between efforts and reward.
2) This system encourages the efficient workers to increase production.
3) Under this system efficient workers are recognized and rewarded.
4) It helps to reduce the cost of supervision and idle time.
5) Tenders or quotations can be prepared confidently and accurately.
1) Where a concern is producing large quantities, it is difficult to fix a piece rate.
2) In order to maximize their earnings, workers working with high speed may affect their health.
3) The quality of output cannot be maintained.
4) This system is not encouraging to the inefficient workers.
5) Temporary delays or difficulties may affect the earnings of the workers.
Piece Rate System is suitable where
1) Quality and workmanship are not important.
2) Work can be measured accurately.
3) Quantity of output directly depends upon the efforts of the worker.
4) Production of standardized goods in a factory.
5) Job is of a repetitive nature.
There are three important methods of paying labour remuneration falling under this type : a) Straight Piece Rate (b) Piece Rates with Guaranteed Time Rates and (c) Differential Piece Rates.
a) Straight Piece rate: Under this system workers are paid according to the number of units produced at a given rate per unit. Thus, total earnings of each worker are calculated on the basis of his output irrespective of the time taken by him. The following formula is used for measuring piece work earning:
Straight Piece Work Earnings = Units Produced × Rate Per Hour
b) Piece Rate with Guaranteed Time Rates: Under this method, the worker earning from piece work less than the guaranteed minimum wage, will get the fixed amount of guaranteed time rate. A guaranteed rate would be paid per hour rate or day rate or week rate.
c) Differential Piece Rates: This system is designed to provide for variation of piece rates at different levels of output. Accordingly increase in wages is proportionate to increase in output. Under this system efficient workers get ample reward and at the same time inefficient workers are motivated to earn more. The following are the important types of differential piece rates :
i) Taylor’s Differential Piece Rates System.
ii) Merrick’s Differential Piece Rates System.
iii) Gant Task Bonus Plan.
a) Taylor’s Differential Piece Rates system
F.W. Taylor, who is the father of scientific management introduced this plan. Under this system, two piece rates are applicable on the basis of standard of performance established. Accordingly one is high rate and the other one is lower rate. Thus high piece rate is applicable for standard and above the standard performance. Lower piece rate for those workers with below the standard performance.
Exercise : 1
Calculate the earnings of workers A and B under Straight Piece rate system and Taylor’s Differential piece Rate system from the following Particulars :
Standard time allowed 50 units per hour.
Normal time rate per hour Rs. 100
Differentials to be applied.
80% of piece rate at or above standard.
120% of piece rate at or above standard.
In a day of 8 hours A produced 300 units and B produced 450 units.
Calculation of Piece Rates :
Standard production per hour = 50 units.
Standard production for 8 hours = 50 × 8 = 400 units.
Rate per hour = Rs. 100.
A produced 300 units (below standard) = 300 × 1.60
Therefore low Piece rate of Rs. 1.60 applicable = Rs. 480
B produced 450 units (below standard) = 450 × 2.40
Therefore high Piece rate of Rs. 240 applicable = Rs. 1080
b) Merrick Differential Piece Rate System:
This is also termed as Multiple Piece Rate system. This plan is designed to overcome the drawback of Taylor’s Differential Piece Rate System. Under this method, three piece rates are applied with different levels of performance. Accordingly
c) Gantt’s task Bonus Plan: This system is designed by Henry L. Gantt. Under this system standard time for every task is fixed through time and motion study. The main feature of this system is a good combination of time rate, differential piece rate and bonus. In this system day wages are guaranteed to all workers. Wages under this system are calculated as follows:
3. BONUS OR INCENTIVES SCHEMES:
Incentive Scheme of wage payment is also known as Premium Bonus Plans. Introduced in order to increase production with ensuring proper industrial climate. Wage incentive plans may be of two types : (1) Individual Incentive Plans and (2) Group Incentive Plans.
A. Individual Incentive Plans: Under individual incentive plans, remuneration can be measured on the performance of the individual worker. In the case of the group incentive scheme earnings can be measured on the basis of the productivity of the group of workers or entire work force of the organization. Various types of incentive schemes are combinations of time and piece rate systems. The following are the important individual incentive plans discussed below :
1) Halsey Premium Plan: This Plan was developed by F.A. Halsey. This system also termed as Split Bonus Plan or Fifty-Fifty Plan. Under this plan, Standard time is fixed for each job or operation on the basis of past performance. If a worker completes his job within or more than the standard time then the worker is paid a guaranteed time wage. If a worker completes his job within or less than the standard time, then he gets a bonus of 50% of the time saved plus normal earnings. Under this method, the total earnings is calculated as follows:
Total Earning = Guaranted Time Wages + Bonus of 50% of Time
Total Earning = T × R + 50% (S - T) R
Where T - Time Taken; R - Hourly Rate; S - Standard Time
Total Earnings = Time taken × hourly rate + 50 / 100(Time Saved × Hourly Rate)
Exercise : 2
Calculate the total earnings of the worker under
Halsey Premium Plans:
Standard Time 12 hours
Hourly Rate Rs. 3
Time Taken 8 hours
Earnings under Halsey Premium Plan:
Standard Time = 12 hours
Time Taken = 8 hours
Time Saved = Standard Time - Time Taken
= 12 - 8 = 4 hours
Rate per hour = Rs. 3
Total Earnings = T × R + 50% (S - T) R
= 8 × 3 + ——— (4 × 3)
= 24 + 6 = Rs. 30
Total Earnings = Rs. 30
1) It is simple to understand.
2) Total earnings of each worker can be easy to calculate.
3) Both employer and employee get equal benefit of time saved.
4) This system not only benefits efficient worker but also provides average worker to get guaranteed minimum wages.
5) This system is based on time saved and it can reduce the labour cost.
1) Lack of co-operation among the employees.
2) Under this system establishment of standard is very difficult.
3) Earning are reduced at high level of efficiency.
2) The Halsey -Weir Scheme: Under this system the worker gets the bonus of 30% of the time saved instead of 50% of time saved under Halsey Plan. Except for this, Halsey Plan and Halsey-Weir Systems are similar in all other respects.
3) Rowan Plan: This plan was introduced by James Rowan of England. It was similar to the Halsey Plan in many respects except that it differs in calculation of bonus. Under this system, bonus is determined as the proportion of the time taken which the time saved bears to the standard time allowed. Under this system the following formula is applied to calculation of bonus:
Exercise : 3
From the following information, calculate total earnings of a worker under Rowan System:
Standard Time = 10 hours
Time Taken = 8 hours
Rate per hour = Rs. 3
Calculation of total earnings under Rowan Plan:
Standard Time = 10 hours
Time Taken = 8 hours
4) Emerdon’s Efficiency Sharing Plan: Under this plan, earning of a worker is by combining guaranteed day wages with a differential piece rate. Accordingly the level of efficiency is determined on the basis of establishment of standard task for a unit of time. If the level of worker’s efficiency reaches 67% the bonus is paid to him at a normal rate. The rate of bonus increases in a given rate as the output increases from 67% to 100% efficiency. Above 100% efficiency, the bonus increases to 20% of the wage earned plus additional bonus of 1% is added for each increase of 1% in efficiency.
Exercise : 4
From the following particulars calculate total earnings of a worker under Emerson’s Efficiency
Standard output per day of 8 hours is 16 units
Actual output of a worker for 8 hours is 20 units
Rate per hour is Rs. 2.50
Calculation of earnings under Emerson’s Sharing Plan :
At 100% efficiency = 20% of time wages
Further increase of 1% in the bonus is given for every 1% increase in the efficiency.
For next 25% efficiency @ 1% for = 25% of Time Wages
each 1% increase in efficiency
Total Bonus payable = 45% of Time wages.
Time Wages for 8 hours @ Rs. 2.50 per hour = Rs. 20.
Add : 45% bonus of time wages = ————— × 20 = Rs. 9
Total Earning = Rs. 20 + Rs. 9 = Rs. 29
5) Barth Variable Sharing Plan: This scheme is introduced to attract newly recruited and skilled employees who are motivated to learn work. It provides sufficient incentives to inefficient workers who are motivated to increase productivity. Earning under this method is calculated by applying the following formula:
Exercise : 5
From the following particulars calculate earnings of a worker under Brath Variable sharing plan :
Standard Time = 12 hours
Time Taken = 8 hours
Rate per hour = Rs. 5
Calculation of earnings under Barth Variable sharing plan :
6) Bedaux Point Premium System: This plan was introduced by Charles E. Bedaux in 1911. Under this plan, standard time fixed for each operation or job is expressed in terms of Bedaux point or ‘B’. For example, a standard time of 360 B means the operation or job should be completed within 360 minutes. The chief advantage of this plan is that it can be applied to any kind of job. Under this system, worker is paid at the time for actual hours worked and 75% of the wages for the time saved are paid as bonus to the worker and 25% to the foremen, supervisors etc. The following is the formula for calculation of total wages of a worker :
Total earnings = S x R + 75% of R (S — T)
7) Accelerating Premium Bonus Plan : Under this plan, bonus is determined on the basis of time saved unlike a fixed percentage under Halsey Plan and as decreasing percentage under Rowan Plan. The bonus is paid to workers at an increased rate. This provides increasing incentives to efficient workers.
B. Group or Collective Bonus Plan: The incentive schemes explained so far are applicable to individual performance depending directly on production. However it is not the individual workers who produce the goods or services (operation) alone but group of several other workers are required to jointly perform a single operation. It is, therefore, essential that a group incentive scheme should be introduced. Bonus is calculated for a group incentive scheme. The bonus is calculated for a group of workers and the total amount is distributed among the group of workers on any one of the following basis :
a) Equally by all the workers of the group.
b) Pro rate on the time rate basis.
c) Pre determined percentage basis.
d) Specified proportion basis.
The following are the important types of group incentive bonus plans:
1) Budgeted Expenses bonus plan
2) Priest Man bonus Plan
3) Towne’s Gain-sharing Plan
4) Scanlon Plan
1) Budgeted Expenses Bonus Plan: Under this method, bonus is determined on the basis of savings in actual expenditure compared with total budgeted expenditure.
2) Priest man Bonus Plan: Under this plan standard performance is fixed by the management and committee of works. The group of workers get bonus when actual performance exceeds the standard performance irrespective of individual’s efficiency or inefficiency.
3) Towne’s Gain-sharing Plan: Under this plan, bonus is calculated on the basis of savings in labour cost. The group of workers get bonus when actual costs is less than the standard costs, one -half of the savings is distributed among workers including foremen in proportion with the wages earned.
4) Scanlon Plan: Scanlon Plan is designed with the chief aim of reducing the cost of operations in order to increase the production efficiency. This plan is generally applicable in industries where the operation cost is high. Under this scheme, bonus is determined on the basis of standard costs or wastages and percentage of the reduction in operation cost.
4. INDIRECT MONETARY INCENTIVE:
Indirect schemes are regarded beneficial to both employers and workers.
In this regard, under indirect monetary incentives by giving them a share of profit and introducing co-partnership scheme or as they have become partners in the business in order to make a very profitable enterprise.
Profit Sharing: Profit Sharing and bonus is also known as Profit sharing Bonus. Under this scheme, there is an agreement between the employer and employee by which employee receives a share, fixed in advance of the profits. Accordingly profit sharing bonus refers to the distribution of profit on the basis of a certain percentage of one’s monthly earnings. The amount to be distributed depends on the profits earned by an enterprise. The proportion of the profits to be distributed among the employees is determined in advance.
Co-partnership: This system provides not only a worker to become partner in the business but also to share in the profit of the concern. There are different degrees of partnership and share of responsibilities allowed to the workers to take part in its control.
5. NON-MONETARY INCENTIVE SCHEMES:
Under this system, employees are provided better facilities, instead of additional monetary payments. Some of the examples of non-monetary incentives are free education for children rent free accommodation, medical facilities canteen facilities, welfare facilities, and entertainment facilities etc.