ALLAMA IQBAL OPEN UNIVERSITY

SUBJECT NAME: COST ACCOUNTING

NAME: ATIFA TANVIR

SESSION: MBA (2nd) Autumn 2009

Roll # AD511555

ASSIGNMENT TOPIC: WAGE INCENTIVE PLANS

FOR VARIOUS CATAGORIES
OF EMPLOOYEES

PRESENTED TO: MS. RUKHSANA ASIF

 ACKNOWLEDGEMENT

First and the foremost I offer my gratitude to Holy Lord for enabling me to complete this
fascinating but hard working project. This project not only enlarges my vision but also
show me the real picture of the ethical issues.

I want to thank my teacher and colleagues who helped me a lot in preparing this task

Last but not the least, I express my heartiest regards to my parents who supported me
morally, spiritually and prayed for my success to achieve all goals in my life.
 Abstract

A worker’s total compensation may be based on negotiated labor contracts, productivity

studies, job evaluation, profit sharing, incentive wage plans and guaranteed hourly wages.
In contrast to pay by the hour, week or month an incentive wage plan rewards workers in
proportion to their increased high quality output. A standard hour’s or day’s work should
be established so workers can exceed it with reasonable effort and thereby receive full
benefit from the incentive.

The operation of an incentive wage plan requires not only the combined efforts of the
personnel department, labor unions, factory engineers and accountants but also the
cooperation of workers. To be successful an incentive wage plan must, be applicable to
situations in which workers can increase output or provide for proportionately more pay
for output above standards or set fair standards so that extra efforts will result in bonus
pay.
Therefore, different incentive wage plans are applied in the industries for this purpose,
such as Straight piecework, One hundred percent bonus plan, Group bonus plan etc.

As far as case study is concern, Kohinoor Textile Mills Ltd uses or apply Straight Piece
work Plan for its workers. This wage incentive plan has some strengths, weaknesses,
opportunities and Threats that are included in the assignment.
 Table of Contents

 Wage incentive plans

 Purpose of wage incentive plan
 Types of wage incentive plan
o Incentive wage plan based on piece rate
 Straight piece rate
 Piece rate with guaranteed time rate
 Differential piece rate
 Taylor’s Differential System
 Marrick’s Multiple Piece Rate System
o Incentive Wage System Based on Time Rate
o Halsey Plan
o Rowan Premium Plan
o Gantt task and bonus plan:
o Bedeaux plan:
o Emerson's efficiency plan:
o One Hundred Percent Bonus Plan:
o Group Bonus Plan:
o Organizational Incentive Plan:
 GainSharing Plan
• Scanlon
 Profit Sharing Plan:
 Incentive Plan for White Collar Workers / Salesman
 Incentive for Management Employees:
 For Effective Implementation of Incentive Plan

 CASE STUDY
 KOHINOOR TEXTILE MILLS

 SWOT Analysis
 Ocnclusion
 Recommendations
 References
 WAGE INCENTIVE PLAN
A worker’s total compensation may be based on negotiated labor contracts, productivity
studies, job evaluation, profit sharing, incentive wage plans and guaranteed hourly wages.
In contrast to pay by the hours, week, or month an incentive wage plan rewards worker in
proportion to their increased high quality Output. A standard hour’s or day’s work should
be established so workers can exceed it with reasonable effort and thereby receive full
benefit from the incentive.

The term incentive wage system refers to methods of remuneration whereby wages
earned by the workers vary with their output.

The operation of an incentive wage plan requires not only the combined efforts of the
personnel department, labor unions, factory engineers and accountants but also the
cooperation of workers. To be successful, an incentive wage plan must be:

 Applicable to situation in which worker can increase output.

 Provide for proportionately more pay for output above standard.
 Set fair standards so that extra effort will result in bonus pay.

Along with these essentials, the plan needs to be reasonably simple and understandable

Purpose of Wage Incentive Plan:

The primary purpose of an incentive wage plan is to induce workers to produce more to
earn a higher wage, and at the same time to reduce unit cost. The plan seek to ensure
greater output, to increase control over labor cost by ensuring more uniform unit cost, and
to change the basis for reward from hours served to work accomplished. Naturally,
producing more in a given period of time should result in higher pay. The greater number
of unit produced should also result in a lower cost per unit for factory overhead and labor
cost combined.
Companies are striving to increase productivity of employees at every level. Just-in-time
and other productivity enhancement program urge employees to perform well and to
exercise initiative. Incentive wage plan can enhance the establishment of a working
environment in which everyone must perform. However, there is an art to establishing
appropriate wage levels and meaningful incentive plans. The danger over the long term is
that base pay incentive will lose their identity as employees begin to consider the
incentive as part of base. Therefore, standards should be clearly set and communicated to
the workers, if the plan is to have its desired effect.

Types of Wage Incentive Plan:

In actual practice, time wages and output wages are not clear cut and distinct. Incentive
plans typically involve wage rates based on various combinations of output and time.
Many wage incentive systems retain the names of industrial engineers and efficiency
experts who originate the plans
 The piece rate plan
 Halsey premium plan
 Rowan premium plan
 Barth premium plan
 Bedeaux point plan
 Scalon plan
 Time rate plan

Incentive Wage Plan Based on Piece Rates:

Piece rate systems offer wages to the workers according to number of unit produced or
operations performed. Predetermined piece rate is multiplied by the number of pieces
produced to arrive at the earned wages.
 Earned wages: Piece rate X Pieces produced

Different variations of piece rate systems are as follows:

Straight Piece Rate:

Under straight piece rates, workers are paid at standard rates for the pieces produced. The
standard piece rate is determined by time and motion studies. The same standard piece
rate applies to all workers without any regard that some of the workers are more efficient
than the others. There are no guaranteed minimum wages for the workers.

Piece Rate With Guaranteed Time Rate:

Under this system time rate earnings are assured to workers, but those workers who
produce above standard output are paid on piece rate basis. The reason for guaranteed
time rate is that, the workers should be protected against low productivity and low wages
caused by factors beyond their control. Such factors include power failure, machine
breakdown, faulty material, shortage of material etc. Moreover, straight piece rates are
not favorably viewed by workers, and labor unions, exert pressure for a guaranteed
minimum wage. Therefore, piece rate are coupled with guaranteed time rates.
Plus Points:
 Encourages efficient workers to produce more
 Workers adopt better ways of getting things done, to earn more
 Idle time is reduced to the minimum
 Workers take every precaution to avoid machine breakdowns.
 Cost of supervision is less
Minus Points:
 Delays beyond one's control could affect workers earnings adversely
 Beginners and slow learners are left behind in the race
 The focus on quantity would affect quality
  Workers may stretch themselves to unhealthy levels to earn more
 Encourages rivalry between workers

Differential Piece Rates:

Differential piece rates systems offer higher piece rates to workers attaining desired level
of productivity. The purpose is to provide stronger incentive to workers to increase the
output. For example, piece rate of Rs. 0.25 is paid to workers producing less then the
standard output and Rs. 0.30 per piece is paid to workers producing standard output or
more.
 Taylor’s Differential System
 Marrick’s Multiple Piece Rate System

Taylor’s Differential System

This system was introduced by Taylor, the father of scientific management. A worker is
paid more if he finishes the assigned task before the stipulated time.Taylor was of the view
that an inefficient worker had no place in an organization and he should be penalised by
paying low piece rate for low production. To encourage the worker to complete the work
in standard time , he is given a lower piece rate. Thus if standard production has been
fixed at 8 units/day of 8 hours , the higher piece rate for 8 units or beyond may be Re 1/=
per unit and lower rate for an output if less than 8 units per day, may be 80 paise Per
unit.Hence Taylor decided to give a large reward to those who would complete the work
within or less than the standard time. The system is very harsh to inefficient workers on
account of low rate and low output.

Marrick’s Multiple Piece Rate System:

This method uses three rates; up to 83%of the standard output workers are paid at the
ordinary piece rate; between 83% to 100% at 110% of the ordinary piece rate and above
100% at 120% of the ordinary piece rate.
Earning of efficient workers under defferential piece rates shall be higher than the
aernings under straight piece rate. Main advantage to employer is the reduction in per
unit fixed factory overhead costs caused by greater volume of output.

Incentive Wage System Based on Time Rate:

Time based incentive wage systems pay to the worker according to the time rates for hours
worked. In addition to regular time rate earnings, premium are paid to workers exceeding
the standard effieinecy level. Efficiency of workers is measured in hours produced and not
in pieces produced. In simple words A worker is paid on the basis of time spent on the
work, irrespective of the amount of work done.

Plus Points:
 Simple and easy to operate
 Guaranteed wages to workers
 Favoured by trade unions
 Good for precision jobs
Minus Points;
 Makes no distinction between efficient and inefficient workers
 Offers very little to efficient workers
 Requires close supervision so that workers do not waste their time
 No relationship exists between wages and productivity

Halsey Plan:

Here the worker gets a guaranteed wages based on the time, irrespective of whether the
assigned work is completed or not. If the worker is able to finish the task in less than the
standard time, he or she is entitled to get fifty (in some cases one third) per cent of time
saved at time rate in addition to normal time wages.
Halsey Premium plan 50% of the time saved as premium
 Halsey Weir Premium plan offers 30% of the time saved as premium

Example:

Rate per hour = Rs 15/hour

Time allowed for job = 20 hours
Time taken = 15 hours

Calculate the total earnings of the worker under the Halsey plan

S (standard time) = 20 hours

T(time taken) = 15 hours
R(rate) = Rs 15 per hour.

Total earnings = TXR+50%(S-T)XR

= 15X15+50/100(20-15)X15
= 225+2.5X15
Total wages for 15 hrs = 262.5

Find the effective rate of earnings = 262.5/15= Rs17.5

Rowan Premium Plan:

It assures minimum time wages. Bonus is paid on the basis of time saved.But unlike a
fixed percentage , it is calculated thus

Bonus = Time saved/Hours alloed X Hours worked X Time rate

Gantt task and bonus plan:

Here time wages are guaranteed. Standard time for each task is fixed. Workers, who fail
to finish the job within the time limits, get time wages. A worker who reaches the standard
is paid time wage plus bonus at a fixed percentage (20 per cent)of normal time wages. If
a worker exceeds the standards, he is paid a high piece rate.
Bedeaux plan:

In this plan every operation is expressed in terms of standard minutes called as “B's”
representing one minute. A worker gets time wages for 100 % performance; ie, finishing
the job exactly as per standards set. If actual performance exceeds the standard
performance in terms of B's then 75% of the wages of time saved is paid to worker as
bonus and 25% is given to the foreman.

Emerson's efficiency plan:

If the worker achieves 67% efficiency, he gets bonus at a given rate. The rate of bonus
increases gradually from 67% to 100%. Above 100% bonus will be at 20% of the basic
rate plus 1% for each increase in efficiency.

One Hundred Percent Bonus Plan:

It is a variation of the straight piecework plan. It differs in that standards are stated not in
terms of money, but in time per unit of output. Instead of price per piece, a standard time
is allowed to complete a unit, and the worker is paid for the standard time at the hourly
rate if the unit is completed in the standard time or less.

Example:

If a worker produces 100 units in an 8 hour shift and the standard time is 80 per units per
shift (or 10 units per hour), the worker is paid the hourly rate for 10 hours. In other
variations of the 100% bonus plans, savings are shared with the supervisor and or the
company.

Each payroll period, an efficiency ratio must be figured for every worker before earnings
can be computed. Production standards in units of output per hour are set by industrial
engineers. Hour of works and units produced are reported to the payroll department,
where the reported hours worked are multiplied by the hourly production standard to
determine the standard units.

Group Bonus Plan:

Iondustry uses a great variety of incentive wage plan ,some of which depend on the
superior productive performance of a whole department or an entire factory and can
include support or indirect labor as well as direct labor. Fectory operations using large
machines often require employee to work in groups or crew. Although the worker of each
employee is essential to machine operations, it is frequently impossible to separate the
work of one member of a crew. A worker on the assembly line cannot increase output
without the operation of entire group
Group bonus plan, like plans designed for individual incentive, are intended to encourage
production at rates above a standard. Each worker in the group receives an hourly rate for
production up to the standard output. Unit produce in axcess of the standard are regarded
as time saved by the groups, and each worker is in effect paid a bonus for time saved.
Usally the bonus earned by the group is divided among the group members in proportion
to their base pay rate.

Example:

A crew of 10 workers uses costly equipment and each is paid Rs. 10 per hour for a regular
8 hour shift. Standard production is 50 units per hour or 400 units per shift and overhead is
Rs. 320 per 8 hour shift or Rs. 40 per hour. In this, the bonus is computer for each day. In
other group or individual incentive plans, the bonus can be computer for each week,
month of quarter.

Organizational Incentive Plan:

Management should evaluate the strengths and weaknesses of both individual and group
incentive plans to determine what is best for their organizations. In situation where
productivity of whole organization needs improvement, an organizational and gainsharing
plan may be the best answer.

GainSharing Plan:

It is based on a mathematical formula that compares a baseline of performance with actual

productivity during a given period. When productivity exceeds the base line an agreed
upon savings is shared with employees. Unlike profit sharing plans which have deferred
payments, gain sharing plans are current distribution plans. These are based on individual
performance and are distributed on a monthly or quarterly basis.

Scanlon:

The Scanlon plan was developed by Joseph N. Scanlon, a Lecturer at the Massachusetts
Institute of Technology in USA in 1937. The plan is essentially a suggestion scheme de-
signed to involve the workers in making suggestions for reducing the cost of operation and
improving working methods and sharing in the gains of increased productivity.
The plan is characterized by two basic features. First, both employees and managers can
participate in the plan by submitting their suggestions for cost-cutting methods. Second,
increase in efficiency on account of cost-cutting is shared by the employees of the unit.

The Scanlon plan, wherever adopted, has been successful to encourage a sense of
partnership among employees, improved employee-employer management relations, and
increased motivation to work.

Profit Sharing Plan:

Here the organisation agrees to pay a particular portion of net profits (given in cash or in
the form of shares) to eligible employees.
Advantages:

 Empower the employee to participate in the growth of a company as part owner

and get a fair share of the cake.
 Helps the company to retain talented employees and make them committed to the
job and the company
 Better industrial relations, reduced employee turnover, lesser supervision, are other
benefits.

Incentive Plan for White Collar Workers / Salesman:

The salesman usually given an incentive in the form of sales commissions. One study
reported that almost 75% organizations paid salesman on some type of incentive basis.
This is due to three factors.
 The unsupervised nature of most sales work.
 Tradition in the market.
 The assumptions the incentives are needed to motivate sales man.
There are several incentive plans, each appropriate for different markets, products, etc,.
but all plans are basically variation of three types of plans
 Straight salary method
 Straight commision basis
 Combination method of salary and commision basis
 Salary plus commission

Incentive for Management Employees:

In many organizations the managers are paid bonus. There are two types of bonus plan.
 Determined by formula (some criteria like increased sales)
 Determined by some discretion used in allocation of bonus (paid on more or less
permanent basis)
The bonus plan is generally reviewed annually to make them more effective. For top level
management, bonuses are generally tied to overall corporate result. The size of bonus is
much higher for top level executives.

For Effective Implementation of Incentive Plan:

Link the incentive with company’s strategy
Ensure that efforts and reward are directly related
Make the plan understandable and calculableby the employees
Set effective standards
guarantee an hourly base rate
get support for the plan
develop good measurement systems
Emphasize long term as well as short term goals
Take the corporate culture into consideration