Incentive plans are used by companies to keep employees motivated. These plans rely on the power of incentives to affect employee behavior. When incentives are aligned through the use of incentive plans, this encourages employees to perform their tasks with more effort and efficiency. In the context of factories, the following advantages typically arise after the introduction of incentive plans: When setting up an incentive plan, the following steps should be carefully considered: First, the basis of payment should be decided. Second, the plan must be considered in light of its impact on productivity, cost reduction per unit of product, provision of real inducement, and the practicable incentive bonus earnings. Third, the plan should be discussed with the shop foremen and workers union. Fourth, the plan should be introduced with maximum clarification to the workers. Finally, for a period of three or four months after the introduction of the incentive plan, the results achieved must be evaluated to ensure the following: The following principles must apply to all incentive plans: There are four types of incentive plans: These plans are discussed below: Under premium bonus plans, the time taken to complete a job is fixed based on a careful time analysis. If a worker performs a job in less time than the average time taken, they receive a bonus for the time saved in production. Thus, in a premium bonus method of incentives, a Time Allowance (TA) is given, the time taken is recorded, and a bonus is paid on the basis of Time Saved (TS). It is important to remember that this method relates to bonuses (extra payment), while basic pay and allowances remain undisturbed. The formula, therefore, for an employee's Total Remuneration (TR) is: TR = Normal wages + Bonus based on time saved If no time is saved, then the worker does not earn a bonus. In this case, they are entitled only to normal wages. Different methods are available to calculate the payment of bonuses to workers for time saved in production. The relevant formulas are given below: Under this plan, between 50% and 100% of the time saved in production is paid to the worker. If half the time saved is allowed as a bonus, the premium bonus will be: Bonus = 1/2 time saved x Hourly rate of wages In this plan, the bonus is restricted to one-third of the time saved. That is to say, Bonus = 1/3 time saved x Hourly rate of wages Under this plan, the bonus amount payable to the worker is determined by the following formula: Bonus = (Time taken / Time allowed) x Time saved x Hourly rate of wages Profit-sharing involves making payments to employees of a prescribed proportion of the company's trading profits. Co-ownership relates to the plan under which employees may own shares in the company. Both profit-sharing plans and co-ownership aim to make employees the partner in the enterprise. Workers must decide whether they want to be well-paid risk-free labor or treated as risk-sharing partners. Some production works can't be completed by a single worker, hence requiring a group. In these cases, group incentive plans are created and members of the group decide between themselves how to share the bonus. In group incentive plans, teamwork is essential. Generally, group piece-rate is offered with guaranteed monthly or weekly wages in plans of this kind. In a direct incentive plan, workers are induced to apply more effort to produce a larger number of units during the same time through direct incentives. However, there are also indirect incentives that make service in a company attractive. These indirect plans include:Incentive Plans: Definition
Advantages of Incentive Plans
Setting up Incentive Plans
Basic Principles of Incentive Plans
Types of Incentive Plans
1. Premium Bonus Plan
Methods to Calculate Premium Bonus
(a) Halsey Premium Plan
(b) Halsey Weir Plan
(c) Rowan Plan
2. Profit-Sharing and Co-ownership
3. Group Incentives
4. Indirect Incentive Plans
Incentive Plans FAQs
Incentive plan may be defined as an arrangement between the employer and employees, under which employees are given share in the profits or receive some other economic benefits.
Advantages of incentive plans for employers include increased productivity, reduced turnover, less supervision, and a better work environment. The advantages for employees include participation in profits, participation in management of the business, possible ownership of a portion of the company, and a higher salary than that paid to workers who do not receive incentives.
Incentive plans create extra responsibilities for employees and may lead to tension between workers who receive incentives and those who do not.
An incentive is a payment made to an employee for achieving a specific goal, whereas a bonus is paid without regard to whether or not the goal has been achieved.
Incentive plans are popular because they offer a number of advantages to both employers and employees.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
