With rising competition, the cost of manufacturing too is rising, making manufacturer’s life more difficult. There is always pressure to curb the operational costs and increase productivity. On the other hand, work force requires motivation to work. But are monetary incentives a key motivator? If yes, then how much incentive should be given and how should it be decided? The incentive given has to be justified and rational. It should be able to fulfil the purpose of productivity improvement otherwise it may result into huge financial loss to the organization and may even lead to unethical work practices. Designing and implementing incentive schemes are complex issues and involve active participation and accurate inputs from the IE Department. Given the different opinions and methodologies, it is important to address the question – How to decide on the most effective mechanism suiting individual organizational requirements? Manoj Tiwari, Associate Professor, NIFT Jodhpur and Dr. Prabir Jana, Professor, NIFT Delhi discuss various incentive mechanisms and framework.
Most of the time incentive schemes fall into controversies and become a point of dispute, as the workforce finds the incentives unjustified and wants to get more every day, whereas the management feels that they are already giving the workers more than what they deserve. In order to avoid such conflicts, many organizations opt for overtime work which is in-fact not good in the long term – neither for workforce nor for the management. A logical, justified, yet easy to understand and implement incentive system is always sought-after.
There are two broad classes of incentives – the remunerative or financial incentives, and the moral incentives. In a financial incentive, a material reward, most of the time money (in addition to his/her guaranteed pay) is given, while moral incentives results into admiration, acknowledgement, or may be boost in confidence. Most of the operators are more concerned with monetary incentives in order to improve their living standards. That is the reason remunerative incentives are more popular and widely used. There are different practices followed while implementing such remunerative incentives – such as incentives directly proportional to the output of the operator (may be treated as piece rate), dependent on the individual or group efficiency, or it may be dependent on the time taken by the operator while doing the job. As far as apparel manufacturing is concerned, the piece rate incentive system is more practised where payment to the worker is directly linked to the output on a given day. Here it may be noted that most of the time quality of output is not given due attention and in order to achieve more incentive, many a times quality of product is compromised. Such situations are prominent where contractual labour is involved and the prime focus is to finish the task in a given period of time. At the same time it is worth mentioning that in such systems the workers deployed are highly skilled and who work at a higher pace.
“To achieve high productivity, management must manage effectively and enhance the will of the employees to work, and the will of the employees to work is enhanced by removing restraints to employees’ motivation, by assuring employees’ motivation, and providing motivation.” – Mitchell Fein, a noted consultant
How to determine the piece rate?
As a common practice, piece rate incentives are set at 15% to 30% higher than the guaranteed salary of the operator. Assuming an operator’s guaranteed salary is US $ 6,000 and he works for 8 hours a day with 26 working days in a month. This makes hourly rate of pay US $ 28.84 per hour; subsequently a base rate (which is higher by 15% to 30% of the hourly rate of pay) may be set. The base rate may be decided based on the SAM value of the operation. Let’s assume base rate is set @ 25% higher than the hourly rate of pay, which makes base rate @ US $ 36.05. Amount to be paid for per minute of work @ base rate will be US $ 0.60 per minute. For example, if the SAM value of an operation is 1.0 minute and the operator is working at base rate (producing 60 pieces per hour); the cost per operation will be US $ 0.60 per operation. If the operator makes 80 pieces per hour he/she may be earning US $ 48 per hour. In case the operator is working at lesser efficiency he/she should be paid as per minimum guaranteed pay. The difference of pay (amount to be paid at base rate and minimum guaranteed pay) is treated as make up pay.
Case – Let’s try to develop an incentive plan for a company named ABC Limited which is situated in the NCR. Let’s assume the monthly wage rate of per worker is US $ 9,500. Apart from that they may earn single over time rate for their extra work to be done. Per SAM value of operator is US $ 0.76 (Operator salary per month/Total minutes available in a month, 9500/26x8x60) and for the operator may be earning 15-30% more per extra SAM produced above standard.
The factory has plenty of orders for the limited time, and the factory management wants to complete the order within that time. The same may be achieved by either of the following two options – opting for some overtime work or motivating people with some incentive planning to enhance the productivity.
An incentive plan may be devised covering areas such as cutting, sewing and finishing & packing. It may be a combination of both individual and group incentive depending on the requirement. For example for sewing floor, incentive scheme may be individual incentive payment and people such as Operators, Direct Helpers, Indirect Helpers, Quality Checkers, Sewing Supervisors and Floor Incharge may be covered under the incentive scheme.
Incentive payment in the sewing room is based on operators/ batch performance. The incentive scheme is designed such that the worker earns 1% of salary for 1% percentage increase in efficiency. Incentive is paid to a worker if batch efficiency is over 60%.The pay per extra SMV over 60% is US $ 0.76. The incentive for the Floor In-charge, Supervisor and End Batch Checker is also 1% of salary for 1% increase in efficiency but it also includes another performance criterion – Quality.
Under the time-based incentive plans, a standard time is determined for doing a job. Under the production-based incentive plans, a standard time is determined on the basis of number of units produced by a worker, wherein an efficient worker is paid at a higher rate per unit.
A guaranteed minimum pay equivalent to the current basic pay is assured to all workers. The operators earn the basic pay if the weekly efficiency is less than 60%. At higher efficiency they may earn incentive at the rate of US $ 0.76 per SMV produced. The incentive rate may be kept same for all grades of operators. For operators of higher grade, an increase in earnings may be due to a higher basic wage. Minimum production required @ 60% efficiency should be calculated. It can be calculated as (working minutes per day/SMV for garment) x 60%. Rate for each operation may be calculated at the beginning of a style. The operation piece rate may be calculated as (SMV of the operation x US $ 0.76).The incentive calculation for an operator may be done as (basic salary/days x No. of days attended) + (SMV’s Prod) – (No. of minutes worked x 60%) x 0.76).
As mentioned earlier, quality should be considered while calculating incentives for the floor in-charge, supervisor and end batch checkers. Assuming the batch efficiency is 80% and DHU achieved is 12 against target of 10, the incentive for such persons may be calculated as difference in Actual Efficiency against Target Efficiency x (Target DHU/Achieved DHU). Hence final incentive earning for such person will be (80% – 60%) x (10/12), which is 16.6% of the salary.
Classification of incentive plans
The incentive plans are broadly classified into two categories: time-based and production-based. Under the time-based incentive plans, a standard time is determined for doing a job. If a worker finishes his job in less than the standard time, he is said to be efficient. He may be given a bonus under an appropriate incentive plan as a reward for his efficiency.
Some of the important time-based incentive plans are:
1. Halsey Plan – It is an American plan which was introduced by F.A. Halsey in 1891. This plan guarantees the time rate, i.e. a worker who finishes his job within the standard time or more, receives the time rate wage. But if the worker completes his job in less than the standard time, he is rewarded with a bonus which is a fixed percentage of the time saved.
2. Rowan Plan – James Rowan introduced this plan in 1901, and which is similar to Halsey Plan in respect of the time saved but a different method is used to calculate bonus which is based on that proportion of the time saved which the time taken bears to the standard time. The bonus earned under Rowan Plan is calculated as time saved (in hour) x (time taken/standard time) x hourly rate. Assuming that the hourly rate of an operator is US $ 30 and he completes the task in 45 minutes against Standard Time of 60 minutes, by following Rowan Plan, incentive will be 0.25 (hour saved) x (45/60) x 30 = US $ 5.625.
3. Emerson Plan – This system was developed by Emerson to encourage efficiency among workers. This system is similar to the piece work system with guaranteed time wage. Certain arbitrary points are used in order to spread incentive at both low task and high task levels. The schedule of bonus or incentive under this scheme is as mentioned in Table 1.
|Table 1: Schedule of Bonus under Emerson plan|
|Below 66 1/3% efficiency||No bonus, only time rate wages|
|66 1/3 – 100% efficiency||Initially a very small bonus but it increase rapidly to 20% of basic wages on attaining
|Over 100%||A bonus of 20% of basic wage plus 1% for each 1% increase in efficiency over 100%|
4. Bedeaux Plan – The standard time (which is determined by the method study) is expressed in terms of minutes which is called Bedeaux points or Bs. Each B represents a point equal to one minute (Please refer to IE in Apparel Manufacturing – Operator Rating), SW Sept. 2014. For example if the standard time for a job is 30 minutes, it would be expressed under this plan as 30 Bs. Under this plan, a worker gets wages for only the actual time worked if it is more than the standard time (Bs) fixed, hence no incentive is paid, but in case the standard Bs fixed are more than the actual time taken (means operator completes the task in lesser time than standard), the difference is divided by 60 to give the time saved. Then following the plan a 75% share of the wages of the time saved goes to the worker concerned and remaining 25% share is allocated to the supervisor or the floor in-charge. Assuming an operator working at hourly rate of US $ 30 deployed is on a task having standard time as 480 Bs and the operator finishes the task in 400 minutes (400 Bs), then following the Bedeaux Plan, incentive paid to the operator should be 75% of 80 (as Bs saved from standard) x 30/60. That makes US $ 30 as incentive for the day, hence operators’ total earning for the day will be US $ 270, where US $ 240 (working for 8.00 hours US $ @ US $ 30 per hour) will be the wage component and US $ 30 the incentive component.
5. Hayne’s Plan – Under this plan the wages for a task (which has a standard time allocated) are paid on time basis. In case the actual time taken in job completion is lesser than the standard time allocated, the operator is paid a share of the time saved. The saving is usually computed in terms of Manits which is the short form of man-minutes. The resultant saving is divided by 60 to convert it into hours. Then the time saved is distributed on the following basis: (i) If the work is standardized, i.e. of repetitive nature, 5/6th to the worker and 1/6th to the supervisor or floor in-charge; (ii) If the work is of non-standardized nature, 5/10th to the worker, 1/10th to the supervisor or floor in-charge, 4/10th to the management.
6. Barth Variable Sharing Plan – This plan aims to attract newly recruited employees who are motivated to learn work. This plan does not guarantee a time rate although a standard time is set for the completion of a job. The wages under this plan are calculated as square root of (standard hours x actual hours) x rate per hour. Under this plan, due to consideration of square root, the wages of a worker can rise steeply even if at a diminishing rate. For example, if an operator who is working at hourly rate of US $ 30, completes his task in 6 hours against standard time, i.e. 8 hours, the wages to be paid (including incentives) should be 6.92 (square root of 8 x 6) x 30, that is US $ 208. While in normal condition for a 6 hours work he is supposed to get US $ 180 (hourly rate x number of hours worked), hence he is getting US $ 28 as incentive when he finishes a work of 8 hours in 6 hours. In case, if the same operator takes 8 hours for a work of 8 hours (as standard time) he will be earning US $ 240 (that is (square root of 8 x 8) x 30), hence there will not be any incentive applicable.
Some of the important production based incentive plans are:
Under the production based incentive plans, a standard time is determined on the basis of number of units produced by a worker, wherein an efficient worker is paid at a higher rate per unit. The important production-based incentive plans are:
1. Taylor’s Differential Piece Rate Plan – This system was devised by F.W. Taylor (Father of Industrial Engineering and Founder of Scientific Management). Under this system, piece rates were suggested on which an operator is supposed to be paid. A low piece rate for output below standard and a high piece rate for output above standard. Assuming if the standard rate of performing some task is 80 units per hour and the high and low piece rates are US $ 3.0 and US $ 2.5, respectively per unit, then a worker who produces more than or equal to 80 units per hour may get wages at the rate of US $ 3.0 per unit but if he/she produces less than 80 units per hour, he/she may be paid at the rate of US $ 2.5 per unit only.
2. Merrick’s Multiple Piece Rate Plan – This plan is a modified version of the Taylor’s differential piece rate plan. In total three rates are considered in this system, one for the beginners, the second for the developing workers and the third for the highly skilled workers. The rates of wages under this plan have been mentioned in Table 2.
|Table 2: Merrick’s Multiple Piece Rate Plan|
|Output percentage standard||Payment|
|Up to 83 %||Ordinary piece rate|
|83- 100%||110% of ordinary piece rate|
|Over 100%||120 % of ordinary piece rate|
3. Gantt’s Task Bonus Wage Plan – This plan is a piece-rate system with a guarantee of wages on time basis. This plan considers three factors which are time, bonus and piece rate using the differential piece-rate principle. The wages under this plan have been mentioned in Table 3.
|Table 3: Gantt’s Task Bonus Wage Plan|
|Output below standard||Time rate (guaranteed)|
|Output at standard||Bonus of 20% (usually) of the time rate|
|Output above standard||High piece rate on worker’s whole output|
4. Prestman Bonus System – In this plan the productivity of all workers is considered as a whole. For example, if the average output per year increases either above the standard output or the output of the previous year, the wages are increased in the same ratio. Assuming if in a particular year the average output per worker in a unit of time achieved was110 units while in the previous year the average output per worker in a unit of time was 100 units, then the wages to be paid would be 10% more than those in the previous year. The limitation of the Priestman bonus system is that it does not consider individual efficiency.
Unconventional incentive schemes
As a common practice, incentive schemes have been primarily related to only money. There is no doubt that money is one of the prime factors but there are other factors which could be considered.
Productivity – This may be considered in designing and implementing incentive plans as apparel manufactures seek increased productivity through more meaningful incentives. Productivity sharing plans have been in existence for many years, but have not as yet gained widespread acceptance. To date, productivity sharing plans have been used primarily in hard goods, with little or no exposure in the apparel industry. According to a study conducted by the General Accounting Office, firms with productivity sharing plans, reported savings of 17% in labour costs. In addition, nonfinancial benefits attributes to these plans included improved labour/ management relations, reduced absenteeism and turnover and fewer employee complaints.
Improshare – It is a relatively new plan that is growing quite rapidly in other industries. Improshare (Improved Productivity through Sharing) is the registered service work of Mitchell Fein, the consulting industrial engineer who developed it. This plan measures performance rather than monetary savings and provides for financial gains due to productivity improvement to be shared between the company and employees. Management and employees share equally in all productivity gains initiated by either party. One exception is when the productivity gain results from technological advances and capital expenditure exceeding a specified cost. In these cases, the company receives 80% of the gains with the employees receiving the balance.
Example: In a month employees of ABC Ltd. produce 2000 pcs of style A and 3000 pcs of style B. Assuming 50:50 share between company and employees, and the number of work hours for the month were 1700.
Improshare hours = (units produced x standard hours) x base productivity factor (BPF)
BPF = Total production and non production hours (direct & indirect) / total standard value hours
BPF = 45 workers x 40 hours per week x 25 weeks / 40 workers x 40 hours per week x 25 weeks = 1.125
Improshare hours style A: 0.5 hours x 2000 pcs x 1.125 = 1125
Improshare style B: 0.25 hours x 3000 pcs x 1.125 = 845
Total improshare hours = 1125 + 845 = 1968
Less actual hours worked during month = 1968-1700 = 268 gained hours
Employee share is 50% of 268 = 134
Each employee’s share of 134 hours is determined by his hours for the month as a percentage of total work hours for the month multiplied by his hourly pay rate.
Thus if an employee worked for 5% of total hours worked in the month and his regular rate of pay is US $ 40 per hour, then his bonus for the months is 0.05 x 134 x 40 = US $ 268
Scanlon Plan – It was developed by Joseph Scanlon in the 1930’s and the basic principle of the Scanlon plan is employee involvement. It is achieved through a formalized suggestion system together with a committee structure and the payment of a bonus to participating employees for increased productivity. A base ratio that is ratio of payroll costs to the value of production is calculated using the historical data. The bonus is usually paid on a monthly basis and is applicable in any month when actual payroll costs are less than the established base ratio. It is more of a management philosophy than an incentive plan. Key benefits of the Scanlon Plan include improved teamwork and cooperation, quicker responses to problems, improved product quality and reduced absenteeism and turnover.
Rucker Plan – Also called as Share of Production Plan, the Rucker Plan primarily involves production personnel but may involve everyone in the company. Basic motivation to reduce costs and improve profits is that the resulting gains are shared between the employees and company, usually on a monthly basis. Basic measurement of gains is based on improvements in the ratio of payroll costs over production value.
A historical relationship between labour cost and the production value created is used to establish a base for the Rucker bonus plan. For example if following the past data, labour costs in the base period (month) were US $ 1,32,000 and production value is US $ 2,40,000 the Rucker standard will be 0.55 that is (1,32,000/2,40,000). The production value is calculated as “Net sales turnover – cost of materials & supplies used”.
The incentive system should be more comprehensive in nature and it should cover factors such as start-up/ learning curve during style change over, attendance and quality. A balanced mix of individual and group incentive may be drawn and implemented.
In case the organization is able to maintain the ratio below the Rucker standard, it’s going to be profitable. Employee input into how to better decrease costs/improve efficiency is actively encouraged. Resultant costs savings from employee input that increase profitability are shared with employees in some form of bonus.
Therefore, in any month that the actual labour costs are less than 55% of the production value, a bonus is earned. A reserve of 20%-30% is normally established to avoid extreme fluctuations. This plan partially accounts for variables such as product mix, and is applicable for the apparel industry.
Key characteristics of a good incentive system
Devising and implementing an incentive system is a sensitive issue and has to be drawn very carefully. There are few key factors which must be carefully considered, such as:
1. Justified standard values of operations, the same may be developed with scientific method and time study, adopting correct procedures and skill development. This will also result in efficiency improvement among the operators.
2. Defects level or quality while working should be associated with the incentive system. The efforts should be to make incentives justified and operators should not be paid for their mistakes. The repairs should be corrected by the same operator who is responsible for the defect. This will make the operators more quality-conscious and may reduce defect rates.
3. In addition to individual incentive system, a group incentive may also be adopted wherever required. To enhance the team work and reward the team efforts, incentives may be divided among the team members. Such practice may be adopted for small runs or highly complex garments where inter dependency is more.
4. There has to be an error free, unbiased and transparent mechanism to track individual operator performance. Technological advancement such as Real Time data monitoring may be a helping hand in this regard.
5. The incentive system should be devised in such a manner that it is a win-win situation for both management and work force and people should feel motivated while working in such system. The other requirement is that incentive system should be easy to understand and implement. At the same time targets set in the incentive system should be achievable so that operator is motivated enough to achieve it. This makes the system more meaningful and practical.
6. The incentive system should be more comprehensive in nature and it should cover factors such as start-up/ learning curve during style change over, attendance and quality. A balanced mix of individual and group incentive may be drawn and implemented.
Incentives are just one of the motivators and directly related with productivity. It must be very clear that one is getting incentives because he/she is contributing in the productivity improvement and growth of the organization. IE should work in devising and implementing a meaningful incentive mechanism which is easy to understand by the operator and well supported by technology. One should know the logic of how he/she had earned that particular amount and how he/she can achieve more. Here IE should come forward as helping hand in order to motivate operators achieve more and add value to the organization.