Productivity Improvement through Incentive Scheme - A Case Study

International Journal of Latest Technology in Engineering, Management & Applied Science (IJLTEMAS)
Volume VI, Issue III, March 2017 | ISSN 2278-2540
www.ijltemas.in Page 71
Productivity Improvement through Incentive Scheme
- A Case Study
Debesh Mishra1
, A. Mohanty2
1
Mahavir Institute of Engineering & Technology, Bhubaneswar, Odisha
2
College of Engineering and Technology, Bhubaneswar, Odisha
Abstract: National Aluminum Company, a profit making public
sector had an incentive scheme earlier under which the incentive
amount payable to the employees of NALCO, Angul (Orissa),
was based on their wages not on their performance. More over
the employees without full presence in the plant were getting the
same incentive amount as that of employees with full presence
i.e. nil absent employees. Hence an attempt is made in the revised
incentive scheme to reduce absenteeism; through introduction of
productivity based group incentive scheme. This study is an
attempt to do a comparative analysis of the earlier and newly
introduced incentive scheme at NALCO, Angul. The objective
analysis clearly indicates that the newly introduced incentive
scheme not only helped in improving productivity and
performance but also in reducing the absenteeism of employees
significantly.
I. INTRODUCTION
Incentives are the benefits provided to employees other than
their normal wages. Incentives may be of monetary form or it
may be provided in non-monetary form also, which motivates
the employees to put more efforts in their works to achieve the
organizational objectives.In most of the industries and
business houses today one of the main causes of disputes is
wage inequality, which arises when different wages are paid
for comparable jobs. In order to eliminate such inequalities, it
is essential to develop a rationalised wage and salary
structure. In a rationalised wage structure, same basic wages
are paid for jobs, which are of same level of difficulty. So, it
is necessary to determine objectively the relative worth of
different jobs in the organization. Various jobs differ in terms
of tasks involved, skills required, physical and mental strain
caused and working conditions etc. An orderly and systematic
procedure is needed to determine which jobs are more
valuable and therefore should be paid more and job evaluation
is the technique used for this purpose, which establishes a
rational basis for incentive schemes.
According to ILO ( International Labour Organization-
Geneva ) “ Job Evaluation may be defined, as an attempt to
determine and compare the demands which the normal
performance of particular jobs make on normal workers
without taking account of the individual abilities or
performance of the workers concerned.” Thus job evaluation
is the process to determine, in a systematic and analytical
manner, the comparative worth of jobs within an organization.
It assesses the worth of a job not of the job holder. He worth
or merit of employees is determined through merit rating. Job
evaluation is concerned only with the evaluation of jobs and
not of workers performing them.
II. OLD INCENTIVE SCHEME IN NALCO SMELTER
PLANT
National Aluminium Company limited (Nalco) is
considered to be a turning point in the history of industries. In
a major leap forward, Nalco has not only addressed the need
for self sufficiency in aluminium but also given the country a
technological edge in producing this strategic metal as per
world standards.
Incorporated in 1981 as a public sector enterprise,
Nalco was set up to exploit a pant of the east coast, in
technological collaboration with aluminium echini of France.
With consistent track record in capacity utilization
technology absorption, quality assurance, export performance
and posting of profits, Nalco is a bright example of India’s
industrial capacity, today as an ISO 9001, ISO 14001,
OHSAS 18001 and NAVARATNA company with its
products registered in London Metal Exchange, Nalco has
emerged as the largest integrated bauxite-aluminium complex
in Asia.
(Fig: NALCO SMELTER, Angul)

The old incentive scheme in NALCO, Angul was
directly proportional to the wage of employees. Based on the
operating experience this scheme was developed with more
emphasis on the followings,
a) Increase of availability of equipment.
b) Reduced cost of production.
c) Quality parameters/pollution control.
d) Individual area performance.
e) To comply with marketing target
Coverage
The scheme covers all workmen, supervisors
including Trainees who are in receipt of wages on regular roll
including employees on deputation to NALCO. The
employees are broadly classified into 3 major groups
depending upon their contribution to production.
a) Direct production at units-Group“A”
b) Technical services at units-Group“B”
c) Common services at units-Group“C”
It will not cover Apprentices, Casual labour, Work
charge labour and employees on deputation from NALCO to
other organizations.
Selection of parameters
For the purpose of the incentive payment NALCO is
divided into two major heads e.g. production units and
corporate and other offices in the production unit, the
geographical locations of the complexes has been taken into
consideration. Smelter and captive power plant are considered
to be one complex. Mines and Alumina Refinery as another
complex and the port facility is taken as one subsidiary
complex. For corporate and other offices of NALCO, the
incentive will be governed by the points earned by the above
complexes.
III. INDICES AND POINT PLAN SUMMARY FOR
SMELTER PLANT
For measuring the performance of each unit various key
parameters have been selected and the relative weightages
have been assigned according to their influence for achieving
the corporate objectives.
1. Capital Productivity Indices
Sl.n
o.
Parameters Unit FPP Earning Range
1.
Smelter
Productivity
Index
% 30 85-100
2.
Power Plant
Productivity
Index
% 10 60-80
2. Area Productivity Indices
(A) Carbon Area
Sl.no. Parameters Unit FPP
Earning
Range
1.
Butt and Green
Scrap
Consumption
% 10 24-34
2.
Apparent
Density
( Green Anode)
T/m³ 15 1.54-1.60
3.
Cast Iron
Consumption
Kg/rodded
anode
10 18-13.5
4.
Overall
Recovery
% 15 90-95
5.
HFO
Consumption
LT/T 10 85-74
(B) Potline
Sl.No. Parameters Unit FPP
Earning
Range
1.
DC Energy
Consumption
Kwh/T 10
14900-
13900
2. Alf3 Consumption Kg/T 05 29-25
3.
Average Metal
Purity
Al% 10 99.4-99.7
4.
Completion Of Shift
Schedules
% 20 91-100
5. Pot Productivity Kg/potday 10 1280-1320
6. Average Instability Mohm 05 0.25-0.20
(C) Cast House
Sl.No.
Parameters Unit FPP
Earning
Range
1.
Rail Despatch of
Aluminium (Free
Time)
Hours 10 58-28
2. ICM Productivity % 05 90-100
3. WRM Productivity % 05 90-100
4. BCF Productivity % 2.5 90-100
5. Sows Productivity % 05 90-100
6. Strip Productivity % 2.5 90-100
7. Melt Loss % 05 1.80-1.40
8. Overall Productivity % 15 90-100
9.
HFO Consumption
(ICM+WRM)
L/T 05 85-60
10. Pending Ladle No.s 05 3-0
Factor Productivity Point
FPP is a measure of incentive earning in terms of productivity
and is calculated for different groups at units.
The employees working in different areas will be eligible for
100% FPP earned by the area.

Formula Used To Calculate The Incentive Amount
Incentive Earning(Rs.) = (Wage×0.2×FPP× AI× GF× PF ) /
100
i) The wages for this purpose shall mean & include the sum
total of basic pay and dearness allowance (Basic + DA).
ii) FPP, which is the factor productivity point, shall be derived
with respect to performance level using the parameters,
weightage and measuring scales.
iii) LPI=Labour Productivity Index
Where wage of individual = Basic Pay + DA
iv) AI = Absenteeism Index
The AI relating to number of days worked, applicable for
the employees are as follows,
AI =
No. of working days are the days excluding weekly
offs, closed holidays, compensatory offs.
How ever the following will be considered as days present,
* Period of official tours excluding external official
training, seminar or conference.
* Special leave period granted by the management on
account of Blood donation, participation in sports etc.
* Training period for the In-house training sponsored by
the company.
For Full present employee with 25 working days, AI = (29-
0)/25= 1.16
v) GF is the Group Factor which is a multiplying factor for the
calculation of incentive amount.
GF for A Group = 1.00
GF for B Group = 0.85
GF for C Group = 0.70
vi) PF is the Productivity Factor which is the multiplying
factor and is allowed for higher productivity (FPP earning
beyond 50), which will be calculated as follows,
For FPP up to 50, PF = 1.00
For FPP 50 to 100, PF = 1+0.006 for every productivity
increase.
vii) Incentive Ceiling is fixed for Rs.2850 p.m.
IV. ANALYSIS OF THE OLD INCENTIVE SCHEME
Problems faced in Old Incentive Scheme
As the old incentive scheme was wage dependent,
even though the wage remains equal for different workers and
their performance factor varies, or even if the wages are equal,
the performance factors are equal and absenteeism index
varies, the workers were getting the same bonus amount. So it
became essential to form a new incentive scheme such that the
company productivity can be increased with minimizing the
absenteeism of employees.
The above problems can be better understood from the
example below,
Example
i) In July 2005, for a full present employee i.e. AI = 1.16,
FPP with PF is 120.00, his wage is Rs.22,000, LPI is
1.087, GF is 1.00
Then, Incentive Amount = 0.2× 22,000×1.16×120×1.00
100
= Rs.6125
But, the ceiling limit is Rs.2850, hence
The Payable Incentive Amount = Rs.2850× 1.087 = Rs.3098
ii) In July 2005, for an employee with 6 days leave with the
working days of 25 days i.e. AI = (29-6)/25 = 0.92
LPI = 1.087, Wage = Rs.22,000, FPP with PF = 120.00,
GF =1.00
Then, Incentive Amount = 0.2× 22,000×0.92×120×1.00
100
= Rs.4858
But, the ceiling limit is Rs.2850, hence
The Payable Incentive Amount = Rs.2850× 1.087 =
Rs.3098
Thus, from the above example it can be observed that both the
employees are getting the same incentive amounts even
though one of them is absent for 6 days while one is full
present.
Hence, considering all the above problems the quality
circle running in the plant decided to formulate a new
incentive plan such that there will be no discrimination in
paying the incentive amount and the new plan will reduce the
absenteeism of its employees i.e. persons remaining absent
from their duties will be getting less incentives.
V. FORMULATION OF NEW INCENTIVE PLAN

If incentive schemes are to be effective, they must be accepted
by those who will be affected by them. From the rich body of
literature on human resources management we can learn that
the following factors are important criteria that staff members
take into consideration when judging their own remuneration:
a) Distributive fairness: Here an employee might ask:
”How much do I receive and how much do I receive
in comparison with my peers?”
b) Procedural fairness: “What is the process that was
used in order to decide how much I receive?”
c) Equity principle: According to this principle
employees believe that they should be paid according
to their contributions to the organization.
d) Principle of status consistency: It demands that
salaries should (at least roughly) reflect the staff
members’ positions in the organizational hierarchy.
In other words, superiors should receive higher
salaries than their subordinates.
Factors Influencing the Choice of Incentive System
When deliberating what would be an appropriate system of
incentives for a particular organisation, it may be useful to
analyse the following factors:
a) Technology: Are that tasks interdependent or
independent from each other? Can the tasks (and thus
the performance of individual employees) be
measured? For example, according to this criteria,
there are substantial differences between the delivery
of credit under an individual lending technology
(mostly independent and measurable tasks) and the
provision of deposit facilities in a branch setting
(tasks may be interdependent and difficult to
measure).
b) Composition of Workforce: What is the occupational
mix of the workforce (i.e. what levels of education
and professional training)? What is the demographic
composition? How long have the staff members
served in the organisation? For instance, university
graduates may be motivated by different factors than
staff members with only a basic education. Young,
unmarried staff members may seek different rewards
than older staff members who have to take care of
children.
c) Culture: What is the value that is placed on openness
and transparency? Do staff members enjoy self-
management? What is the importance of money?
Some cultures may place a very high value on money
while its prominence may be reduced in others.
d) External Environment: Examples are the levels of
unionisation, social norms, and a host of other legal
issues, including labor laws and worker co-
determination.
e) System of Governance and Strategy: Finally, it is
important to study the system of governance in the
particular organisation as well as the institutional
strategy. Care must be taken to design an incentive
scheme that will support the respective institutional
strategy.
Careful analysis of the above items will most likely help
to prevent costly mistakes and unnecessary revisions of
incentive schemes.
Incentive planning process
Designing a new incentive plan depend upon the nature of
problem in the existing incentive plan and the nature of the
organization. Fig. below illustrates the process followed while
making a new incentive plan.
(Fig: Incentive planning process)
i) Identification of problem
Identification of a problem begins with recognition
of the problem, which arises due to gap between what is and
what should be i.e. present and desired state of affairs. The
problem with the existing incentive scheme was the
absenteeism of the employees which reduces the productivity
of the plant.
ii) Diagnosis and analysis of the problem
Diagnosing the real problem implies knowing the
real cause of gap between what is and what should be and

understanding the problem in relation to the objective of the
organization. The next phase after diagnosing is the analysis
of the problem which involves classification of the problem
and gathering information. Problem with the existing
incentive scheme was even though an employee remains
absent for some days, he was getting the same incentive
amount as that of a full present employee of the same group.
This was because the incentive was directly proportional to
the wage of the employee.
iii) Searching for Alternatives
The next step is to find out different alternative
solutions based on the decision makers past experience,
practices followed by others and using creative techniques.
iv) Evaluation of alternatives
Evaluation is the process of measuring the positive and
negative consequences of each alternative. Peter F.Drucker
has suggested the following criteria to weigh the alternative
such as Risk involved in each alternative, Economy of efforts
i.e. cost, time and efforts involved, Timing or situations,
Limitation of available resources.
v) Selecting an alternative
In this stage the optimum alternative which maximizes the
results under given conditions is selected. This is selected by
comparing different alternatives with various approaches such
as experience, experimentation, research and analysis.
vi) Implementation and Follow up
Implementation of alternative involves the following, such as
the decision should be communicated to those responsible for
its implementation, acceptance should be obtained from them,
and responsibilities for specific task should be assigned to
individuals. Once the decision is implemented, it has to be
closely monitored. Constant follow up helps to take corrective
measures as and when necessary.
VI. REVISED INCENTIVE SCHEME
Introduction
The revised incentive scheme in NALCO, Angul is a
productivity linked group incentive scheme. Based on the
operating experience the scheme has been reviewed giving
more emphasis on the followings,
a) Increase of availability of equipment.
b) Reduced cost of production.
c) Quality parameters/pollution control.
d) Individual area performance.
e) To comply with marketing target.
f) Improvement of attendance & labour productivity.
g) Simplification of method of calculation of incentive
amount.
h) Encourage team work and integration.
Coverage
The scheme covers all workman, supervisors including
Trainees who are in receipt of wages on regular roll including
employees on deputation to NALCO. The employees will
broadly be classified into 2 major groups depending upon
their contribution to production. The Groups are,
a) Direct production at units-Group“A”
b) Services at units-Group“B”
The scheme will not cover Apprentices, Casual labour,
Workcharge labour and employees on deputation from
NALCO to other organisations.
Factor Productivity Point
FPP is a measure of incentive earning in terms of
productivity and is calculated for different direct A groups at
units. The employees working in different areas will be
eligible for 100% FPP earned by the area.
Formula Used To Calculate The Incentive Amount
Incentive Earning (Rs.) = PI× LPI× AI ×GF× CF
i) PI = Payment Index = FPP× PF× BFI
100
a) BFI = Base Financial Index = Rs.3600
b) FPP = Factor Productivity Point i.e. Performance of
plant
FPP = 100 points.
1. Capital productivity Indices for,
i) Smelter = 30 points
ii) CPP = 10 points
2. Area Productivity Indices for,
i) Carbon Area = 60 points
ii) Potline = 60 points
iii) Cast House = 60 points
For other departments it is calculated in a weighted
average.
c) PF = Productivity Factor
For FPP upto 80, PF = 1.00
For FPP from 81 to 100, PF = 1+0.006 for every point
increase

ii) LPI=Labour Productivity Index
Duty Hours
LPI = ____________________________________
(Duty hours + OT hours)- 8% of Duty hours
Where Duty Hour is the schedule working hours of particular
month.
For example- * If the OT is Nil, then
LPI = 1/0.92 = 1.087
* For 25 working days, OT = 4×8 = 32 hrs.
LPI = 200/(200+32-16) = 0.92
iii) AI = Absenteeism Index
The AI relating to number of days worked, applicable for
the employees are as follows,
AI =
No. of working days are the days excluding weekly offs,
closed holidays, compensatory offs.
How ever the following will be considered as days present,
* Period of official tours excluding external official
training, seminar or conference.
* Special leave period granted by the management on
account of Blood donation, participation in sports etc.
* Training period for the In-house training sponsored by
the company.
For Full present employee with 25 working days, AI = (29-
0)/25= 1.16
iv) GF is the Group Factor which is a multiplying factor
for the calculation of incentive amount.
GF for A Group i.e. Direct production = 1.00
GF for B Group i.e. Services = 0.875
v) CF is the Category Factor which is the multiplying factor
and is alloted for different catgories of employees as follows,
Category Symbol Range
a. Semi skilled/ Un
skilled
W W1-W6
b.Skilled T T0-T7
c.Supervisor S S0-S4
d.Executives E E0-E9
CF for various categories are as follows,
For W1, CF = 0.7
W2, CF = 0.9
T0-T2/W3-W4, CF = 1.0
T3-T4/S0-S2/W5, CF = 1.025
T5-T6/S3/W6, CF = 1.05
T7/S4, CF = 1.10
E0-E9, CF = 1.20
vi) Incentive Ceiling is fixed for Rs.5005 p.m. for Group A &
Rs.4805 p.m. for Group B Executives.
VII. RESULT ANALYSIS
Absenteeism: (As % to Total Working Days)
Month 2005-2007 2007-2009
April 11.83 10.96
May 11.64 10.32
June 9.34 9.02
July 17.86 9.51
August 8.24 8.85
September 6.8 6.46
October 7.27 7.63
November 7.27 8.78
December 7.46 7.93
January 12.53 12.06
February 13.33 11.34
March 10.54 8.51
Mean 10.3425 9.2808
Thus, as average number of working days is 60,000,
so availability increases by 637 man days per month.
Plant performance
Pot Line
Alf3 Consumption in kg/T
Month 2005-2007 2007-2009
April 24.39 25.19
May 24.56 26.05
June 22.86 24.65
July 24.04 23.81
August 23.50 25.11
September 27.99 25.63
October 24.76 23.87
November 24.35 23.09
December 24.57 23.09

January 24.27 22.94
March 24.61 21.86
Mean 24.6341 23.9841
Thus the productivity increases by 0.02%.
Carbon Area
HFO Consumption in LT/T
Month 2005-2007 2007-2009
April 77.87 85.93
May 86.27 72.02
June 88.48 81.40
July 73.39 74.28
August 78.55 65.51
October 81.95 66.24
January 81.14 69.59
March 72.38 74.75
Mean 78.18 72.84
Cast House
H. F.O. Consumption in LT/T
Month 2005-2007 2007-2009
April 39.91 45.68
May 36.73 42.44
June 34.11 43.04
July 34.45 40.52
August 32.37 40.10
October 37.11 42.37
January 36.97 42.26
March 39.88 38.91
Mean 36.15 41.68
VIII. CONCLUSION
The present revised incentive scheme which is
productivity linked group incentive scheme, has reduced the
absenteeism of employees to much more extent and made the
calculation of incentive amount easier and also increased the
productivity of the plant as compared to the previous incentive
scheme.
Any incentive scheme must be monitored
and improved periodically based on its performance in the
plant and the satisfaction of the employees availing the
incentives.
Each department should come up with its own set of goals,
but the initial plan must be a company-wide one with a big
picture goal. Once that goal is stated, each department can
look at its own operations and come up with a set of smaller
goals that are all designed to help meet the larger goal. The
performance of one department is directly dependent on the
performance of another department, so it is important that
those two departments work together in establishing goals.
As far as the design of incentive schemes is concerned, one
fundamental lesson seems to be that for any incentive
mechanism to be effective, it must be fully integrated into the
organization. Thus, incentive schemes must be adapted to the:
Culture, Clientele, Products and Processes.
REFERENCES
[1]. NALCO at a glance (National Aluminium Company Ltd)
Corporate HRD Department, Bhubaneswar.
[2]. Industrial Engineering ( By- Dr. B. Kumar, Sixth edition, Khana
publisher-1999)
[3]. Industrial Engineering the Science of Productivity(By- B.K Lenka,
First edition-2002, Smt Sneha Lenka Publishers)
[4]. Terborg, James R.; Miller, Howard E. Journal of Applied
Psychology. Vol 63(1), Feb 1978
[5]. Patricia Milne. "Motivation, incentive and organizational culture"
journal of knowledge management.vol 11,2007
[6]. C. Bram Cadsby. " Sorting and Incentive Effects of Pay-for-
Performance:An Experimental Investigation."August 2005.
[7]. Dr.kadir yilmaz” Influence of salary and monetary incentives on
project performance” Essay, 2009.
[8]. Mitchell L.; Mirvis, Philip H.; Hackett, Edward J.; Grady, James
F. Journal of Applied Psychology. Vol 71(1), Feb 1986,p- 61-
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[9]. Francisco J. Román.”Accounting, Organizations and Society”
Volume 34, Issue 5, July 2009, Pages 589-618
[10]. Baron, James A. and David M. Kreps (1999): Strategic Human
Resources. Frameworks for General Managers. New York: John
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[11]. Martin Holtmann, “Principles for Designing Staff Incentive
Schemes”
(http://www.microsave.net/files/pdf/Principles_for_Designing_Sta
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