Wage components

UNIT 4: WAGE COMPONENTS
Objectives
After going through this unit, you will be able to:
 Understand the Various wage/salary components
 Understand the Wages Incentives
 Understand the Pay structure: basic and allowances
Structures
4.1 Wage/Salary Components
4.1.1 Introduction
4.1.2 Meaning Of Wage And Salary
4.1.3 Concept Of Wage And Salary
4.1.4 Objectives Of Wage And Salary Administration
4.1.5 Principles Of Wage And Salary Administration
4.1.6 Wage Structure
4.1.7 Components Of Wage And Salary
4.1.8 Factors Influencing Wages And Salaries
4.2 Incentives
4.2.1 Meaning Of Incentive
4.2.2 Definition Of Incentive
4.2.3 Need Of Incentive
4.2.4 Incentives For Work
4.2.5 Classification Of Incentives
4.2.6 Merits Of Incentives
4.2.7 Problems Arising Out Of Incentives
4.2.8 Requirements Of A Sound Incentive Plan
4.2.9 Categories Of Incentive Plans
4.2.10 Time-Based Individual Incentive Plans
4.2.11 Output-Based Individual Incentive Plans
4.2.12 Group Incentive Plans
4.3 Pay Structure: Basic And Allowance
4.3.1 Basic Wage
4.3.2 Basic-Wage Component Of Pay Structure
4.3.3 Dearness Allowance
4.3.4 Systems Of Payments Of Dearness Allowance
4.4 Self-Assessment Questions

4.1 WAGE/SALARY COMPONENTS
4.1.1 Introduction:
Wage and salary administration affect levels of employee commitment to theorganisation.
However, fascinating the individual‘s job assignment is, theemployee must be paid. Pay affects
the way people work-how much and howwell. A large part of the compensation that people
receive from work ismonetary. Although managers are expected to conserve money and
distribute itwisely, many employees feel that they should get more of it for what they do.Wages,
salaries and many employee benefits and services are form of compensation.Contemporary
employment reward systems attach great prominence to wagesand salaries. In the evolution of
economics, the role of financial rewards hasgrown. The sophistication of wage and salary
administration has increased asindustrialized economies have become more complex. New
suggestions formanaging compensation systems are constantly emerging.
4.1.2 Meaning of Wage and Salary
Wage and Salary administration, also known as Compensation management, remuneration
management, or reward management, is concerned with designing and implementing total
compensation package. The traditional concept of wage and salary administration emphasised on
only determination of wage and salary structures in organisational settings. However, entered the
business field which necessiated to take wage and salary administration in comprehensive way
with a suitable change in its nomenclature. Beach has defined wage and salary administration as
follows:
"wage and salary administration refers to the establishment and implementation of sound
policies and practices of employee compensation. It includes such areas as job evaluational,
surveys of wages and salaries, analysis of relevant organisational problems, development and
maintenance of wage structure, establishing rules for administering wages. wage payments,
incentives, profit sharing, wage changes and adjustments, supplementary payments, control of
compensation costs and other related items"
4.1.3Concept of Wage and Salary
Wage and salary are the most important component of compensation and these are essential
irrespective of the type of organisation. Wage is referred to as remuneration to workers
particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar

employees including managerial personnel. Wages and salary are paid on the basis of fixed
period of time and normally not associated with productivity of an employee at a particular time.
4.1.4 Objectives Of Wage And Salary Administration
A sound plan of wage and salary administration seeks to achieve the followingobjectives :
1. To establish a fair and equitable compensation offering similar pay for similar work.
2. To attract competent and qualified personnel.
3. To retain the present employees by keeping wage levels in tune with competitive units.
4. To keep labour and administrative costs in line with the ability of the organisation to pay.
5. To improve motivation and morale of employees and to improve union management
relations.
6. To project a good image of the company and to comply with legal needs relating to
wages and salaries.
7. To establish job sequences and lines of promotion wherever applicable.
8. To minimize the chances of favoritisms while assigning the wage rates.
According to D.S. Beach, was and salary administration has four mainpurposes.
1. To recruit persons for a firm
2. To control payroll costs
3. The satisfy people, to reduce the incidence of quitting, grievances andfractions over pay
and
4. To motivate people to perform better.

4.1.5 Principles of Wage and Salary Administration:
The following principles should be followed for an effective wage and salaryadministration ;
1. Wage policy should be developed keeping in view the interests of allconcerned parties viz.,
employer, employees, the consumers and thesociety.
2. Wage and salary plans should be sufficiently flexible or responsive tochanges in internal and
external conditions of the organisation.
3. Efforts should be made to ensure that differences in pay for jobs arebased on variations in job
requirements such as skill, responsibility,efforts and mental and physical requirements.
4. Wage and salary administration plans must always be consistent withoverall organizational
plans and programmes.
5. Wage and Salary administration plans must always be in conformity withthe social and
economic objectives of the country like attainment of equality in income distribution and
controlling inflation, etc.
6. These plans and programmes should be responsive to the changing localand national
conditions.
7. Wage and salary plans should expedite and simplify administrativeprocess.
8. Workers should be associated, as far as possible, in formulation andimplementation of wage
policy.
9. An adequate data base and a proper organizational set up should bedeveloped for
compensation determination and administration.
10. The general level of wages and salaries should be reasonably in line withthat prevailing in
the labour market.
11. There should be a clearly established procedure for hearing and adjustingwage complaints.
This may be integrated with the regular grievanceprocedure, if it exists.
12. The workers should receive a guaranteed minimum wage to protect themagainst conditions
beyond their control.

13. Prompt and correct payments to the employees should be ensured andarrears of payment
should not accumulate.
14. The wage and salary payments must fulfill a wide variety of humanneeds including the need
for self-actualization.
15. Wage policy and programme should be reviewed and revisedperiodically in conformity with
changing needs. For revision of wages, awage committee should also be preferred to the
individual judgmenthowever unbiased of a manager.
4.1.6 Wage Structure
According to economic theory, wages are defined broadly as any economic compensation paid
by the employer to his labourers under some contract for the services rendered by them. In its
actual sense which is prevalent in the practice, wages are paid to workers which include basic
wages and other allowances which are linked with the wages like dearness allowances, etc.
Traditionally, in the absence of any bargaining power possessed by labourers, they did not have
any say in the determination of wages paid to them. This has led to the development of several
theories of wages such as subsistence theory by Ricardo, wage fund theory by Adam Smith,
surplus value theory by Karl Marx, residual claimant theory by Frascis Walker, marginal
productivity theory by Philip Wickstted and John Clark, bargaining theory by John Davidson.
andbehaviouraI theory by James March and Herbert Simon. Each theory tries to explain how
wages are determined. In the Indian context, soon after the independence, Government of India
set up a Committee on Fair Wages in 1948 which has defined various concepts of wages which
govern the wage structure in the country specially in those sectors which can be termed as
underpaid and where workers do not have bargaining power through unions. These concepts are:
i) minimum wage,
ii) living wage, and
iii) fair wage.
Later, the concept of need-based minimum wage was added. Let us have a brief look at these
concepts.
Minimum Wage
A minimum wage is one which has to be paid by an employer to his workers irrespective of his
ability to pay. According to the above committee,

"Minimum wage is the wage which must provide not only for the bare sustenance of life, but for
the preservation of the efficiency of the workers. For this purpose, minimum wage must provide
some measure of education, medical requirements and amenities. "
Subsequent to the committee's report, Government enacted legal provisions regarding minimum
wages under the Minimum Wages Act. 1948. This Act does not define the concept of minimum
wages but empowers the Central Government as well as State Governments to fix minimum
wages from time to time. Wherever this Act applies, the payment of minimum wages is
mandatory. In 1957, Indian Labour Conference elaborated the concept of fixation of minimum
wars which were termed as need-based minimum wages.
For the calculation of wages, the Conference suggested the following guidelines:
1. The standard working class family should be taken to consist of three consumption units for
the earner; the earnings of women, children and adolescents should be disregarded.
2. The minimum food requirements should be calculated on the basis of the net intake of2.700
calories per adult.
3. The clothing requirements should be estimated at a per capita consumption of 18 yards per
annum per person.
4. In respect of housing. the norms should be the minimum rent charged by the Government in
any area for houses provided under subsidizedhousing scheme for low-income groups.
5. Fuel. lighting and other miscellaneous items of expenditure should constitute 20 per cent of
the total minimum wage.
Living Wage
Along with the minimum wage the Committee on Fair Wages has given the concept of living
wage which has been defined as follows:
"A living wage is one which should enable the earner to provide for himself and his family not
only the bare essentials of food, clothing and shelter but a measure of frugal comfort including
education for his children, protection against ill-health, requirements of essential social needs
and a measure of insurance against the more important misfortunes including old age. "
Living wage is more than the concept of minimum wage. Such a wage is determined keeping in
view the national income and paying capacity of industrial sector. The Committee also observed
that since the national income did not support the payment of living wage. it should be
implemented in three phases. In the initial stage the wages to be paid to the entire working class
were to be established and stabilised. In the second phase fair wages were to be established in the
community and industry. In the final phase the working class was to be paid the living wage.
Fair Wage

The concept of fair wage is linked with the capacity of the industry to pay. The Committee has
defined fair wage as follows:
"Fair wage is the wage which is above the minimum wage but below the living wage. The lower
limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity
of the industry to pay. "
Thus, fair wage depends on different variables affecting wage determination. Such factors are
labour productivity prevailing wage rates, the level of national income and its distribution and
the capacity of industry to pay. At present, the concept of fair wages is followed by the most
business organisations.
4.1.7 Components of Wage and Salary:
An average employee in the organized sector is entitled to several benefits-bothfinancial as well
as non-financial. To be specific, typical remuneration of anemployee comprises:
Wages and Salary:
Wages represent hourly rates of pay, and salary refers to the monthly rate of pay,irrespective of
the number of hours put in by an employee. Wages and salariesare subject to annual
increments. They also differ from employee to employee,and depend upon nature of job,
seniority, and merit.
Incentives:
Also called ―payments by results‖, incentives are paid in addition to wages andsalaries.
Incentives depend upon productivity, sales, profit or cost reductionefforts.There are:
i) Individual incentive schemes and
ii) Group incentiveprogrammes.
Individual incentives are applicable to specific employeeperformance.Where a, given task
demands group effort for completion,incentives are paid to the group as a whole. The amount is
later divided amonggroup members on an equitable basis.
Fringe Benefits:

These include such motley crowd of employee benefits as provident fund,gratuity, medical care,
hospitalization, accident relief, health and groupinsurance, canteen, uniform, recreation and the
like.
Perquisites:
These are allowed to executive and include company car, club membership, paidholidays,
furnished house, stock option scheme and the like. Perquisites areoffered to retain competent
executives.
Non-monetary Benefits :
These include challenging job, responsibilities, recognition of merit, growthprospects, competent
supervision, comfortable working conditions, job sharingand flexi time.
4.1.8 FactorsInfluencing Wages And Salaries
A number of factors, thus, influence the remuneration payable to the employees. These factors
can becategorized into
(i) External Factors and
(ii) Internal Factors.
External Factors
External factors influencing wages and salaries are as discussed below:
1. Demand and Supply:The labour market conditions or demand and supply forces operate
at thenational and local levels and determine organizational wage structure. When
thedemand of a particular type of labour is more and supply is less then the wageswill be
more. On the other hand, if supply of labour is more demand on theother hand, is
less then persons will be available at lower wage rates also. In thewords of Mescon, ‗the
supply and demand compensation criterion is veryclosely related to the prevailing pay,
comparable wage and on going wageconcepts since, in essence all of these remuneration
standards are determined byimmediate market forces and factors.
2. Cost of Living:The wage rates are directly influenced by cost of living of a place. The
workerswill accept a wage which may ensure them a minimum standard of living.Wages
will also be adjusted according to price index number. The increase inprice index will
erode the purchasing power of workers and they will demandhigher wages. When
the prices are stable then frequent wage increases may not be undertaken.

3. Trade Unions‘ Bargaining Power :The wage rates are also influenced by the bargaining
power of trade unions.Stronger the trade union higher well be the wage rates. The
strength of a tradeunion is judged by its membership, financial position and type of
leadership.Union‘s last weapon is strike which may also be used for getting wage
increases.If the workers are disorganized and disunited then employers will be successful
in offering low wages.
4. Government Legislation:To improve the working conditions of workers, government
may pass alegislation for fixing minimum wages of workers. This may ensure
them aminimum level of living. In under developed countries bargaining power of labour
is weak and employers try to exploit workers by paying them low wages.In India,
Minimum Wages Act, 1948 was passed to empower government to fix minimum wages
of workers.
5. Psychological and Social Factors :Psychological the level of compensation is perceived
as a measure of success inlife. Management should take into consideration the
psychological needs of theemployees while fixing the wage rates so that the employees
take pride in theirwork. Sociologically and ethically, the employees want that the wage
systemshould be equitable, just and fair. These factors should also be taken
intoconsideration while devising a wage programme.
6. Economy:Economy also has its impact on wage and salary fixation. While it may
bepossible for some organisations to thrive in a recession, there is no doubt thateconomy
affects remuneration decisions. A depressed economy will probablyincrease the labour
supply. This, in turn, should lower the going wage rate.
7. Technological Development:With the rapid growth of industries, there is a shortage
of skilled resources. Thetechnological developments have been affecting skills levels at
faster rates.Thus, the wage rates of skilled employees constantly change and an
organization has to keep its level upto the mark to suit the market needs.
8. Prevailing Market Rates:No enterprise can ignore prevailing or comparative wage
rates. The wage ratespaid in the industry or other concerns at the same place will form a
base forfixing wage rates. If a concern pays low rates then workers leave
their jobswhenever they get a job somewhere else. It will not be possible to
retain goodworkers for long.
B. Internal Factors
The important internal factors affecting wage and salary decisions are asfollows:
1. Ability to Pay:The ability to pay of an enterprise will influence wage rates to be paid. If
theconcerns is running into losses then it may not be able to pay higher wage rate.A

profitable concern may pay more to attract good workers. During the periodof prosperity,
workers are paid higher wages because management wants toshare the profits with
labour.
2. Job Requirements:Basic wages depend largely on the difficulty level, and physical and
mentaleffort required in a particular job. The relative worth of a job can be
estimatedthrough job evaluation. Simple, routine tasks that can be done by many
peoplewith minimum skills receive relatively low pay. On the other hand,
complex,challenging tasks that can be done by few people with high skill levels generally
receive high pay.
3. Management Strategy:The overall strategy which a company pursues should determine
to remunerationto its employees. Where the strategy of the organisation is to
achieve rapidgrowth, remuneration should be higher than what competitors pay. Where
thestrategy is to maintain and protect current earnings, because of the decliningfortunes
of the company, remuneration level needs to be average or even below average.
4. Employee:Several employee related factors interact to determine his remuneration.
(i) Performance or productivity is always rewarded with a pay increase.Rewarding
performance motivates the employees to do better in future.
(ii) Seniority. Unions view seniority as the most objective criteria for payincreases
whereas management prefer performance to effect payincreases.
(iii) Experience. Makes an employee gain valuable insights and is generally rewarded.
(iv) Potential. Organisation do pay some employees based on their potential.Young
managers are paid more because of their potential to performeven if they are short
of experience.
(v) Luck. Some people are rewarded because of their sheer luck. They havethe luck
to be at the right place at the right time.

4.2 INCENTIVES
4.2.1 Meaning of Incentive
„Incentive‟ may be defined as any reward of benefit given to the employee over and above his
wage or salary with a view to motivating him to excel in his work. Incentives include both
monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate
individual or group performance.
4.2.2Definitions of Incentive
The following are some of the definitions of the term „Incentive‟:
1. Wage incentives are extra financial motivation. They are designed to stimulate human effort
by rewarding the person, over and above the time rated remuneration, for improvements in the
present or targeted results” – The National Commission on Labour.
2. “It refers to all the plans that provide extra pay for extra performance in
addition to regular wages for a job” – Hummel and Nickerson.
3. “It is any formal and announced programme under which the income of an
individual, a small group, a plant work force or all the employees of a firm are partially or
wholly related to some measure of productivity output” – Scott.
4.2.3 Need for incentive
It is true that monetary compensation does constitute very important reason for the working of an
employee. But this compensation alone cannot bring job satisfaction to the workers. One cannot
expect effective performance from a worker who is dissatisfied with its job, even if he is well
paid. Sociologists and industrial psychologists also view that the financial aspect is not the only
dominant motivating force. Confidence in the management, pride in the job and in firm and
concern for the overall good cannot be brought by a bonus. Hence the modern authorities on
management science have recognized the need for the provision of incentives to build up good
morale.

4.2.4 Incentives for work
Incentives can take any form. According to Z. Clark Dickinson the important incentives for work
can be listed as follows:
1. Desire for livelihood and fear of want.
2. Desire for approval of master and fear of punishment.
3. Desire for praise and fear of being dismissed.
4. Impulse to activity or joy in work and dislike of inactivity.
5. The moral command and fear of conscience.
Robert E. Salton has mentioned the following nine factors as the Motives for work.
1. Doing something worthwhile (Good).
2. Trust in leadership.
3. Doing my share (Participation)
4. I count for something (Recognition).
5. A decent living (Fair Wages).
6. A chance to get somewhere (Opportunity).
7. A safe future (Security).
8. Know what‟s going on (Communication).
9. Conditions at work (Environment)
4.2.5 Classification of incentives
All forms of incentives can be broadly classified into two kinds namely,
(i) Financial Incentives, and (ii) Non-financial Incentives.
These incentives can be further sub-divided into various kinds. These kinds can be explained with the
help of the figure below:
Types of Incentives
Financial or Pecuniary Incentives Non-financial Incentives
1. Wages 1. Job Security
2. Salary 2. Recognition
3. Premium 3. Participation
4. Bonus 4. Pride in Job
5. Delegation of Responsibility

6. Quick Promotion
7. Facilities for Development
8. Labour Welfare Amenities
Now we shall briefly discuss the various kinds of incentives.
1. Financial Incentives
Financial incentives or pecuniary incentives are the most original of all the incentives. It is given in
the form of money. The financial incentives still form the most important influencing and motivating
factor up to a certain limit. Because it is only by virtue of the monetary compensation that the
workers can satisfy their fundamental needs such as food, clothing, shelter etc. The financial
incentives may be either direct or indirect. Direct incentives include wages, bonus and other
incentives directly given to the workers in the form of cash. Indirect financial incentives include
subsistence allowance expenses, medical expenses etc.
2. Non-financial Incentives
Non-financial or non-pecuniary incentives include all other influences planned or unplanned, which
stimulate exertion. Mere monetary incentive cannot help the management in solving all the problems
of industrial unrest. Further additional cash wage may also tempt the workers to misuse the money in
vices like gambling, drinking etc. Under such circumstances, the non-financial incentives have a
significant role to play. Such incentives create a healthy atmosphere and change the mental outlook
of the workers. They make the working class more stabilized and economically sound. Thus, in short,
the workers by virtue of the non-financial incentives are enabled to enjoy a richer and fuller life.
Experiences of foreign countries particularly countries like Britain, America and Japan have shown
that there is a high degree of positive correlation between non-financial benefit schemes and labour
productivity.
Examples of Non-Financial Incentives
Non-Financial Incentives can take a variety of forms. Some of the popular ones are given below:
1. Job Security: The management must try its best to create a sense of job security. There should be
no risk of retrenchment, demotion and termination. Experiences have also shown that the
productivity is less in those concerns where workers have no feeling of safe and secure. But it is high
in those concerns where they have a feeling of job security.
2. Recognition: Recognition of work is the essence of securing good work. Efficient people would
naturally like to get recognition for their skill and excellence in their work. Such recognition can do
many things that what a cash reward can do. Of course it is not practicable for the superiors to praise

everybody for everything done by them. But the technique of praise must be practiced as far as
possible.
3. Participation: Workers feel more satisfied when they are given an opportunity to raise their voice
in handling the affairs of the enterprise. Since they actually take part in the decision-making their co-
operation is assured.
4. Sincere Interest in Subordinates as Individual Persons: The workers must be made to feel pride
in their job. Various techniques can be employed to develop pride to work. Food products, dynamic
leadership, fair treatment, ethical conduct etc. can effectively stimulate the workers‟ pride in their job
and in the firm.
5. Pride in job: The workers must be made to feel pride in their job. Various techniques can be
employed to develop pride to work. Food products, dynamic leadership, fair treatment, ethical
conduct etc. can effectively stimulate the workers pride in their job and in the firm.
6. Delegation of Responsibility: Delegation of rights and responsibilities to execute a given task
often proves to be a strong motivating factor. By delegation the superior trusts his workers and
stimulates them to show better results.
7. Other Incentives: Other incentives like quick promotion, provisions of facilities for development
and training, provision of labour welfare amenities etc. also have a significant role to play in
motivating the employees.
4.2.6 Merits of Incentives
The following are the advantages derived by providing incentives to employees:
1. Higher output:By providing incentives to his employees, the employer is able to induce them to
work better. This leads to higher output.
2. Greater profits:Needless to say, higher output results in greater profits for the business. This
happens in two ways. First, the cost per unit becomes less and second, the enterprise is able to keep
the selling price low and this results in greater sales.
3. No problem of idle time:In an organisation where no proper incentives are available for the
workers, the tendency will be to while away the time. When suitable incentives are available, the
workers become time conscious. They begin to see every minute in terms of money.
4. Supervision does not pose any problem:When suitable incentives are available, the workers
become duty conscious. The need for close supervision, thus, does not arise.

5. Efficient workers are able to earn more:Such of those workers who are highly efficient are able
to earn more by way of performance bonus, higher commission and so on.
6. Possible to identify inefficient and dull workers:If, in spite of the incentive schemes, some
workers are able to earn only their normal wage, it should mean that they are basically dull. The
employer, therefore, has to decide whether to retain them or subject them to rigorous training.
7. Rate of labour turnover is bound to be low:If adequate incentives are available to the workers,
they may not have a feeling of dissatisfaction. Such workers are sure to have greater work
commitment and therefore may not leave the organisation. The rate of labour turnover, as a result, is
bound to be low.
8. Reduction in complaints and grievances:As the organization makes available suitable incentives
to the workers, they may not have anything to complain about. This leads to reduction in complaints
and grievances.
4.2.7 Problems arising out of incentives
The following problems are bound to arise while implementing an incentive plan:
1. Quality of work may suffer:The workers, those in the production department in particular, may
give undue importance to the quantity of output produced neglecting the quality of output. Such a
problem can be overcome only if the organization has a perfect system of quality control.
2. Inter-personnel relationships may suffer:Only those employees who are really efficient will
be benefited out of incentives. This may promote ill-feelings among the employees of an
organization.
3. Wear and tear of machines may be more:As the employees are keen on increasing the output
all the time, they may handle the machines carelessly. This increases the wear and tear of machines.
4. Health of the workers may get affected:Some workers tend to overwork in order to earn more
and this may affect their health.
5. Increase in accidents:There is always a preference to step up output disregarding even safety
regulations and this may increase the rate of accidents in the workplace.
6. Increase in paper work: Proper administration of any incentive scheme involves lot of paper
work. It necessitates the maintenance of proper records and books.
4.2.8 Requirements of a sound incentive plan

A good incentive plan shall fulfill the following requirements:
1. Trust and confidence – The success of any incentive plan depends on the existence of an
atmosphere of trust and confidence between the workers and the management. In the absence of such
an atmosphere, the workers may resist any such proposal by the management.
2. Consensus required – The management should not take a unilateral decision while evolving an
incentive scheme. Consensus between the workers and the management is necessary for the success
of the plan.
3. Assured minimum wage – Payment to any worker should not be totally related to his
performance. Every worker should be assured of a minimum wave notwithstanding performance.
Only then the workers would have a sense of security.
4. No scope for bias or favouritism- The standards set under the incentive plan should be based on
objective analysis. It should not expect too much out of the employee nor should it give scope for
bias or favouritism.
5. Simple to operate - The incentive plan should not involve tedious calculations. It should be so
simple that the worker will be in a position to work out his total earnings himself.
6. Beneficial to both the workers and the management - The incentive plan should be beneficial to
both the workers and the management. From the management's point of view, it should be cost
effective. From the workers' point of view, it should offer return, at a rate higher than the normal rate
of wages, for the extra efforts made by them.
7. Sound system of evaluation - A perfect system of evaluating the employees performance should
be created in the organisation. The results of evaluation should be made known to the employees at
the earliest.
8. Redressing grievances - Grievances and complaints are bound to arise whenever any incentive
plan is in vogue in the organisation. Proper machinery should be installed for the quick handling of
all such complaints.
9. Review - The progress of the incentive scheme should be periodically reviewed. Only then it
would be possible to notice and remove defects, if any, in the plan.
4.2.9 Categories of Incentive Plans
Incentive Plans are two types. These are
1) Individual Incentive Plans
2) Group Incentive Plans

Individual Incentive Plans also two types. These are
(i) Time- based Plans (ii) Output-based Plans
1. Hasley's Plan 1. Taylor's Differential Piece
2. Rowan's Plan Rate Plan
3. Emerson's Plan 2. Merrick's Multiple Piece
4. Bedeaux's Plan Rate Plan
3. Gnatt's Task Plan
4.2.10 Time-based Individual Incentive Plans
Halsey's Plan
F.A.Halsey, an American engineer, introduced this plan. Under this plan, standard time is determined
for each job. A worker who completes the job by taking the standard time or even exceeding it is
paid normal wages calculated at the time rate. In case, he completes the job in less than the standard
time, he is given bonus equal to 50% of the money value of the time saved.
The bonus payable to the worker and his total earnings, under the Halsey's plan, are calculated as
follows:
Bonus = 50% (Time Saved x Time Rate)
Total Earnings = Time Rate x Time Taken + Bonus
Merits of Halsey's Plan
The following are the plus points of Halsey's plan:
1. It is simple to understand.
2 The workers are assured of a minimum wage.
3. The employer and the worker share equally the benefit resulting from
savings in time.
4. The plan encourages workers to be more efficient in their work.
Demerits
Halsey's plan, however, suffers from the following limitations:
1. The efficiency of the worker is rewarded to the extent of50% only.
2. The time saved is wholly due to the efficiency of the worker but the
management grabs 50% of the resulting benefit.
3. The plan does not say anything about, the quality of the work done.

Rowan's Plan
Under Rowan's plan, the manner of calculating bonus is slightly different from that under the
Halsey's plan. Bonus, under Rowan's plan is calculated as follows:
Bonus = % of Timesaved x Time Wage
Standard Time
Total Earnings of the worker = Time Wage + Bonus
Merits
The following are the positive aspects of Rowan's plan:
1. Minimum wage is guaranteed to all workers.
2. When compared with Halsey's plan, bonus under Rowan's plan is more
although the basic time wage is the same under both the plans.
3. The plan provides a check against over-speeding by workers. As the worker saves more time, his
bonus and total earnings only begin to decline. In the above illustration, suppose, the worker
completes his task within one hour, i.e. he saves 4 hours, his bonus will only be Rs.16. He earns the
same bonus of Rs.16 by completing the task in 4 hours, saving just one hour.
Demerits
The drawbacks of Rowan's plan are given below:
1. It is not as easy as Halsey's plan is.
2. The earnings of the worker become less as he saves more time. This
discourages efficient workers.
Emerson's Efficiency Plan
Under Emerson's plan too minimum wage is guaranteed to all workers. Payment of bonus, however,
is related to the efficiency of the workers. Efficiency is determined by the ratio of time taken to
standard time. Usually, a worker is given bonus only when his level of efficiency, in terms of
percentage, is above 66.67%.
Merits
The following are the advantages of Emerson's efficiency plan:
1. Minimum wage is guaranteed.
2. It pays bonus to workers based on their level of efficiency.
3. The 66.67% or two-third efficiency criterion is within the reach of many
workers.
Demerits
The disadvantages of the plan are as follows:
1. It is not a straight-forward approach to determining bonus.
2. If the standard time allowed itself is low, it may not be possible for many

workers to fulfil the efficiency criterion laid down under the plan. .
Bedeaux's Plan
Under this plan, the standard time and time taken for each job is reduced to minutes, and each minute
is referred to as "B", i.e., one hour is the same as 60 B's. The bonus and total earnings of the worker,
under the plan, are calculated as follows:
Bonus = 75% (Standard Time - Time Taken) x Time Rate
Total Earnings = Time Wage + Bonus
Merits
The benefits of Bedeaux's plan are:
1. It guarantees minimum wages to the workers.
2. It enables efficient workers to earn more.
3. The benefit of three-fourth of the time saved is given to the worker.
Demerits
The weaknesses of the plan may be stated as follows:
1. The unit name of 'B' in place of the 'minute' does not make the plan altogether different.
2. The entire benefit of time saved by the worker is not passed on to him.
4.2.11 output-based individual incentive plans
Taylor's Differential Piece Rate Plan
F. W.Taylor, who is known as the Father of Scientific Management, developed the differential piece
rate plan. Under the plan, two piece rates are laid down –
(i) A lower rate for those workers who are not able to attain the standard output within the standard
time; and
(ii) A higher rate for those who are in a position to produce the standard output within or less than the
standard time.
Under the plan, minimum daily wage is not guaranteed.
Taylor's differential piece rate plan has the following components:
(i) Standard Output.
(ii) Standard Time

(iii) A Lower Piece Rate and
(iv) A higher Piece Rate
Merits
The following are the merits of Taylor's differential piece rate plan:
l. It is easy to understand and simple to operate.
2. It enables efficient workers to earn more.
3. Workers not reaching the standard are paid at a lower rate. Such people, thus, are punished for
their inefficiency. This protects the interests of the organisation.
Demerits
The limitations of Taylor's plan are given below:
l. It does not guarantee minimum wage. This creates a sense of insecurity for the workers. .
2. There may be ill-feelings among workers in view of the differential piece rates.
3. The quality of the output is ignored.
Merrick's Multiple Piece Rate Plan
Under this plan too a standard task is set for the workers. But unlike Taylor's plan that provides for
two differential rates, Merrick's plan contemplates three rates as shown below:
(i) Workers producing less than 83% of the standard output are paid at a
basic rate.
(ii) Workers producing between 83 % and 100% of the standard output
will be paid 110% of the basic piece rate.
(iii) Those producing more than the standard output will be paid at 120%
of the basic piece rate.
Merits
The merits of the plan may u~ stated as follows:
1. It is an improvement over Taylor's plan.
2. It has greater flexibility.

3. It offers greater scope for efficient workers to earn more.
Demerits
The following are, probably, the drawbacks of the plan:
1. It is a complicated plan.
2. Even a worker achieving 83% target is branded as a poor performer.
Gantt's Task Plan
This plan guarantees minimum daily wage. Its special feature is that it combines time rate, piece rate
and bonus. A worker who is unable to produce the standard output receives only the time wage. He
becomes eligible for bonus only when he attains or exceeds the standard output within the standard
time. The rate of bonus varies between 20% to 50% of his wages.
Merits
The plus points of Gantt's task plan are:
1. It has, as mentioned above, time wage, piece rate and bonus. It is, therefore, a three-in-one scheme.
2 It guarantees daily minimum wage.
3. It provides enough opportunities for efficient workers to earn more.
Demerits
The weaknesses of the plan are:
1. It is not easy to understand.
2. The fluctuations in the output levels, of different workers not attaining the standard, are ignored
and they all receive the same daily minimum wage. In the illustration given above, if two workers
produce 6 units and 8 units respectively (against standard output of 10), each is assured a daily wage
of Rs.50.
4.2.12 group incentive plans
Profit sharing
Profit sharing is the most popular method rewarding the employees. Under it, the employees are paid
in addition to the regular wage, a particular share of the net profits of the business as incentive.
Characteristics of Profit Sharing
The key features of profit sharing may be stated as follows:
1. It is based on an agreement between the employer and the employees.

2. It is a payment made after ascertaining the net profits of the business. It is not therefore, a charge
on profits.
3. The amount paid to the employees is over and above their normal pay.
4. The amount to the paid is determined based on some agreed formulas.
5. The payments based on seniority and wage level of individual workers.
Merits of Profit Sharing
The advantages are profit sharing are as follows:
1. Better employer-employee relations - This is possible, as the employer is ready to share the
profits of the enterprise with his employees.
2. Increase in productivity -The employees make every possible effort to increase productivity
because they know very well that higher profits for the enterprise would mean higher bonus for them.
3. Better living standards - It helps to increase the living standards of the employees as the amount
received is in addition to the usual wages.
4. Reduced costs of supervision - The workers themselves are duty conscious and, therefore, they
need no close supervision. Thus, costs of supervision are reduced.
5. Promotion of team spirit - The employees know the importance of Teamwork, as only such an
effort would result in higher output.
Limitations of Profit Sharing
The limitations of profit sharing are as follows:
1. Regular income not assured:Payment to workers, by way of profit sharing, at a particular rate
depends upon the profits of the enterprise. If the enterprise makes low profits or incurs losses, it will
not be in a position to pay bonus as agreed.
2. Suppression of profits:Attempts may also be made to suppress true profits so that the employees
need not be paid their share. This is done by manipulating accounts.
3. No inducement:Payment under the profit sharing scheme will be made to the employees once or
twice a year when accounts are closed. Such, payments at longer intervals may not really motivate
employees. Daily or weekly incentive payments are far more superior to profit sharing.
4.All workers paid alike:Payment to workers under profit sharing is made without considering their
relative level of efficiency. This amounts to doing injustice to those who have really made target
attainment possible.

4.3 PAY STRUCTURE: BASIC AND ALLOWANCE
4.3.1 Basic Wage
Basic Wage is fixed on the basis of weightage given to jobs in an organisational context at
various levels on the basis of skills, efforts, qualificationsetc which are required to perform
those jobs. Determination of weightage given to each job is done on the basis of studies carried
out by industrial engineers along with other experts. Practices prevailing in other similar
organisations are also taken into consideration.
4.3.2 Basic-Wage Component Of Pay Structure
The basic wage provides and stable base to the wage structure. It is the price to be paid to get a
given job done. This could be on monthly, weekly or daily basis.
Basic wages is built upon the statutory minimum wage, through the awards of the Industrial
Tribunals and directives of the Pay Commission at National and State Levels and the collective
bargaining. The minimum wages, according to the recommendations of the 1949 Report of the
Fair Wages Committee appointed by the Government of India, should provide not merely for
bare subsistence of life but for the preservation of efficiency of workers by providing some
measure of education, medical requirements and amenities.
It was after the end of the second world war that the Industrial Tribunals and Courts have set the
pattern of basic wages in Industries through awards. Basic wage of Industrial worker is based on
a "Standard-Budget" concept or a family of four, should include food, clothing, housing and
fuel.
This is also known as Need Based Minimum Wage. The underlying assumptions behind the
basic wage legislation is that the industry does not have the right to exist unless the minimum
needs of workers are met.
The Committee on Fair-Wages (1948) and 15th session of I.L.C. (1954) propounded certain
wage concepts such as minimum wages, fair wages, living wages, and need based minimum
wages.
Minimum wages - not merely for bare subsistence but also for the preservation of efficiency and
providing some measure of education; medical etc.
Fair-wage - while the lower level of fair wage is the minimum wage the upper-limit is the
capacity of the industry to pay. Between these two limits, the actual wage can depend on
(I) the productivity of labour
(II) the prevailing wage rate
(III) National income

(IV) the place of industry in national economy.
Living-wages - It represents and inclinds decency, protection against ill health, requirements of
essential social heads and insurance against some future misfortune etc.
Living wage is a concept enshrined in our constitution and state will make all efforts to attain it.
.
The concepts of Nominal/Money wage and Real Wage also require explain in brief.
• Nominal/Money wage is the earning in cash or its equivalent
• Real wage is the money wages discounted by cost of living index to denote the
pruchasing power of the wages.
Differentials in basic wages are normally based on a set of criterion which the Fair Wages
Committee suggested. They are as follow:
• The degree of skill
• The strain of work
• The experience involved
• The training required
• The responsibilities undertaken
• The mental and physical requirements
• The disagreeableness of the task
• The hazard on the work
• The fatigue involved
Basic wage is generally practised through scales of pay. An employee draws his basic pay in a
range provided in the scales. He also gets increments on periodical basis. Basic pay generally
remain static, unless an employee moves upward (gets promotion) or downward
(getsdemotion).
4.3.3 Dearness Allowance
Employees are employed with a particular wage or salary rate. In due course of time due to price
increase, the real income of employees goes down. It means with the same level of wages
employees are unable to buy goods and services, which they were able to buy before increase in
prices. Dearness Allowance is paid to employees by way of compensating them for the loss of
real income caused to them by increase in the cost of living due to increase in prices.
4.3.4 Systems of Payments of Dearness Allowance
The system of payment of Dearness Allowance are mainly classified into two categories. They
are: -
(i) Not linked to consumer price index numbers and

(ii) Linked to consumer price index numbers.
Not linked to consumer price index numbers
(A) Flat Rate : Flat Rate system of payment is a method under which a fixed amount is paid to
all employees irrespective of their categories and wage scales. The practice of paying Dearness
Allowance at a fixed rate is regardless of any change in the consumer price index.
(B) Graduated Scale: Workers belonging to higher income groups objected to the award of the
same amount of Dearness Allowance to all employees irrespective of their wages or salaries. ,
With this background the graduated scale system came into existence.
According to this method Dearness Allowance is paid on a graduated scale according to various
wage scale. On the basis of different wage scale the workers are divided into groups. Dearness
allowance increases with each scale of salary increase but after a limit, their is no increase in the
amount of Dearness allowance, whatever high the wage rate is.
A minimum amount of dearness allowance is also set for the workers in each scale, below which
the dearness allowance is not allowed to fall.
This method is considered to be equitable and hence it is quite popular.
Linked to consumer price index numbers:
Under this system the dearness allowance is linked with the consumer price index number.
(A)Flat rate: In this method dearness allowance rate per point or scale is fixed and this varies
only with variations in points of consumer price index numbers.
(B)As a percentage of Pay In this method the dearness allowance is fixed. It is calculated as the
percentage of pay per slab of the consumer price index numbers. The dearness allowance is
expressed as a fixed percentage of pay and equated to a scale of points of the consumer price
index.
The system of dearness allowance being linked with consumer price index is in vogue today.
The payment of Dearness Allowance for central government employees is based on the
recommendation of the Pay Commissions.
In the banking sector Dearness Allowance is paid as per the Desai Award. Under this dearness
allowance is paid at a rate of 3 percent for every 4 points rise over 100 in the quarterly average of
the consumer price index of the working class.
In various other industries and commercial houses, payment of dearness allowance is paid in
common according to the scales.
In many companies a 100 percent neutralisation system has been introduced against the rise in
prices. This implies that the employees are under complete protection against the rising prices.

On the other hand some organisations have provided a ceiling on the payment of dearness
allowances, in terms of maximum amount of dearness allowance payable to a person.
Apart from the basic, Dearness allowance, many other allowances are paid to employees to
compensate them adequately so that the total package of remuneration provides them suitable
compensation package.
The various allowances given to the employees are:-
(i) House Rent Allowance (HRA):Organisations are set up in various types of locations such as
urban centres; industrial belt etc.where houses are not available at a reasonable rent.
If the employees are required to pay house rent as per the prevailing market rates, a substantial
portion of their wages will go as house rent and the employees will not be left with sufficient
money to meet their other requirements.
Hence HRA is paid to the employees enabling them to pay house rent for a suitable
accommodation . It varies according to the cost of living in different cities and places.
Employees are paid HRA as per their slabs in their wages and salaries. This allowance is not
considered as wages. The HRA shall also not be reckoned for any direct payment like gratuity,
overtime, provident fund etc.
(ii) Leave Travel Allowance (LTA): Employees while working, seldom get opportunity to visit
places where they can go and spend sometime along with the members of their families to get
relaxed and reenergized for the work to be continued with zeal and enthusiasm. For such purpose
employees are also willing to visit their native places.
Many organisations have introduced schemes commonly called Leave Travel Assistance
(LTA)/Leave Travel Concession (LTC) etc. and this facility facilitates the employees to go to
their home town or places for relaxation and reenergising .
Organisations have different types of practices for various categories of employees. Normally
employees who have completed a few years of service satisfactorily are entitled to LTA/LTC.
(iii) Washing Allowance: While employees are working in various industrial processes, various
kind of dirt gets accumulated on their body and uniform. If the employees do not keep
themselves clean, they are likely to get different types of diseases.
A particular amount is paid as washing allowance to certain categories of employees and they are
expected to keep themselves clean.
In some organisation duty uniforms are provided to front line employees who directly come in
touch with customers .These employees are given washing allowance and are expected to keep
their unforms clean and make better presentation before the customer.

Once washing allowance is provided, the employers are in a position to enforce a .standard of
cleanliness on the workforce which will ultimately force the employees to keep themselves clean
and in due course of time, the organisation will have its own standard of cleanliness.
(iv) Conveyance Allowance: For smooth and efficient functioning of any organisation,
employees are required to come to work place in time. Employees who neither have got a
residence in the housing colony nor at any nearby places, commutes everyday distance by
various means while coming to -work place. While commuting employees loose hilt of time and
energy and after reaching work place they find themselves exhausted.
In order to facilitate employees to come to the work place comfortably and in time , employers
provide convence allowance to the employees for availing better transport service, or
maintaining and using own vehicle. The conveyance allowance is paid to employees for the days
in which he receives normal wages. This however is not paid for days on which he is on leave
without pay.
(v) Shift Allowance (S'A);Someorganisations are required to work continuously under shift
system because of the nature of production or service they have.
Normally there are three shifts 6 A.M. to 2 RM., 2 P.M. to 10 RM. and 10 RM. to 6 A.M. In
order to establish balance among employees, so far shift duty is concerned; the employees are
rotated among these three shifts. It implies that all employees will get by rotation duties at night
shift equally.
However there are organisations where a few employees are required to work more in nightshifts
and rotations are not possible. They are paid an additional allowance called night shift allowance
because they do jobs frequently during night hours which is streneous. The rate of SA varies
from organisation to organisation. 159 of the time a fixed amount is paid as SA.
vi) Cash Handling Allowance: There are organisations where one particular category of
employees handles a lot of cash (currencies and coins) of various denominations. Their job is to
receive/pay , transfer cash amount. While doing so, they are required to count cash correctly.
Sometimes by way of genuine error, they receive less money, pay more money and also receive
bad currencies and coins. In such situation they are required to compensate the loss caused to the
employers due to such error.. Thus an element of risk is involved. In order to cover this risk
element, these employees receive this allowance on regular basis.
(vii)Lunch Allowance and Dinner Allowence: Those employees who are required to do the
organisad-on's work away from the usual place of duty during the lunch or dinner period, are
paid lunch & dinner allowance.
(viii)Education Allowance: The education allowance is paid to the employees to make the
package more attractive and facilitate greater spirit to educate their children.
(ix) Underground Allowance: All employees working in underground operations are entitled to
this allowance because the underground job is more strenuous and risky.

(x) Outstation Allowance: This allowance is paid to all employees on outstation duty.
(xi) Servant Allowance: In order to enable the executives to work in a relax mind and free from
household duties, they are provided servants or allowance enabling them keep servants.
(xii)Social Security Allowance: This allowance is paid to employees to help them to protect
themselves and their families in an unforeseen situations in life. 'The employers get their
employees insured under various types of social security schemes. The amount for the insurance
schemes is paid by the employers.
(xiii)City Compensatory Allowance: In cities due to high prices the cost of living remains
higher. Employees posted in these cities are paid city compensatory allowance by way of
compensating them against loss of real income caused to them due to higher consumer price
index prevailing there. This allowance varies in rates according to consumer price index
prevailing in various categories, of cities.
(xiv)Overtime Allowance: Daily working ,hours for workers are prescribed under various acts'
Workers working for more than the prescribed hours are entitled to receive overtime payments,
which is normally double the ordinary rates of wages.
4.4 SELF ASSESSMENT QUESTIONS
1. What are the objectives of wage and salary administration ?
2. What are the principal of wage and salary administration ?
3. Discuss the factor influencing of wage and salary.
4. What are the Components of Wage And Salary and explain ?
5. What is definition if incentives ?
6. What are the needs for incentives?
7. What are the classification of incentive and explain ?
8. What the advantages of incentives?
9. What are the categories of incentive plan and explain?
10.Discuss the various allowances, briefly.

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