Piece rate is used in the case of selling. Sometimes, bonus at a higher rate is paid for production or selling products above a maximum limit.
A manager gets salary and bonus based on the performances of employees working under him. Recently, many Indian organizations have started paying wages and salaries with a combination of time and piece rate.
A minimum salary is paid to all the employees irrespective of their performance, along with the wages earned above the minimum production at a certain rate of unit produced or sold.
The piece rate pay provides a direct connection between performance and reward. Employees producing more units are awarded more wages and salary.
It is an incentive to perform better. The quality may not improve, as employees are interested only in quantity.
A minimum salary is assured to provide employees’ satisfaction and maintain quality, irrespective of qualities produced.
A quantity-quality measure is used to ensure high quality along with more output. Many enterprises rigorously follow wage payment and they award wages only when a minimum quality is maintained.
Linking wages with cost efficiency is a good proposition but a practically difficult outcome. However, many organizations have started rewarding employees if they incur less costs of production and sale.
The expectancy theory is fully applicable in piece rate pay plans, as the effort-performance-reward relationships are highly feasible as per the expectations of the employees.
Valence, i.e. reward related effort, is strengthened. Expectancy, i.e. effort-performance relationship, is high. Instrumentality, viz. performance-reward connection, is firmly tied. Thus,
Valence x expectancy x instrumentality = motivation
The belief of instrumentality is that reward will automatically follow the performance. Valence of money motivates employees for higher work.
The input-output valence equates many employees. Employees having inequity or less wages will try hard to equate themselves to others.
The equity theory is applicable as behaviour modification. The desirable consequences of more pay reinforce their desire for better performance.
Undesirable behaviour is prevented on equity grounds as no one likes to be termed a poor performer.
The goal setting theory is also applicable, as employees set achievable goals to be attained within a specific period. Objectives tend to achieve a higher performance.
The limitation of the piece rate payment system is not accurately calculated. Favourable consequences may be accompanied with some unfavourable results.
When hard work does not result in some outputs, employees are discouraged. The cost reward analysis is not accurately calculable.
Employees having reduced energy are unable to produce more and have to be satisfied with lower rewards.
Economic consequences are not always effective and additional social recognition and psychological satisfaction is needed. However, more pay and reward have been accepted as symptoms of social achievement.
2. Wage incentives:
More pay for more production, is an incentive to employees for higher production. Normally, workers devote routine time and energy towards performing their jobs, but they exert themselves more when some incentives are given for higher productions.
Workers have the potential to work hard, which they do in special cases for getting extra benefits. It is different from piece rate wherein payment is linked with the production per unit.
It is a routine method of payment of wages. If an employee does not perform or does not achieve any production, he is not paid at all.
Therefore, it becomes a routine and known matter. In wage incentives, an additional reward is given only to those employees who perform exceptionally well, while other employees get normal wages.
The instrumentality of the expectancy theory is applicable, as the employees feel secured as all of them get base pay, unlike the piece rate wherein base pay is not assured.
Feeling a sense of security helps employees develop themselves under wage incentives. Uncertainty of pay makes people restless and troublesome.
Wage incentives provide safety and security to the job, besides giving additional wages to high performers.
Unlike in the piece rate, a low performer is not penalized in this system. All the employees get equal opportunities to get additional benefits. Wage incentives reinforce desirable behaviour.
It provides an objective basis for rewards. Valence is strengthened as effort is directed as per rewards expected.
The strength of value motivates employees who achieve their targets and the goals of the organization.
The equity theory helps understand the benefits of wage incentives. Wage incentive is a complex process, as evaluation of additional performance requires specialized techniques. Rate determination may also create confusion.
3. Profit sharing:
Profit sharing is a practical type of motivation to monitor employees for better performance.
An organization declares bonus on additional profitability at an agreed rate of sharing, because the increase in profitability is not only the outcome of employees but is also due to organizational structure, machines, method and management.
The additional profit so shared between employees and organization is paid either in cash or bonus shares.
The cash bonus is an immediate reward motivating employees for hard work, while bonus share is a deferred benefit.
Bonus shares entitle employees to become owners of the company. Employees become partners in all the functions of the company.
Responsibility, growth, attitude and mutual interest are developed if employees also become owners of the company.
Employees take interest in the development of the organization and institutional spirits are developed.
Employees also develop a high commitment for technological breakthrough and efforts for outstanding performance.
If the organization is successful, employees are further motivated to exert more and achieve better performance.
Profit sharing works better when there are opportunities for development. Government rules and regulations are favourable to award bonus, because the government sometimes restricts the rate of bonus to curtail inflation in the economy.
An organization having immense opportunities of growth will use profit sharing, particularly bonus shares, as a tool for development.
The participative theory is correctly applicable here. Employees are developed and given opportunities of managing the organization effectively and efficiently.
Low profit is not a motivating factor because the organization cannot distribute bonus for preserving funds for development.
Profit may increase, but employees’ contribution may be negligible. It awards a non-contributory factor.
Similarly, profit may not increase due to a market slump although employees have worked hard.
Therefore, profit sharing is not always a motivating factor. Many times, employees consider it their right to share profit although there is low profit.
It creates confusion and criticism. Inspite of the criticism, profit sharing has been a welcome step for motivating and retaining qualified employees.
Many Indian business houses are experiencing satisfaction over the issue of bonus shares as the organization and employees are equally benefited and continue to get the increased rewards with strengthened efforts and performance.
4. Gain sharing:
Gain sharing is a formula-based group incentive plan. Improvement in group productivity is aimed for under gain sharing which is an incentive plan by which the total gain is allotted to employees.
It is the distribution of the total amount of gain which may be 50:50 between employees and the company, unlike profit sharing where a portion of profit is distributed amongst the employees and the rest of the amount is preserved with the company.
Employees receive their awards through gain sharing even though there is no profit. Gain sharing is based on productivity.
If there is improvement in productivity, employees get the incentive award although there is no profit because profit is the result of external factors over which employees have no control.
If the employees have worked hard and additional productivity is gained, they would share the incentive.
For example, if an employee has produced an additional two units within the specified period, he is entitled to share in the gain (total reserve-total cost) of two units, specially in the ratio of 50:50.
Gain sharing is a historical-based programme as it decides additional gain based on the previous year’s production.
It is a measure of improvement and sharing the gain on a specified formula. Gain sharing explores the specific areas of improvement by providing incentives at the inventory level, labour hour per unit of product, usage of materials, quality of finished goods and methods of production.
The management pinpoints the areas which are controllable and where improvement is possible.
Gain sharing improves these areas by providing incentives to employees. For example, if the inventory management reduces certain costs, the employees are awarded for the cost saving, irrespective of profit.
Gain sharing is instrumental for behaviour improvement. Employees are taken into confidence and told that the gain achieved will be shared in their respective areas.
The valence of reward and performance is strong enough to encourage employees’ behaviour towards better and higher performances.
It provides an incentive for coordination and teamwork. The employees’ resistance to change is loosened as they find additional gain by technological development.
Gain sharing is an effective form of participation. The attitudes of employees are broadened as they experience the awarding of performance and a conducive atmosphere for development.
The success of gain sharing depends upon the possibilities of creation of standards, existence of controllable areas and receptiveness of employee’s ideas.
The management-employees relationship should be cordial and trustworthy for the success of gain sharing.
5. Skill-based plan:
A skill-based plan refers to payment for knowledge and skills possessed by employees. It is totally different from profit sharing and wage incentives.
Employees are paid for their skills, depth of knowledge, range of capabilities and experience based skills.
For example, a university professor gets a higher salary, although he takes less classes than a lecturer, because the former has achieved more skill, knowledge and experience of teaching.
Employees in factories too are given an initial starting pay which increases along with knowledge.
It is not an automatic yearly increment which is given for working a certain period of time. Skill-based pay is given only on acquiring a specified skill.
If an employee acquires knowledge of computers, he is paid additionally. Many companies award additional pay for getting a management degree.
Public sector banks in India grant additional increments if the employees get banking diplomas. Insurance employees who are graduates from insurance institutes are given additional increments, although they might not directly be contributing to profits or gains.
Many companies have started encouraging employees to acquire technical and professional knowledge.
The purpose behind skill-based pay is that employees become competent to perform their duties efficiently, which lead to higher profit and gain.
Employees reinforce self-esteem and get satisfaction by being highly skilled. Satisfied skilled employees perform better.
Skilled employees use their skill in performance for getting performance satisfaction. They perceive that their knowledge is being used for increasing results and reducing cost.
Skill-based pay is not always productive, as employees may demand promotions after acquiring skills. In the absence of promotion avenues, employees may develop frustration, which causes reduced productivity.
Skill-based pay is successful in those organizations which have a good work climate, trusted employees and a congenial relationship between employees and the management.
Skill-based pay should encourage employees to acquire a broader range of skills so that they can work effectively in the absence of some employees.
6. Flexible benefits:
Flexible benefits provide combinations of benefits from which the employees have to select the benefits of their respective choice.
It is also called a cafeteria benefit program, as employees are allowed to pick and choose benefits of their own from a menu of benefit options.
The purpose is to allow each employee to choose a benefit package tailored to his own needs and requirements.
It replaces the traditional ‘one benefit plan for all’. Flexible benefit is the latest form of motivation which is contingent upon the needs of employees, the type of work and the organizational environment.
Employees select their preferred combination of economic and social rewards. Employees are given an adequate amount of autonomy and independence to select their fringe benefits.
For example, an employee with a large family would like monetary benefits, life insurance and expanded medical and education facilities.
He is given such benefits for additional performance. Another employee may be interested in social recognition, as he has already satisfied his family needs.
The motivation package is open to employees who are free to select any one or some of them, depending upon the environment.
Flexible benefits meet the diverse needs of employees. Many organizations in India have started flexible benefits such as optional medical benefits, education facilities, encashment leave, travel benefits, vehicle allowances, disability benefits, pension plans and so on.
These benefits are given to those who are entitled to them under the organizational situation. Insurance for key employees, tuition fee reimbursement, medical reimbursement, etc. are examples of flexible benefits which employees after fulfilling certain conditions can enjoy.
These benefits are motivators and they are granted in only a few organizations. The equity theory helps to motivate employees.
The expectancy theory is fully applicable because the rewards for performance are expected by the employees.
Flexible benefits are taken as deductible expenses for computation of income tax of companies. The main defect of flexible benefits is that these are not always linked with performance and effort.
An employee may receive medical, education and housing benefits, although his contribution to production and profit is very small.
Nevertheless, flexible benefits assure the employees’ high satisfaction of being members of a sound organization which is providing all these benefits.