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Remuneration method

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Remuneration method

  1. 1.  Introduction  Characteristics of a sound Remuneration system  Classification of Remuneration Methods > Meaning > Examples > Usage
  2. 2. The employees working in any organization are compensated by way of salaries, wages and other benefits in return of services rendered. These services could be: Engaging in the process of transformation of raw material into finished product Supporting the process of transformation by doing other functions.
  3. 3. Remuneration-  It is the salaries, wages and statutory benefits put together.  It is always individual based Incentives-  Payments and benefits given to stimulate better performance or paid in return for a better performance  Could be in monetary as well as non-monetary terms.  It could be based on group performance.
  4. 4. a) It should be easy to understand for everyone and easy to implement. b) It should provide for a reward for good work and penalty for bad workmanship c) It should help keeping labour turnover within stable limits d) It should be able to attract talent and retain them e) It should minimize absenteeism f) It should reflect a fair return to employees in consistence with efforts put in by them g) It should boost productivity and performance h) It should be flexible enough to factor in effects of changes in cost of living, and systems of similar companies in the same industry.
  5. 5. The payments could be broadly classified into:  - Those paid on the basis of time spent by an employee irrespective of output produced by him, called Time Rate.  - Those paid on the basis of output given by the employee irrespective of the time spent by him, called Piece Rate
  6. 6. 1) Time based  Flat time rate  High Wage System  Graduated time 2) Results based  Straight piece rates  Standard hours piece rates  Differential piece rates-Taylor & Merrick plans
  7. 7. 3) Combined time and piece rates  Emerson’s efficiency  Gantt task plan  Points system 4) Bonus Systems  Halsey – plan  Halsey – Weir  Rowan plan  Barth plan  Accelerating premium plans
  8. 8. Payment is made on time basis like daily, weekly or monthly irrespective of the results achieved during the time period. These payments are in conformity with the applicable laws such as Minimum Wages Act. Useful in following situations: a. Where output is not distinguishable and measurable. In other words, it’s useful when there’s no relationship between effort and output. b. Where a high level of skill and quality are required. c. Where supervision is go odd. Where work is not repetitive  Easy to understand and operate, so less clerical work is involved.  Does not motivate increased output.  Advance estimation of labor cost per unit becomes difficult.  Does not distinguish between efficient and non-efficient workers.
  9. 9. The variants of time rate are discussed below. a) There is no incentive to produce more within the same time as workers do not get additional remuneration for increased output. b) If overtime is paid for, there is a tendency among workers to go slow during normal time and earn more by working over-time. There is a likelihood of output getting suffered. c) Standards are difficult to set and operate under this method. Workers get paid for the time clocked (i.e. entry and exit to work place) and not as per time booked on actual work. This may lead to idle time which ultimately will increase cost of production.
  10. 10. The rates and time are fixed in advance per day, week or month. If worker work overtime, they are compensated at one and half or two times the ordinary rate. The earning therefore will vary as per the time worked. If a time rate is fixed as Rs 100 per day of 8 hours, and the worker works for four hours; he will get Rs 50
  11. 11.  This method is similar to the above except the fact that the time rate is fixed at a higher level compared to the rates prevailing in the industry. This is done to attract efficient and high performance workers and also to induce them to improve productivity as they would be satisfied with high level of earnings. However, the level of performance cannot be guaranteed over a longer period and it also may not be possible to keep wages always at higher level compared to industry.
  12. 12. Under this method, payment consists of two portions – one based on regular time base payments and the other is linked to cost of living (e.g. dearness allowance) and merit awards. As the cost of living is taken care of, the system has an advantage. It’s further enhanced by the fact that the method rewards individual merits. However, merit rating is highly subjective and thus the method is difficult to implement. It is difficult to calculate the cost of the cost unit. I t is generally observed that trade unions prefer time based payments as they do not have to guarantee output. The variations in the time based payments do not really bring in any additional benefits and they are difficult to sustain in the longer run
  13. 13.  These methods are based on the output linked payments to workers. The payments are fixed per unit of output irrespective of the time taken by the worker to produce a unit. The payment is simply calculated as rate per unit x units produced. These payments may be released for a period e.g. day, week or a month. The output produced by the workers during that period is multiplied by the pre-fixed rate per unit. The objective here is to induce workers to produce more and thereby increase sales. As workers get more money, they tend to produce more. Some-times under such systems, the benefits of increased output are shared between workers and the business. This method is simple to understand and easy to operate. The workers also prefer it as they can earn more by producing more. The labor cost per unit is known in advance and hence it helps in fixation of overhead rates based on direct wages and therefore estimation of cost per unit is easy. If benefits are shared with employees, they are motivated to put in their best efforts.  However, fixing a piece rate itself is not a simple job. Considerable amount of engineering estimations, time and motion study and assessment of physical efforts needed to perform a job are needed to arrive at a piece rate per unit. The nature of job should be standard and repetitive for piece rate system to be successful. It cannot be applied if the jobs are non-standard, and the specifications change for every order received. Further, in the quest of increasing the earnings workers may compromise quality. It may increase supervision and cost of rework as well. It also may add to fatigue and increase absenteeism.
  14. 14.  This is the simplest form of payment by results.  Under this a predetermined rate per unit of output is applied. Eg) In a laundry, a worker may get Rs0.50 for pressing one shirt. If on a day he presses 100 shirts, he will get (100x0.50) i.e. Rs50. If he presses 200 shirts he will get Rs 100 and so on.
  15. 15. This is the result based payment with a time dimension factored into it. We have seen that time and motion study and other engineering methods are used to determine time based piece rate per unit. In addition, a standard time is set up per unit of product. Workers are supposed to complete production of one unit within this allotted time. The rate is fixed per hour (or any other time unit). If the worker completes the job within the standard time, he is paid for the 77time he worked plus also for the time saved based on the time rate. If he spends more than standard time per unit of output, he is paid at this time rate for the time actually spent on the job. Thus this takes care of time performance as well. The formula to work out the earnings as per this method is:
  16. 16.  When production is in excess of standard performance; Earnings = (Actual hours worked x hourly rate per day) + Hourly rate per day x (standard hours produced – Actual hours worked)  When production is at or below standard performance; Earnings = Actual hours worked x hourly rate per day
  17. 17.  This system is simple to understand and operate. It can be applied for group installation type of job and also where the jobs are of non-repetitive & non-standard nature. It takes into account the individual performances. Almost all disadvantages of straight piece rate system are removed by this method. However, a great care needs to be taken for fixation of time per unit of output. Also, there has to be close monitoring of quality of the performance. It has to be ensured that the worker does not compromise quality in order to show time saved.
  18. 18. This system is based on the logic that workers should be rewarded for higher efficiency. The earning method offers a motivation for increasing productivity. These systems are however difficult for workers to understand. There are two variants of this system. One was developed by F. W. Taylor (the father of scientific management in the early era of industrial revolution) and the other by another expert Merrick. This method tries to penalize workers when they do not perform as per standard by applying differential rates.
  19. 19.  The payment scheme is based on fixing two or more pieces rates –  a base level piece rate is used for workers who do not perform as per standard and  a higher piece rate is used for workers who perform as per standard. The difference between these two rates is deliberately kept so wide that the award for efficient worker is really goods and simultaneously, punishment for inefficient worker is severe.
  20. 20. question) Consider a factory operates an 8 hour day. The standard output is 100 units per hour and normal wage is Rs 50 per hour. The company operates Taylor plan as 80% of piece rate for workers performing below standard and 120% of piece rate for performance at or above standard. Hourly rate paid = Rs 50 Standard output per hour = 100 units Normal piece rate = (50 / 100) = Rs 0.50 per unit For performance below standard, the piece rate will be = 80% of Rs 0.50 i.e. Rs 0.40 perunit & For performance at or above standard, it will be = 120% of Rs 0.50 i.e. Rs. 0.60 per unit. It can be found that there is a differential of Rs 0.20 between the two piece rates. This will induce an ambitious worker to increase efficiency and earn more. On the other hand, inefficient worker gets penalized for not achieving minimum standards. It will reduce fixed overheads per unit as it induces more production. The success of this plan depends highly on setting a standard. Any error in fixation of the differential rates could be disastrous. Also, this system does not guarantee any mini-mum wages. Further the piece rates and standard are to be fixed in such a way that the earnings won’t fall below minimum wages as per the law in force.
  21. 21.  The punitive element under Taylor plan was quite severe. It tends to discourage and attract average workers.  Merrick modified this differential system by introducing more slabs and by removing the punitive element. He advocated that performance up to a certain level (although below standard level) should be rewarded at normal piece rate and then progressive slabs are provided to recognize above standard performance.
  22. 22.  He worked out the following formula for differential payments: Up to 83 & 1/ 3% - at normal piece rate Above 83 & 1/ 3rdup to 100% - 10% above normal piece rate Above 100% - 20% over normal piece rate In the above example, the normal piece rate was fixed as Rs 0.50 per piece. A worker under Merrick plan will guarantee this earning if he achieve efficiency level of 83 1/ 3%. The worker, who performs above this and up to 100% mark, will get paid at Rs 0.55 per piece which is 10% above the normal level. A worker giving in performance above 100% will get paid at Rs 0.60 i.e. 20% above normal piece rate.
  23. 23.  DISADVANTAGE OF DIFFERNETIAL PIECE RATE:  Both these plans however put a cap on maximum earnings. So the worker will just ensure to perform at 100% or slightly above and then does not improve further as there is no additional incentive for him to do so.
  24. 24.  The combination of time based and piece based methods of remuneration aim at combining the benefits and removing the deficiencies of both specific time based and specific piece rate systems.  Basically this method has a combo offering for the workers – a time rate, a piece rate and a bonus. -> Essentially for workers who do not perform as per standards, there is a guaranteed time rate payment. -> For workers performing above standard there are piece rates with bonuses applicable for higher rewards.  Variants of this system: 1) Emerson’s efficiency 2) Gantt task plan 3) Points system
  25. 25.  The main features are guarantee of daily wages regardless of performance. A standard time is set for per unit of output or a volume of output per unit of time is taken as standard.  The following differential rates apply: >Below 66 2/ 3rd% - Time rate without any bonus >Above 66 2/ 3rd% up to 100% - Bonus varies between 1% to 20%* (*At 100% efficiency the bonus percentage will be 20%) >Above 100% performance - Bonus of 20% of basic wages plus 1% for every 1% increase in efficiency.  The efficiency for this purpose is calculated as: On time basis: Percentage efficiency = (Standard time allowed / Actual time) x 100 On output basis: Percentage efficiency = (Actual Production / Standard production) x 100  Total Bonus = New bonus%*(hours worked *rate per hour)
  26. 26.  The efficiency for this purpose is calculated as: On time basis: Percentage efficiency = (Standard time allowed / Actual time) x 100 On output basis: Percentage efficiency = (Actual Production / Standard production) x 100  Total Bonus = New bonus%*(hours worked *rate per hour)
  27. 27.  The system is certainly more worker centric than Taylor and Merrick plans. They have an element of efficiency based payment so as to motivate workers. Also, a worker is kept interested to improve even beyond 100% level as it includes additional bonus even above 100% level. It is however complicated to calculate and involves a lot of clerical work in keeping records of efficiency levels of different workers. It is difficult to adopt this for group jobs
  28. 28. Q) Standard output in 10 hours is 240 units; actual output in 10 hours is 264 units. Wages rate is Rs.10 per hour. Calculate the amount of bonus and total wages under Emerson Plan. Sol) Efficiency percentage = 264/240*100= 110% As per Emerson plan, in case of above 100% efficiency bonus of 20% of basic wages plus 1% for each 1% increase in efficiency is admissible. So, new bonus percentage = 20 + (110 – 100) = 30 Total Bonus = 30/100*(hours worked *rate per hour) = 30/ 100* (10*10) = Rs.30 Total wages = Rs. (10 * 10) + 30 = Rs. 130
  29. 29.  As per this system a higher standard is set and payment is made at time rate to a worker for production below the standard. If the standards are achieved or exceeded, the payment is made at a higher piece rate. The piece rate fixed also includes an element of bonus to the extent of 20%. Bonus is calculated over the time rate.  The computation is usually done as follows: >For output below standard level -guaranteed time rate payment >Output at standard - Time rate plus Bonus of 20% of time rate >Output above standard - Bonus of 120% of normal piece rate
  30. 30. Q) In a factory the output produced by workers in 8 hours is A- 8 units, B- 10 units and C- 15 units. Standard production in 8 hours is 10 units. Daily wages guaranteed are Rs 2 per hour. Bonus rate on time rate is 20%.Standard output per day is 10 units. So ‘A’ has performed below standard, ‘B’ has achieved the standard and ‘C’ has performed above standard. Sol) Under Gantt Task plan the earnings will be: A will get only time rate payment i.e. Rs 16 (8 x2) B will get time rate + bonus @ 20% of time rate i.e. Rs 16 + 20% of Rs 16 = Rs 19.20 C will get piece rate payment which is 120% of normal piece rate. The normal piece rate here is ((8*2)/ 10) i.e. Rs 1.60 per unit. 120% of this is Rs 1.92 per unit. C produced 15units, so he will get Rs 28.80 See how the earnings increase with increase in productivity. The impact on per unit cost is worth noticing. For ‘A’ producing 8 units and getting Rs 16 the unit cost is Rs 2. For ‘B’ producing 10 units and getting Rs 19.20, the unit cost is Rs 1.92 and for ‘C’ producing 15 units and getting Rs 28.80, the unit cost is Rs 1.92.
  31. 31.  Under this method, the performance is measured in terms of ‘points saved’ by the workers.  Standards are also fixed in terms of points and workers are paid bonus based on the points saved, either in full or a portion thereof.  There are two variants of the points system. The “Bs” are fixed based on a rigorous time and motion study with time for actual work plus a reasonable allowance for rest.
  32. 32.  The points are called as “Bs”.  Hence a standard performance one hour is expressed as “60 Bs”.  A standard number of points are specified for a job. The worker gets a time rate payment and a bonus. When the scheme was originally formed bonus was calculated at 75% of points saved. Later it was modified to 100% of points saved.  The formula is: Time rate payment + (75% or 100%) of (points saved/ 60) x hourly rate Example: The standard time is 320 Bs and the worker consumes 240 Bs to complete a job. The hourly rate is Rs 10 per hour for an 8 hour day. Here the worker has saved 80Bs. Hence the payment based on75% bonus will be: (10 * 8) + 75% (80/ 60)*10 = Rs 90
  33. 33.  This is similar to that of Bedaux.  The standard unit of time is called a Manit. Bonus is calculated on the basis of: Manits saved multiplied by the value of one Manit  When the system was fixed originally, the bonus due to Manits saved was shared as -> 50% to workers, -> 10% to Supervisors and -> 40% was retained by the company. At present, the entire 100% is given to the workers.
  34. 34.  These are also referred to as premium bonus plans that guarantee a minimum wages per hour plus a premium for output in excess of stipulated norms. Here as in many of the above schemes, a standard time is determined for a job or operation.  There are many variants of this method. They are given below. 1)Halsey – plan 2) Halsey – Weir 3) Rowan plan 4) Barth plan 5) Accelerating premium plans
  35. 35.  This was developed by Mr. F. A. Halsey.  Under this method the payment for work done is related to time taken to do a job. -> If the time taken is equal to or more than the standard time, the worker is paid at time rate based payment. -> If actual time is less than the standard time, then the worker gets a bonus @ 50% of the time saved. The balance 50% is retained by the business.  The formula is: Total earnings = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate)
  36. 36.  It was developed as a modified version of Halsey plan. The bonus percentage was modified to 33 1/3% instead of 50%.  The other computations are same.  This was developed by G & J Weir ltd. Glasgow.  The reduction in the bonus percentage makes this plan unpopular.
  37. 37.  Under this method, a standard time is fixed.  The worker gets time rated pay as per time worked. The bonus shared is in proportion of time saved to standard time applied to the time rated earnings.  In other words, the percentage time saved is applied to time taken a payment is done for time actually taken plus the proportion of time saved.  The formula for the labour cost is: (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate/ Time Allowed For bonus is: (Time saved / Standard time) * Actual hours * hourly rate
  38. 38. Q) The firm employs 5 workers at an early rate of 2. During the week, they worked for 4 days for a total period of 40 hours each and completed a job for which the standard time was 48 hours for each worker. Calculate the labour cost under the Halsey method and Rowan method of incentive plan payments. Sol) hourly rate= 5*2= 10 standard time= 48 hours actual time taken= 40 hours time saved= std.time- actual time taken= 48-40= 8 hours  Halsey Method = (Hourly rate x Time taken) + (50% x Time Saved x Hourly rate) = (10 x 40) + (0.5 x 8 x 10) = 440  Rowan Method = (Hourly rate x Time taken) + (Time Saved x Time Taken) x Hourly Rate/ Time Allowed = (10 x 40) + (8 x 40) x 10/ 48 = 467
  39. 39. This is also a time based payment scheme. But it does not guarantee any time rate payment. The earning is determined as follows: Hourly rate x √Standard time x √ Actual time Example: Time allowed to perform a job is 5 hours and the hourly rate is Rs 2. If the actual time taken by A, B and C are 6, 5, and 4 respectively, the payment under Barth system will be calculated as: For A = 2 x ( √5 x √ 6) = Rs 10.95 For B = 2 x (√ 5 x √ 5) = Rs 10 For C = 2 x (√5 x √ 4) = Rs 8.95 It can be seen that when efficiency goes above 100%, this scheme is not that attractive.
  40. 40.  For low and average levels of output, the incentives are small, but for above average output, the incentives are paid at accelerated rates.  This plan may not be suitable for machine operators as they may want to increase output for earning incentives. It may be useful for supervisors.  The most popular scheme is the equation given as below: y= 0.8 x sq. where x denotes efficiency and y denotes earnings.

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