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Incentives are monetary benefits paid to workmen in recognition of their outstanding performance. They are defined as “variable rewards granted according to variations in the achievement of specific results”. But it is appropriate to call them ‘incentive systems of payment’ emphasizing the point of motivation, that is, the imparting of incentives to workers for higher production and productivity2. However, both these terms are used in this chapter. Unlike wages and salaries which are relatively fixed, incentives generally vary from individual to individual, and from period to period for the same individual.
Importance
The primary advantage of incentives is the inducement and motivation of workers for higher efficiency and greater output. It may not be difficult to get people for fixed wages and salaries. But with fixed remuneration, it is difficult to motivate workers to show better performance. Fixed remuneration removes fear of insecurity in the minds of employees. A feeling of secured income fails to evoke positive response. Positive response will surely come when incentives are included as a part of the total remuneration.
Earnings of employees would be enhanced due to incentives. There are instances where incentive earnings exceed two to three times the time-rated wages or salaries. Increased earnings would enable the employees to improve their standard of living.
There will be reduction in the total as well as unit cost of production, through incentives. Productivity would increase resulting in greater number of units produced for given outputs. This would bring down the total and unit cost of production.
The other advantages of incentive payments are reduced supervision, between utilisation of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover, and increased output. Furthermore, systems of payment by results would, if accompanied by improved organization and work measurement, enable firms to estimate labour costs more accurately than under the system of payment by time. This would facilitate the application of cost-control techniques like standard costing and budgetary control.
Apart from the benefits cited above, incentive packages are a very attractive proposition for managements because they do not affect employer’s contribution to the provident fund and other employee-retirement benefits.
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Participants