Compensation Of Labor: Definition; Time Based &Performance Based Remuneration

1.1 Definition

It refers basically to the total gross (pre-tax) wages paid by employers to employees for work done in an accounting period, such as a quarter or a year.

Compensation of labor or labor compensation is the rewarding or payment done by the employer to an employee as a result of work done or services provided within a certain period. Usually, a year. The amount paid to the employee or a worker should be net of any statutory charges or other deduction which should be done at source. 

1.1.1 How is labor compensated?

The concept of how labor is compensated is a matter of methodology adopted by different firms when it comes to payment of laborers. The work done has to be measured using universally accepted measurement indicators. The Key Measurement Indicator (KMI) commonly used in the labor market is labor rate per useful labor hours or piece rate which is based on the number of units a laborer is able to produce


If the Key Measurement Indicator used is labor hours consumed in production, then the labor rate is used to calculate the total labor cost. On the other hand, if the Key Measurement Indicator used is number of pieces produced at the end of the day, then piece rate is used.


Using labor hours

Solid Foundation company is a manufacturing firm which specializes in producing product Zee. The number of labor hours needed to produce one unit of Zee is 2 hours. Labor rate per hour is $3.5/hour

Therefore, labor cost to be incurred to produce one unit of Zee is;



Using number of pieces produced

Let us assume the same example of Solid Foundation Company which is a manufacturing firm which specializes in producing product Zee. If the basis of paying labor force used in production of Zee is on piece rate. Then if the rate per piece is $4 per piece. Then the labor cost to be incurred to produce one unit of Zee is;

1*$4 =$4.00

There are diverse methods of compensating employees which are pegged on certain criteria and some of the common ways of payment are, namely:

  1. Time Based remuneration method
  2. Output or performance Based method

Time Based Remuneration Method

2.1 Definition

Time based remuneration method is a method of rewarding workers based on the time spend at the place of work. It is one of the most conventional approaches of compensating employees. Again, depending on the nature of timing, this approach is further classified in to three categories;

  1. Basic system
  2. High Day Rate System
  3. Common Bonus time Based System

2.2 Basic System

Definition: Basic system remuneration is a method based on pre-determined time frame where by the employee is paid for working for certain number of hours or time for a week. Month or year. Let say for 40 hours for a week for a month which translates to 160 hours per month. In this approach, it is assumed that the employee will work normally without any anomaly. So, it is assumed that reporting and logging out time is well observed by the employee and at the same time, the floor supervisor is ensuring that all is well.

It should be noted that although he focusses is on hours worked for, the issue of the quality and quantity of work done is paramount. That is, output done is of the employer’s concern.

2.2.1 Applicability of the Basic System or Method

This method is more appropriate in the following circumstances;

  1. Where the quality of work is preeminent-that is the quality of work gotten or done is given the first priority.
  2. Applies where incentive scheme doesn’t work well.
  3. Works well where the employee is not in a position to control the output rate.
  4. Where by it is hard to measure the worker’s productivity with precision.
  5. Works well where it is possible to closely watch over what the employee is doing.

2.2.2 Advantages of Basic System

  1. Simple to understand and implement at the place of work. For instance, it is simple for one to compute how much he/she owe the employer.
  2. Job security assurance-this method adopted by employers guarantees the workers of job continuity. This is because there is no link between job wages and the level of output.
  3. Assurance of better quality of output. Since employees are not tied to timelines, they are able to take their humble time and do a good job. Hence good output is rest assured.
  4. Supported by trade union most of the times-this approach wins the heartbeat of the labor organizations and as a result, there are few cases of workers’ strikes.
  5. Suitable to job beginners-those who are newly employed find this approach convenient for them to grow with the profession for they can learn the job skills without difficulties.

2.2.3. Disadvantages of Basic System

  1. Efficiency is low. This is because the workers ae left on their own to perform and it may take some time before they polish their skills for, they are aware no hurry in perfecting their skill. So, a lot of resources may be utilized with less output
  2. Time wasting. The method promotes time loss instead of minimizing the time resources spend on a particular job.
  3. No room to motivate those workers who are high performers. The workers who do better in the place of work as compared to the others are paid equally with those who are lazy. This is demoralizing.

2.3 High Day Rate System

Definition: High Day Rate System is a method of rewarding workers more above their normal work load such that a high incentive is paid to them when they perform way above the basic normal time. This is made possible by entering into agreement with the labor force and the relevant trade union on the required level of production above which better rates are used to compensate the workers. The term high day rate system tells it all.

2.3.1 Advantages of High Day Rate System

  1. High performing employees are well compensated which becomes a source of encouragement
  2. Simplicity in computation of the wage fee due. It is easy to determine the wages or salary to be paid to workers for it is a straight forward model.
  3. High chances of attracting professional and experienced workers. Since the method is attractive, many qualified employees prefer this option and this guarantee good output to the employer.

2.3.2 Disadvantages of High Day Rate System

  1. Creation of unhealth job competition amongst employers. High rates of payment could interrupt the job structure competition amongst employers for those who pay low are forced to increase their salaries even when their level of production is low so as to retain workers.
  2. Compromise to quality output. Since the system works with extra hours, the employees may focus more on the hours worked at the expense of the quality work.

2.4 Common Bonus Time Based System

Based on high-rate time bonus scheme, there are those specific methodologies which fall under this broad approach. They include;

i). Shift Bonus-the bonus paid over and above the normal working hours are pegged on the work done in another shift. Such as night shift which is highly paid as compared to day jobs.

ii). Timekeeping bonus-this involves the approach of good working record where by if one has a track record which is extra ordinary, then some bonuses are paid pegged on that exemplary work.

iii). Continuous working Bonus method-As the name suggests, if the firm has experienced workflow without interruptions such as strikes by employees, then the employer pays bonus based on that good report.

Performance Based Method

3.1 Definition

Performance/output-based method is an approach of rewarding employees pegged on their output levels. Under this classification, the approach is divided in to two main categories, namely;

  1. Individual Incentive schemes
  2. Group Incentive Schemes

3.2 Individual Incentive schemes

Definition-1: As the name suggests, this method of rewarding focuses on individual employee versus his or her output level. In this case the reward level of compensation is directly related to the employee’s level of output. Such that the more one produces, the more the reward and the vice versa is true.

Definition 2: Individual incentive plan is a rewarding system to the performance of individual employees and the type of reward is pegged on the category of workers for which they are designed.

3.2.1 Applicability of Individual Incentive schemes

  1. This method applies commonly where output is more associated to a particular worker or employee.
  2. The scheme is structured in a manner that it is possible for either the employer or employee determine the amount of bonus thereof without difficulties.
  3. Performance terms are fairly favorable to all workers such that the scheme is not discriminative as far as terms and conditions thereof is concerned.
  4. No artificial or micromanaged conditions around the working environment of the worker and any time such condition occur which curtain any specific worker from effectively performing, then the employer should protect the worker.
  5. The scheme works well where there is consensus from all parties concerned such as the workers, employers and the trade unions.
  6. The scheme perpetuity should be well assured such that the rates, set earnings to be paid and other working conditions should be such that it is reasonable to guarantee its long existence.

Some of the examples of individual incentive schemes are as detailed below with their corresponding applicability/characteristics distinguishing them and the advantages and disadvantages thereof. These schemes are;

-Merit-Based compensation scheme

-Piece-Rate Incentive schemes

-Bonus System

-Differential Piecework

3.2.2  Merit-Based Compensation Scheme Definition

Merit-Based compensation scheme is an individual incentive scheme/method of rewarding employees with a higher performance history above what is expected or is normal production. The method is also referred to as incentive pay scheme or pay for performance. How practical is merit-based incentive scheme?

To understand how merit-based incentive scheme for individual employee works, the following general steps are followed by the human resource department of the firm adopting this methodology.


In this step, the human resource department lays down the rules of the game. Such that some measurement metrics are put in place so as to assess what is normal work load and what is classified as bonus workload. This objective is achieved through setting of performance review schedule which are either pegged on monthly, quarterly or yearly interval basis.

STEP TWO: SETTING OF THE WITH EFFECT DATES (i.e., With Effect From-w.e.f.)

The human resource needs to set the timeframe when the increment or additional reward is to be effected. This is made possible by putting in place the specific dates when the incentive scheme is effective and on the same breath, when its validity ends. All the concerned parties should be well aware of this timing to avoid any conflict of interest.


The human resource department has to correctly collect the relevant data to ensure that the computation of the incentive is pegged on correct information. This helps in avoiding cases of over or under incentive payments.


After the human resource department has collected the data needed, it further establishes the amount to be paid by using the correct computation model. Once this is accomplished, then payment can be done accordingly. Some of the methods commonly used are a certain set percentage of their basic salary or pay rate already in existence. For instance, a 2.5% increase may be given to individual performers with may be individual performers who have outperformed the rest are paid something like 4%. Advantages of Merit-Based Incentive Scheme

  1. A firm enjoys quality output from the top professional workers. That is since the additional pay is anchored on how much one produces over and above the normal, this attracts those employees who have self-confidence that they can do a better job. Coincidentally those who are poor performers will not bother themselves and therefore the firm in question automatically avoids them.
  2. Less friction/resistance between the management and the employees. Since this scheme is well framed, all the participating parties such as the employees, employers and the trade unions know what is expected. So, productivity is guaranteed.
  3. Promotion of equity amongst employees. The employers use this system to rank employees in accordance to performance. Top performers are ranked highly and the low performing receive low ranking and of course payment of incentives are done as supposedly.
  4. Accelerate achievement of company objectives. When companies tie compensation increases to accomplishing goals, they make their performance objectives to be actualized within the stipulated time frame.
  5. Increased production efficiency. Although this method of incentive is output oriented, the workers are also keen on the quality of the output to avoid disqualification. This is commendable.
  6. Enhance inter-competition. Healthy competition a rise amongst employees and this increases productivity in the organization and by extension increase profitability of the firm. Disadvantages of Merit-Based Incentive Scheme

  1. Killing of some employees’ morale. The aim of merit-based scheme is to promote the morale of the hard-working workers. Coincidentally, those who are not in a position to outperform may be disappointed.
  2. Loss of greater opportunity cost. Instead of paying these incentives, may be such resources can give better results if invested elsewhere.
  3. Suffer biasness. Since output is the key thing to how much an individual employee will take home, the human resource department may be tempted to allocate more assignments to the best workers leaving the average and lowly performing ones behind. This is a discriminative act at the work place.
  4. Perceived favoritism: Employees who are not satisfied with their merit pay may feel like there is manager favoritism toward other employees, regardless of their performance reviews.
  5. Managerial burden. Extra pay is always an extra liability to the firm for it entails extra cash out flow over and above the normal.

3.2.3 Piece-Rate Incentive Schemes Definition

Piece-Rate is an individual incentive scheme/method where by workers are paid based on a constant or fixed rate per unit produced or are paid on piece rate basis with a guaranteed time rate if and only if he or she produces over and above the flat rate already set. The following illustration clarify this scenario. 


A worker is paid an agreed rate per unit for the number of units produced and where there are various categories of goods or products produced by one employee, then different set rates apply. For example, assume that a worker produced the following number of units during the working hours. Say 40 hours per week, as follows;

600 units of product X Piece time allowance 1.9 minutes/unit

300 units of product Y Piece time allowance 1.5 minutes/unit

150 units of product Z Piece time allowance 1.2 minutes/unit

If the piecework rate is $0.50 per minute produced, then the total incentive paid is;

(600*1.9) + (300*1.5) + (150*1.2) =82,140 hours

Total pay= 82,140*.50= $41,070


NB: The straight piecework may assume the following approaches;

  1. Piecework with guaranteed day rates-this is where if the earnings from piecework fall below normal day rates, then there is a guarantee that, that days rate would be paid. This is playing safe when cases of other eventualities arise such as production delays, material shortages and machine breakdown.
  2. In lieu of Bonus-in this case, the worker is normally covered by an incentive scheme whereby there is an option of the benefits being transferred to ordinary day work. In this case, the in lieu of bonus can be paid on top of the ordinary day rate or payment. This is commonly applied to other workers were the piecework incentive does not apply. Applicability of piece-rate incentive schemes

The big question which we need to ask ourselves is, why is this incentive method common amongst organizations and what makes it so practical? The following are some of the key points to success or applicability of this model.

i). It is characterized by jobs of repetitive nature and as result a worker knows precisely the expected outcome. Similarly, the employer knows what he/she expects from the employee.

ii). Accessibility of output quantity is possible. This is because there is always a devised method of measuring the output gotten.

(iii) Controllability of the output. The management is in a position to monitor and dictate the expected quality of output.

(iv) Rating of the output is possible. The human resource is in a position to fix an acceptable piece rate for the pieces to be produced. 

(v) The method of incentive is characterized by reasonability of the piece rate set. This makes it possible for the workers to attain the set levels of production and even exceed. 

vi) There is flexibility of the system which accommodates variances of the price levels in the market.

(vii) The system advocates for maintenance of time cards to make workers punctual and regular so that production may not slow down. Advantages of Piece-Rate Incentive Schemes

  1. Idle workers cannot be paid. The system does not advocate for the payment of who are idle or not worked or who are ghost workers.
  2. Adoption of better production methods by the workers-the piece-rate incentive scheme prompts the workers to devise better production methods which benefit them and as a result, the productivity efficiency of the firm improves.
  3. Enjoy economies of scale. Where the productivity is increasing, the average cost declines and this has an advantage of increased profitability.
  4. Pricing of goods or services is made easy. With precise labor cost incurred, it becomes simple assign prices to the final output.
  5. Less chances of machine or tool breakdown. The employees usually make good use of their tools or machinery with due diligence to avoid any kind of production stoppage. This helps in protecting them from their replacement which could imply cash outflow to the organization.
  6. Minimum worker supervision. Less supervision is required because workers have the fear of not earning wages if they do not work as supposedly.
  7. Occurrences of increased performance efficiencies may arise amongst the workers. The inefficient workers are motivated to become efficient by the already those employees who are enjoying the scheme. This generally increases the performance of the business. Disadvantages of Piece-Rate Incentive Schemes

  1. In cases where the rate of inducement is perceived by the workers as low as compared to other competing firms may not help in achieving the role of motivating the same employees in that organization.
  2. Quality of the final product may be compromise-sometimes the quality of work done may be short changed with the number or level of production. This is disadvantageous to the organization.
  3. Increase in the level of production may not guarantee enjoyment of economies of scale. This may be due to other arising logistics.
  4. Health side effects-health problems amongst the workers may arise due to overworking without resting.

3.2.4 Bonus System

Bonus System is an individual incentive scheme/method which involves payment of extra amount on top of the worker’s salary. Of course, you know the reason why one will be paid a salary is because of the output one generates. But this system focuses more on one’s salary such that a higher salary implies more output but the focus will be indirectly to the salary level. Types of Bonus System

These bonuses may take diverse forms based on the nature of the objective being complied and accomplished. Those bonuses may be;

a).-Spot Bonus Incentive System

This occurs when an employee does something extra ordinary. Over and above what was expected. The system is referred to as spot because the payment is done spontaneously. There by then and may not follow any pattern. 

b). Non-cash Bonus Incentive System

This incentive as the name suggests is not on cash basis. It is in other forms such as issuance of a trophy, certificate etc. For example, the incentive can be something like the employee of the year. 

c). Referrals Bonus Incentive System

This system is pegged on extra payments as a reward to the already existing employee when he or she directs his or her employer to another resourceful employee who turns out to be an asset to the organization. 

d). Signing Bonus Incentive System

A signing bonus is a system of bonus paid to new employees by the new employer for honoring that specific offer of a new job. Sometimes the pay may not be immediate for some logistical issues.

e). Milestone Bonus Incentive System

This is a commonly used bonus system in projects. The employer pays some cash to appreciate the employee for spearheading a specific project assignment to a certain level. It is also known as mission or task bonus.

f). Project Bonus Incentive System

In this case, the incentive is paid if and only if the project is completed at the end of the actual project assignment date. It is contrary to the milestone bonus where by the project is not yet complete. i.e., the worker is rewarded even when the project is still under Work in Progress (WIP).

g). -Attendance Bonus Incentive Scheme

 Attendance bonus is a reward given to workers who are efficient in reporting to the work place in time such that within a specific period of time, the attendance cuts above the rest. The reward is given on quarterly or yearly basis based on the organization’s budget. 

k). Holiday Bonus Incentive Scheme

Holiday bonus is reward given to all employees especially during a certain holiday such as Christmas and may not necessary be in cash form. For example, it can be in form of shopping voucher or extension of a holiday tour to an employee.

l). -Annual Bonus Incentive System

Annual bonus is a reward given to all employees of a firm at the end of the financial period as a result of the firm making profits. The bonus may be tied to a certain level of performance goals.

m). -Longevity Bonus Incentive System

The reward is based on the time duration a certain employee(s) has remained with the organization. It is common to those employees who have served for the longest time. The reward may not necessarily be in form of cash.

n).-Commission Bonus Incentive Scheme

Commission bonus is a reward given to salesmen or salesperson on hitting beyond a certain level of sales volumes. In this case, over and above the normal or basic salary, the worker is paid a certain amount pegged on the level of sales beyond a certain point.

o). -Safety Bonus Incentive System

This is reward extended to workers who have hit the safety target of the organization and can be done on quarterly or yearly basis. This is common for example in factories or on transport businesses where precaution is key.

p). -Retention Bonus Incentive System

This reward is common where mergers or acquisition has taken place. In this case the reward is aimed at ensuring that the old employees in the former firms before merger are kept in the new company.

q). -Profit Sharing Bonus Incentive System

The incentives in this case are pegged on a certain percentage of company profit threshold reached or generated. This awarding can be done on quarterly basis, annually etc. Advantages of Bonus Incentive System

  1. Source of employee motivation-this rewarding system is a psyche to the workers and can really lead to increased output.
  2. Firms get high caliber employees-the system ensures that the best workers are gotten to do good work.
  3. Low rate of employee turnover-very few workers will leave the organization due to low payments. This assures the firm that no much investing in training new employees through induction processes.
  4. The organization is forced to plan well-this planning entails setting of clear targets to be achieved which is an advantage to the firm for there is proper or optimal utilization of resources. Disadvantages of Bonus Incentive System

  1. Favoritism between workers and employers-sometimes employers may be tempted to show biasness to some employees and not others and this becomes source of disappointment.
  2. Ineffective approach-sometimes this rewarding system may fail to work. This is because some employees may be less motivated by bonuses especially when they don’t benefit in the rewarding process.
  3. Increased labor cost-of course any rewarding system is accompanied by cash out flow and if the cost exceeds the benefits, then it is uneconomical to the firm.
  4. Lack of unity amongst employees-Disharmony may arise for there is an obvious inter-competition amongst employees. This may slow down productivity.

3.2.5 Differential Piecework Incentive System Definition

Differential piecework incentive system is a rewarding system which involves rewarding of the worker in a progressive manner such that the more active employees are paid more at higher levels of production while the less performing employees are equally paid less and less reward as long as production is declining.

This scheme was introduced by Tylor, the father of Scientific Management. The aim of this professor was to eliminate those workers who are not devoted to production or work.

Professor Tylor’s proposition was to ensure that the inefficient workers are done away with. He achieved this by setting very low rates of salaries and incentives such that such employees automatically fall off. For instance, the active workers, if the piecework can be set at eight (8) units for 8 hours duration at a rate of $1.00. But any production beyond the 8 units, is at a rate of $1.30. contrary, to the lazy workers, they may be paid $0.60 for any production beyond 8 units per day. So, the lazy workers are forced to quit their jobs.

The progressive approach uses a structure as follows;

Up to 100 units per day $0.5/unit

101 units up to 150 units per day $.80/unit

151 units up to 200 units per day $1.10/unit Advantages of Differential Piecework Incentive System

  1. Saves time-those workers who are active do their work within the stipulated period and this saves the organization’s time resources.
  2. Increased production efficiency-the system encourages improved productivity which is beneficial to the organization.
  3. Cost effective-when the lazy employees are eliminated, they leave the active ones in place and they produce more than they are paid. This is economical.
  4. Possible for the management to measure the value for money of work done-you see wage is directly linked to output and therefore, it is possible to avoid payments to workers which are unnecessarily leading to increased cash outflows.
  5. Optimal utilization of the production tools/equipment- the employees will continuously engage the machines used for production such that no cases of idle machines.
  6. No close employee supervision is needed. The firm management does not need to engage full supervisors for each employee is focused on what to achieve at the end of the day. So, the firm saves a lot of money they could have spent in engaging supervisors.
  7. Cost control effectiveness-the firm will enjoy reduced production cost for this system advocates for increased employee efficiency.
  8. Enhance planning and control management perspective-because each employee has his/her target to meet, this increases certainty to management in planning for the future activities. Disadvantages of Differential Piecework Incentive System

  1. Interrupts production-when weak workers are laid off, their contribution is eliminated and this adversely affects the overall production level of the business. Why am I saying this? We all know that even with loss making department, its closure may worsen the overall productivity of the organization as a whole. This is because there is that contribution element the loss-making department provide. So, similarly, the case of eliminating the weak or inefficient employees may not be a guarantee of full success.
  2. Job insecurity-No provision for unavoidable circumstances on the side of the employee. So, if one becomes sick, there is a challenge of getting any earnings.
  3. Low quality products arise-employees focus more on numbers and not the quality for they want to maximize their returns through bonuses.
  4. The method is not appropriate for the beginners-the aspect of learning curve theory is key here because for a new employee, the system is not applicable for the learning process keeps on improving with time. That means in the early stages when the employee is producing lowly for he is not yet used to, his reward may turn to be unattractive.

3.3 Group Incentive Scheme

3.3.1 Definition

There is diverse meaning of the term group incentive scheme. This article has summarized them in to two as follows;

Definition-1: Group incentive schemes are employees’ programs for rewarding them due to the fact that they have exceeded a certain set organizational performance.


Definition 2: Group incentive scheme is an awarding scheme program that compensate a group of employees some payment for performing better than expected.

The reward may assume diverse forms such as lump-sum cash payments, time-off rewards or non-cash rewards such as recognition items to groups or employees who meet set performance targets. Group incentive schemes are distinguished from other organizational plans due to the following characteristics.

   3.3.2 Applicability of Group Incentive Scheme

Under which circumstances does group incentive plans become more suitable than individual incentive plans?

The circumstances under which group incentive plans are more suitable is where;

  1. When it is not clear on how to assess the individual employee contribution towards the performance goal arrived at.
  2. When a job or task is being undertaken by a group of employees. Such that the end results are as a result of joint efforts.
  3. Each task is structured in a manner that the skills of each individual worker is the same among equals.

3.3.3 Characteristics of Group Incentive Schemes

  1. Measurable Performance

These incentives are built on reliable, accepted measures of performance. The final goal of the organization in question that should be met should be well articulated and measurable either in quantitative or qualitative manner.

  1. Definite completion timeframe

The group’s set target should be within a limited period of time so that the matter of concern is objective. Therefore, there must be a clear communication with employees about the set deadlines when they are expected meet their goals.

  1. Payment limits or boundaries

The scheme is characterized by well-defined payment thresholds. Such that all parties have agreed on the time of starting the program and when it ends and at what point in time is the performance qualifying for the payment.

  1. Payout structure

Group incentive plans are characterized by well set pay plan with zero cases of pay complexities. The guideline on how payment of the group efforts will be done is well outlined in the agreement document.

  1. Group incentives are majorly pegged on the time duration taken by the group to accomplish the assignment.
  2. Group incentive payment may take the two extreme aspects of either cash pay or non-cash pay which may assume the form of rewarding such as pleasure trips, times off and luxury items.

3.3.4 Types of Group Incentive Schemes

Some of the commonly used methods or plans of rewarding a group of workers are;

a) Priest Man’s Scheme

It is a group incentive which was established by Priestman of Hull in 1917 and it entails the setting of the overall expected (standard) performance level for the whole organization. Such that if the group of the targeted employee outperform the set threshold, a pay is done to them. Otherwise, failure to hit this set standard performance, the employees just receive the minimum pay only. 


The set standard output is 2,000,000 mushroom cakes per week. If the employees concerned with this production produces 2,600,000. Then the pay for the extra units, i.e., 600,000 mushroom cakes will be paid for as per the group incentive agreement/plan. Say 20% pay above the normal pay will be paid as bonus.

So, if the normal pay is $0.75, then the total pay will be the normal amount of (i.e.,2,000,000*$0.75) = $1,500,000 plus 20%*(600,000*$0.75)= $1,500,90,000 Advantages of Priest Man’s Scheme

  1. Foster team spirit amongst employees

    The approach of inventive of this nature promotes the idea of working as a team and not in isolation as a result overall productivity of the organization is increased.

  2. Minimizing of resistance at the work place

    The fact that the workers are pulling together, each one of them values the efforts of his/her workmate and this reduces cases of resistance which may slow down output. Which in turn may endanger the profitability of the business

  3. Low chances of workers’ strike. It is in rare cases that there will be work stoppages due to workers going on strike. This is because there is teamwork. As a result, the performance of the whole organization improves.
  4. Low chances or probability of employee high turnover

    Now that this approach is an appropriate approach of motivating the employees, it reduces the cases of high labor turnovers. As a result, there is continuous assurance that production will be rest assured. The good thing about the continuous production is that there is again no cases of lost market share. Disadvantages of Priest Man’s Scheme

  1. No chances of motivating the individual workers who seem to be more skilled or experienced as compared to the others. You see the plan paints all the employees with the same brush. This is demotivating to such employees.
  2. More cash out flow from the business

Assuming that this plan is not there, it means no extra cost would be incurred or paid by the organization which adversely affects the firm’s profitability.

b)   Rucker Plan/Or Cost Saving Plan

The proponent of Rucker group incentive scheme was Allan W. Rucker who named the model after his name. He was an Economist by profession. In his supposition, the point was that bonus should be pegged on the historic correlation between the aggregate earnings of the employees’ and the monetary value of the corresponding physical output realized. The plan focuses on the only directly concerned employees as far as that specific output is concerned. But then the program can also be extended to the whole population of the organization’s employees.

So, the focus of this plan is on the value addition associated to a certain group of employees along different stages of production. The bonus is computed based on the comparison of labor costs and sales value minus cost of goods sold. Advantages of Rucker Plan/Or Cost Saving Plan

  1. Suitable for decision making by the production manager

    The plan focuses on the value addition other than the total production of the organization. The good thing about this approach, is that the management is in a position to assess whether the bonus is economical for it entails comparison of the marginal revenue gotten vis a vis cost of bonus to see if it is economical or not.

  2. Improvement on quality of work produced.

    The plan enhances the overall quality of work done because the human resource is very keen on the additional value as a result of allowing the certain employees to be subjected to a certain plan.

  3. Less cases of employee high rate of turnover

    This is the case because the plan motivates a group of employees at ago. Disadvantages of Rucker Plan/or Cost Saving Plan

  1. The plan ignores the conceptualization stage which may not portray immediate output.

    The plan only focuses on the end output but does not consider paying bonus to those who come up with the idea.

  2. Complexity leading to few employees understanding how the plan works.

    The plan is complicated for it involves many factors to be factored in for the employees are many as compared to a case of individual cases. This makes an average employee not understand the logic behind the plan.

  3. Demand-supply mismatch scenario

    Sometimes when there is much or over production, does not guarantee over demand of the product. If this be the case, then the problem of selling the products at lows prices is high and this lowers the profitability of the firm.

c)   Scanlon Incentive Scheme

Scanlon plan was established in 1930’s and it focuses on paying bonus to the employees when they end up achieving the cost-saving objective of the production process. It is based more on the departmental level employees where committees are formed to work towards reduction of costs.

The cost saving aspect is measured by comparing the sales value of production with that of the employee costs.

Scanlon group incentive scheme is commonly used in service industry where by the customer is given pre-eminence over and above the other issues.


Note that;

One, both employees and managers are allowed to participate in this scheme by providing the firm with their cost-saving suggestions. Further, when production efficiency improves as evident by reduction in costs the employees are then rewarded.

Two, the theory behind the Scanlon plan is that there must be existence of good management leadership, trust and respect especially in honoring the employees’ specific ideas on how to reduce costs. Advantages of Scanlon Plan

  1. Improved management-employee relationship.

Since the plan caters for allowing both the employees and the management to fully participate in the contributing cost reduction ideas, the relationship is exalted.

  1. Improved production efficiency

The increased level of production efficiency due to reduced cost of production enhances the profitability of the firm.

  1. Creation of sense of belonging for the employees

Since the scheme allows for both employees and management to participate equally in idea generation, the employees feel appreciated by their seniors and this is too much motivating. Disadvantages Of Scanlon Plan

  1. Scanlon incentive scheme does not encourage payment of the whole amount of bonus the employees hence discouraging to some extent.

    The way this scheme is set, is such that a certain percentage say 15% of the whole amount of bonus is set aside to form a reserve.

  2. Complex to understand

    The logic followed for this scheme to work is not simple.

d)   Gainsharing Incentive Plan

Gainsharing incentive plan is also referred to as profit sharing plan and it entails sharing of the profit generated by the business such that as the owners of the company are sharing profits by the virtue that they have contributed the capital, the employees are also rewarded for contributing labor force. Advantages of Gainsharing Incentive Plan

  1. Improve the employee loyalty

The plan promotes the level of the employees being obedient to the management for they know that at the end of each year, there is a bonus.

  1. Co-ownership of the company shares.

The reward given sometimes can be in cash form or can be even be in form of ordinary shares issued to the employees so as to become part of the company. This promotes assurance of less employee turnover.

  1. Improves transparency and accountability of workers.

The workers are forced to be sincere in whatever they do no matter how sensitive it is. For example, if it is a case of medical service provision, then the secrets of the medical facility which sometimes it may pertain the patients is kept at top secrecy.

  1. No close supervision of employees

The organization saves the cost hiring supervisors to watch of the work being done. This is because the employees are self-motivated.

  1. The firm enjoys the benefit of employing the highly talented employees

Since the scheme advocates that an employee can own shares, this advocacy attracts those employees who value share ownership in a company for future retirement purposes. So, chances are high that the firm will get best employees. Disadvantages of Gainsharing Incentive Plan

  1. Chances of losses to the employees are high.

    When the advocacy of the firm is to issue shares to the employees as a way of compensating them then this may translate to losses especially when the company does not make profits.

  2. Concocted profits by the management may disadvantage the employees.

    Sometimes the management may forge the amount of profits made by the company which may end up the employees being unrightly paid their share.

  3. More improved relationship between the employees and the management through sharing of free shares may weaken the trade unions.

    The sharing of the company shares to extent ownership to the employees kills the purpose of forming trade unions hence no wage bargaining power amongst employees.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.