Productivity Linked Incentives

&Motivational

ActivitiesPresented By:Chandra PrakashHaresh Pal SinghJashoda GoyalRohit JohariSandeep JoshiSwati Gupta

Date: 1st Feb.2005

What is Productivity?

Productivity is a quantitative measure. It is the measure of how well we use our resources to produce goods and services.

Our major resources are people (labor) and capital (machines, technology, raw materials).

Productivity Framework

Higher Standard of Living

Higher G.D.P

Increase in Employment

Higher Capital Intensity

Higher productivity

Higher Total Factor productivity

Quality & WorkforceQuality of Capital &

System

Quantitative Methods

Qualitative Methods

Better Quality of Life

What Is Productivity Linked Incentive System?

The Productivity-Linked Incentive System is a system which establishes a closer link between wages and productivity so as to enhance competitiveness.

Types of Incentives - What They’re Based…

Piece rate Units produced Standard hour plan Time saved Bonuses Established goals Commissions Sales Stock options Established goals Profit sharing Organizational

profits

 

Halsey Premium Plan

This plan is a combination of time and speed.

- That every worker is paid according to hourly rate.

- Every worker is paid according to the time he has spent on the work.

- Every worker is given that he has to finish the allotted work within the standard time. If he is able to save the time, he will be paid a bonus for the time he has saved.

- The amount of bonus is 50% of time saved.

Total Earnings = Time Taken * Hourly Rate + (Standard Time – Time Taken) * Hourly Rate * 50%

Rowan Plan

The worker gets wages at an hourly rate for actual time spent on the job.

The worker also gets the guaranteed minimum wages.

The worker gets bonus if the task is finished before the standard time.

The worker here gets the bonus in his proportion of wages of actual time he has taken. 50% or 30% is not taken into consideration in Rowan Plan.

Contd…

The Rowan Plan can be expressed in the following way:

Total Earnings = Time Taken * Hourly Rate

+Bonus

Amount of Bonus = (Time Saved/Standard Time) *Time Taken * Hourly Rate

Gantt Task & Bonus System

This system involves the following: Establishment of standard after carrying out proper

time and motion studies. Workers completing the work in standard time are

100% efficient. Such workers are entitled to their normal wages plus bonus at a fixed percentages of wages earned.

Workers completing the work in less than the standard time get wages for the standard time plus bonus at a fixed percentage of wage earned.

Bonus is 20% (usually) of the time wages earned. Slow workers are paid guaranteed wages for the

day.

Advantages of Incentive Plans

Higher wages for worker and higher profits for companies

Greater competitiveness for companies

Low Inflation

Focus Employee Effort

Variable Costs linked to Results

Tied to Performance

Can Foster Teamwork

Reward those who Perform well

Key Elements of Plws are as Follows:

Fixed Component Basic Wage Annual Increment Contractual Bonus (where applicable)

Variable Component Wage increase for the year based on

Productivity/Profit sharing formula.

Types of Models

Profitability Model

Productivity Model

Combined Model

Profitability Model

Establish the cap to the bonusAccording to profit levels

Profit After Tax Bonus Month (s)Million ($) Salary<1.5 (threshold) 01.5 - 1.99 0.52.0 - 2.49 1.02.5 - 2.99 1.53.0 and above 2.0

THE PRODUCTIVITY MODEL

Fixed Component Basic Wage An Annual Increment

Variable Component

A variable productivity payment to be determined

Formulation

T = A + P

Where;

T = wage increase

A = annual increment

P = variable productivity payment

Example:

Year 1 (T=A+P) If basic wage = 1000 per month, Annual increment (A) = 2% and Productivity

payment (P) = 4%, Basic wage + A = 1000 + 2% (1000) = 1020 (built

into basic wage). P = 4% x 1000 x 12 months = 480 per annum

Year 2: (T=A+P) If basic wage = 1,020; A = 2% and P = 4% Basic Wage + Annual Increment (A) = 1,020 + 2%of

(1,020) = 1,040 per month Productivity payment (P) = 4% x 1,020 x 12 months =

489.60 per month Annual Variable Productivity Payment at end of year

2:

P for year 1 480.00

P for year 2 489.60 Cumulative for 2 consecutive years 969.60

Combined ModelAnnual Profit (in mn.)

Months of Basic Wage

>1.49 1 1 1.25 1.5 1.75 2

1-1.49 .75 .75 1 1.25 1.5 1.75

.70-.99 .50 .50 .75 1 1.25 1.5

.50-.69 .25 .25 .50 .75 1 1.25

< .50 0 0 .25 .50 .75 1

Productiv-ity ratio

<1 1-2.492.5-4.99

5-7.457.5-7.99

>10

Factors For SuccessfulImplementation

Satisfactory Labour-management relations Realistic annual increments Challenging and equitable variable payment Formula for variable payment Applied company-wide Wage system should be – Specific – Measurable – Achievable – Realistic – Time specific

Case-study: Productivity Incentive Scheme for Tea

Pluckersin Tamil Nadu

Till 1980’s workers were paid a fixed rate and a small incentives for extra plucking of leaves.

This was a constant amount per kilogram of leaf but, in due course, the system was refined by having two incentive slabs (categories).

After several rounds of negotiations, an agreement was reached in 1990

Yield of green leaf /hectare/month (Kg.)

Base output /day (Kg.)

Slab

(Kg.)

Incentives rates (INR/ Kg.)

1-400 12 13-15 16+ 0.26 0.31

401-800 14 15-20 21 0.26 0.31

801-1600 15 16-30 31+ 0.26 0.31

1600 & above

16 17-35 36+ 0.26 0.31

1st 2nd 1st slab 2nd slab

Productivity Incentive Scheme for Tea Pluckers,

Tamil Nadu, India

Yield of Green Leaves/Hectare/month

Base output per day

Slab (Kg.) Incentive Rates (Indian Rupees/Kg.)

1st 2nd 3rd 1st 2nd 3rd

1-400 12 13-15 16-30 31+ 0.27 0.35 0.40

401-800 14 15-20 21-40 41+ 0.27 0.35 0.40

801-1600

15 16-30 31-50 51+ 0.27 0.35 0.40

1600

& above

16 17-35 36-60 61+ 0.27 0.35 0.40

Results

Led to a 36 per cent improvement in the plucking average

The benefit to pluckers during the five-year period had gone up by 25 per cent.

10 per cent of the total leaf harvested during 1994 came from pluckers in the 50 kg + slab

Indian Airlines During the period from November 1993 to May

1996, IA entered into MOU’s with various parties for payment of various productivity-linked incentives.

IA did not assess the total financial outgo

resulting from these agreements. IA signed another set of MOU’s with all its unions during the period from January 1996 to October 1997

Cont…

Guidelines (October 1988) of the Bureau of Public Enterprises (BPE) regarding payment of PLI stipulated that the total of bonus and incentive should not exceed 35 per cent of wages.

It was observed that the benefits of PLI ranged from 61 per cent to 1165 per cent of average wages even though capacity utilization in terms of Revenue Tonne Kilometers (RTKm) was much below the available capacity.

Between 1991-92 and 1995-96, the increase in pay and allowances of the executive pilots was 842% and that of non-executive pilots was 134%.

It was not the threat of exodus but the pressures brought upon IA by the pilots through agitation etc. which forced the Management to yield to the unjustified demands of the pilots for further increase in remuneration.

Contd…

Indian Airlines

Year Profit (+)/Loss (-)

Rs in Crores

PLI

1995-96 (-) 109.98 31.78

1996-97 (-) 14.59 163.63

1997-98 (+) 47.27 219.06

1998-99 (+) 13.12 252.26

Total (-) 64.18 666.73

Year Staff Cost

(in

Crores)

Per Employee

Cost

(Lakhs)

Total Exp.

(Cr.)

Total

Operational

Exp.

(in Crores)

Staff Cost as % of TOE

Effective Fleet

Size

93-94 285.45 1.29 2074 1849 15 54

94-95 374.46 1.65 2258 2008 19 58

95-96 571.37 2.53 2599 2310 25 55

96-97 710.48 3.21 2928 2713 26 40

97-98 817.25 3.72 3220 2984 27 40

98-99 875.45 3.99 3431 3129 28 41

Measuring employees’ productivity in any airlines is ‘Available Tonne Kilometer’

(ATKm) Per employee. Year No. of Employee

s

ATKms in millions

ATKm per

Employee

Percentage Increase over

1993-1994

93-94 22,182 1056.888 47,646 -

94-95 22,683 1025.784 45,221 (-)5.09

95-96 22,582 1045.813 46,312 (-)2.80

96-97 22,153 1075.238 48,537 1.87

97-98 21,990 1094.132 49,756 4.43

98-99 21,922 1122.922 51,224 7.51

It May be noted that Increase in the

Productivity per Employee over the next Six

Year Period was Nominal at 7.51% in

Comparison to the increase in Wages per

Employee at 207% over the Same Period.

Contd…

Productivity Enhancement Program

(1/3, 1/3, 1/3) Designed to increase employee productivity

through the elimination of vacant positions, reallocation of workload and shared savings with employees and the company.

One-third of the salary and benefits (excluding health insurance) of the deleted positions would be reallocated to the employees within the unit who are assuming the increased workload .

Contd…

One-third of the salary and benefits (excluding health insurance) would be used to purchase productivity enhancing technology, or other productivity enhancing tools .

The remaining one-third of the salary and benefits (including the full cost of the health insurance) would revert to the State .

Productivity Enhancement Program Position Deletions

And Reallocation ANNUAL SALARY

Benefits@20%

Insurance TOTALSALARY

CLERK 18,000 3,600 2,000 23,600

ACCOUNTANT

25,000 5,000 2,000 32,000

TOTAL 43,000 8,600 4,000 55,600

Productivity Enhancement Program Reallocations

One-third to be reallocated to employees

14,333 2,867 0 17,200

One-third for technology

enhancements

14,333 2,867 0 17,200

One-third reverts to

organization

14,333 2,867 4000 21,200

Total 43,000 8,600 4000 55,600

Saving to State

One third deleted Salary & Benefit Cost 21,200

Technology Enhancement Costs after Year 17,200

Total 38,400

Effective Savings (38,400/55600) 69%

THANKS