Labour Costing and Compensation Management (2)

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Question No 1: What is Labour Turnover? How it takes place? How you can keep it

under Control?

Ans. INTRODUCTION

Most organizations viewed the presence of a long serving group of employees as an indication

of internal efficiency. However, with economic liberalization opening up new career horizons for

professionals in most industries, and thereby tremendously enhancing their prospects for

mobility from one organization to another, turnover has come to be understood as a negative

spill over effect of industrial growth. This phenomenon commonly called turnover had been of

secondary interest to most researchers but increasingly more and more attention is beginning to

pour in this direction. Labour Turnover is national problem of evry country and leads to high

costs and low productivity. The extend of labour turnover varies according to industry,

proportion of male and female in labour force, Structure of employment in the country, and

physical condition within a particular organization. A thorough understanding of the causes of

labour turnover and analysis and comparison of coat of such turnover may help in controlling

the situation.Labour turnover refers to the movement of employees in and out of a business. However, the

term is commonly used to refer only to wastage or the number of employees leaving. High

labour turnover causes problems for business. It is costly, lowers productivity and morale and

tends to get worse if not dealt with.

DEFINITION

Labour turnover has been defined as a permanent movement of the employee beyond the

boundary of the organization. The process of workers leaving and coming in business

organisation give rise to the phenomenon of employee turnover.

Labour turnover is the rate of displacement of the personnel employed in an organisation due to

resignation, retirement or retrenchment.

Labour investigation committee has defined the labour turnover as It is a measure of the extent

to which old employees leave and new workers enter the service of a concern in a certain

period.

Labour turnover is an expensive method because the experienced and trained workers leave

the organization and the organisation has to spend much on the training of the new workers.

Labour turnover or Employee Turnover is the number of permanent employees leaving the

company within the reported period versus the number of actual Active Permanent employees

on the last day of the previous reported period (physical headcount).


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The number of leavers, that are included in Employee Turnover, only includes natural turnover

(resignations, termination, retirement etc); it does not reflect any redundancies. Planned

redundancies are reported and explained separately if relevant for Employee Turnover.

MEANING

Turnover means a change. We often observe that either a friend or relative of us change his job.

When he changes the job he leaves his original company say X and joins a new company say

Y. In this case, this change has twofold effect. Company X strength of workers/employees has

been changed with reduction by one number and for company Y; there is change because of

additional one number. Thus, any change in the composition of strength or number of workers

or employees is known as Labour Turnover. It can be defined as the change or rate of change

in the working force of the organization during a particular time period.

TYPES

Internal vs. external turnover

Like recruitment, turnover can be classified as 'internal' or 'external'. Internal turnover involves

employees leaving their current positions and taking new positions within the same

organization. Both positive (such as increased morale from the change of task and supervisor)

and negative (such as project/relational disruption) effects of internal turnover exist, and

therefore, it may be equally important to monitor this form of turnover as it is to monitor its

external counterpart. Internal turnover might be moderated and controlled by typical HR

mechanisms, such as an internal recruitment policy or formal succession planning.

Skilled vs. unskilled employees

Unskilled positions often have high turnover, and employees can generally be replaced without

the organization incurring any loss of performance. The ease of replacing these employees

provides little incentive to employers to offer generous employment contracts; conversely,

contracts may strongly favour the employer and lead to increased turnover as employees seek,

and eventually find, more favorable employment.

However, high turnover rates of skilled professionals can pose as a risk to the business or

organization, due to the human capital (such as skills, training, and knowledge) lost. Notably,

given the natural specialization of skilled professionals, these employees are likely to be re-

employed within the same industry by a competitor.Therefore, turnover of these individualsincurs both replacement costs to the organization, as well as resulting in a competitive

disadvantage to the business.
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Voluntary vs. involuntary turnover

Practitioners can differentiate between instances of voluntary turnover, initiated at the choice of

the employee, and those involuntary instances where the employee has no choice in their

termination (such as long term sickness, death, moving overseas, or employer-initiated

termination).

Typically, the characteristics of employees who engage in involuntary turnover are no different

from job stayers.However, voluntary turnover can be predicted (and in turn, controlled) by the

construct of turnover intent.

CAUSES OF LABOUR TURNOVER

There can be one or more reasons for employee leaving the company. Those reasons are

related to different factors like job description, salary, organizational culture, local economy,

workload, duration on current position, personality etc. One of the predominant reasons for

leaving of position is the local economy and ratio of demand for employees and number ofemployees that are looking for a job. If there are more jobs available, than the employee

turnover rate is higher, since employees are trying to get the better offer. TheMaslow's

Hierarchy of Needsexplains the structure of human needs. If they are not fulfilled, the

employee will look for the environment that will satisfy his/her needs.

The management should study the causes of turnover and take necessary steps to remove

them, if possible form the control point of view, the causes may be classified into two groups-

avoidable and unavoidable.

1. Avoidable Causes.Among the avoidable causes, the most important causes are which may

be caused by the seasonal character of he business, shortage of material, inadequate planning

lack of management foresight and determination etc. The other avoidable causes may be

dissatisfaction with job, remuneration, hours of work and working conditions and bad relations

with supervisors etc.

2. Unavoidable Causes. There are certain causes which are not due to the negligence of the

management but due to certain other causes which are beyond the control of management. A

few are the following:

a) Personal betterment.

b) Domestic affairs such as marriage and pregnancy in case of women employees.

c) Illness and accident etc.

d) Unsuitable for job on misconduct or his part.

e) Housing or transport problem.
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f) Retirement of death etc.

The reasons for labour turnover may be ascertained by personal interviews with the outgoing

employees.

3. Personal Causes.

Change of job for betterment

Premature retirement due to ill health and old age

Domestic problems and family responsibility

Discontentment over the job and working environment

Causes of labour turnover summarized

A high level of labour turnover could be caused by many factors:

Inadequate wage levels leading to employees moving to competitors.

Poor morale and low levels of motivation within the workforce.

Recruiting and selecting the wrong employees in the first place, meaning they leave to seek moresuitable employment.

A buoyant local labour market offering more (and perhaps more attractive) opportunities toemployees. Employees quitting, retiring, getting fired, dying, getting disabled, or abandoning the job.

There are various reasons on account of which an employee leaves. However for additional

employee the reasons can be:

1. Expansion of departmental functions and activities2. Increase I production facilities and target of higher output.3. Creation of new level of management in the organization structure.4. Change in technology, process, methods and operations5. Change in legal provisions6. New activities, project taken up by the organization.7. Diversification into new product lines or services.8. Mergers and Acquisitions.9. New services required by the organization.10. In house programs of training

11. Replacement in place of old employee.

Measurement of Labour Turnover:

There are two parts of Labor turnover. When the employee leaves the organization he gets

separated from the workforce. Thus an outgoing employee on account of registration, transfer,

promotion results into separation from the present work force.


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The second part is replacement of an employee by another employee. Many times the

separated employee may not get replaced. Therefore while measuring labour turnover the

formula is to be selected according to the choice of the interest of the management .

The labour turnover can be expressed by using any one method. By using following formula weget the rate of labour turnover and it is expressed as percentage.

1. Separation Method/ Rate:

Number of employees separated in a period x 100

Average number of employees in the period

Where,

Average Number = ( Number of employees at the beginning + Number of employees at the

end)/2

2. Replacement Method/Rate:

Number of employees replaced in a period x 100


(Here only those who are replaced, that number are to be considered. Suppose 100 employeesare separated however only 50 are replaced, then only 50 to be considered.)

3. Flux Method/ Rate:

This is combined measure of both separation and replacement.

Number of employees separated + Number of employees replaced x 100

Average number of employees in the period.

COST OF LABOUR TURNOVER

High rates of labour turnover are expensive in terms of:

- Additional recruitment costs

- Lost production costs

- Increased costs of training replacement employees

- Loss of know-how and customer goodwill


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- Potential loss of sales (e.g. if there is high turnover amongst the sales force)

- Damage that may be done to morale and productivity (an intangible cost)

Benefits of labour turnover

Labour turnover does not just create costs. Some level of labour turnover is important to bring

new ideas, skills and enthusiasm to the labour force.

A "natural" level of labour turnover can be a way in which a business can slowly reduce its

workforce without having to resort to redundancies (this is often referred to as "natural

wastage".

HOW TO CONTROL LABOUR TURNOVER

Employees are important in any running of a business; without them the business would be

unsuccessful. Providing a stimulating workplace environment, which fosters happy, motivatedand empowered individuals, lowers employee turnover and absentee rates. Promoting a work

environment that fosters personal and professional growth promotes harmony and

encouragement on all levels, so the effects are felt company wide. Continual training and

reinforcement develops a work force that is competent, consistent, competitive, effective and

efficient. It is also important to motivate employees to focus on customer success, profitable

growth and the company well-being. Employers can keep their employees informed and

involved by including them in future plans, new purchases, policy changes, as well as

introducing new employees to the employees who have gone above and beyond in meetings.

Early engagement and engagement along the way, shows employees they are valuable through

information or recognition rewards, making them feel included. When companies hire the bestpeople, new talent hired and veterans are enabled to reach company goals, maximizing the

investment of each employee. Taking the time to listen to employees and making them feel

involved will create loyalty, in turn reducing turnover allowing for growth.

Remedial measures may involve the following:

1. Proper planning of ma power requirements to avid redundancies.

2. Labour policy should be based on sound principles of personnel management in relation to

recruitment, promotion, placement and training.

3. Introduction of proper-wage incentives and promotion plans.

4. Provision of reasonable amenities and welfare measures.

5. Setting up f machinery for ascertaining the cause of grievance and redress thereof.


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6. Provisions of retirement benefits.

7. Provisions of proper channel of communication to improve the morale of the employees.

8. Working conditions and work environment should be improved.

9. The attitude of employers should be changed. Their tendency of replacing old workers by the

new recruiters to avoid certain legal provisions should be discounted.

10. Exit interviews

11. Job analysis and evaluation

12. Scientific system of recruitment, selection, placement and promotion

13. Enlightened attitude of management

14. Use of committee

Question No 2: Explain Briefly A) Productivity, B) Overtime and its treatment.

Ans.

PRODUCTIVITY

People are the key to increased productivity, creativity and profit. Having the right people, with

the right skills in the right roles is critical in all aspects of HR management from recruitment toexit management.

Absenteeism, employee turnover, poor job match, poor work ethic, and weak managers, are

some of the factors that contribute to substandard productivity. Todays global business leaders

depend on significant productivity increases to maximize the bottom line. Consequently,

employees are asked to do more each day with fewer capabilities, resulting in a mismatch of

resources and loss of productivity. Fortunately, employee productivity increases can be

achieved by knowing more about your employees and what motivates them. Creating a work

environment in which employees are productive is essential to increase profits for your

organization, corporation or small business. Principles of management that dictate how, to

maximize employee productivity center around two major areas of focus: personal motivation

and the infrastructure of the work environment.Essentially, productivity is a ratio to measure how well an organization (or individual, industry,

country) converts input resources (labor, materials, machines etc.) into goods and services. This

is usually expressed in ratios of inputs to outputs. That is (input) cost per (output) good / service.

It is not on its own a measure of how efficient the conversion process is.

Productivity is a measure of the efficiency of production. Productivity is a ratio of what is

produced to what is required to produce it. Usually this ratio is in the form of an average,


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expressing the total output divided by the total input. Productivity is a measure of output from a

production process, per unit of input.

At the national level, productivity growth raises living standards because more real income

improves people's ability to purchase goods and services, enjoy leisure, improve housing and

education and contribute to social and environmental programs. Productivity growth is important

to the firm because it means that the firm can meet its (perhaps growing) obligations to

customers, suppliers, workers, shareholders, and governments (taxes and regulation), and still

remain competitive or even improve its competitiveness in the market place.

Workforce productivity is the amount of goods and services that a worker produces in a given

amount of time. It is one of several types of productivity that economists measure. Workforce

productivity can be measured for a firm, a process, an industry, or a country. It was originally

(and often still is) called labor productivity because it was originally studied only with respect

to the work of laborers.It can be defined as, "the ratio of a volume measure of output to a

volume measure of input". The three most commonly used measures of input are:

1. hours worked;

2. workforce jobs; and

3. number of people in employment.

Measured labour productivity will vary as a function of both other input factors and the efficiency

with which the factors of production are used (total factor productivity). So two firms or countries

may have equal total factor productivity (productive technologies) but because one hasmore capital to use, labor productivity will be higher.

Output per worker corresponds to the "average product of labour" and can be contrasted with

the marginal product of labor, which refers to the increase in output that results from a

corresponding (marginal) increase in labor input.

Measurement

Worker productivity can be measured in physical terms or in price terms.

Whilst the output produced is generally measurable in the private sector, it may be difficult tomeasure in the public sector or in NGOs. The input may be more difficult to measure in an

unbiased way as soon as we move away from the idea of homogeneous labour ("per worker" or

"per standard labour hour"):

the intensity of labour-effort, and the quality of labour effort generally.

the creative activity involved in producing technical innovations.


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the relative efficiency gains resulting from different systems of management, organization,

co-ordination or engineering.

the productive effects of some forms of labour on other forms of labour.

These aspects of productivity refer to the qualitative, rather than quantitative, dimensions of

labour input. If you think that one firm/country is using labour much more intensely, you might

not want to say this is due to greater labour productivity, since the output per labour-effort may

be the same. This insight becomes particularly important when a large part of what is produced

in an economy consists of services. Management may be very preoccupied with the productivity

of employees, but the productivity gains of management itself might be very difficult to prove.

Modern management literature emphasizes the important effect of the overall work culture or

organizational culture that an enterprise has. But again the specific effects of any particular

culture on productivity may be unprovable.

The factors affecting labour productivity or the performance of individual work roles are of

broadly the same type as those that affect the performance of manufacturing firms as a whole.

They include:

(1) physical-organic, location, and technological factors;

(2) cultural belief-value and individual attitudinal, motivational and behavioural factors;

(3) International influences e.g. levels of innovativeness and efficiency on the part of the

owners and managers of inward investing foreign companies;

(4) managerial-organizational and wider economic and political-legal environments;

(5) levels of flexibility in internal labour markets and the organization of work activities e.g. the

presence or absence of traditional craft demarcation lines and barriers to occupational entry;and

(6) individual rewards and payment systems, and the effectiveness of personnel managers and

others in recruiting, training, communicating with, and performance-motivating employees on

the basis of pay and other incentives.

Creating a work environment in which employees are productive is essential for the growth and

development of any organization. For obvious reasons, Employee productivity usually revolves

around two major areas of focus: personal motivation and the work environment (including

infrastructural facilities). Personal motivation encompasses a wide range of areas like the

current role, career progression, training, appreciation, compensation and benefits, culture,value etc. Infrastructure includes the actual physical layout of an office, facilities, hardware and

software, communication equipment, etc.

If the HR department wants to achieve a strategic role in improving an employees productivity,

it needs to be sensitive to their requirements, proactive in understanding the issues that

employees may face and address them. It should work towards providing an environment that is


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not only conducive to work in, but also clearly defines roles and responsibilities of each

individual and relating his/her contribution to the bigger organizational picture.

The HR staff can play a vital role in making sure employees are psychologically ready to hear

and support the mission, values and goals of the organization. Employee productivity is directly

related to the growth of the company. The role of HR in such situations is critical. Very often as

a company is growing and new recruits come on board the HR team has a crucial role to play inkeeping the culture of the company intact and introducing the new joiners to the companys

traditions.

Employee productivity should and can be maintained and monitored. It is a management

function directly tied into employee morale. Employees success depends on management

support, which in turn yields expected progress, profit, and success.

Employees must be motivated to produce. Old school thinkers believe salary and promotional

opportunities create motivation, while new thinking has led many managers to understand that

other factors are more motivational in the workplace.

Explain the Job

The job description has the information. But it is up to the manager to explain the particular

nuances of the job to the employee, upon hire, throughout the employment, and in particular

when and if issues arise. When shadowing is beneficial, provide that opportunity. Training also

does the trick.

Provide the Necessary Tools

Be sure to provide your employees with what they need to get the job done. Some obvious toolsare a computer, phone, training, and supplies. But there might be things not readily recognized

that are needed, such as re-training, or perhaps allowing fellow employees to mentor. An open

door policy is a good motivator and allows employees the freedom to remark about their jobs

and enter information and input regarding the job as they see it. Valuable feedback can be

gathered with such a policy, as well as through an employee survey.


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Goal Setting

Employees need to know their jobs. Yes, they read their job descriptions upon hire. They

understand the other projects as required statement. But it is up to human resource s andmanagement to remind employees about the goals. The employee may understand his/her

tasks and have the ability, experience and tools to perform them. But management must

reiterate the ultimate goal for the completion of these tasks on a routine basis. Remind

employees that their individual goals are tied directly into the business plans goals.

Environment

Providing the type of environment that encourages honesty, and an environment that makes

employees feel welcome, safe and wanted, yields the highest performance results. This is key

in human resources planning. Studies have demonstrated that employees are more alive,

awake and interested in their work when the environment is physically pleasant, and this may

include furniture, lighting, but also trusted co-workers. Be especially aware of an environment, in

which negativity has been introduced, typically in the form of a disgruntled employee who can

create irreversible damage.

Inclusion

Including employees in providing input and ideas is an excellent motivator, even when all the

ideas may not be feasible. Employees appreciate being asked about their experiences and are

pleased about management feeling they have valuable skills. Solicit input where it makes

sense. Typically an excellent forum is through a confidential survey, or by establishing an ideabox where employees can place comments confidentially. Good feedback also can be

garnered via exit interviews, when outgoing employees are less afraid to speak up. Chances are

the exiting employees are still in touch with some remaining employees, and they can pass the

word that their ideas were solicited. And chances are too, that current employees share some of

the ideas. Using the input where it is sensible is another motivator, and identifying the source of

the idea as well.

Counseling

In situations where an employees productivity is failing, management counseling is necessary.

Offer your assistance. Ask what is going wrong and how it can be fixed. Give the employee achance to improve his/her performance. Allow for human resources involvement in situations

that are beyond basic improvement. Be sure you have a fair, legal and procedural method of

disseminating counseling and discipline, and that it is proven effective. Always be clear when

discussing issues with employees. Refer to the issue and do not point fingers.


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OVERTIME

Overtime is the amount of time someone works beyond normal working hours. Normal hours

may be determined in several ways:

by custom (what is considered healthy or reasonable by society),

by practices of a given trade or profession,

by legislation,

by agreement between employers and workers or their representatives.

Most nations have overtime labor laws designed to dissuade or prevent employers from forcing

their employees to work excessively long hours. These laws may take into account other

considerations than the humanitarian, such as preserving the health of workers so that they may

continue to be productive, or increasing the overall level of employment in the economy. One

common approach to regulating overtime is to require employers to pay workers at a higherhourly rate for overtime work. Companies may choose to pay workers higher overtime pay even

if not obliged to do so by law.

Overtime pay rates can cause workers to work longer hours than they would at a flat hourly rate.

Overtime laws, attitudes toward overtime and hours of work vary greatly from country to country

and between different economic sectors.

DEFINITION

Overtime is time worked that exceeds the hours of a full-time employees regular daily schedule

on pay status or exceeds 40 hours on pay status in a workweek.Pay status includes time worked and paid leave such as sick leave, military leave,

compensatory time off, vacation leave, holidays, and administrative leave with pay.

Overtime Rates

When employee work overtime, they will be paid at rate:

Monday to Friday: 1.5 x hourly rate.

Saturday, Sunday: 2.0 x hourly rate.

Holidays: 3.0 x hourly rate.

Principles of working overtime

Employees are paid for working overtime provide that they must be in compliance with

principles as follows:

Any overtime working must be agreed in advance with the line manager.

Overtime will only be paid for periods of more than one hour in any day.


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Advance warning of overtime working will be given wherever practicable, but it is inevitable

that some overtime may be required at short notice due to sickness or other emergencies.

Claims must be made monthly, for overtime worked in the previous month, on authorized claim

forms.

Payments will be made through the payroll

Overtime calculation

Per day salary Basic salary = (pertaining to the no of days in a month)

= Basic/31 = Salary per day

Per day basic / 8 = per hour salary

Overtime = 1.25*per hour salary*no. of overtime hours worked.

LAWS RELATED TO OVERTIME

Since the late 1940s, Indian government has established several acts that deal with various

aspects of overtime laws. These laws are designed to protect members of the working classes

by legislating work hours and work pay. The acts that specifically deal with overtime pay in India

are the Apprentices Act of 1961, Minimum Wages Act of 1948, Child Labor Act of 1986, the

Factories Act of 1948, the Mines Act of 1952 and the Working Journalists Rules of 1957.

Minimum Wages Act, 1948

According to Section 14 of the Act, when an employee who works for minimum wageduring a fixed hour or day, works any additional hours or days in excess of his normal

working day, his employer must pay him the overtime rate for every additional hour he

works. The overtime rate is the rate enforced under the law of the government at the

time he works the overtime hours.

Apprentices Act, 1961

Chapter II of the Apprentices Act specifies in Section 2 that no apprentice is permitted or

shall be required to work overtime hours. The exception to this rule is if the

apprentices supervisor approves the overtime work and the nature of the work is

for completing training or in the interest of the public.

Child Labor Act, 1986

According to Section 7 of the Act, children are not permitted to work additional hours in

excess of the standard hours that are permitted for the kind of establishment or company

where the child works. Children are never allowed to work overtime. There are no


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exceptions to this rule. Children must also rest for one full hour after working for three full

hours.

Factories Act, 1948

A factory employee who works more than nine hours per day or more than 48 hours perweek shall be awarded overtime in the amount of twice his average hourly rate. If the

average rate is not paid in cash but food grains, the overtime rate must be calculated

based on the cash value of those food grains, which would then be doubled.

Mines Act, 1952

According to Section 33 of the Act, if a miner works above ground for more than nine

hours a day or below ground for more than eight hours day, or works for more than 48

hours a week whether working above or below ground, he is entitled to overtime pay.

The overtime pay is twice his daily pay rate, unless he is paid weekly, in which case it is

twice his weekly rate.

Working Journalists Rules, 1957

According to Section 10 of the provisions and rules, when a journalist works for more

than six hours a day for a day shift or five and a half hours on a night shift, he shall be

entitled to overtime compensation. In the case with journalists, the overtime

compensation is paid not in money but in hours of rest. The journalist is awarded hours

of rest equal to the number of additional hours he worked.

Q 3. What do you mean by Monetary and Non Monetary benefit schemes for workers.

Explain with two examples of each type.

Ans. In todays world organizations tries more to asses the worth of an individual in terms of his

performance and contribution to the organizations. With the growing demand of workforce and

constant challenges in the business environment, organizations have to evolve and accurate

system for evaluating jobs and assessing their worth. Compensation management helps to

determine the relative worth of a job in an organization in a systematic, consistent and accurate

manner. It also helps in estimating the basic pay for each job in accordance with the importance

of the job in the organizational hierarchy .once a basic pay is determined , the rewards ,

incentives and benefits attached worth the pay, positions and performance are also determined.The basic wage, incentives and rewards and benefits, together form the compensation package

of an employee.


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BENEFITS

One of the most vital factors the motivation, retention and the morale amongst the employees id

the compensation system, policies and review philosophies of any organization. While the

bargain able employees generally have their unions to negotiate or review terms with the

Management-which are governed by the Long Term Settlements- the terms of the managerial

employees are mostly seen to be at the mercy or the goodwill of the organization, reviews of

which may or may not be regular or timely, or often do not seem to meet the expectations or

logic of such employees. Management Compensation therefore, now plays a very significant

part along with the working style and environment, empowerment etc. in the organizations

success strategy.

An incentive or reward can be anything that attracts a workers attention and stimulates him to

work. In other words, An incentive scheme is a plan or programmes to motivate individual or

group performance. An incentive programme is most frequently built on monetary rewards

(incentive pay or monetary bonus ), but may also include a variety of non-monetary rewards orprizes.

Incentive may be defined as any reward of benefit given to the employee over and above his

wage or salary with a view to motivating him to excel in his work. Incentives include both

monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate

individual or group performance.

The following are some of the definitions of the term Incentive:

Wage incentives are extra financial motivation. They are designed to stimulate human effort

by rewarding the person, over and above the time rated remuneration, for improvements in the

present or targeted results The National Commission on Labor.

It refers to all the plans that provide extra pay for extra performance in addition to regular

wages for a job Hummel and Nickerson.

It is any formal and announced programme under which the income of an individual, a small

group, a plant work force or all the employees of a firm are partially or wholly related to some

measure of productivity output Scott.

Need for incentive:

It is true that monetary compensation does constitute very important reason for the working of

an employee. But this compensation alone cannot bring job satisfaction to the workers. One

cannot expect effective performance from a worker who is dissatisfied with its job, even if he is

well paid. Sociologists and industrial psychologists also view that the financial aspect is not the

only dominant motivating force. Confidence in the management, pride in the job and in firm and

concern for the overall good cannot be brought by a bonus. Hence the modern authorities on


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management science have recognized the need for the provision of incentives to build up good

morale.

Incentives for work:

Incentives can take any form. According to Z. Clark Dickinson the important incentives for workcan be listed as follows:

Desire for livelihood and fear of want.

Desire for approval of master and fear of punishment.

Desire for praise and fear of being dismissed.

Impulse to activity or joy in work and dislike of inactivity.

The moral command and fear of conscience.

Classification of Incentives:

All forms of incentives can be broadly classified into two kinds namely,

Monetary Incentives, andNon-monetary Incentives.

Incentives include monetary as weft as non-monetary benefits offered. There is motivation to

work hard and to earn more. In every incentive plan, wages are linked with the given output.

Incentives are not fixed like wages and salaries. They vary from individual to individual and from

period to period.

Monetary Incentives

Financial incentives orMonetary Incentivesor pecuniary incentives are the most original of all

the incentives. It is given in the form of money. The financial incentives still form the mostimportant influencing and motivating factor up to a certain limit. Because it is only by virtue of

the monetary compensation that the workers can satisfy their fundamental needs such as food,

clothing, shelter etc. The financial incentives may be either direct or indirect. Direct incentives

include wages, bonus and other incentives directly given to the workers in the form of cash.

Indirect financial incentives include subsistence allowance expenses, medical expenses etc.

Non-monetary incentives

Non-financial or Non-monetary incentives or non-pecuniary incentives include all other

influences planned or unplanned, which stimulate exertion. Mere monetary incentive cannot

help the management in solving all the problems of industrial unrest. Further additional cash

wage may also tempt the workers to misuse the money in vices like gambling, drinking etc.

Under such circumstances, the nonfinancial incentives have a significant role to play. Such

incentives create a healthy atmosphere and change the mental outlook of the workers. They

make the working class more stabilized and economically sound. Thus, in short, the workers by

virtue of the non-financial incentives are enabled to enjoy a richer and fuller life.


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Examples of Monetary Incentives:

Benefits generally comprise of mostly unfurnished company owned or leased accommodation,

use of company or leased vehicles, medical coverage, retrial benefits covering Provident Fund,

Pension or Superannuation and Gratuity, post-retrial medical assistance, easy loan schemes atlow or zero interest rates for house building, cars or vehicles, furniture or utility items etc. renting

employees owned housing, club

entrance free reimbursement etc. Minor benefits could be provision of security, driver or

gardening assistance, else of products or assets at a concessional rate, relocation and transfer

expenses including admission etc. fees for children, credit card fees, phones etc.

Performance Bonus that do not increase future liability is being given more as recognition of

results generated. It requires transparent, balanced and fair systems and benchmarks, and also

agrees targets by the managers in advance during planning and review discussions.

Profit-sharing is regarded as a steppingstone to industrial democracy. Prof. Seager observes:

"Profit-sharing is an agreement by which employees receive a share, fixed in advance of the

profits."

Profit-sharing usually involves the determination of an organisation's profit at the end of the

fiscal year and the distribution of a percentage of the profits to the workers qualified to share in

the earnings. The percentage to be shared by the workers is often predetermined at the

beginning of the work period and IS often communicated to the workers so that they have some

knowledge of their potential gains. To enable the workers to participate in profit-sharing, they

are required to work for certain number of years and develop some seniority. The theory behind

profit-sharing is that management feels its workers will fulfill their responsibilities more diligently

if they realise that their efforts may result in higher profits, which will be returned to the workersthrough profit-sharing.

FEATURES OF PROFIT-SHARING:

The main features of the profit-sharing schemes are:

(a) The agreement is voluntary and based on joint consultation made freely between theemployers and the employees.

(b) The payment may be in form of cash, stock of future credits of some amount over and

above the normal remuneration that would otherwise be paid to employees in a given situation.

(c) The employees should have some minimum qualifications, such as tenure or satisfy some

other conditions of the service which may be determined by the management.(d) The amount to be distributed among the participants is computed on the basis of some

agreed formula, which is to be applied in all circumstances.

(e) The amount to be distributed depends on the price earned by the enterprise.

(f) The proportion of the profits distributed among the employees is determined in advance.


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ADVANTAGES OF PROFIT-SHARING:

1) Extra incom e to wo rkers:Workers get extra cash payment due to profit-sharing

arrangement. This money is useful for raising their welfare. Workers can purchase costly

consumer durables out of this money available at one time. Thus, profit-sharing provides

better life and welfare to workers. It creates contended labour force with higher standard of

living. Profit-sharing plan acts as a good supplement to regular wages paid to employees.

In fact, profit-sharing is aptly described as a form ofadded remuneration.

2) Workers take mo re in i t iat ive and interest in th e work: Due to profit-sharingarrangement, workers/ employees take more interest in the work. This develops team

spirit among the employees because their share in the profit depends on their collective

initiative, efforts and hard work. In this sense, profit-sharing is useful for motivating

employees. It encourages employees to be regular, stable and efficient as the benefits of

these elements are offered to them through profit-sharing. Here, efforts and reward are

directly and proportionately linked. This encourages employees to take keen interest in

the work and develops team spirit. Profit-sharing acts not only as supplement to regularwages (i.e. as an incentive wage plan) but also as a motivating factor to all employees. It

creates common objective before employer and employees and diverts their energies for

achieving one common objective.

3) Increase in product ion and product iv i ty: Profit- sharing acts as a driving force for

more production and productivity. It motivates workers for raising production as they get

direct and immediate benefit of additional efforts on their part. The benefits of increase in

production are available to employer and employees.

4)Fairto employ er and employees:Profit-sharing gives mere remuneration to workers

along with more profit to employer. Employer pays a part of profit to workers but he is notadversely affected as profit is paid only when it exceeds a particular limit agreed by both the

parties. This arrangement is, certainly fair to both parties. There is an element of social

justice in it.

5) Ensures cor dial indu str ial relations:Profit-sharing creates cordial labour-management

relations. It. reduces industrial disputes, strikes and lock-outs. This is because both have

common objective and both are likely to suffer due to industrial disputes, strikes and lock-

outs. Thus, profit-sharing reduces industrial disputes and leads to friendly relations between

employer and employees. It certainly acts as a tool for reducing industrial disputes and also

for creating industrial peace.Thus, profit-sharing agreement encourages workers to work

efficiently and also avoid dispute and quarrels with the employer. It acts as a natural andself-imposed check on industrial disputes. Profit-sharing creates team spirit in the higher

cadres of management as well as in the rank and file of workers.

6) Les s s uper v is ion r equ ired :Profit-sharing reduces the expenditure on supervision of

workers as they take interest in the work on their own. Moreover, wastage of' materials,

volume of spoiled work, etc. are also reduced.


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7) Stabi l i ty to labour force: Profit-sharing brings stability to labour force as the benefit of

profit-sharing is usually given only to those who work in the company for the whole year.

Thus, profit-sharing brings down the rate of labour turnover and this gives benefit to the

employer/ management.

8) Promotes socia l just ice: Profit-sharing is a method of social justice. It is a method by

which workers are given the reward of their hard work and also allowed to participate in the

progress and prosperity of their company. Profit-sharing introduces industrial democracy as

workers are treated not only as wage earners but also as partners for sharing the profits of

the company.

Examples of Non- Monetary Incentives:

Non-Financial Incentives can take a variety of forms. Some of the popular ones are given below:

Job Security:The management must try its best to create a sense of job security. There shouldbe no risk of retrenchment, demotion

and termination. Experiences have also shown that the productivity is less in those concerns

where workers have no

feeling of safe and secure. But it is high in those concerns where they have a feeling of job

security.

Recognit ion:

Recognition of work is the essence of securing good work. Efficient people would naturally like

to get recognition for their skill and excellence in their work. Such recognition can do many

things that what a cash reward can do. Of course it is not practicable for the superiors to praise

everybody for every thing done by them. But the technique of praise must be practiced as far as

possible.

Part ic ipation:

Workers feel more satisfied when they are given an opportunity to raise their voice in handling

the affairs of the

enterprise. Since they actually take part in the decision-making their co-operation is assured.

Sincere Interest in Subor dinates as Indiv idual Persons:

The workers must be made to feel pride in their job. Various techniques can be employed to

develop pride to work. Food products, dynamic leadership, fair treatment, ethical conduct etc.

can effectively stimulate the workers pride in their job and in the firm.


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Pride in job:

The workers must be made to feel pride in their job. Various techniques can be employed to

develop pride to work. Food products, dynamic leadership, fair treatment, ethical conduct etc.

can effectively stimulate the workers pride in their job and in the firm.

Delegation of Responsibi l i ty :Delegation of rights and responsibilities to execute a given task often proves to be a strong

motivating factor. By

delegation the superior trusts his workers and stimulates them to show better results.

Other Incentives:

Other incentives like quick promotion, provisions of facilities for development and training,

provision of labor welfare amenities etc. also have a significant role to play in motivating the

employees.

Question No 4: Following Information is given to You.

Number of workers at the beginning of Month: 130.

Number of workers at the end of Month: 170.

During the month 10 workers Leave the Organisation, while 50 are discharged. 100

workers are recruited during the month of these 30 are recruited in the vacancies of

those leaving.

Calculate Labour Turnover under Separation Method, Replacement Method and under

Flux Rate method.

Sol. Given,

Number of workers at the beginning of Month: 130.

Number of workers at the end of Month: 170.

Number of workers separated: 60

Number of workers replaced: 30

Average Number of workers at the given period: 130 + 170/ 2 = 150

Labour turnover:

Separation Method/ Rate:

Number of employees separated in a period x 100


Where,


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Average Number = ( Number of employees at the beginning + Number of employees at theend)/2

60 x 100

150

Labour turnover = 40 %

Replacement Method/Rate:

Number of employees replaced in a period x 100


(Here only those who are replaced, that number are to be considered. Suppose 100 employeesare separated however only 50 are replaced, then only 50 to be considered.)

30 x 100

150


Flux Method/ Rate:

This is combined measure of both separation and replacement.

Number of employees separated + Number of employees replaced x 100

Average number of employees in the period.

90 x 100

150


Question No 5. Following are details of Costs for Jagjit Industries. All figures in Rupees.

Material used in Manufacturing 54.000, Material used in Primary Packing 10,000

Material used in selling the Product 1,500 ,

Material used in Factory. 750.

Labour for Production 10,000.

Labour for Factory Supervision 2,000.

Direct Expenses 5,000

Indirect Expenses (Factory) 1,000


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Administrative Expenses 1,250.

Depreciation on Office Building 750

Depreciation on Factory Building 1,750

Selling Expenses 3,500

Freight on Material Purchased 6,000

Advertisement 1,250.

Management wants to know what should be selling price to obtain a profit of 20% on Selling

Price.

Sol.

PARTICULARS AMOUNT(RS.) AMOUNT(RS.)

1. Material used in Manufacturing+ Labour on production+ Direct expenses

+ Freight inward

PRIME COST

2. Material used in factory+ Labour for factory supervision+ Depreciation on factory building+ Indirect expenses

WORKS COST

3. Administrative expenses+ Depreciation on office building

COST OF PRODUCTION

4. Material used in primary packing+ Material used in selling the product+ Selling expenses+ Advertisement

TOTAL COST

PROFIT

SALES

54,00010,0005,000

6,000

1,0002,0001,7501,000

1,250750

10,0001,5003,5001,250

76,000

5,750

2,000

16,250

1,00000

20,000

1,20000

Documents

Labour Costing and Compensation Management (2)