How to design a

Universal Incentive

SchemeFor a manufacturing company

Contents

Incentive Theory

Quantity vs. Quality

Setting an Incentive Scheme: Stepping Stones

Incentive System Types

Incentive Approach Types

Incentive Slabbing: Linear & Logarithmic

Introduction to “Incentive Index”

Divisional Index

Multiplicative Index

Divisional vs. Multiplicative: Head to Head

Incentive vs. Penalty

Penalty Plan

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Incentive Theory

Let’s consider an example:

Production Capacity: 100 units

Production Target: 80 units (i.e. 80% of Capacity)

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0 units 80 units 100 unitsEntitlement for

Incentive

0 units 80 units 100 units

5 5 5 5

Incentive given for

these extra units

Incentive Theory4

0 units 80 units 100 units

Ascending Incentive

Rate

5 5 5 5

Quantity vs. Quality

Incentive is given based on increased quantity.

With increased quantity, there is a possible chance to

trade-off quality.

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Focus on Quality

So, while giving incentive to motivate our work-force

for increased quantity…….

We need to keep “Quality” also in our mind

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Setting an Incentive

Scheme: Stepping Stones

Set the incentive system

Set the Approach

Set the incentive slabs

Set the incentive index

Fix the incentive rate

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Set the incentive system

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Incentive System Types:9

Name of System Method of Rate

Determination

Major

Characteristics

Straight piecework

system

Units of production

per time frame

Straight rate after

entitlement

Taylor Differential

piece rate system

Units of production

per time frame

Differential rate at

each slabs after

entitlement

Standard hour

system

Time frame per unit

production

Rate fixed if time of

production is less

than expectation

Halsey 50-50 system Time frame per unit

production

Profit shared on 50-

50 basis for saving

time in production

Set the Approach

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Incentive Approach Types:

Approach:

Individual incentive approach

Ex: Goods produced by a single individual

Team incentive approach

Ex: Goods produced by a group of individuals

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Set the incentive slabs

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Incentive Slabbing: Linear &

Logarithmic Equal units in each slab

Differential rate should be introduced

E.g. incentive entitlement is 1000 units/shift & capacity

is 1500 units/shift.

Linear slabbing for 5 slabs will be:

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Slabs Units

Produced

Slab 1 100

Slab 2 100

Slab 3 100

Slab 4 100

Slab 5 100

0

500

1000

1500

2000

Linear Slabbing

Linear

Slabbing

Incentive Slabbing: Linear &

Logarithmic Differential units in each slab

Equal/Differential rate should be introduced

E.g. incentive entitlement is 1000 units/shift & capacity

is 1500 units/shift.

Linear slabbing for 5 slabs will be:

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Slabs Units

Produced

Slab 1 193

Slab 2 114

Slab 3 80

Slab 4 62

Slab 5 51

0

500

1000

1500

2000

Logarithmic Slabbing

Logarithmic

Slabbing

Incentive Plan: Example

Let’s consider an incentive plan for a shop floor

consisting 30 associates working in 3 shifts having 10

individuals in each shift.

The parameters are as follows:

Number of individuals: 10 persons

Number of work-days in a month for a shift: 20 days

Incentive system: Taylor differential piece rate system

Approach: Team Approach (Single Shift)

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Incentive Slabs: Example

Incentive Slabs according to team approach

Type: Linear

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Slab No Units of good

produced per shift

Entitlement 1000

Slab 1 1100

Slab 2 1200

Slab 3 1300

Slab 4 1400

Slab 5 1500

Set the incentive index

&

Fix the incentive rate17

Introduction to…

“Incentive Index”

“Incentive Index” is the highest monetary value a

company is willing to pay to its receptor team or

individual for a given time period (e.g. a month)

based on the performance of a given time frame.

For team incentive plan:

When the receptor is a team, it’s called “Divisional Index”

When the receptor is an individual, it’s called

“Multiplicative Index”

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Divisional Index: Example

Lets consider that management has decided to give highest 10,000 BDT as incentive to a specific shift for a month based on the performance of each work-day

Here,

Receptor type: Team

Time period: 1 month

Time frame: Single Work-day

Highest monetary value: 10,000 BDT

As the receptor is a team, the incentive index in this case will be “Divisional Index”

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Divisional Index: Example

Highest monetary value: 10,000

Number of working days in a month: 20

Divisional index: 10000/20

=500

So, highest 500 BDT will given as incentive to an entire

shift for a single working day

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Divisional Index: Incentive

Rate Fixing Example

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0 units 80 units 100 units

Ascending Incentive

Rate

5 5 5 5

Divisional Index: Incentive

Rate Fixing Example

Divisional

Index

% of

Index

BDT Incentive

Slabs

Extra

units

produce

d

Incentive

Rate,

BDT/unit

produce

d

1000

500

10% 50 1100 100 0.5

15% 75 1200 100 0.75

20% 100 1300 100 1

25% 125 1400 100 1.25

30% 150 1500 100 1.5

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Divisional Index: From Time

frame to Time periodDays Units Produced Extra units after

entitlement

Incentives

earned, BDT

Day 1 1155 155 91.25

Day 2 920 0 0

Day 3 1455 455 432.5

Day 4 1305 305 231.25

Day 5 1275 275 200

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For day 1,

Extra units produced after

entitlement = 155 units

Incentive earned = 100 x 0.5 + 55 x

0.75 = 91.25 BDT

Total incentive earned in first 5

days = 955 BDT

Slab No Rate

Slab 1 0.5

Slab 2 0.75

Slab 3 1

Slab 4 1.25

Slab 5 1.5

Divisional Index: From Time

frame to Time period

For simplification, lets consider that the next 15 days for this shift goes just like the first 5 days

Therefore, total incentive earned by this shift for a total of 20 days ( a time period) will be = 955 x 4 = 3820 BDT

From previous slides, Number of individuals in this shift = 10

Therefore, Incentive earned by a single person of this shift for a time period = 3820/10 = 382 BDT

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Incentive Plan: Example

Let’s consider an incentive plan for a shop floor

consisting 30 associates working in 3 shifts having 10

individuals in each shift.

The parameters are as follows:

Number of individuals: 10 persons

Number of work-days in a month for a shift: 20 days

Incentive system: Taylor differential piece rate system

Approach: Team Approach (Single Shift)

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Multiplicative Index:

Example

Lets consider that management has decided to give highest 1,000 BDT to each individual of a specific shift for a month based on the performance of that shift of each work-day

Here,

Receptor type: Individual

Time period: 1 month

Time frame: Single Work-day

Highest monetary value: 1,000 BDT

As the receptor is an individual, the incentive index in this case will be “Multiplicative Index”

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Multiplicative Index:

Example

Highest monetary value: 1,000

Number of working days in a month: 20

Multiplicative index: 1000/20 = 50

So, highest 50 BDT will given as incentive to each

individual of that shift for a single working day

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Multiplicative Index: Incentive

Rate Fixing Example

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0 units 80 units 100 units

Ascending Incentive

Rate

5 5 5 5

Multiplicative Index: Incentive

Rate Fixing Example

Multiplica

tive Index

% of

Index

BDT Incentive

Slabs

Extra units

produced

Incentive

Rate,

BDT/unit

produced

1000

50

10% 5 1100 100 0.05

15% 7.5 1200 100 0.075

20% 10 1300 100 0.1

25% 12.5 1400 100 0.125

30% 15 1500 100 0.15

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Multiplicative Index: From

Time frame to Time periodDays Units Produced Extra units after

entitlement

Incentives

earned, BDT

Day 1 1155 155 9.125

Day 2 920 0 0

Day 3 1455 455 43.25

Day 4 1305 305 23.125

Day 5 1275 275 20

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For day 1,

Extra units produced after

entitlement = 155 units

Incentive earned = 100 x 0.05 + 55 x

0.075 = 9.125 BDT

Total incentive earned in first 5 days

= 95.5 BDT

Slab No Rate

Slab 1 0.05

Slab 2 0.075

Slab 3 0.1

Slab 4 0.125

Slab 5 0.15

Multiplicative Index: From

Time frame to Time period

For simplification, lets consider that the next 15 days for

that shift goes just like the first 5 days

Therefore, total incentive earned by each individual of

that shift for a total of 20 days ( a time period) will be =

95.5 x 4 = 382 BDT

For reconciliation, total amount given to that shift for a

month= 382 x 10 = 3820 BDT

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Divisional vs. Multiplicative:

Head to Head

Divisional Index Multiplicative Index

Favorable for teams with equal

members & equal capacity within

same dept. & not prone to sudden

change in number of members

Favorable when setting a universal

incentive scheme across shifts of

different departments.

As the receptor is a team,

individual earning from incentive is

hard to control

As the receptor is an individual,

earning of every individual can be

controlled

With a change in capacity &

personnel, both slabs & index

should be changed

With a change in capacity &

personnel, only slabs need to be

changed

Different index for diff.

departments. Therefore, so many

indices. Hard to be documented

bcoz of changing.

A single index for all the

departments & shifts.

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Incentive vs. Penalty

In order to motivate production, incentives are

rewarded for increased quantity.

Likewise, in order to maintain quality benchmark,

penalties are imposed on defects.

Example:

Lets consider entitlement is on 1000 units/shift.

Production in a certain shift is 1155 units.

Of these units, 20 is defective.

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Penalty Plan

Penalty can be imposed in two ways:

Active Penalty:

Incentive is given on extra 155 units after entitlement. For the 20 defectives, defective rate is determined. For that defective rate, penalty rate is introduced.

So, 95.5 BDT is the incentive gain per person on that day (155 units extra production)

Defective rate: 20/1155 = 0.0173

Defective rate slabs are introduced.

Penalty rates are introduced.

Penalty loss is being calculated.

Ultimate gain = Absolute of (Incentive gain – Penalty loss)

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Penalty Plan

Penalty can be imposed in two ways:

Passive Penalty:

Incentive is given on the good units only i.e. 1155 - 20 =1135 units

There is not direct penalty.

Therefore, there will be either 0 or (+)ve gain in ultimate.

Actually, there is no penalty!!!

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Thank You.

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