Subject: Industrial Engineering

Subject Code: ME 0061C

Department of Mechanical Engineering

Note : Consider this PPT as reference only

5. WAGES AND INCENTIVES

Wages and salary administration- Meaning principlesTechniques of wage fixation
Job evaluation- Merit rating .
Methods of wage payment.
Incentive scheme, Types, Advantages and disadvantagesProductivity base incentives, Case Example- Evaluation of incentive scheme
TEXT BOOKS
l. Khanna O. P., Industrial Engineering and Management, Khanna publishers, New Delhi, 1999.
2. Samuel Ellen, Elements of Production Planning and Control, McMillan and Co., 1971.
3. Dr. Ravi shankar.., Industrial Engineering and Management, GalGotia Piblisher, New Delhi.
4. S. Anil kumal, N Suresh-Production_and_Operations_Management, New Age International.

REFERENCE BOOKS
1. Kumar B., Industrial Engineering, Khanna Publishers, New Delhi, 1998.
2. James M. Apple, Principles of Layout and Material Handling, Ronald press, 1997.
3. Maynard, H., Industrial Engineering Hand Book, McGraw Hill Book Co., New York, l999.

JOB EVALUATION AND MERIT RATING

It is essential that there should not be any inequity in the salaries of the
persons working on the same or in different or different organizations.
Differences in pay lead to among the workers which in turn increases labor
turn over, therefore a planned comparison is necessary to restrict the occurrence
of such situations.
At this stage job evaluation techniques comes to help the management.

Job Evaluation
Job evaluation: It is a systematic process of evaluating different jobs of an
organization. (is a process of determining the relative worth of a job.)
Job Evaluation with job only and is in no way concerned with persons
doing these jobs.
Merit rating : For Evaluating the merit of the person(say worker).
Objectives of Job evaluations
Decide the relative values of different jobs in an organisation.
Helps to formulate an appropriate and uniform wage structure.
Clarifies the responsibility and authority connected with each job.
Provides a basis for recruitment , selection, training promotion and transfer of the
employees.
Improves employer and employee relationships.
Adds to job satisfaction. Minimizes labour turn over.
Describes and evaluates new jobs.

Procedure for installing job evaluation / steps in Job evaluation

1.
2.
3.
4.

Identify the job to be evaluated.

Describe and analyze the requirements of the job write down the skill
statement and the responsibilities involved.
Compare the job with pre identified key jobs and decides its level or value.
Use the information supplied by above three to arrive at a suitable wage
structure for the job.
Job Description

Job analysis

Job Evaluation

Wage survey

Job Specifications

Fig: Purpose of Job Evaluation

Wage payment
Salaries
*Incentives

Job Evaluation Methods

Non-Analytical Methods

1. Ranking
Method

2. Classification
Method

Methods designed on the

basis of the jobs as a
whole

Analytical Methods

3. Factor
Comparison

4. Point Method

Methods designed on the

basis of the requirements
and elements of the jobs

1. Ranking Method
The ranking method can be performed by an individual or a committee and
is an acceptable method for small organizations of less than 25.
Forced ranking or paired comparison techniques are used to establish the
job hierarchy. Following are two examples of this method.
1. Ranking by job title only
2. Ranking by job title and job content.
Advantages:
Simple and fast.
It can be easily mastered and administrated.
Suitable for small organizations involving lesser number of job to evaluated.
Does not involve any expenses.
Disadvantages:
There is no commonly accepted base for deciding the rank.
Not very accurate.
Not useful for Large organizations
It is least used method

2. Classification Method /Grading/ Job Classification/Predetermined Grading.

The second qualitative approach.
The classification method is widely used to evaluate administrative and
clerical jobs, and is used by the U.S. Civil Service Commission.
This method compares jobs on a whole-job basis but improves on the
ranking method by introducing factors for comparison.
The Civil Service Commission uses the following eight factors:
1. Difficulty and variety of work
2. Degree of supervision received or exercised by the jobholder
3. Judgment
4. Originality
5. Type and purpose of official contacts
6. Responsibility
7. Experience
8. Knowledge

..Classification Method
Advantages:
This method resembles ranking method. Simple, can be easily mastered and
administrated.
More accurate as compared to ranking method.
Disadvantages:
Not useful for large organizations
Job classification process is cumbersome and time consuming
Does not involve detail job analysis.
Some time difficulty to correlated the job grade of the job with, the present
salary of the worker.

3. Factor Comparison Method

Using the premise that all jobs contain common aspects or universal factors,
the factor comparison method represents a more objective approach to job
evaluation than the previous methods.
The factor comparison method is based on how much more of a specific
factor one job possesses over another. The common aspects or universal
factors used by this method have become job evaluation standards and
include the following:
Skill
Mental demands
Physical demands
Responsibility
Working conditions

.. Factor Comparison Method

Advantages:
Factor comparison method find the wages for a job from existing wage rates.
It finds wages by direct comparison.
For fixing wages for a new job, this method uses already made job
comparison(Monetary) scale and thus the wages can be calculated speedily.
Disadvantages:
Complicated method. It is not easily understood.
Selection of unfairly paid jobs as key jobs can introduce considerable error
in the wages calculated by this method.
It is difficult to divide each factor into large number of sub factors and
unless done so, accurate results may not achieved.
The method depends upon subjective judgement.

4. POINT-FACTOR SYSTEM (POINT SYSTEM)

Represents the most practical quantitative job evaluation technique. Off-the-shelf or
customized point-factor plans are the most prevalent job evaluation systems in use
today.
Surveys show that the point-factor system is, by far, the most popular approach to
evaluate factory, clerical, and professional jobs.
Point-factor systems are based on the notion that all jobs contain varying degrees of
the universal factors.
In most plans, these universal factors are partitioned into sub-factors, and these subfactors are then defined in terms of varying degrees.

FIGURE: Universal factors.

Degree Level 1: Requires simple reading and writing, adding, subtracting of whole numbers;
carrying out instructions; using fixed gauges and reading simple instruments.
Degree Level 2: Requires using shop mathematics (basic algebra and trigonometry); using
complicated drawings, schematics, and specifications. This level is equivalent to completed
journeymen craft or trade training, or Associates Degreelevel technical
training.
Degree Level 3: Requires using higher mathematics involved in the application of engineering,
business, or computer science principles. Comprehensive knowledge of the theories and
application of these principles developed through completion of Bachelors Degree.

.. . Point-factor System
Advantages:
Most reliable and accurate due to detailed analysis.
Less chance of subjectively and judgment after initial grade tables are
established.
Mostly widely used.
Disadvantages:
Analysis involves experienced persons
Time consuming in establishing initial grade tables.
Subjectively in initial grade table cannot be totally eliminated

COMPARISON OF DIFFERENT JOB EVALUATION METHODS

Factors

Simple
ranking

Job grading

Factor
comparison

Point System

1.Nature

Non Quantitave Non Quantitave Quantitave

Quantitave

2. Types of
comparison

Job to Job

Job to category
definition

Job to Job

Job to category
definition

3. Factors
Evaluated

No

No

3 to 7

Around 10

4. Technique

Ranking of jobs Comparing job

in order of
to arbitrarily
difficulty
defined grade

Multiple scale
of point and
key job titles

Multiple scales
of point and
definitions of
factor degree

5. Adoption

Least

Medium

Medium

Most popular

6. Comparative
stage

Easy, Simple,
and Crude

Easy, Simple,
and Crude

Modification
over simple
ranking

Modification
over Job
grading

7. Advantage

Simple

Simple

Practical

Practical

MERIT RATING
Performance Appraisal/ Personnel Rating/ Employee Evaluation.
Merit rating is associated with the performance appraisal of an employee.
This is systematic approach for evaluating the performance of an employee
on the job, which he/she perform.
OBJECTIVES:
Helps in execute decision related to human resource department.
Appraisal of workers.
Continue record for the worth of a worker.
Tool for decision related to training, placement, promotions,
confirmations, increment, transfer counseling of workers.
Useful for understanding areas of improvement in a worker.
Helps in discovering a special talent in a worker.
Useful in personnel research, validation of training objective and training
methodology.

Difference between Job Evaluation and Merit Rating

JOB EVALUATION
1. It evaluates a job or work.

MERIT RATING
1. It evaluates a worker/ employee.

2. It is for the purpose of fixing a base wage for 2. It is for the purpose of deciding reward for
a wage.
exceptional merit of worker.
3. It is independent of operator (or) worker. It
is impersonal in nature.

3. It is independent of job. It is impersonal in

nature.

4. Useful for decision regarding wage and salary

administration, skill match etc.

4. Useful for decision regarding training,

placement, promotion, counseling., etc

5. It considers requirement of job.

5. It considers ability and performance of

individual.

Employees are rated on the basis of many factors related personal attributes, leadership
quality, on job performance, interpersonal quality, loyalty, attendance, etc. some these factors are
1. Quality of work ( Accuracy, rejection & scrap, Thoroughness, Economy of time, House
keeping, contribution in quality circle team.)
2. Quantity of work (output, approach in meeting over demand)
3. Personal qualities ( Team spirit, Attitude for work, loyalty, leadership, relation with superior
& subordinates, integrity, judgment)
4. Other (Attendance, ability to follow Instructions, Safety habits, Interest in training & learning,
Interest in Corporate culture.)

FIVE DIFFERENT METHODS FOR MERIT RATING

1. Rating scale method
2. Checklist Method
3.Employee comparison Method
4. Rank method
5. Graphic rating scale method

WAGES AND INCENTIVES

Definitions
Wages: It is the payment for the use of efforts which may be physical or manual. It
includes both financial and non financial payments.
Fair wages: It is the wages which are fair to the efforts( or labors) and work
accomplishment of an employee. These should be sufficient to fulfill the basic
needs of life.
Fringe Benefits: Non financial part of wages is called as Fringe benefits. Ex: free
official car, Free House, attendant, for house hold work etc.
Incentive: it is reward or encouragement or inducement to an employee for the
hard work and efficiency at job, assigned by the organization.
It is motivating employee to do better and harder.
1. Financial Incentives (Ex: Bonus, Profit sharing etc)
2. Non Financial (Ex:Social Benefits, Recognition, Job Satisfaction,
enhances of promotion, Job securities, Training)
3.Semi Financial (Ex: Subsidised Medical/ration/education for children)

Difference between Wage and Salary:

Wage is compensation to the employees for services rendered to the organization.
Normally the wage period is shorter than the salary period.
Payment made to labor is generally referred as wages.
In case of the quantum of services rendered is difficult to measure , then the
payment is called salary.
Money paid periodically to persons whose output cannot be easily measured, such as
clerical staff as well as supervisory staff, is generally refereed to as salaries. Salaries are paid
uniformly generally on monthly basis and at times the element of incentives is introduced in the
form of commission.

WAGE PAYMENT PLAN

I. Time rate
system

II. Piece rate

system

1.Straight piece
rate system
3. Differential
Piece rate
system

2.Straight piece rate

with minimum
guarantee

III. Wage Incentive

plan
1.Time based
approach
a) Hasley
Plan
b) Emerson
Plan

c) Rowan
Plan
d) Bedeaux
Plan

Productive based
approach
Merrick
plan
Gantt plan

Difference between Time-Rate System and Piece-Rate System

Time-Rate System

Piece-Rate System

Most common method.

Payment by results system.

Time-based wages .

Output-related payment.

Mostly for general roles (administration, Encourages effort at the cost of quality.
maintenance, etc).
Home-based workers, sub-contractors.
Tendency to creep upwards (inflation,
promotion, etc).

Working hours are unaccountable.

Easier from an employees perspective .

Earnings mostly below average.

I. Time rate system/ Flat day rate:

The simplest of the incentive plan. In fact it is hardly an incentive plan.
The worker is paid for the number of hours he works.
Say,
R- Rate of pay Rs per hour
T- Time or hour per day( he works)
Then Daily wage earning (E)
E= R*T
There is no importance of qualities of work.
Therefore an efficient worker fell frustrated and would not work whole
heartedly to improve the productivity.

II. (1) Straight Piece Rate System:

In the straight piece rate system , a worker is paid straight for the
number of pieces which he produces per day.
In this plan quality may suffer.
The payment is directly proportional to the number of jobs done.
R- Wage rate per job
N- Number of such jobs done by a worker in a day.
Then daily earning

E=R*N

This system is preferred by management since its requires little

supervision and workers are forced automatically to produce more but inspection
of jobs increases.
It puts the worker on slightly inconvenient position. Since an average
worker will have no incentive and will always get less than an efficient workers.
There is no guarantee for minimum wage.
The worker will also lose if there is short supply of raw materials, or
machine breaks down etc.

..Straight Piece Rate System:

Advantages:
Simple and easy to understand
Focus of Productivity
Satisfaction to efficient and fast workers
Disadvantages:
No quality focus
No job security
No compensation for breakdown or sickness
No guarantee of minimum wage
Discourage group effort

II. (2) Straight Piece Rate With minimum guaranteed base wage:
In this method in addition to the payment in accordance with an individual
output, a fixed guaranteed base wage is also provided.
How ever, for a production up to a certain level there is no incentive.
Input: Base Wage (B), Output(o),
Standard Production(P) Wage rate(R)

Is
Output P

No

Wage=B

Yes
Wage=B+(O-P)*R

Pay wage to the

Worker
Fig : Approach of Straight Piece Rate With minimum guaranteed base wage

Straight Piece Rate With minimum guaranteed base wage

Advantages
Encouragement for higher production
Efficient methods can be adopted to increase production
Easy to prepare quotation estimates and budgets
No pay for idle time
Less supervision cost
Disadvantages
No standardised basis for minimum guarantee
Beginners and average workers cannot earn enough due to inability to work faster
Quantity will be overemphasised than quality (unless there is close supervision
Overwork and health concerns
Not suitable for intermittent work
Not suitable when jobs are un-standardised

II. (3) THE TAYLOR DIFFERENTIAL PIECE-RATE SYSTEM :

This system was developed by P.W. Taylor.
There is a low piece-rate for output below standard (R1), and a higher rate
for output above standard (R2).
As high as 50 per cent of the time-rate is paid for standard output. Thus
this system while rewarding handsomely the above-standard workers, penalizes the
below standard workers.
Input differential wage rate R1, R2
Output(o), Standard Production(P)

# It does not guarantee

minimum base wage.
# Standard output may be decided
by careful time and unction
study procedure.

Is
Output > P
Yes
Wage=(R1*P)+(O-P)*R2

Fig : Approach of Taylors plan

of Differental Piece rate system

Pay wage to the Worker

No

Wage=R1*O

Advantages:
Provides incentives to efficient worker.
Penalizes inefficient worker.
Focuses on high production rate
Simple and Easy to implement.
Disadvantages:
Minimum wage is not assured.
No consideration for the machine failure, power failure.
Over emphasis on high production rate.
There are chances of quality of work may suffer.

Fig: Comparison of three piece rate systems.

III. (a). THE HALSEY PREMIUM PLAN

A standard time is set for completing a job or a unit of work which is
usually based on past production records.
The worker gets the guaranteed wage if he completes the job in the
allowed time or more than the allowed time. If the job is completed in less than
the standard time, the worker is paid at his time rate for the actual time taken, and,
in addition, is rewarded at his time-rate for a definite percentage of the time saved.
This percentage varies from 30 to 70 per cent of the time saved, the most
common percentage being 50 per cent, and the other 50 per cent being the
employer's share.
Since there is a sharing and the bonus is modest, slight inaccuracies in
time standards would not be too serious. A portion of the employer's share may be
given to indirect workers and supervisors, thus encouraging overall performance.
The plan is easy to introduce.
The Halsey System can also be applied to indirect workers, such as
maintenance, where the work can be estimated.

Let say,

Standard time : S Hours

Time taken by worker: T- Hours
Wage rate: Rs R per hour
Incentive or premium : Wage for I % (Percentage of Time saved at a rate of R
per hour)
Wage to be paid to a worker (W)
(i) When T S
W=TR+ (I/100)*R(S-T)
(ii) When T < S
W=SR
Advantages:
Simple
Beneficial to Efficient Worker
Causes no harm to new worker, trainee or slow worker.
Management shares benefits of over achievement by worker.
Minimum bas wage is guaranteed.
Disadvantages:
Worker get only a percentage of return on their overachievement.
Due to undue importance on overachievement quality suffer.
Management gets wrong picture of workers ability.

THE ROWAN SYSTEM:

It is quite similar to Halsey plan execept that incentive for completing the job
lesser than standard time is paid to the worker.
the incentive is paid on the basis of a ratio, which is time saved over standard
time per unit standard time.
Then,
Let say, Standard time : S Hours
Time taken by worker: T- Hours
Wage rate: Rs R per hour
Wage to be paid to a worker (W)
(i) When T> S
W=SR+ [(S-T)/S]*R
(ii) When TS
W=SR
Implication of term [(S-T)/S] in Rowan Plan.
As time saved(S-T) increases, time taken by the worker (ST) decreases, as
standard time constant. Thus, as the incentive term increases, the base wage term(TR)
decreases.

THE ROWAN SYSTEM:

Therefore, the cumulative effect would be such that bonus rate decreases as
output keeps on increasing over standard output. This prevents unnecessary over
speeding by worker, which my be counter- productive to quality or group behavior.
Advantages:
Checks over-speeding overstrain by workers.
Assured minimum base-wage.
Efficiency is rewarded.
Disadvantages:
Discourages workers to over-achieve.
Difficulty in ascertaining wages as it requires large data processing.
Sharing of profit for over-achievement may not be liked by workers.

EMERSON PLAN
In this minimum time wage is guaranteed.
Working conditions and standard output are fixed on the basis of time study.
Bonus schemes as follows
(i) upto 66.67% of standard Output(SO)-------No incentives but only minimum
guaranteed wage(GW)
(ii) 66.67%-- 80% of standard Output(SO)-----GW+4% of Output
(iii) 80%-- 90%of standard Output(SO)-----GW+10% of Output
(iv)90%-100% of standard Output(SO)-----GW+20% of Output
(v) Above 100% of standard output(SO)--- GW+20% of (SO)+10% of Output above (SO)
Advantages:
i. Guarantees minimum wage till 66.6% of standard output.
ii. Efficient worker is rewarded handsomely.
Disadvantages:
In-proportionate of bonus below standard output.
Chances over speeding and compromise of quality.

BEDEAUX POINT PLAN

In this minimum base wage is guaranteed.
In this plan the caluclation of wage is based on a term, Bedeaux point(B).
One B is defined as a sum of fraction of a compensation of rest aggregating to one.
Standard time is also expressed in term of (Bs)
A worker, Who earn 1B on one minute or 60 Bs in hour, the wage payment is as follows:
(i) When actual Bs earned by worker(Bw)> Bs for Standard time
Wage=RS+[(Bw-Bs)/60]80.75R
(ii) when Bs caused by worker (Bw)Bs for standard time
Wage= RS
Here R is wage rate per hour and S is standard time.
Advantages:
i. Minimum base wage is guaranteed.
ii. For time saved as compared to standard time, 75% of the compensation is given to
worker, rest 25% may be given to his supervisor.
iii. Bedeaux point may be added up for worker even if his job requires
different assignment in a day.
Disadvantages:
Discourages worker to over achieve.
Difficulty in ascertaining wages as it requires large data processing..
sharing of profit for overachievement may not be liked by worker.

MERRICK MULTIPLE PIECE RATE PLAN

This is modification over Taylors plan. In this a minimum wage is not guaranteed.
A worker wage is calculated as follows:
(i)When output(O) is less than 83% of standard output(SO), Scheme for wage (W)
is equal to piece rate scheme.
(ii) When 83% of (SO) < O<100% of (SO);
W=110% of piece rate.
(iii) when O100% of (SO), W=120 % of Piece rate
Advantages:
Efficient Worker are rewarded handsomely.
Disadvantages:
Wide gap in slabs of differential wage rate.
Over emphasis in high production rate.

GANNT TASK AND BONUS WAGE PLAN;

In this minimum wage is guaranteed. Minimum wage is given to anybody, who
completes the job in standard time.
If the job is completed in less time, then there is hike in wage rate. This hike is varies
between 25% to 50% of the standard rate.
Then,
standard time =S hours
Actual time = T (T<S)
Time rate for wage= Rs
Rupees per hour
Bonus rate= P% of hourly rate
= Rs(PR) per hour
Thus wage =(RS+PRS) in T hours
W=[(RS+PRS)/T] per hour
Thus actual time (T) is lesser, hourly wage rate would be more.
Advantages:
Minimum wage is guaranteed.
Suited to efficient worker.
Disadvantages:
Emphasis on over speed (or) high production rate.

GROUP INCENTIVE:
In department, where more than one operator are working as a tem for
the same product such as in assembly section, repair and maintenance of heavy
equipment, erection work etc.
It is not possible to have incentive plans for individual workers, the
group incentive plan is introduced.
Every worker under this plan will get the same bonus.
This system forces cooperation among the workers of a group but and
efficient and fast worker loses due to a slow and non cooperative worker.

PROFIT SHARING:
A system to distribute a portion of the profits of the organization to
employees.
Primary objectives:
Improve productivity
Recruit or retain employees
Improve product/service quality
Improve employee morale
Drawbacks:
Disclosure of financial information
Variability of profits from year to year
Profit results not strongly tied to employee efforts