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Study Material-1

Site: School of Open Learning
Course: Paper XXVIII: Compensation Management
Book: Study Material-1
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Date: Tuesday, 20 August 2019, 8:29 AM

1 Unit-4


Contains three chapters...





--Dr Neetu Jain


Wages should be determined in such a way that they are perceived to be fair and equitable by all the employees. Compensation system should be so designed that it is able to attract, retain and motivate people. Total payable compensation can be paid in different forms. Besides classifying components of compensation in many other ways, one method of classification that has been discussed is ‘financial compensation and non-financial compensation’.

Concentrating on financial compensation presently, different financial components can be broadly categorized as:


  1. Basic wage/salary
  2. Dearness allowance
  3. Bonus
  4. Incentive compensation
  5. Fringe benefits and retirement benefits


Different Components mentioned above and their sub-components (mentioned later) are  valued by different people differently. Therefore, not only the total reward should be perceived to be fair and equitable, but it should be in such form which is valued by the recipient. In what components, compensation should be paid can be largely decided by the employer and the employee, through there are some other factor influencing such decisions, namely, past practices of the organization, legal requirements and Governments decisions.


Basic Wage / Salary

Basic wage provides the foundation of pay packet. It is a price for services rendered.

Base wage is the cash compensation that an employer pays for the work performed. It remains fairly stable over a long period of time. Determination of such wage is done keeping in mind certain factors like education and skills of employees, ability of the organization to pay, wages paid by other firms in the industry and some such other factors.


The base wage remains fairly stable over some period of time. It happens when the base wage is determined in the manner of spot rate for the skills and abilities possessed by the individual. In other cases, where wage rates are determined according to the grades, it progresses evenly within job grades. Such wage are revised periodically to:


  • Keep pace with the increasing cost of living
  • Maintain gap between the senior employees and newer employees
  • To give the psychological feeling to employees that they have progressed over a year.




The grade determines the range of the wage/salary along with the rate of annual increment for a particular level of employee. For example, the grade would be as follows:


Rs. 8,000-275-13500


In the above grade, the amount mentioned in the beginning is the starting salary, the next amount, i.e., Rs. 275 is the amount of annual increment upto a maximum salary 13500.


There are two ways in which basic wages can be determined (though incentives can also be given in these two ways)


(i)           Time Wage System

(ii)         Piece Wage System


Time Wage System

Under this system, the wages are paid on the basis of time spent on the job irrespective of the amount of work done.. This is the oldest and the most common system and the wages are based on a certain period of time during the course of work. The unit of time may be an hour, a day, a week, a fortnight or a month and the wage rate will depend upon the period of time. Such wages are paid after the time fixed for work is completed irrespective of the output or the completion of the work. For example, if the unit of measurement of time is “hours”, wage can be determined as under:


Wages = Number of hours worked  * Rate per hour.



Suitability of the Time Wage System

Time wage system is suitable in the following situations:


(a)                When it is difficult to fix the standard time for doing a job.

(b)               When quality of job is of utmost importance

(c)                When the job relates to office or clerical work.

(d)               When collective efforts of a group of persons are necessary for the completion of a job.

(e)                Where mental work is involved, such as policy making and administration.

(f)                Where machines, equipments and tools used for production are delicate and very costly.

(g)               Where production process is complicated and demands higher degree of skills.


Merits of Time Wage System

Time wage system offers the following benefits:


(i)   Simplicity. It is very simple to understand and implement.

(ii) Feeling of Security. It makes the amount to be paid and received certain. So the        employee can plan his expenditures and the employer can make provisions for the payment.

(iii) Equity of wages.  All workers doing similar jobs get wages at the same rate, so sense of  equality prevails.

(iv) Better Quality. It does not compel worker to speed up work as they are assured 

        of the payment for the time they spent. Thus it results in better quality work.

(v)  Less Wastages. As workers are in no hurry to produce more, it leads to proper handling of machines and materials and reduced wastages of materials and damages to machines.

Adaptability. Even if a worker does a variety of jobs, he can be compensated on time wage basis.

Acceptable to Trade Unions. As it cannot lead to exploitation to workers. Workers get same wages irrespective of the number of units produced by them.


Demerits of Time Wage System

(i)     Inefficiency. As there is no a link between productivity and wages.

(ii)         Lack of motivation. To employees who work more as all get the same amount  of  wages irrespective of their contribution.

(iii)  Strict supervision. Strict supervision is required if high productivity is to be  ensured.


Piece Wage System

This system is based on the productivity or output of workers. A predetermined rate is paid for each completed unit of output irrespective of the time taken. Thus under this system,


Wages =  Number of units produced *  Rate per unit


It is also known as straight piece rate systems as the rate per unit remains the same irrespective of the number of units produced.

Piece wage system is suitable in the following situations:


(a)    When method of production are standardized and the job is of  repetitive nature.

(b)    When productivity of the worker is to be increased.

(c)    When the job involves more physical work than the mental work.

(d)   Where output can be measured and quality control system  exist to discourage low quality production.

(e)    Where work does not require personal skills of higher order.


Merits of Piece Wage System

i)Provides incentives to workers to produce more.

ii)Ensures fairness by correlating wages and productivity.

iii)Helps in Personnel decisions like transferring, training, and/or laying off employees.

iv)Lesser supervision as workers know if they produce more, they will get higher wages.



Demerits of Piece Wage System

(i)         Quality gets ignored as workers try to produce more. As a result, thorough inspection and quality control become essential.

(ii)       Speeding up may cause injury to workers health, increased wastages of raw materials, and increased damages to machines.

(iii)     Wage insecurity among workers increases.

(iv)     Strained Industrial Relations results if the output is low due to some fault of management.

(v)       Fixing Accurate Rate is quite difficult. Lower rate may result in resentment on the part of the workers. Higher rate may cause heavy cost burden on the employer.



The piece wage system guarantees reward efficiency  on the one hand, time wage system guarantees minimum wages ,not rewards efficiency on the other .So a system is often should be so devised that guarantees minimum wage (time wage) and rewards efficiency (piece rate).


Dearness Allowance

Dearness allowance also known as cost of living adjustments was used for the first time after World War I to enable the workers to meet the steep rise in prices of essential commodities such as food stuffs. Also called as Cost of Living Allowance (in section 3 of minimum wages Act), the special allowance thus paid aimed at neutralizing the increasing cost of living due to inflation and thus protect the real wages of the wage earners.


Usually, the Consumer Price Index (CPI) is used to link DA with the cost of living . However, there prevail varying practices with respect to the fixation of DA across industries, regions, sectors, and governmental and private undertakings. National Commission on Labor (1969) reports, “ In some cases it was linked to the Working Class Consumer Price Index… in others it was not. In some cases it was at flat rate and was applicable in some cases to all employees irrespective of their wages whereas in some other cases; it varied according to wage or salary slabs. A graded percentage, linked to wage or salaries, was also prevalent”. In view of this divergence, the DA issue has been usually referred to tribunals and courts for adjudication.


The escalating system of DA linked to movement of the CPI numbers provides more immediate relief to the workers from the increasing rate of inflation. This system has a built in mechanism to ascertain the points of neutralization in terms of fluctuations in the CPI which is related to the cost of basic necessities of life.

The correlation between the increase in the number of points of the CPI to the magnitude of money to be paid must be ascertained to settle the DA problem.


There are divergent suggestions with respect to the extent of neutralization. The NCL had recommended that 95 percent neutralization should be allowed against rise in cost of living to those drawing a minimum wage in non- scheduled employments. There have also been suggestions to provide maximum (i.e., 100 per cent) neutralization at lower levels with a gradual tapering of as wage or salary scale improves.


There has been a great deal of controversy between point to point adjustment and slab-to slab adjustment. While DA can be equated to slab of pay in a way that the lower slabs receive a higher weightage, the size of the slab itself whether it should be five points or 10 points is further a controversial issue. The Dearness Allowance Commission (1967), also called the Gajendragadbar Commission, felt that the slab system would work better than point-to-point adjustment. The NCL also recommended linkage of DA to a five-point slab.


Another controversy with respect to DA relates to its relationship with capacity to pay. The NCL felt that the capacity to pay was not a relevant consideration for payment of DA at the minimum level. At other levels or where DA is fixed on the basis of collective bargaining or other methods, the “capacity to pay” may be a relevant consideration.


Last but not the least, there was a controversy whether DA has to be fully or partly merged with the basic wage. However, this controversy has been answered by the Fifth Central Pay Commission in para 105.11 of their report. The Commission recommended that ‘DA should be converted into Dearness pay each time the CPI increases by 50% over the base index used by the last pay commission’. That recommendation of the Fifth CPC was considered and approved by the President. Its implementation came into affect since 1st April, 2004. As per that order DA equal to 50% of the then existing pay was merged with the basic pay. The order further said that such amount should be shown separately as Dearness Pay (DP) which would be counted for purposes like payment of allowances, transfer grant, retirement benefits, contribution to GPF, License Fee, monthly contribution for CGHS, various advances etc. (O.M.,dated 1.3.04 ). The order further clarified that the entitlements for LIC, TA/DA while on tour and transfer and government accommodation shall, however, continue to be governed on the basis of the basic pay alone without taking into account Dearness Pay.


In the case of pensioners the order clarified that “for existing pensioners, Dearness Relief equal to 50% of the present pension will w.e.f. 1.4.2004 be merged with pension and shown distinctly as Dearness Pension”.


The order further clarified that Dearness Allowance/Dearness Relief converted into Dearness Pension respectively would be deduced from the existing rate of Dearness Allowance/Dearness Relief. As the rate of Dearness Allowance was 61% of the base pay w.e.f. 1st January, 2004; 50% of it converted into Dearness Pay meant Dearness Allowance from 1.4.2004 become payable at the rate of 11% (Ministry of Finance, 1st March, 2004).


The following methods are used to calculate  dearness allowance:


1) Flat Rate

According to this method, DA is paid at a flat rate to all workers irrespective of their wage levels and regardless of changes in consumer price index. This method was used in jute, cotton and engineering industries in west Bengal in the early days of adjudication.


2.Graduated Scale

Under this method , DA increases with each slab of salary. Therefore, DA, as a percentage of basic pay decreases steadily.


3.Index Based D.A

In this method a flat rate per point of index is prescribed so that all workers determine the same amount of DA irrespective of their pay scale.For example, if Rs 1.50 is the rate, Rs 15 will be paid as DA.Whenever the All India Consumer Price Index (AICPP)increases by 10 points.This method is in force in the cotton mills of Bombay and Madras and in many central government undertakings.

4. Da Linked To Index And Pay Scale

Under this method, a higher rate of DA is prescribes, for lower pay scales and a lower rate for higher pay scales. This method is used to pay DA to employees in Government offices and in many central public sector undertakings.

In addition to DA ,several types of allowances are in use. These are given in the table:


Main Types Of Allowances Paid To Employees


1.House Rent Allowance (HRA)

2.City Compensatory Allowance (CCA)

3.Conveyance / Car Allowance

4.Bank Allowance

5.Medical Allowance

6.Education Allowance

7.Tiffin Allowance



Bonus  is defined as “an allowance in addition to what is usual , current or stipulated; sum given or paid beyond what is legally required to be paid to the recipient; something given in addition to what is ordinarily received by or strictly due to the recipient”. Thus, bonus may be a boon, a gift or a gratuitous allowance described as an ex-gratia payment. The word ‘bonus’ is also sometimes used to denote an incentive payment to the workers aimed at enhancing their efficiency and loyalty to their organization.


In India, the bonus component of the industrial wage structure, though a quite old one, has now assumed a statutory status with the enactment of the Payment of Bonus Act, 1965. The Act is applicable to factories and other establishments employing 20 or more employees. Under the Act, a minimum statutory bonus at the rate of 8.33 per cent of the wages earned by an employee is guaranteed, irrespective of the profit or loss by the firms during an accounting year.


It has been suggested that one of the most effective way of enhancing organization performance is to link bonus with productivity. But productivity linked bonus is often resisted by the workers on the ground that the present level of wages is low and needs to be raised to the fair wage level. However, the Central Government has incorporated productivity linked bonus in its wage policy as far as public sector is concerned. Productivity linked bonus is applicable in railways, posts and telegraphs and several other public enterprises.


Fringe Benefits Or Prequisites

The idea of Welfare State has given birth to the concept of fringe benefits associated with a job. In a wider sense, fringe benefits include all expenditure by the employer on labor other than basic wage and in a narrow sense; it includes those benefits which the employee can convert into cash. These have been variously expressed as ‘wage supplements’ ‘sub wages’, or ‘social charges’:


The compensation that the workers receive for their contribution in the industrial activity cannot be measured by the mere estimation of wages paid to them. Certain supplementary benefits and services known as “fringe benefits” are also provided to them. Some examples of fringe benefits are:


(i)           Medical and maternity benefits.

(ii)         Educational and recreational facilities.

(iii)       Payments for time not worked such as vacations, holidays, sick leave, maternity leave, travel allowance, etc.

(iv)       Pension, provident fund, life insurance, gratuity.

(v)         Housing benefits

(vi)       Compensatory city allowance.

 Several new fringe benefits or fringes have been initiated by industrial giants particularly for the executives. Such benefits are referred to as ‘Perquisites’ or ‘perks’. Perks include chauffeur driven car, corporate aircraft, and company apartment, home security, club membership, paternity leave, self defense training, company credit card, etc.





Incentive wage systems are considered to be incentive management systems. Traditionally, incentive wage plans have been thought of as payment plans based on the output of the employee, generally considered to be a factory employee. But incentive wage systems of today go far beyond the simple single objective of payment for output. Now-a-days incentive wage systems are so designed that the employee feels satisfied intrinsically as well as extrinsically.


Incentive wages relate earnings to productivity and may use premiums, bonuses or a variety of rates to compensate for superior performance (Dale Yoder, 1974). Thus, the incentive plans offer an attraction of extra payment for efficiency or more production. They are popular all over the world and are known by different names like variable pay, pay for performance, contingent pay, merit pay etc.


Objectives Of Wage Incentive Plans

The objectives of incentive wage systems have been made clear by McGregor(1960) when he defines them as “a formal method providing an opportunity for every member of the organization to contribute his brain and ingenuity as well as his physical efforts to the improvement of organizational effectiveness… It is the means by which rich opportunities are provided to every member of the organization to satisfy his higher level needs through efforts directed towards the objectives of the enterprise.”


Benefits Of Incentive Compensation

Incentive compensation, also called ‘payment by result’, is essentially a managerial device for increasing workers’ productivity. Simultaneously, it is a method of sharing gains in productivity with workers by rewarding them financially for their increased productivity. The advantage of  incentive plans are as under:


(i)                 Alignment between Organization’s Objectives and Employees’ Objectives. The employee tries to increase productivity which is also the aim of the organization.


(ii)               Wage Get Related to Output. Differences in employees’ ability, motivation and output are automatically recognized and rewarded accordingly. This understanding by the employees tends to reduce the friction, jealousy, and resentment in the work group.


(iii)             Unit Labor Costs are reduced. Incentive wage plans result in reduction of per unit labor, both direct and indirect, costs as the efficiency is emphasized on.


(iv)             Need for Less Supervision. Employees need lesser supervision as the employees are disciplined and responsible.


(v)               Good Human Relations. There are good human relations in the firm as the workers are satisfied with higher earnings and management with increased productivity.


Limitations Of Incentives Compensation

Except employee’s attitudes, all other limitations of incentive wage systems centre around situations involving the firm. These limitations are briefly discussed below:


(i)                 Lack of Receptive Attitude on the Part of the Management and the Employees: The proper functioning of the system required existence of mutual trust between labors and management. If workers think that high, unattainable targets have been fixed, and/or management thinks that workers are not putting in their best efforts, the system is going to fail.


(ii)               Lack of proper Management Practices: For incentives wages to be equitable, working condition must be as nearly standard, uniform, and dependable as possible. They should be available to all employees. Management must make sure that enough work will be provided to workers so that maximum wages can be earned by them. As most of these sound management practices are absent, wage incentive systems also become less beneficial.


(iii)             Leads to Inequities in the Wage Structure: All the jobs in an organization can be divided into two types manual jobs and physical jobs. Performance of physical jobs is not that easily identifiable so they are paid according to straight time basis. Many times, incentive pay systems result in situations where hardworking but low skilled employees working on incentive pay jobs earn more than the more skilled employees working on jobs for which payment is made according to straight time wages. These pay inequities can destroy social relationships, build resentment and animosity among employees.


Types Of Incentive Plans

Following Exhibit shows an overall view of systems of wage payment and incentive plans.


                       Systems of Wage Payment and Incentive


A good incentive plan should encourage the workers to work hard and produce more than the standard production set for them. There are many wage incentive plans which reward the workers for their better performance. The standard output is determined on the basis of time and motion studies by the specialists and the rates of wages are fixed for different jobs on the basis of job evaluation. Broadly speaking, the various wage incentive plans can classified into two groups:


(a) Individual incentive Plans,

(b) Group Incentive Plans as shown in the following table:


Individual Incentive Plans

Under this, earnings are directly related to the performance of the individual employee. Individual incentives may be based on time or output. In time based plans, a standard time is determined and incentive is paid if any employee completes the job in less than standard time. In output based plans, a standard of output is determined and an employee producing more than standard output is given incentive. Output linked incentives can lead to:


(i)                 earnings varying in proportion to output; or;

(ii)               earnings varying less proportionately to output; or;

(iii)             earnings varying more proportionately to output; or;

(iv)             earnings varying in different proportions at different levels of output.


Different incentive plans that reward efficiency are discussed here under.

The Straight Piece Work System. Worker is paid at a specified rate per unit of output.


The standard Hour System. A standard time is worked out to complete a job and in case an individual completes the job before time, he earns wages for the time saved.


Halsey Premium Plan

This incentive plan was devised by P.A. Halsey This system is a simple combination of time-speed basis of payment. Under this plan, a minimum time wage is guaranteed to every worker. A standard time is fixed for the completion of a job. If a worker performs his job in less than the standard time, he is rewarded. But there is no penalty for performing the job in more than the standard time fixed. The slow worker is paid the time wages and the efficient worker is paid some bonus in addition to the time wages. The bonus is in proportion to the wage which he could have earned during the time saved. The working of Halsey Premium Plan is explained with the help of the following illustration:


            Standard time (S)                  =                       10 hours                                                                

            Rate (R)                                =                        Rs. 4 per hour                                                      

            Time (T)                                 =           6 hours                                                                 

            Rate of Bonus (P)                 =            50%of time saved                                                

            Total Wages                          =            T X R + (S-T) X P X R

                                                          =            6 X 4 + (10-6) X ½ X 4

                                                          =            Rs. 32.00


In the above illustration, the worker gets Rs. 8 extra than he would have earned under the time wage system.


The merits of Halsey plan are as under:

1.      Halsey premium plan is very simple to understand. The amount of wages can be calculated very easily.

2.      Both the workers and the employer get the benefit of time saved.

3.      Halsey plan gives due importance to the efficient workers by paying them bonus for the time saved by them in doing a particular job.

4.      Minimum wage is assured to each worker. Every worker gets wages for the time he has actually devoted at the fixed rate irrespective of his output.


Halsey plan suffers from the following limitations:

1.      workers may not like the sharing of the benefit of their efficiency with the employers. Under this plan, the worker get wages for 50% of the time saved only.

2.      There may be deterioration in the quality of work because the worker may just rush through not caring for the quality of the product or the amount of waste of raw materials.

3.      The standard time may not have been properly fixed.


Rowan Bonus Plan

            Rowan Plan is a modification of Halsey Plan. It guarantees the minimum time wages and does not penalize the slow worker. A standard time as fixed for the completion of a job and the bonus is paid on the basis of time saved. Bonus is a proportion of the wages earned by the worker for the time taken by him and the proportion is the ratio of time saved to standard time. It implies that as the time saved increases, time taken will be reduced and as such the bonus would increase at a diminishing rate. This will check over speeding and overcome a major drawback of Halsey Plan. The working of this plan is explained with the help of the following illustration :


                        Standard time(S)         =          10 hours

                        Time taken (T) =          6 hours

                        Rate ( R)                     =          Rs. 4 per hour



            Total wages                 =          T X R X [ T X R X Time saved__    ]                           

                                                                                            Standard time

                                                =          6 X 4 + ( 6 X 4 X 4/10)

                                                =          Rs. 33.60



The advantages of Rowan plan are as follows:


1.      As under Halsey plan, the minimum wages are assured in Rowan plan also.

2.      Employer are also benefited when the efficient workers get bonus.

3.      The efficient workers get bonus at a diminishing rate if they save more than 50 percent of the standard time. This checks them to overstrain themselves and compels them to maintain quality.


The limitations of Rowan plan are as under :


1.      Where time saved is more than 50 percent of standard time, employees get bonus at a diminishing rate. Thus, a worker is discouraged to achieve saving in time more than 50 percent of the standard time.

2.      Calculation of wages is difficult and the workers may not be able to understand this system .

3.      The workers do not like sharing of the benefits of time saved by them.


Emerson Efficiency Plan

            Under this plan, a minimum time wage is guaranteed to the workers. Conditions of work are standardized and standard output is fixed which is to be completed within a specified period of time .This plan is similar to Gantt’s Task and Bonus Plan and is an improvement over the Taylor’s Differential Piece Rate Plan.


Under this plan, a worker is entitled to bonus if he is able to achieve 66.67 percent or more of the standard. If a worker’s output is less than 66.67 percent of the standard output, he does not get any bonus, but he gets the minimum time wages. The workers whose output exceeds 66.67 percent of the standard get incentives at a differential piece rate, a small bonus is paid for increases in efficiency from 66.67 percent upwards, until at 80 percent efficiency the bonus payable is 4 percent, at 90 percent efficiency, it is 10 percent and at 100 percent, 1 percent bonus is given for every additional 1 percent efficiency. For instance, if the standard output is 25 units and a worker produces 18 units, he is 90 percent efficient. He will get wages for the day plus 10 percent bonus. But if he produces 25 units, his efficiency will be 125 percent and his remuneration will be day’s  wages plus 45 percent bonus (20per cent of 100 per cent and 25 per cent for efficiency above 100 percent.).


The chief advantage of this plan to the workers is that their minimum wages for the day are secured. If a worker is unable to produce 66.67 per cent of the standard output, he is not deprived of his daily wage. Secondly, there is  enough scope for  earning more and more for the efficient workers. The rate of bonus increases at an increasing rate. This plan is very beneficial to the extraordinary workers. This plan is criticized by some people because the bonus rates are not uniform. Below 100 per cent efficiency 20 per cent bonus is to be distributed among the additional 33.33 efficiency. But after 100 per cent efficiency, bonus rate increases exactly  in proportion to increase in efficiency.


Bedeaux Point Plan

            Under this plan, the minute is the time unit described as the standard minute and accounted as Bedeaux point B. In determining the Bs, the time of operation and the  time of rest taken into account. Thus, B may be defined as a fraction of a minute of effort plus a fraction of compensation rest always aggregating unity. The standard time for each job is fixed after undertaking time and motion study and expressed in terms of Bs. The standard time for a job is the number of Bs allowed to complete it. Thus, if the standard time required for a job is five hours, it will be expressed as 300 Bs.

            The workers who are not able to or are just able to complete the work within standard time are paid at the normal time rate. Those who are able to complete their work earlier are paid bonus equal to the wages for time saved as indicated by the excess of B point over the actual time taken.

            Generally, the bonus paid to the worker is 75% of the wages for time saved. The remaining 25% goes to the foreman. The working of the Bedeaux plan is explained with the help of the following illustration:

            Standard time (S)        =          300 Bs (5 hours)

            Actual time (T)            =          240 Bs (4hours)

            Rate of wages (R )      =          Rs. 6 per hour

            60 Bs                           =          1 hour


            Value of time saved    =          300-240 x 6


                                                =          Rs.6.00

            Total wages (W)          =          S x R + 75% of value of time saved

                                                =          5 x 6 + 75 x 6


                                                =          Rs. 34.50


The merits of Bedeaux plan are as under:


1.      In industrial units where conditions are  standardized and where facilities exists for measuring the task and the output with a fair degree of accuracy through time and method studies Bedeaux plan can be useful as a bases for scientific production control particularly for purpose of estimating, planning and controlling machine capacities and for determining standard production costs.

2.      The Bedeaux premium plan is mostly used in those units where the performance by individuals machines or workers has to be constantly watched and kept under control by comparing the number of B’s actually produced with the number of B’s standard.

3.      Minimum wages are guaranteed to the workers, even if the are not able to complete their job within the standard time.

4.      Since 25% of the wages for time saved goes to the foreman, he is motivated to get higher productivity from the workers.


The demerits of this plan are as under:


1.   Much clerical work is   involved in maintaining record and in preparing wages accounts etc. So in this respect, Bedeaux plan is costlier than many other incentive plans .

2.      Though the earnings of a worker increase as his efficiency rises, the rate of increment in the earning is less than in a straight piece rate plan.

3.      Some employers considers that this plan is  not easily intelligible to many workers.

4.      Like all other incentive plan, the success of this plan depends on the reaction of the workers to the plan. Therefore, before adoption this plan may need a certain amount of modification.


Taylor’s Differential Piece Rate System 


            Tailor’s plan is based on piece rate method and does not guarantee a minimum time wage. Under this plan, standard output per hour or per day of worker is fixed. There are two piece rates ; one for those who do not attain the standards fixed and the other for those who attain or exceed the standard. In the second case, the piece rate is higher. This system provides an incentive to the efficient worker and at the same time penalises the inefficient ones. Let us suppose that the standard output per worker has been fixed at 8 units per day and the rate per unit for this standard output or above is Rs.6 per unit. The worker producing 7 units will get Rs.37.50 and the one producing 8 units will get Rs.48. Thus, the first worker is penalised at the rate of Rs.0.50 per unit if he does not achieve the target output.


            The benefits of Taylor’s plan are as follows:


1.      The system not only provides the incentive to efficient workers but also at the same time penalises the inefficient ones. An efficient worker gets full piece rate per unit of production and an inefficient worker (i.e., whose output is less than standard output) is paid at a lower rate per unit.

2.      There is increase in production because every worker tries to increase his productivity in order to get higher piece rate.

3.      It is simple and easy to understand by the workers.


The drawbacks of Taylor’s plan are as follows:


1.      Minimum wages are not assured to the workers. So it is vehemently opposed by the Workers.

2.      The existence of lower piece rate in Taylor’s plan does not act as incentive force, but is

a sort of punishment to those who produce below the standard output.

3.      This plan fails to attract workers who are accustomed to receiving time rate wages or piece rate wages back by guarantied wage.


On the whole, the scheme is very harsh for those whose productivity is less than the standard laid down. This plan may bring about disunity among the workers because it divides them into two groups, viz., efficient and inefficient, the inefficient workers may feel jealous of efficient ones as the letter get wages at higher rates.


Merrick’s Multiple Piece Rate Plan

            M. Dwight V. Merrick realized that it is unreasonable and unrealistic to classify all workers into two categories only, viz., workers of high efficiency and those who lower efficiency because there are various degrees of efficiency and there are many workers who actually work in their effort to produce more and for their own progress. These persons deserve to be encouraged. Merrick, therefore, introduced three piece rates and made the lowest piece rate equal to the ordinary piece rate which became the ‘Basic Piece Rate’. The rates introduced by Merrick are usually as follow:


________________________________________________________________________           Output ( % of task)                                                    Piece Rate wage

            1. less than 83%                                                       Basic Piece Rate

            2. From 83% to 100%                                              110 % of Basic Piece Rate

            3. Over 100%                                                           120% of Basic Piece Rate 



            To the workers who are potentially high producer, Merrick plan is good incentive system. It seems reasonable to pay production bonus at 110% of the basic piece rate to the workers when they reach 83% task because many workers should be able to reach 83 % task with a little extra effort. When they do so, they will be encouraged to reach the 100% task

            By introducing the basic piece rate for low output, Merrick removed the punitive wage rate originated by Taylor. In fact, Merrick’s plan is only a modified form of Taylor’s plan. Like Taylor’s plan, Merrick’s plan also does not guarantee minimum wages for the workers. Another drawback of the system is the existence of a wide gap in slabs. As is obvious from the plan, all workers producing 1% to 82% of the standard output are considered as sub-standard workers and are paid the same piece rate.


Gantt’s Task and Bonus Wage Plan-

It was developed by Henry L. Gantt, a close associate of F.W. Taylor. Under it, standard time for every task is fixed through time and motion study. Minimum time wage is guaranteed to all workers. A worker who fails to complete the task within the standard time receives wages for actual time spent at the specified rate. Workers who achieve or exceed the standard get extra bonus varying between 20% to 50% of the hourly rate for the time allowed for the task. Suppose, the standard time fixed for the job 8 hours and the time rate is Rs 10 per hour and the rate of bonus is 25 per cent. A worker who completes the task in 10 hours he will be paid Rs. 80( 8 * Rs. 10) only. On the other hand, the worker who completes the task in 6 hours will receive Rs. 100 (Rs. 80 + 25 % of Rs. 80). Therefore, the actual rate comes out to be Rs.100 / 6 =Rs. 16.67 per hour.


Under this method, minimum wage is assured to all workers, wages increases progressively with increase in efficiency, and at the same time inefficient workers are not penalized severally.



·         Minimum wages to every worker.

·         Incentive for the efficient workers.

·         Motivates the employees to increase their efficiency.

Group Incentive Plans

Under these plans, bonus is calculated for a group of workers and the total amount is distributed among the group members on one of the following bases:


·         If the group members possess similar skills and abilities, group bonus may be distributed among them on an equal basis; or

·         If the group members have different basic rates of wages, the bonus may be distributed in proportion to the basic rates as under priestman’s output bonus plan; or

·         Group members may be paid bonus on a specified percentage basis.


Such percentage may be determined on the basis of skill, experience and basis rate of pay of each individual worker.



These methods are suitable in the following situations:


·         Where it is not possible to measure the performance of each individual employee:

·         Where the workers constituting a group possess similar skills, abilities, experience: and

·         Where the finished product is the result of collective efforts of group members.


Priestman’s Plan


Under this plan productivity of the group as a whole is the starting point. Standard output is laid down for the group. However, a minimum wage is assured to each group member. The group members become entitled to the bonus if their output exceeds the standard. The bonus is paid in proportion to the excess of actual output over the standard output. For example, if the actual production is 20 per cent higher than the standard output, the wages of each group member will rise by 20 per cent. The additional wage of each member is his bonus.

The main benefit of Priestman’s Plan is that it brings about a team spirit among the group members. This scheme can be successful only if the number of workers in the group is small. However, as no distinction is made between efficient and inefficient workers, no regard is paid to efficiency of the individual.


Gain Sharing Plan

Towne devised this plan. Under this plan, half of the savings in labor cost as a result of output in excess of the standard is distributed among workers and foreman and bonus is paid half yearly. The percentage of the foreman is fixed in advance.


Goal Sharing Plan or Work Team’s Results


It rewards employees for meeting specific goals in terms of quality, service and job performance e.g., an employee may be paid Rs. 20 extra for each one per cent improvement over baseline (minimum performance). Suppose the baseline is 90% and the group achieves 93% performance, this would mean each group member would receive Rs. 60 bonus based on group performance.






An organizational incentive system compensates all employee in the organization based on how well the organization as a whole performs during the year. The purpose of these plans is to produce better results by rewarding co-operation throughout the organization. The conflicts between different departments, levels, and individuals can be reduced by rewarding organization wide productivity. To be effective, an organizational incentive programme should include every one in the organization.

At times, no distinction is made between group incentive plans and organizational incentive plans as an organization is a bigger group.

Some of the organizational incentive plans are (they can be used as group incentive plans): 

·         Scanlon Plan

·         Profit Sharing

·         Employee Stock Option Plans

·         Employee Stock Ownership Plans

·         Co-partnership

·         Bonus


Scanlon Plan

It is a plant-wide scheme designed to involve workers in making suggestions for reducing the cost of operations and improving work methods by showing the gains of increased productivity. It has two basic features: 

(1)   Financial incentives are used to increase productivity and to reduce costs.

(2)   Department/Plant screening committees are set up to evaluate employee suggestions. 

Generally all the employees (workers, supervisors and managers) participate by making suggestions for improving productivity and cutting costs. These suggestions are screened by various screening committees. If a suggestion is implemented successfully, all employees share the gains in productivity. 

·         Involves workers in making suggestions for reducing cost of operation, improving working methods and sharing in the gains of increased productivity.

·         Assumes efficiency requires company wise cooperation.

·         Employees participate in cost cutting suggestions and a committee evaluates these suggestions.

·         Employees share 75% of the savings if a suggestion is implemented successfully.

·         Encourages a sense of partnership.


The conditions needed for the success of the plan are: 

·     The number of workers should be small preferably less than 1000.

·     Product lines and costs are stable,

·     Healthy industrial relations and good supervision,

·     Strong commitment to the plan on the part of management.


Profit Sharing 

It is a system to distribute a portion of the profits of the organization to employees. The primary objectives of any profit sharing plan include the following:


·         Improve productivity.

·         Recruit or retain employees.

·         Improve product/service quality.

·         Improve employee morale. 

Following are the features of the profit sharing:


  • An incentive based compensation program to award employees a percentage of the company's profits.
  •  The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees.
  •  The amount distributed to each employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits.
  • This is done on an annual basis.


Typically, the percentage of the profits distributed to employees is agreed on by the end of the year before distribution. In some profit-sharing plans, employees receive portion of the profits at the end of the year, in others, the profit are deferred, placed in a fund and made available to employees on retirement.


  • Brings groups of employees to work together toward a common goal.
  •  Helps employees focus on profitability.
  •  The costs of implementing the plan rise and fall with the company's revenues.
  •  Enhances commitment to organizational goals. 


  • The pay for each employee moves up or down together (no individual differences for merit or performance).
  •  Focuses only on the goal of profitability (which may be at the expense of quality).
  •  For smaller companies, these plans may result in drastic swings in earnings for employees, which the employees may find difficult to manage their personal finances.

 Following Exhibit shows how profit sharing plans can be set up.

 Profit Sharing Plan Framework




Funding Choices



Allocation Choices

1. Fixed percentage of profits.

1. Equally to all employees.


2. Flexible percentage based on sales or return on assets.

2. Based on employee earnings.



3. Units profits

3. Based on years of service.


4. Some other formula.

4. Based on contribution and performance.



 Profit sharing plans link employee’s pay with organizational performance. Because of this feature, in recent years unions have started supporting these plans. However when used throughout an organization, including lower echelon workers, these plans can have some drawbacks. Often the level of profits is determined by accounting decisions, marketing efforts, competition, and elements of executive compensation. Therefore, to be credible, management must be willing to disclose sufficient financial and profit information to alleviate the skepticism of employees, particularly if profit levels are reduced from previous years. Second, profits may vary a great deal from year to year, resulting in windfalls and losses beyond the employee’s control. Third, payoffs far removed from employees’ efforts may fail to strongly link higher rewards with better performance.

 Profit Sharing in India

The Government of  India appointed in 1948 a committee to study the problem of profit sharing in industry. The committee suggested the introduction of profit-sharing as an incentive to productivity- as a method of ensuring industrial peace and as a step towards labor participation in management. The committee suggested that 50% of the profits be shared among workers. Both employers and trade unions rejected the scheme. Trade unions prefer the minimum bonus to profit sharing. The Payment of Bonus Act, 1965 provides for payment of minimum bonus despite loss in an undertaking. This system of compulsory bonus is unscientific. For achieving higher productivity, productivity linked bonus has been introduced by many industrial enterprises both in the public and private sectors.

 Employee Stock Option Plan / Scheme (Esop / Esos)

It provides a mechanism through which certain eligible employees may purchase the stock of the company at a reduced rate (Edwin B. Flippo, 1989). Eligibility is usually determined by wage level or length of service or both. There are various ways in which ESOP is implemented. 

The stock is offered at the market rate.

The stock is offered at a price which is 10 to 20 percent less than the market price.

The employee is given the option to purchase a certain amount of stock at stated price in future within a specified period of time. 

Stock options, once the exclusive domain of executive compensation, are now being used for operatives also in some organizations, though its use for the operative employees is still limited. Another feature of ESOP is that employees are authorized to pay for stock in installments. The employee authorizes a payroll deduction every month. 

Under ESOP, employees stand to gain if the stock’s market price exceeds the exercise price. On the other hand, if market price falls below the market price, the option becomes worth less. 

The salient features of ESOP are: 

(i)    It offers an option to the employee to purchase a certain amount of shares or stock of company.

(ii)  It is intended to procure and hold talented professional employees in the company.

(iii)  It creates mutuality of interests between the employees and the employer.

(iv)  Participation is voluntary in nature.

Benefits of ESOP

ESOP has many benefits: 

(i)   One of them being creation of feeling among all employees that they own their organization.

(ii)   It also reduces labor turnover.

(iii)  It boosts the morale of the employee.

(iv)  As employees are allowed to pay in installments. It reduces their financial burden.

(v)   The employees get an opportunity to attend the meetings of the shareholders and have detailed information about the progress and future plan of the company.

(vi)   It constitutes a source of extra income to the employees.

(vii)   Tax treatment of earnings earmarked for use in ESOP is more favourable as compared to others terms of earnings and their distribution.

 Limitations of ESOP

 Though voluntary in nature, some employees may feel they are being forced to join.

(i)     Their earnings at present and in future become subject to a greater risk (that of performance of their employee)

(ii)    It is being used as a management tool to fend off unfriendly takeover attempts. Holders of employee owned stock often align with management to turn down bids that would benefit outside stock holders but would also replace existing inefficient management and restructure operations.

(iii) There is no direct relationship between efforts and reward. 

 Therefore, ESOPs suffer from many disadvantages and are effective only during periods of prosperity. Still, they are continuously growing in popularity. A more extensive approach of employee stock option plans result in employees actually owning all or significant parts of their employers. That is also known as Employee stock ownership plans(ESOPs) 

Mechanism of Establishing an ESOP

An organization establishes an ESOP by using its stock as collateral to borrow capital from a financial institution. Once the loan repayment begins through the use of company profits ,the lender releases a certain amount of stock, which the company allocates to an Employee Stock Ownership Trust(ESOT). The company then assigns shares or stock kept in the trust to individual employees based on length of service and pay level. On retirement, death, or separation from the organization, employees or their beneficiaries can sell the stock back to the trust or on the open market, if the stock is publicly traded. 

Appraisal of Employee Stock Option Plan

One of the commonly cited objectives of ESOP is to promote a mutuality of interests. The employee is encouraged to consider the viewpoint of the company as shareholder. He is also led to read company reports received as shareholder which would probably be ignored as an employee. Other possible values are the promotion of thrift and security, the creation of an added incentive to work efficiently. 

Employee stock option plan may not be preferred due to the following reasons:

(i)  The employee is asked to invest savings as well as earnings in the company.

Most of the workers have hardly any surplus to invest in shares.

(i)  There is no guarantee about increase in the market value of shares in future.

(iii) As long as the share prices go up, the morale of employees is higher. When share prices go down, the employees are likely to blame the company. This is what happened in the 1930s in the U.S.A, when the share prices crashed due to economic depression. Thus, such plans are effective during the periods of prosperity only.

(iv) Employee participation in company meetings, management and control, sometimes, may prove more an interference rather than an aid to cooperation.

(iv) It is a very poor incentive because of indirect relationship between effort and reward of employees and remoteness and uncertainty of reward.


 Employees Stock Option Scheme in India

The Securities and Exchange Board of India (SEBI) guidelines for Disclosure and Investor Protection explain that ESOS is a voluntary scheme on the part of the company to encourage employee’s participation in the company. A suitable percentage of reservation can be made by the issue, for the employees of his company. However, under the existing guidelines, 5% of the new issue may be reserved for the ESOS subject in a maximum limit of 200 shares per employee who agree to participate to the ESOS. Further, the membership of the ESOS should be restricted only to the permanent employees of the company.

 Profit-Sharing and Co-Partnership

Profit-sharing implies payment of specified share in the annual profits of the firm to its workers. Thus, profit sharing is an attractive supplement of a wage system. Under profit-sharing, the employer undertakes to pay his employees a share in the annual net profits of the enterprise. This share is in addition to regular wages and is based neither on time nor on output. Profit-sharing is an agreement entered into between the employee rand the employees under which the employer agrees to pay to the employees the share in the profit fixed in advance.

 Profit-sharing is different from wage incentives which are directly connected with the output of workers. But profit-sharing is related to the profit of the enterprise which depends on productivity and several other factors. It is amajor departure from the traditional concept of profit where it is treated as the exclusive monopoly of the employer. The workers are treated as co-partners in the productive process and profit is treated as the outcome of the joint efforts of employer and workers. Naturally, the whole profit should not be pocketed by the employer alone, but should be shared between the employer and the employees.

 The Concept Of Profit-Sharing

According to I.L.O., "Profit-sharing is a method of industrial remuneration under which an employer undertakes to pay to his employees, a share in the  net profits of the enterprise in addition to their regular wages" Profit-sharing arrangement enhances social justice, strengthens the common interest of capital and labor and increases the productive efficiency of the workers. It would be highly successful if both the parties, viz., labor and employers, take each other into mutual confidence.

 The concept of profit-sharing is now accepted in the industrial world and also at the government level. In Western countries, profit-sharing is very popular among the industrial workers. However, this concept is not popular in India. We have a system of bonus payment which is compulsory even when there is no profit to a company. In India, workers and trade unions are interested in bonus payment and they are not interested in profit-sharing agreement. This is because bonus payment is compulsory even when the workers are not co-operative and there is no profit to the industrial unit. However, profit-sharing is possible only when workers give full co-operation to raise the profits over and above a particular limit. The system of bonus payment existing inIndia is defective and unscientific as compared to profit-sharing which is fair to workers and employers.

 The objectives of profit-sharing may be summarized as under:

(i)  To supplement the earnings of the workers.

(ii) To enable the workers to participate in the prosperity of their firm because the higher profits are among other things caused by sincere co-operation of the workers.

(iii) To create a sense of partnership among the workers and the management so that the interests of both the classes are reconciled.

 Features of Profit-Sharing 

The salient features of profit-sharing are as under:

(i)   Profit-sharing denotes the extra payment given to workers in addition to usual Wages and allowances,

(ii)  It is paid out of the net profits and as per the agreement between the two parties, i.e., employers and employees.

(iii) The sharing of profits in a particular proportion is decided by an agreement between the employers and the employees.

(iv) The profit-sharing agreement is possible at the unit level or even at the industry level. It is  also possible to have such agreement on regional basis or industry-cum-region basis.

 (v) The payment to workers under profit-sharing is generally made on cash basis, but it is also possible to make such payment in shares or transfer of money to provident       

fund account of the employees.

(vi) Workers share the profits only. They do not contribute to the losses incurred by the  firm. 

Rationale Of Profit Sharing

Profit-sharing is a controversial issue in wages and incentives administration. It is contended that labor being the life factor in production is entitled to a legitimate share in the surplus earned by the employer. Because it is labor’s skill, effort, steadfastness and loyalty that bring profits to the firm, employees assert their right to have a share in the surplus profits. On the ground of equity, they argue that profit-sharing is nothing but deferred wage; share in the profit would bridge the gap between the living or fair wage and the actual wage.Wages as a rule are to be based on the firm's ability to pay. But employers often use the profit sharing device to extort their loyalty and reduce the influence of trade unions. It is in general looked upon as a scheme of providing a sort of group incentive to the workers for higher productivity and greater profitability. 

Emphasis on profit-sharing and worker's co-ownership in business was laid during the periods of expanding corporate profits notably in the U.K, U.S , France and other industrially advanced countries. In the U K., as early as in 1891, a profit-sharing scheme was initiated by South Metropolitan Gas Company. Since then several companies have been operating profit-sharing arrangements. In the U.S.A., various plans have been adopted to improve employee-morale and increase productivity. 

Deferred participation in profits by employees has been widely practiced in France ever since 1820's, in many countries including the U.S A employee ownership in share capital of companies where they are employed has come into vogue whereby stipulated share of each worker in profits is converted into his share-holding. In some countries, profits shared are accumulated and paid on employee’s pension or provident funds. 

There are two discernible view-points about the feasibility of profit-sharing.

(1) Participation in surplus profits, and (2) Bonus as a deferred wage. 

These are discussed below: 

1.   Participation in Surplus Profits

It is contended that profits remaining after meeting certain claims and making provisions should be shared between the workers and the Management. Employees skill, efforts, loyalty and sincerity should be regarded as the contributing factors in increasing the profits of the firm. Hence they are entitled to a reasonable share in the aggregate net surplus. Such surplus or profits available for workers would be determined after providing fordepreciation, tax liability etc., and ensuring a reasonable return on share capital and built up reserves. 

The implication of this approach is that just as divident on shares is declared every year, wage dividend should also be offered to the workers every year provided adequate surplus profits are available. If no surplus becomes available, obviously workers will have to be content with only their usual wages. Just as dividend is paid only out of profits, bonus too is to be paid out of the apportionable profits, 

2.   Bonus as a Deferred Wage

A more vocal section of workers contends that if bonus is linked with availability of surplus profits, management will always try to manipulate the finances and show losses or minimum profits so as to avoid payment of bonus to the employees. Hence it is argued that all the workers should be paid a minimum bonus every year irrespective of the profits earned by the firm. 

They regard bonus as the deferred wage and hence a charge on the earnings of the firm. Giving an annual bonus is nothing short of giving additional wages at the end of the year. Bonus is meant to bridge the gap to the possibleextent between the actual wages and the living wages standard. Therefore, a minimum bonus is to be paid by every employer to his employees and it will be sliding upwards as the profits increase. A statutory obligation should be cast on the employers to pay a specified sum of minimum bonus to the employees on the roll of regular cadres. 

It is, however, argued by the employers that the concept of minimum bonus will not act as a stimulant for higher productivity. Firms running into losses due to unforeseen uncontrollable factors would find statutory minimum bonus a burdensome liability. 

Benefits Of Profit-Sharing 

The benefits of profit-sharing are listed below:

(i)  There is industrial peace in the enterprise. The workers are satisfied as they get an additional amount over and above their wages. A healthy atmosphere prevails in the enterprise. There is cooperation between labor and management as the objectives of both are common, i.e., to  increase productivity,

(ii) Profit-sharing acts as a driving force for higher production and productivity. The workers take more interest and initiative leading to higher production.

(iii) The share of workers in the profits depends upon the efforts, initiatives and hard work of      the employer and employees. This brings about a team spirit among the workers and the  employers. The chances of conflict are reduced.

(iv) The workers are motivated and have a sense of belongingness to the firm. They cooperate  voluntarily because their prosperity depends upon the prosperity of the firm. If the firm  earns higher profit, the workers will get higher amount of bonus.

(v) Profit-sharing brings about stability in the working of the enterprise. The rate of  Labor turnover is reduced because the workers are contented with the management.

(vi) Profit-sharing results in equitable distribution of profits among the employer and the employees of the enterprise.

(vii) Profit-sharing is a step towards industrial democracy as employees are treated not only as wage earners but also as partners in the progress of the company. 

Limitations Of Profit-Sharing 

 The limitations of profit-sharing are as follows: 

(i)  There is high degree of uncertainty in profit-sharing. The share of profit will be paid only  when the profit exceeds a particular limit. The profit may not cross a particular limit due to  market forces and theworkers will suffer. Thus, profit-sharing does not give full guarantee of  extra-payment to the workers.

(ii)  Profit-sharing gives equal benefit to all workers. Distinction is not made between good and bad workers. As a result, sincere and efficient workers get less than  what  they deserve while bad or inefficient workers get more than what they deserve.

(iii) As the amount of profit is to be distributed after a specified period; there is not real  incentive to produce more. The incentive effect of the scheme is completely lost due to remoteness of the reward,

(iv) The scheme of profit-sharing does not eliminate the need for negotiations Between the management and the labour regarding distribution of profits to the labour. Sometimes, relations between labour and management are adversely affected on profit- sharing agreement. This defeats the very purpose of profit-sharing.

 (v)   Profit-sharing as a method of extra remuneration to workers is used during the period of prosperity when profits are high. Profit-sharing is not possible during the lean years of  depression.

 (vi) Unscrupulous management may manipulate the accounts to the detriment of the  workers.The workers may, therefore, get nothing due to dishonesty of the management. This will dampen the enthusiasm of the workers.

 Profit-Sharing In India

In India the issue of bonus has been a source of acute controversy, employers have hardly volunteered to pay their workers legitimate portion of their surplus profits; the workers have been complaining that the employersparticularly during boom periods earned enormous profits without giving them either substantial increase in their wages or allowing them to participate in the extra or abnormal profits. Worker have asserted that annual bonus is their statutory right enforceable against the employers. In 1924however, the Bonus Dispute Committee headed by the then Chief Justice of Bombay held that it was not an enforceable right. During the Second World War and the years after the end of the war, the courts and tribunals conceded to the workers the claim of annual bonus as their statutory privilege.

 The wartime (Second World War) boom and post war rise in prices brought about unprecedented rise in industrial profits without a proportionate rise in wages. This led to industrial unrest in the country resulting in frequent strikes and lockouts in 1947 and thereafter. Industrial Truce Resolution passed in 1947 urged the formulation of satisfactory plan for payment of bonus on the basis of profit-sharing to the workers. The Industrial Policy Resolution. 1948 also contained affirmation of labour right to share in the profits of the industry on the principles of social justice. Workers pleaded for a minimum annual bonus and a satisfactory formula for determining surplus profits and their share therein.

In 1948, the Central Government appointed a committee to study the problem of profit-sharing in industry. The committee suggested the introduction of profit-sharing as an incentive to production as a method of securing industrial peace and as a step of labour participation in management. It, however, did not give any exact formula of profit-sharing, but suggested that the share of labour should be 50% of the surplus profits (i.e., profits available after providing for depreciation reserves and tax liability). This scheme was not favored by the employers and workers, and so the progress of this scheme was limited. The trade unions preferred minimum bonus to profit-sharing,


The Bonus Commission

The number of disputes relating to bonus increased throughout the country during 1950s. For instance, in 1957, 13.6% of total strikes and lockouts pertained to bonus: it was 10.5% in 1960. In 1961, the Government set up a Bonus Commission under the chairmanship of Shri M.R. Meher to define the concept of bonus and determine the basis of its disbursement. The Commission submitted its report in 1964.


The Payment of Bonus Act, 1965

The Government promulgated an ordinance in 1965 which was replaced by Payment of Bonus Act, 1965. The salient features of the Act were:

 (i)  The Act would be applicable to industrial units employing not less than twenty workers,

(ii)  Employees who have worked for not less than 30 days in a year and whose earning do not     

      exceed Rs, 1600 per month would be eligible for bonus.

(iii) Minimum bonus at four per cent of the salary or wages earned by the employee in a year or Rs. 40 whichever is higher would be paid whether profits or no profits.

(iv) Maximum bonus would be limited to 20% of salary or wages.

(v)  Surplus profits would mean Gross profits-(depreciation + taxes + 8.5% on equity shares     

      actual  divident paid on preference shares + 4% on reserves). Sixty per cent of allocable   

    surplus would be available for bonus disbursement (in case of foreign companies 67%). 

In 1971 due to inflation, rising cost of living, surging profits, etc., there was again a pressing demand for increasing the quantum of bonus. The then Union Labour Minister, Shri Khadilkar, mooted a formula to raise the minimum bonus from 4% to 8.33%. The Bonus Review Committee appointed in 1971 also endorsed the Khadilkar formula. The Government enforced this formula through an ordinance. This ordinance was replaced by the Payment of Bonus(Amendment) Act, 1972. Under the Act, the quantum of minimum bonus was raised to 8.33%. 

The progress of profit-sharing in India has been insignificant. This is partly due to statutory provision of payment of minimum 8.33%. bonus to workers under the Payment of Bonus Act, However, in many industries, the concept of productivity linked bonus has been introduced under which higher bonus is payable to workers where their productivity is higher. The Government has also given encouragement to this scheme in the recent years. 

The reasons of failure of profit-sharing in India have been summed up by V.V. Giri (1972) as follows, "Some employers in India introduced profit-sharing schemes with a view to stimulating interest among their workers in increasing production. There was, however, no change in the outlook of these employers. They did not treat the workers with justice and fairness and refused either to consult or to inform them on matters of common interest in the working of the industry. Requests for facilities for looking into the balance sheets of the companies were resented as unwarranted interference in the sphere of management. Such an attitude defeated the very object and the purpose of the profit-sharing scheme." 


The status of employees needs to be raised. They should be treated as equal partners in business and industrial ventures. The concept of co­partnership is much wider in scope as compared to the concept of profit-sharing. Co-partnership relates to industrial democracy and labour participation in management. In copartnership employees are made part-owners of the enterprise and are allowed to participate in the decision-making process.Here, the employees are converted into co-partners or co-owners of the company. Thus, employees get higher status and naturally they take more interest in the management of their company. The employees are made more active and responsible due to co-partnership, 

Co-partnership can be introduced in the following forms ;

(a)         Profit-sharing in kind. In this method, employees are given their share in the profits not in cash but in the form of shares of the company. As a result, they become the regular shareholders of the company with powers to attend company's meetings and participate in the management of their company. 

(b)         Payment of bonus in kind. In this method, the bonus payment is made in shares and not in cash. As a result, employees are made shareholders of their company with full powers to participate in themanagement of their company by attending company's meetings of shareholders. 

(c)          Offering new shares to employees. In this method, the new shares of the company are offered to the existing employees of the company. Those who purchase the shares become the shareholders of the company with usual rights and powers of shareholders. 

Merits Of Co-Partnership

Under co-partnership, the workers not only get a share in the profits of the company, but also get a control over the management of the organization. Their status is changed and their interests are linked with those of capital. This system is gaining popularity these days. The merits of co-partnership are as follows : 

(i)    The status of employees is increased as they become the co-owners or shareholders of their company.

(ii)   The employees get an opportunity to participate in the management of the company.

(iii)    The employees behave in a more responsible manner as their future is linked with the  future of the company where they are working,

(iv)   The labour-management relations improve considerably. The employees can influence company's labour policies to their advantage.

Difficulties In Co-Partnership

Co-partnership in India has not been very popular because of the following reasons :

(i) Workers show limited interest in co-partnership. They demand bonus in cash and do not purchase shares of their company as and when offered.

(ii) Employees and their leaders have limited capacity to participate in the actual  management of the company. As a result, the co-partnership remains on paper only.

(iii) Employees usually prefer to be wage-earners rather than becoming the co-partners or co- owners of the company.