DIRECT OR FINANCIAL INCENTIVES

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DIRECT OR FINANCIAL INCENTIVES
Direct Incentives includes the basic salary or wage that the individual is entitled to for his job, overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options etc.

I] Wage Incentives:

The term wage Incentives has been used both in the restricted sense of participation and in the widest sense of financial motivation. According to Hummel and Nickerson: "It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job."

According to the National Commission on Labour, "wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the son, over and above the time rated remuneration, for improvements in the present or targeted results."

Bonus:

These consist of such financial amenities and advantages as holiday, overtime and shift premiums, attendance bonus, Diwali bonus, bonus for good quality workmanship, commission, safety awards, profit-sharing bonus, time-saved bonus, suggestion awards, waste elimination bonus, and year-end bonus. Some of them are explained below:

Time-saved Bonus: Time-saved bonus plan is ordinarily used when accurate performance standards have not been established. Time-saved bonuses are normally given to the factory workers on their performance. Under this type of wage incentive, it is optional for a workman to work on the premium or not. His day's wage is assured to him whether he earns a premium or not, provided that he is not so incompetent as to be useless. A standard output within a standard time is fixed on the basis of previous experience.

The bonus is based on the amount of time saved by the worker.
Normally the formula used for calculating bonus is:
Bonus= '/2 (Time saved / Time Taken) * Daily wage

Commission: The salesmen are usually given incentives in the form of sales commission. Salesmen get a commission in proportion to the sales affected.

Profit-sharing Bonus: Profit-sharing bonus refers to the distribution of
profits on the basis of a certain percentage of one's monthly wages.

II] Stock-Option Scheme:

Stock options are common in many countries. This scheme allows the employees to purchase the shares of the company at a fix and reduced price. Employees are motivated when the company allows them to buy the shares at the concessional price. The stock options are viewed as performance based incentives.

Merits: The merits of stock-option scheme are:
(i) This scheme links compensation package closely to performance.

(ii) This scheme enables the companies to retain efficient employees with the company.

(iii) It encourages the employees to work even better.

(iv) It inculcates a sense of ownership and responsibility.

(v) This scheme establishes significance of team effort among employees.

Limitations: The limitations of the scheme are:

(i) This scheme can be used by only the profit-making companies.

(ii) Share prices do not always reflect fundamentals.

(iii) Falling share prices result in loss of employees.

(iv) Unsound stock market conditions cause inconvenience to employees in encashing their investment
 
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