Appendix: Examples of some commonly used schemes
Individual payment by results schemes
Most individual payment by results schemes are based on performance ratings, generally using the British Standard Institution formulae(9) on which:
- 75 performance equates with a normal (ie: non-incentive) level, such as a worker receiving time rates could expect to achieve
- 100 performance equates with a standard level such as a qualified worker receiving payment by results could expect to achieve.
Where the basis of the scheme is to pay for increased productivity (the ratio of output to input), the following calculation is used to express the percentage performance achieved:
(standard minutes produced (output) x 100) / actual time taken (input)
For example, where the standard time to produce an item is 5 minutes and the working day is 8 hours (480 minutes) and the worker produces 80 units, the rating would be calculated as:
(output (80 units x 5 minutes per unit) 400 x 100) / input (8 hours x 60 minutes) 480 = 83.3
If the worker produced 120 units the performance rating would be:
600 / 480 x 100 = 125
Straight proportional PBR schemes
In proportional schemes the incentive payment is in direct proportion to performance. On the BSI 75/100 scale for example, basic rate is paid at 75 performance, a 100 performance increases earnings by a third, and earnings are pro rata for other levels of performance. A minimum level of earnings is often guaranteed as a fall-back and this would normally be at the basic, or 75 performance, level in this illustration. The following graph shows the relationship between earnings and performance in a straight proportional scheme.
A standard time for the job is determined using work measurement techniques. The work value of 100 completed jobs with a value of two standard minutes, for example, would be 200 standard minutes - regardless of the time actually taken to complete the jobs. An operator on PBR working at standard performance for a full day of, say, 8 hours (480 minutes) would complete 240 jobs - a total work value of 480 standard minutes. If only 200 jobs were completed in an uninterrupted day, the employee's performance would be: standard minutes produced x 100 = 400 x 100 = 83.3
actual time spent on PBR work
(standard minutes produced x 100) / actual time spent on PBR work = (400 / 480) x 100 = 83.3
In practice, a worker is likely to spend time waiting for material or for a machine to be repaired, doing authorised work outside the scope of the PBR scheme, or on authorised activities away from the workplace such as attending a training course. In calculating performance and earnings, these periods are treated separately from time spent on work within the scope of the scheme and the basis of payment for such periods (basic rates, some intermediate rate or perhaps average earnings) should be specified. Generally, workers are not penalised for matters outside their control. A typical earnings calculation might be as follows(10):
Actual time spent on PBR work = 6 hours 40 minutes (400 minutes)
Completed PR work
=180 items at 2 standard minutes each
= 360 standard minutes (6 standard hours)
Actual time on non-PBR work = 1 hour 20 minutes (80 minutes)
Basic rate (for 75 performance) = £3.00 per hour
Standard minutes produced: 360 x 100 / Actual time spent on PR work: 400 = 90 performance
Using a straight proportional payment scale where 75 performance pays basic rate and standard (100) performance pays one-third of basic pay extra:
90 performance would earn 20 per cent bonus
Therefore earnings on PBR
= 6 2/3 hrs x (£3 + 20%)
= 6 2/3 hrs x £3.60
Total earnings = £24 + 80 minutes at the appropriate agreed rate
Earnings per hour
= 100 x £3.00
for 100 (ie: standard) performance
= £4 per hour (ie: 33% more than basic rate)
Therefore earnings for the 6 standard hours completed on PBR work
= 6 x £4
Total earnings = Earnings on PBR work + earnings on non-PBR work
= £24 plus 80 minutes at the appropriate agreed rate.
Non-straight proportional schemes
In schemes other than straight proportional the relationship between earnings and performance varies. The main types of schemes are as follows:
- Geared schemes in which the bonus follows a straight line which, if extended below the guaranteed minimum, would not (unlike a straight proportional scheme) give precisely zero earnings at zero performance
- Stabilised schemes which are a particular type of geared scheme, in which the bonus follows a straight line which, if extended below the guaranteed minimum, would give some earnings at zero performance
- Progressive schemes in which the rate of change in earnings rises as performance rises
- Regressive schemes in which the rate of change in earnings falls as performance rise
- Differential schemes which are a combination of two or more schemes - straight proportional, geared, progressive and/or regressive - changing from one to another at specified levels of performance.
Examples of geared, stabilised, progressive and regressive schemes, indicating how they compare with a straight proportional scheme are illustrated in the diagram overleaf.
Plant wide payment by results scheme
The standards used in payment by results schemes based on the volume of production of whole plants (or other groups of employees) may be determined by work measurement, but may also be derived from records of production during a reference period. When past production records are used due allowance should be made for any unusual features in the reference period and the performance of people during the period.
An example of a simple plant-wide volume based scheme follows.
Examination of production records in a chemical processing plant show that over a one year period each ton of material processed required a total of ten hours of production operative's time; this productivity ratio is regarded as the standard for the basis of the scheme.
Standard productivity ratio = 10 employee hours per ton
In the current period (ie the period of, say, a week, for which earnings are being calculated in this example) the total time worked by production operatives = 24,000 employee hours
Total volume of material processed in current period = 3,000 tons
Total production labour costs in current period = £96,000
Current period productivity ratio = 24,000 / 3,000 = 8 person hours per ton
Savings in employee hours = standard productivity ratio minus current period productivity ratio
= 10 - 8 = 2 employee hours per ton
Therefore total savings in employee hours:
3,000 x 2 = 6,000 employee hours
Current period labour costs = 96,000 / 24,000 = £4 per production employee hour
Therefore total savings = 6,000 x £4 = £24,000
Under the terms of the scheme, total savings are divided, say 60:40, between workers and company. Consequently, £14,400 (60 per cent of £24,000) is available as the bonus pool for the week.
Since the total employee hours worked in the week are 24,000, the bonus payment is equivalent to £14,400 / 24,000= 60 pence per hour
Each individual production operative's bonus is paid pro rata to the number of hours he or she worked in the week.
The formula for added value is most commonly expressed as:
Sales revenue less cost of raw materials and services purchased outside the enterprise (electricity, consumable stores, transport etc) = Added value
Here is an example of how to calculate added value:
Sales revenue = £4,000
Purchased materials = £1,800
Bought-in services, heat, light etc = £200
Wages = £1,000
Salaries = £400
Total = £3,400
Profit before tax = £4,000 - £3,400 = £600
Added value = Sales minus (materials + bought-in services)
= £4,000 - (£1,800 + £200)
In practice, such factors as depreciation and capital investment can present difficulties when calculating added value and schemes can vary in the way they treat these items.
An example of an added value scheme of the Rucker type is given on the next page.
Added value bonus
Here is an example of how to calculate added value bonus:
Base period calculation
Net sales over three years reference period = £2,000,000
Less bought-in materials, supplies and services = £800,000
Added value over three years = £1,200,000
Employee costs over three years = £400,000
Percentage ratio of employee costs to added value / £1,200,000 = £400,000 x 100
33 1/3 per cent
Net sales over one month = £100,000
Less bought-in materials etc = £30,000
Added value = £70,000
33 1/3 per cent of added value = £23,334
Less actual wage bill = £20,000
Saving available for distribution = £3,334
Under the terms of the scheme 25 per cent of the savings (£834) goes into a reserve fund to provide a bonus for those months when no bonus would otherwise be payable; the remainder (£2,500) is divided equally between company and workers.
Thus the employees' share is equal to a bonus of:
(£1,250 / £20,000) x 100 = 6.25 per cent of the wage bill