Productivity and incentives

[Neo]

Productivity and incentives - I

Mahmood Abdul Ghani

ARTICLE (August 29 2008): Productivity is influenced by many factors, some of which are internal to a unit while others are external to it. The approach to productivity should be comprehensive and all-embracing. Increase of labour productivity in Pakistan requires improvement in the social and economic circumstances of workers. Substantial shares of gains from increasing productivity should, therefore, be provided to labour.

Increase in productivity also requires a modern technological base and improved organisation of work. The productivity movement in Pakistan began with the arrival of the ILO Mission in 1952. The Mission's efforts did not go far due to the fear that any great changes might disturb the established wage structure and industrial relations in the textile industry.

The experience of the Mission showed that productivity programmes have to be formulated on a realistic assessment of actual situations, rather than on preconceived aims and objectives. The setting up of the Productivity Centre and later of the National Productivity Council and the Local Productivity Council is worth examination by sending productivity teams abroad and running training programmes in productivity will give further impetus to the productivity movement.

The impact of these efforts has not, however, come up to the expectations due to various causes. The primary responsibility to raise productivity through proper organisation and control of work, personnel policy and plant and equipment, rests on management. Work should be so organised as to minimise the physiological cost of doing it. In Pakistan, due to the very low nutritional standards of workers, this is particularly important.

Full and efficient utilisation of available means and continued improvement in organisation and methods can increase productivity even when substantial changes in equipment are not possible. The application of work-study, including production planning and control, simplification, standardisation and specialisation close co-operation and interchange of information, costing and budgetary control and so on, are important in the efforts to raise productivity.

Several techniques have been evolved for raising productivity by optimising/maximising the utilisation of all available resources. These techniques draw upon knowledge in various disciplines - mathematical, physical and social sciences - and apply it to men, materials machinery and management.

Production methods and technology that have proved successful in one situation or country will not necessarily prove to be so in another when availability of raw materials, scale of operations, climatic conditions and such other factors are quite different.

Productivity techniques should be applied with the association of the workers' trade unions and the data derived from the studies should be used as guide to the management and the union in arriving at agreed decision about the changes to be made.

Method Study consists of selection of work to be studied, recording of facts about the existing method of doing it, critically examining these facts, evolving an improved method of doing it, installing the evolved method as standard practice and maintaining it. Work Measurement is the determination of the time required to carry out a particular job at a defined standard of performance by a trained worker by the use of any among several available techniques.

In the application of Method Study and Work Measurement, together referred to as Work Study, the fears and suspicious of workers about loss of jobs or harm to their other interests must be dispelled by giving them clear assurances and by keeping them and their representatives fully informed before the studies are conducted.

OTHER TECHNIQUES IN INDUSTRIAL ENGINEERING ARE:

(i) Inventory Control

(ii) stores keeping methods and practices

(iii) Plant design and layout

(iv) Standardisation, simplification and variety control

(v) Job Evaluation

(vi) Merit rating

(vii) Value engineering

(viii) Office organisation and methods

(ix) Materials handling

(x) Production planning and control

(xi) Waste reduction

(xii) Product engineering

(xiii) Systematic plant maintenance

(xiv) Personnel administration

(xv) Marketing

(xvi) Operations research

(xvii) Management controls

Productivity is a measure of the extent to which the resources are utilised to produce goods and services and it can be measured between any two stages in a productive process. It can also be measured for each resource. Two productivity values will be comparable only if both are for the same resource, in the same unit and for the same stage.

Gains of productivity during a given interval of time is the difference in the cost of production on the basis of the productivity at the beginning of the time interval and the actual cost of production at the end of the interval, both costs being calculated at constant prices. Equitable sharing of the gains of productivity among all the agents must fulfil a number of conditions. Several methods already exist for sharing the gains of increased productivity among labour, capital and the community.

There are also several non-financial methods of sharing the gains. Incentive is a device for increasing productivity and sharing the gains of the increase. Among the various available methods, it is the cheapest, quickest and surest. Along with it, improved work methods and improved organisation and planning should also receive first attention since they require no capital expenditure.

Monetary incentive is paid for extra contribution of efforts and co-operation, as distinct from the normal wages which take note of the characteristics of the job itself. Hence, wages and incentives can together take account of both the job characteristics and the workers' application to the job. The performance-based system of payment is more complex than that based entirely on attendance.

Incentive schemes are devices for coinciding the interests of the workers with those of the organisation and can be devised to fulfil various objectives though the most common objective is to increase output. In measuring performance for the purpose of payment of incentives, a number of considerations need to be kept in view. Incorrect standards do incalculable harm to the concept as well as the operation of incentives. Hence correct standards should be set by using industrial engineering techniques.

The period for assessment of performance for the purpose of computing incentive earnings should be as short as possible, a day or a shift being the proper period wherever practicable. Individual incentives are the most effective; but group incentives can also be adopted where special conditions render individual incentives difficult to adopt. Once incentives are introduced in a plant; it is imperative to extend them to cover as many of the employees as possible.

THE FOUR CRITICAL PERFORMANCE INDICES IN INCENTIVE SCHEMES ARE:

(i) The Standard Index,

(ii) The Reference Index,

(iii) The Base Index,

(iv) The Incentive Index.

Since in Pakistan the reference index is far below the standard index, incentives have to start near about the reference index Incentive should be computed as a certain percentage of the basic wage plus dearness allowance. In designing the performance-reward relationship a number of considerations have to be kept in mind. Different types of relationship are also possible.

Multi-factor incentive schemes, which measure workers' performance on more than one factor separately and reward such performance, can also be designed. The quantum of incentive earnings should be such that it should not raise the total unit cost of production but should reduce it, and, at the same time, should be adequate to generate motivation. Above the standard performance, it should pass on to the worker the entire savings in the labour costs.

Between the base performance and standard performance and standard performance the rate of incentive should be somewhat lower than above. Various kinds of safeguards to protect the interests of workers as well as of the organisation should be provided in the collective agreement on incentives. The worker expects an equitable adjustment for failure to meet the set performance levels due to causes beyond his control, such as lack of materials, breakdown of equipment, lack of orders, etc Such adjustment can be ensured by:

(i) Including a factor of adjustment for lost time in the standards and norms themselves where the time loss is such as can be averaged out over a period of time by reference to the records.

(ii) Paying for the lost time at the normal wage rate without incentive;

(iii) Paying for the lost time at the average incentive rate for the time actually worked.

(iv) In case of piece rates, providing certain pre-determined fall-back wage rates.

Rate-cutting undermines the confidence of workers in an incentive scheme and hence defeats the purpose of the scheme. Hence, the incentive norms and standards or the piece rates should be guaranteed. The scheme should provide for measuring of jobs affected by any significant change in the methods materials, machine processes, tools etc.

In the existing schemes, if standards are faulty, it may be possible to correct them; but in doing so care must be taken to suitably compensate workers who may be adversely affected by such correction. Incentive schemes are not a method of increasing of decreasing wages or of justifying low wages.

[Neo]

Productivity and incentives - II

ARTICLE (August 30 2008): Existence or absence of an incentive scheme should not have any effect upon the basic wage which should be governed entirely by the characteristics of the job. It is unnecessary to establish any arbitrary ceilings on incentive earnings to limit human exertion.

However, technical grounds, like safety of workers or equipment or requirements of quality, may justify, under proper circumstances, ceilings to limit performance to levels below human capacity. Gains of technological change should also be shared with workers through one or more of the following methods:

(i) Increase in wages of concerned workers,

(ii) Lump-sum payments,

(iii) Larger share in various bonuses and production-sharing/cost-saving schemes.

Various kinds of non-financial incentives are also known to motivate workers and these should be properly used simultaneously with monetary incentives. Training at different levels and in specific areas plays vital role in contributing to higher productivity.

THE MAIN AREAS OF TRAINING ARE:

(i) Craftsman Training,

(ii) Supervisory/Foremanship Training,

(iii) Scientific and Technological Training

(iv) Management Training

(v) Training of Professional Industrial Engineers,

(vi) Trade Union Training

The rapid growth of science and technology makes it necessary to provide adequate retraining programmes for craftsmen who have already been employed in industry. The supervisors in industry play an important role in determining the performance of the whole organisation and they have to deal with a variety of aspects; technical, social and human. The training of the supervisors, therefore, requires to be given sufficient importance.

A large number of institutions are today engaged in education and training in the field of science and technology, management and industrial engineering. These institutions are making valuable contribution to productivity by supplying industry with personnel of the required training and competence and also raising the performance of the personnel already in employment by offering them opportunities for training in their respective specialities.

To enable trade unionists to understand the problems of productivity and the techniques used, to overcome their misgivings regarding the consequences of rising productivity and to enable them to play a positive role in the productivity campaign, facilities to give them training in productivity need to be expanded. All the agencies presently engaged in trade union education work should give due importance to productivity in their courses. The central trade union organisations in Pakistan have a special responsibility in this respect.

Based on my discussions with various plant managers and engineers, the following conclusions about the use of productivity techniques in industries in Pakistani can be drawn:

(i) Industrial engineering techniques are used over a wide area of operations, but not much in depth.

(ii) The personnel entrusted with the application of productivity techniques is not always adequately trained therein.

(iii) Work-measurement is primarily applied to production jobs and not much to other kinds of jobs. Time study is the most widely used method for this purpose.

(iv) The proposals evolved by work-study are often not implemented, resistance by middle management being the most common cause thereof. Non-operation by labour or indifference of top management are not serious obstacles in implementation.

(v) Among the responding companies the use of incentive schemes is common on production jobs but infrequent on other kinds of jobs. Increases of 30-50 percent in output and 25-45 percent in earnings have been generally achieved. Starting point of incentive earnings is usually between 40-60 per cent performance.

(vi) The frequency of information to workers on their incentive performance generally ranges from daily to monthly.

(vii) Use of other techniques like Job Evaluation, PERT, Operation Research, etc is not very common even in this relatively sophisticated sample.

(viii) None of the persons interviewed has claimed that Employers Federation of Pakistan have framed or have any idea aimed at Productivity and Incentives. While technology in the long run opens up the gates to virtually limitless productivity, the adoption of any particular level of technology in a given situation has to take into account a number of factors: economic, social and human. The displacement of labour by advancing technology is a problem which calls for effective action in the following ways:

(i) Sufficient advance planning of the change and full advance consultation with all groups that are likely to be affected by change;

(ii) Phasing the introduction of the change so that the displacement of labour can be balanced either with the overall growth of the industry or with other factors like natural wastage, retaining for employment in other industries, and so on;

(iii) Reduction in the hours of work;

(iv) Adequate facilities for training in the new skills and operating techniques for the changed technology;

(v) Extensive measures of social security so that the unavoidable redundancy of labour will not cause excessive hardship to the workers concerned;

(vi) High purchasing power in the community as a whole. Adoption of higher technology is not a substitute for the use of proper productivity techniques to ensure the best possible use of existing resource.

FACTORS WHICH HAMPER PRODUCTIVITY OF WORKERS ARE:

(i) Poor standards of nutrition

(ii) Poor living condition

(iii) The traditional management assumptions that workers are naturally lazy, irresponsible and incapable of making any positive contributions to their jobs. These assumptions inhibit any positive response from workers and trade unions to productivity efforts.

(iv) (a) Unsatisfactory industrial relations which make it extremely difficult to introduce productivity techniques smoothly and successfully. To promote sound industrial relations the employers and workers should build up the proper attitude and tradition of resolving their differences on a bipartite basis. This requires a certain degree of mutual recognition between both the sides.

(b) The present administrative machinery for dealing with industrial disputes is not adequately equipped to handle problems of technical nature which are involved in the field of productivity. This makes it all the more important that employers keen on productivity should usefully seek sound bipartite relations with the organisations of their employees.

(c) The question needs to be carefully examined whether the present industrial relations law and machinery inhibit the growth of sound bipartite relations between labour and management.

(v) (a) Trade unions must evolve some satisfactory methods for resolving, at lease at the unit level, the problem of their mutual rivalry since such rivalry does much harm to productivity.

(b) Trade unions must also develop within themselves the necessary specialised knowledge and expertise in productivity techniques both for protecting the interests of their members and for playing a positive role in productivity.

(vi) Although Employers Federation of Pakistan claim social dialogue, it has so far failed to induce the trade unions to productivity and incentives schemes.

Pakistan tripartite labour conferences should allay the fears and apprehensions of workers regarding loss of employment and excessive workloads. Special attention must therefore be paid to the motivation of workers since that is the decisive positive factor in raising their productivity.

Human factors like workers' individual, social and psychological needs are important in their motivation. Workers can make a positive contribution to productivity if their active co-operation is sought and enlisted for the purpose through appropriate institutional framework, like joint productivity committees and through suggestion systems etc.

Attitude and skills of supervisors have much influence on the attitudes and performance of workers under them. Proper training of supervisors is, therefore, important. Mere "social dialogue" over dinners will not result in increasing productivity or introduction of Incentive Schemes.

Hard, honest and dedicated sincere efforts are required to achieve these goals which the Federation of Employers, so far have failed to achieve. The Government of Pakistan must pursue policies which will contribute to the growth of a social, political and economic climate in the country conducive to the rapid and continuing growth of production and productivity and equitable distribution of the same.

The objective of increasing productivity must be raised to the level of high national purpose and the regulation of industrial relations as well as policies in other related fields should be oriented towards this objective. Especially, it must be ensured that the workers get their due share in the benefits of rising productivity and their status in the social and political set up in the country is paid due attention.

Unfortunately even profits made by employers through efforts of the workers have not been distributed amongst workers in entirety, but a certain percentage of profit is to be deposited in the Welfare Fund set up by the government for being channelised amongst workers of other industries. This is unfair to those workers who have contributed in the making of profits. The government must take purposeful steps to improve the nutritional standards and living conditions of workers so as to raise their productivity.

The industrial relations legislations and administration in the country should be so conceived as to promote sound collective bargaining even at the risk of some possible industrial conflicts. Specialised bodies working in the field of productivity, the training institutes in productivity etc should be provided the means to extend their activities at the shop-floor level be made.

Research in all aspects of productivity needs to be promoted and encouraged on the widest possible scale so that approaches and methods best suited to our conditions can be developed and made available to industry. The public sector should play a particularly active role in this respect. The government should provide specialised, technically competent, independent and impartial agencies to assist employers and trade unions in handling productivity problem and resolving disputes arising therefrom.

In terms of Section 26B of the Industrial Relations Ordinance 1969 workers participation in the management was recognised and among other functions training of workers was incorporated. In terms of Section 26C Joint Management Boards were to be constituted for improvement in production, productivity and efficiency.

In establishments employing 50 persons or more, unfortunately between 1969 up to 2002 nothing was done by the Federal Government to ensure enforcement of these provisions of law for increase in production and productivity. The present government already is involved in numerous problems, which it has inherited. Apparently it has little or no time to engage itself on these fundamental issues of productivity and incentives.

It should, therefore, be left for individual employer to formulate policies, either with or without, consultation with Collective Bargaining Agent, and enforce the same till such time any statutory provisions of law are promulgated by the Government of Pakistan in due course of time.

(Concluded)

(The writer is Advocate, Supreme Court of Pakistan)