Incentive Scheme Choice at a Precision Components Unit
Precision Components pays a time rate of ₹60 per hour. The standard time for a batch of 200 components is 12 hours. The normal shift is 8 hours; overtime is paid at 1.5 times the time rate and is charged to the batch. Worker A completes the batch in 8 hours but 8 components need rework at ₹150 each. Worker B takes 10 hours and 2 components need rework. Management is choosing between Halsey (50% bonus) and Rowan incentive schemes. The works manager favours Halsey because it is simple and cheaper; the union prefers Rowan. Quality inspectors have warned that speed is already causing defects and that the rework cost is not captured in the wage records. The batch is repeated every week.
1. Compute the earnings of Worker A and Worker B under Halsey and Rowan, including overtime premium.
Read the worked answer
Time saved: A = 12 − 8 = 4 hours; B = 12 − 10 = 2 hours. Overtime applies to B only: 10 − 8 = 2 hours; overtime premium = 2 × ₹60 × 50% = ₹60.
| Worker | Halsey | Rowan |
|---|---|---|
| A | 8 × 60 + 50% × 4 × 60 = ₹600 | 8 × 60 + (4/12) × 8 × 60 = ₹640 |
| B | 10 × 60 + 50% × 2 × 60 + 60 = ₹720 | 10 × 60 + (2/12) × 10 × 60 + 60 = ₹760 |
Halsey pays 50% of time saved at the time rate. Rowan pays a bonus equal to (time saved ÷ time allowed) × time taken × rate. Rowan gives a higher bonus in both cases, but Halsey is simpler and cheaper for the employer.
2. Compute the effective labour cost per good component, including rework, and advise which worker-scheme combination is preferable.
Read the worked answer
Good output: A = 200 − 8 = 192 components; B = 200 − 2 = 198 components. Rework cost: A = 8 × ₹150 = ₹1,200; B = 2 × ₹150 = ₹300.
| Combination | Total cost | Good units | Cost per good unit |
|---|---|---|---|
| A - Halsey | 600 + 1,200 = ₹1,800 | 192 | ₹9.375 |
| A - Rowan | 640 + 1,200 = ₹1,840 | 192 | ₹9.583 |
| B - Halsey | 720 + 300 = ₹1,020 | 198 | ₹5.152 |
| B - Rowan | 760 + 300 = ₹1,060 | 198 | ₹5.354 |
On total wage alone, A appears cheaper than B under both schemes because A works fewer hours. On cost per good component, B is far cheaper. A’s speed is creating rejects that wipe out the wage saving. The scheme choice should therefore not be based on wage rate alone.
Halsey is cheaper for the employer and simpler to administer. Rowan is more generous and may be preferred by workers, but neither scheme automatically protects quality. The company should introduce a quality gate: pay the incentive only on good output, or add a quality bonus and charge rework cost to the batch. Without that, the works manager’s preference for Halsey may simply hide a quality problem.
3. What behavioural risk arises if an incentive scheme is introduced without a quality check? Recommend two controls.
Read the worked answer
Workers will optimise the measure that is rewarded. If the scheme rewards time saved, the rational response is to work faster, skip checks, or conceal defects because rework time may fall outside the measured batch. This can raise output and bonus while increasing customer returns, scrap, warranty cost and safety incidents.
Recommended controls:
- Pay bonus only on first-pass good units, with rework cost debited to the batch or the worker’s group. This aligns the incentive with quality.
- Publish a quality and safety minimum before bonus is triggered, supported by random inspection and a small group incentive so that co-workers also monitor defects.
A scheme that is theoretically cheaper but ignored by the workforce, or gamed through defects, is not cheaper in practice.