Note on Incentiv Plans, Union Influence and Compensation Practice in Nepal

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Incentive plans

Incentive is a compensation, in addition, to pay for performing the job. It is direct compensation for performance. It is motivational drive to increase person's effectiveness. Moreover, incentive is a part of compensation that helps in increasing productivity through job performance improvement. They link rewards to performance to enhance productivity.

According to Milton L. Rock," Incentives are variable rewards granted according to variation in the achievement of specific results."

According to Wendell French," Incentive plan provides financial or non-financial rewards to employees who make a substantial contribution to organizational effectiveness."


Objectives of incentive plan 

  • Increase Efficiency 
  • Increment in earning of workers 
  • Contribute to the organization's effectiveness 
  • Motivates the employee 



Forms of incentive plan

Incentive plans are programs of organization under organizational overall programs. Incentive plans are further divided into three levels. They are:

1.Individual plans: One by one job evaluation of employee for incentive is individual incentive. It is performance and effort base of individual. Individual performance must be measurable. In most cases, the basic pay is guaranteed and the incentives represent additional competition. It is further divided into peace work, bonus and commission.

  • Peace work: Peace work is per unit incentive to be provided to employees. Here, Peace incentive= Number of units X-Rates per unit.
  • Bonus: Bonus is given to employees for higher effective performance. It can be sports bonus. Sports bonus is provided to operating level employees and year-end bonus is generally provided to administrative employees. Sports bonus is given at workplace whenever one job is completed.
  • Commission: Commission is given to those employees who are involved in sales job. Commission is determined from effective level of sales. For example: 10% commission of total sales in addition to basic pay. Commission incentives motivate self-force to make higher volume of sales.

2. Group incentives: Group incentives is collected type of incentives in which provision of incentives to employees is in group not individually. It is provided on group basis to the employees. Under this plan, job performance of group is evaluated and incentive reward is provided equally to all employees of a group. Performance standard is determined for the employees. Group incentives are also called departmental incentives. For example: sales department and production department is rewarded if whole departmental standard, sales or production is crossed by actual sales or production. It can be provided into three levels. They are production, departmental head and professional incentives. They are easy to administer.

3. Organizational incentives: Incentive provided to employee for the progress of overall organization through the effective performance and to bring effectiveness in performance or overall progress is organizational incentive. The main goal of it is to direct the efforts of all employees towards improving organizational effectiveness. It can be further divided into four types;

  • Profit sharing: This is a kind of incentive in which profit earned by organization can be distributed in different schemes. They are current distribution, deferred distribution and combined plan. Current distribution is an immediate distribution of profit at a certain percentage of total profit. Deferred distribution is future oriented skill in which profit earned by organization can be distributed after their retirement for the security of future but at present employee's account is credited. Similarly, combined plan is a method of incentive under which profit is distributed to employees at certain %. Some portion of profit to be distributed is distributed at present and the remaining portion is distributed after their retirement.
  • Productivity gain sharing: Effective job performance brings better productivity. Incentive given to employees on the basis of productivity is productivity gain sharing. It gives priority to coordination between union and management. It focuses on teamwork. So that, the synergistic effect will be seen.
  • Suggestion plan: Suggestion plan is given for useful ideas for organizational betterment. Those employees are rewarded by compensation who provides such ideas. Suggestion can be for reducing cost, improving quality and productivity, increasing safety and maintaining employee's discipline. Suggestion can be collected through suggestion box, inquiry, survey etc.
  • Employee's share ownership plan: Employees of an organization are assets. Competent employees are needed for future to get organizational success. So, a scheme for providing opportunity of buying companies share is launched. 


Union influence on compensation programs

 Union represents the views of employees to promote and protect mutual interest. Compensation at an average level is determined by management and union through negotiation. It affects the management of the organization in every affair. So, union also has influences to compensation plan of the organization. Following points state the influence of compensation.

Collective bargaining: Union represents employee's interest and demand for high level of wages and salary. On the other hand, management tries to maintain minimum level of wages. At last, average level of compensation is determined through negotiation but that must be able to satisfy employees. Every employee collectively raises their views and union present for negotiation. They are able to get higher compensations for their members. The issues that are important in collective bargaining are pay, time-off with pay.

Influence to follow a two-tired wage system: Seniority base by job period of compensation is two-tired wage system. Under this system of compensation, senior peers get higher compensation for same level of job. This system is taken into practice to respect senior workers where those workers have pass longer time in organization. Newly appointed worker gets low compensation for the same level of the job. Union becomes active to force management to follow this system. This type of salary and wages system respect the seniority.

Security job: Protection of the job is job security. Union of employees builds pressure to make daily basis and contractual workers permanent rather than increasing their wages or services. Protecting job is first priority for employees. So, employees union influences compensation management.

Work to develop trust between union and management: Management of present job is to participate management. Union representative and management make decisions through mutual understanding. Management makes decision with the involvement of union representatives. It creates environment of trust. It helps in determining satisfactory level of compensation.

Pressure to increase salary and wages: Salary and wages should increase on the basis of the rise of market rate. The organization should make adjustment in the salary and wages otherwise employees union puts pressures on the management for the same.

Industrial actions: Unions resorts to industrial actions such as strikes, sit in, go slow, and work to rule to increase their compensation. They put pressures to increase pay and improve conditions of the work environment. So, industrial actions also influence compensation management.


Compensation practices in Nepalese organization

Some practices in Nepalese organization are:

Pay and benefits: Compensation management in Nepal is largely concerned with pay, benefits, and services. Although it is understood that pay and benefits have an important effect on productivity and commitment, they are the most dissatisfying factors in Nepalese organization.

Government sectors: In the government organization, the goal of compensation management is mainly legal compliance. Minimum wage and bonus are paid to the workers and employee according to law.

Private sectors: Pay level in the private sector is not satisfactory. Many private sectors pay even low than the minimum wages. But most of them have applied incentive pay system.

Public enterprises: In terms of compensation management practices in public enterprises, they are suing government pay decision as a benchmark to make their pay decisions.

Incentive and social welfare: Talking about incentive and social welfare, piece rate, commission, and bonus is used for individual incentive. It is performance based. Bonus is used for group and organizational incentives. The bonus Act has limited the payment of bonus at 10% of net profit. Social welfare provisions are specified by Labor Act, 1992. Legally,gender discrimination is not allowed.

Performance-based and variable incentive system: In private sector, there has been an increasing use of performance-based and variable incentive systems. On a limited scale performance based and variable incentives systems have been introduced by some of the organizations.



Lepak, D., & Gowan, M. (2010). Human resource management: Training and Development. Upper Saddle River, NJ: Pearson Prentice Hall

Kharal, S.k. (2006). Foundation of Human Resource Management. Asian.

Acharya, B. s. (2014). Foundation of Human Resource Management. Kathmandu: Asmita.

Adhikari, D. (2010). Human resource Management. kathmandu: Buddha.




  • Incentive is a part of compensation that helps in increasing productivity through job performance improvement. The objectives of incentive plans are to retain and motivate employees, achieve the organizational objective and bring cost effectiveness.
  • Individual plans: One by one job evaluation of employee for the incentive is called individual incentive.
  • Group incentives: Group incentives is collected type of incentives in which provision of incentives to employees is in group not individually.
  • Organizational incentives: Incentive provided to employee for the progress of overall organization through the effective performance and to bring effectiveness in performance or overall progress is an organizational incentive.

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