Compiled by: Chhaya Sehgal

The Winning Edge

CASE STUDY PERFORMANCE INCENTIVE DATAMATICS TECHNOLOGIES LTD

COMPANY OVERVIEW
Datamatics Technologies Ltd. is in the business of Electronic Publishing and Data Warehousing. It
has two offices in Mumbai. Both divisions follow different set of calculations for incentives.
The Electronic Publishing division calculates incentives based purely on productivity. There are
high standards and tools of measurement. This being more of a production environment,
productivity can easily be measured. Since it involves processing of electronic data, the number of
pages processed by an operator is an important unit of measuring productivity.
The Data Warehousing division is more into software development for back office processing. In
this division, productivity measurement is a tough task as there are no proper standards of measure.
Hence, in this division, incentives are disbursed based on individual ratings.

INCENTIVE SCHEME FOR ALL PERSONNEL

The entire process of Incentive calculation in the Data Warehousing division is as follows:
Incentives are paid once every 6 months. i.e. Apr to Sep and Oct to Mar.
The Incentives for the period Apr-02 to Sep-02 need to be disbursed this month. The process starts
with the HR department drawing up a list of employees eligible for incentives. All employees
confirmed with the company as on 01-Sep-02 are eligible for incentives.
Generally, any employee who has joined the company on or before 15-Mar-02 will be covered
under this category unless their probation has been extended. Any employee who has joined on or
after 16-Mar-02 will not be eligible for incentives during this period. This is because during the
initial months, an employee does not directly contribute towards the productivity or revenue of the
organization.

PERFORMANCE RATING
The list of eligible employees is circulated team wise to the various Project Managers who are
supposed to rate their Team Members on a rating scale of 1 6.
1.
2.
3.
4.
5.
6.

Bad Performance
Performance not satisfactory
Satisfactory Performance
Performance up to expectations
Performance beyond expectations
Outstanding Performance

These ratings play a vital role in the disbursement of incentives. These ratings are based on various
factors like discipline, adherence to deadlines, extra hours worked, etc and an overall weighted
average is worked out.

Compiled by: Chhaya Sehgal

The Winning Edge

Calculating the rate of Incentive earned

The process of incentive calculation starts as follows:
The total revenue generated by the division during the period is taken into account. 2.5% of this
revenue is allotted towards incentives. This incentive amount is divided by the employee cost to
find out the percentage of total incentive on total salary. Since the employees not entitled for
incentives do not contribute towards the revenue of the organization, their share of incentives are
reduced from the entire 2.5%. However, when a new employee joins the organization, the older
employees spend additional time and efforts in training the new employees and hence should be
rewarded for the same. Hence, instead of reducing the entire share of the incentives on non-entitled
employees, only half of it is reduced from the entire share and the remaining half is to be
distributed to the eligible employees.
Once this amount is reduced, what is now available is the incentive amount distributable to the
eligible employees within the organization. Dividing this distributable incentive with the salary of
eligible employees will give us the proportion at which the final incentive has been disbursed to
eligible employees.

Department wise calculation

Next, we come to the department wise calculation. Different departments contribute differently
towards the revenue of the organization. They also have varying employee costs. The department
that generates the maximum revenue at the lowest cost is considered more productive. Here, the
same process followed earlier is applied. 2.5% of the revenue generated by the team during the
period under consideration is apportioned for incentives. This is divided by the employee cost and
accordingly 50% of the incentive share of non-entitled employees is deducted from the team wise
incentive distribution. If either revenue generated by the team is lesser than other teams or the
employee cost is higher than the other teams, then the rate of incentive will be less for that
particular team and vice versa.

Individual wise calculation

Once this is ascertained, we finally come down to calculation of individual incentive calculations
within the respective teams.
The Team wise rate of incentives is first apportioned to the individual salaries. This incentive
figure derived is now payable to an employee based on his performance rating. A person with an
average rating within the group would be paid 100% of the incentive calculated. Those above
average will be paid at a higher percentage and those below average will be paid at a lower
percentage. On account of apportioning these incentives based on certain percentages, there will be
a minor deviation in the total incentive figure payable. This deviation will now be adjusted in the
ratio of incentives payable to the employees.
If an employee is on leave without pay for a certain period during those 6 months, incentive for
that period is accordingly reduced and the balance is the net incentive payable to the employee.

Compiled by: Chhaya Sehgal

The Winning Edge

ACTUAL CALCULATION
INCENTIVES FOR THE YEAR 2001-02
1Total Revenue

100,000,000

2Total Incentive

2,500,000

(Total Revenue * 2.5%)

3Total Salary of all Employees

30,000,000

150 employees

8.33%

(Step 2 / Step 3)

4Percentage of Total Incentive over Total Salary

5Salary of Employees eligible for Incentives

20,000,000

100 employees eligible

6Salary of Employees not eligible for Incentives

10,000,000

50 employees not eligible

750% incentives of non-entitled Employees

8Distributable incentive
Percentage of distributable incentive in proportion to
9 salary of entitled employees

416,667

((Step 4) * (Step 6 / 2))

2,083,333

(Step 2 - Step 7)

10.42%

(Step 8 / Step 5)

GROUPWISE DISTRIBUTION : TEAM A

11Group Revenue

20,000,000

12Group Incentive

500000

13Total Group Salary

14Percentage of Group Incentive over Group Salary

9,000,000
5.56%

(Group Revenue * 2.5%)

30 employees
(Step 12 / Step 13)

15Salary of Employees eligible for Incentives

6,000,000

20 employees eligible

16Salary of Employees not eligible for Incentives

3,000,000

10 employees not eligible

1750% incentives of non-entitled Employees

83333.33

((Step 12 / Step 13) * (Step 16 / 2))

18Distributable incentive

416667

(Step 12 - Step 17)

Percentage of group's incentive in proportion to the

19 salary of entitled employees

6.94%

(Step 8 / Step 15)

INDIVIDUAL
DISTRIBUTION
Groups Total
Incentive
416667.00

Compiled by: Chhaya Sehgal

The Winning Edge

Incentive
Percentage
6.94%
Average merit
rating of employees
4.50

Salary

1 1001 AA

200000

13888.90

4.5

100.00%

13888.90

4.63

13893.53

13893.53

2 1002 AB

250000

17361.13

4.5

100.00%

17361.13

5.79

17366.91

28

14709.68

3 1003 AC

400000

27777.80

4.9

102.00%

28333.36

9.45

28342.80

28342.80

4 1004 AD

350000

24305.58

4.1

98.00%

23819.46

7.94

23827.41

23827.41

5 1005 AE

200000

13888.90

4.8

101.50%

14097.23

4.70

14101.93

14101.93

6 1006 AF

450000

31250.03

4.2

98.50%

30781.27

10.26

30791.54

30791.54

7 1007 AG

350000

24305.58

4.7

101.00%

24548.63

8.19

24556.82

24556.82

8 1008 AH

250000

17361.13

4.3

99.00%

17187.51

5.73

17193.24

17193.24

9 1009 AI

100000

6944.45

4.6

100.50%

6979.17

2.33

6981.50

15

6409.25

10 1010 AJ

300000

20833.35

4.4

99.50%

20729.18

6.91

20736.10

20736.10

11 1011 AK

200000

13888.90

4.5

100.00%

13888.90

4.63

13893.53

13893.53

12 1012 AL

250000

17361.13

4.2

98.50%

17100.71

5.70

17106.41

17106.41

13 1013 AM

350000

24305.58

4.4

99.50%

24184.05

8.06

24192.11

24192.11

14 1014 AN

350000

24305.58

4.6

100.50%

24427.10

8.15

24435.25

24435.25

15 1015 AO

500000

34722.25

4.8

101.50%

35243.08

11.75

35254.84

35254.84

16 1016 AP

250000

17361.13

4.9

102.00%

17708.35

5.90

17714.25

17714.25

17 1017 AQ

250000

17361.13

4.7

101.00%

17534.74

5.85

17540.58

17540.58

18 1018 AR

150000

10416.68

4.5

100.00%

10416.68

3.47

10420.15

10420.15

19 1019 AS

650000

45138.93

4.3

99.00%

44687.54

14.90

44702.44

44702.44

20 1020 AT

200000
6000000

13888.90
416667.00

4.1
90

98.00%

13611.12
416528.11

4.54
138.89

13615.66
416667.00

13615.66
413437.51

Sr. Code

Name

Percentage
based on
Rated
Rating average rating Incentive

Pro-rated
Adjustment
deduction
Net
of
Incentive for Leave Incentive
difference payable without Pay Payable

Incentive
based on
salary

Explanation of calculation:
1. In the above example, total revenue generated by the organization during Apr to Sep is Rs.100
million. 2.5% of the revenue i.e. Rs.2.5 million is allocated for disbursement of incentives. The
total cost of employees is Rs.30 million out of which the cost of employees eligible for
incentives is Rs.20 million. Total Incentive as a percentage on Total Salary is 8.33%.
50% of the Incentive share of employees not eligible for incentives has to be proportionately
reduced. This works out to (10 million/2) * 8.33% = Rs.416,667. This amount is reduced from

Compiled by: Chhaya Sehgal

The Winning Edge

Rs.2.5 million. The amount of incentive distributable comes to Rs.2,083,333. The percentage of
distributable incentive as a proportion to the cost of eligible employees comes to 10.42%.
2. Next, we find out the team wise incentive eligibility. The Revenue generated by Team A
during the period Apr to Sep is Rs.20 million and the employee cost of the team is Rs.9 million.
2.5% of the group revenue i.e. Rs.500,000 is allocated for disbursement as incentives to Team
A. The incentive share of non-eligible employees is reduced by half from the disbursable
incentives. The distributable incentive for Team A comes to Rs.416,667 that is 6.94% of the
cost of eligible employees within the team.
3. This percentage when compared to the overall organizational rate of incentives of 10.42% is
quite less. This is either because the team has generated comparatively lesser revenue or has
incurred more cost than the other teams in terms of salary payments.
4. Finally, we come to the calculation of individual incentives in Team A. Employees in Team
A are eligible for an incentive of 6.94%. Once proportion of incentive to salary is allocated,
then individual ratings are considered. In Team A, the average rating is 4.5. Employee having
a rating of 4.5 will be paid his entire incentive as calculated above. Employees having a rating
higher than 4.5 should be rewarded. Also, employees having a rating lesser than 4.5 should be
penalized.
This is done as follows:
For a rating of 4.5, 100% incentive is given.
For a rating of 4.4, 99.5% incentive is given.
For a rating of 4.6, 100.5% incentive is given.
For every point deviation in the rating, 0.5% of incentive is adjusted accordingly.
This step gives the amount of incentive each employee is eligible for. On account of calculating the
incentives proportionately, there will be a marginal difference, which will be adjusted in the ratio of
the incentives payable as calculated in the last step. The figure arrived at is the net figure payable
as incentives.
Employees AB and AI were on leave without pay for 28 and 15 days respectively, on account of
which their final incentive payable has been accordingly pro-rated.
Question: analyse the incentive scheme for its advantages and lacunae as a team and individual
incentive system.