In 1967, I landed my first engineering job at one of the top companies in the machine tool industry. It was a young engineer’s dream.
As an entry-level employee, I was directly involved with the factory workers. Along with my first taste of manufacturing, I received my first real lesson in employee incentives and behavior.
The company was very proud of its incentive system. Production employees, in addition to a base wage, received a piecework incentive. It established standard times for the manufacturing operations required to make every part. The incentive system paid off if employees beat the standard time to complete their operation — if machine operators making a part with a 10 per hour standard made 12 parts that hour, they received 120 percent of their base hourly rate for that hour.
This seemed to be a win-win situation — the company achieved improved production rates and the workers could make more money. However, I discovered productivity was not very good, parts were still late, quality issues were abundant and costs were high.
The system failed. The intentions were good, but the design was flawed. It was actually encouraging the wrong behavior.
One of the more obvious flaws was that operators were paid incentives based solely on the quantity of parts produced. Nothing ensured quality. This often resulted in operators being paid incentives for producing bad parts. And once the bad parts were discovered, they were often sent back to the same machinist, who could earn incentive pay to fix his own mistake.
The key to a successful system is in the design. It must ensure that, unlike that piecework system, it doesn’t inadvertently reward the wrong behavior. Making that mistake is easy. You have a problem, and an incentive program seems like a good way to solve it. You want a quick fix, so you don’t spend the time you should to think through the ramifications and the behaviors that could be encouraged by the plan.
Following simple guidelines can help ensure your design creates the results you intend.
Rules of thumb
In designing a plan, don’t focus on only one aspect of the process; that will likely create unwanted behavior in another part. An incentive plan that rewards speed of manufacturing or delivery may create quality issues.
Don’t be too general. If the plan doesn’t identify specific objectives, it enables interpretation that could hurt rather than help the company. A plan designed to reward sales increases without specifically stating target products or price points may result in increased sales of lower margin, less profitable products and a reduction rather than an improvement in company performance.
Play devil’s advocate throughout the design process. Involve managers and employees to get their input and discuss pros and cons of the plan. You need to feel comfortable that it will provide an incentive for the behavior you intend before you implement it.
Designed and used properly, incentive programs can be a powerful management tool to help solve short-term problems, mold behavior and develop the company culture. Joel Strom ([email protected]) is director of Joel Strom Associates LLC, the growth management practice of C&P Advisors LLC. The firm works exclusively with closely held businesses and their ownership, helping them set and achieve growth objectives while maximizing profitability and value. Contact him at (216) 831-2663.