Structuring Performance Incentives

Business owners discuss ways to tie employee compensation to productivity. February 17, 2006

Should a performance incentive be set so an employee achieves it 50% of the time? 25%, 75%? 100%? What are some other ways of looking at this?

Forum Responses
(Business and Management Forum)
From contributor A:
When you say that an employee achieves it 50% of the time, exactly what performance are you measuring and what incentives are you considering?

From contributor B:
This is a very interesting question. How do you set a standard to measure an employee's performance based on an incentive program? The concept is great, and one that I think every shop could benefit from, but the big question is implementation. For instance, we use a CNC router to process parts in a nested based system. All machine operations are done on the CNC, including construction boring. Our assemblers basically fold the cabinets together and insert the screws. We have timed ourselves (the owners of the company) in this assembly process and found that a standard base cabinet takes approximately 14 minutes to assemble. Is it too much to expect an employee to assemble at a rate of two cabinets per hour? We're having trouble meeting that mark. What kind of experience is everybody else having?

From contributor C:
If it is predetermined how often he/she would achieve the incentive then what is the point? Incentives, in my opinion, are only useful if there is a real chance of achieving them. I use them for motivating guys to go above and beyond what would normally be expected from them. I have not had much luck basing incentives on performance when talking about individual employees, or at least I have not found a tangible way to measure this. It always seems to come down to a gut check. Tying it to sales works well for us - if sales and production are up then the money is there to pay bonuses. If sales and/or production are down we all work harder to push those numbers back up. You can analyze this to death but what it comes down to is finding what motivates your employees to go the extra mile, be it monthly, quarterly or however you measure it.

From contributor D:
To contributor B: If you can do four cabs an hour why canít your men do even two? I worked for a company many years ago that solved what seems to be your problem by going to piecemeal production. Figure out what it costs labor-wise to put together one cabinet thatís what you pay them. Letís say the average hourly pay is $14.00 an hour - that means for each cabinet each guy puts together he or she gets $3.50. They will either leave or they will do the job and make money. You could get a rookie from trade school, train that person to put together the boxes and he would no doubt make you money.

From the original questioner:
I meant what we would like a worker to achieve for any kind of performance we need to measure, and that is usually a production output for the floor guys, but we also have Quality Control, Customer Service, managers, etc. Usually the incentive is monetary.

From contributor C:
If it is predetermined how often he/she would achieve the incentive then what is the point? Every process has output fluctuations. I was envisioning setting the trigger at the mid-point, or average, thinking that if the lower half of performance output could be avoided, we would make a lot more money. And theoretically the shop guys could be motivated to achieve their bonus more than 50% of the time, which would be good for all. If so, maybe they are now hitting their bonus 75% of the time or more. I would think that the point of an incentive program is to modify behavior. If it doesn't, then 50% of the time we would be paying out bonus money when we didn't have to.

I wouldn't use incentives to change behavior or to eliminate the lower half of production output. If someone is not giving adequate output they should be gone. Anything below normal is unacceptable.

From the original questioner:
Isn't the definition of incentive pay to motivate someone to do more than they might otherwise do? Output fluctuates among the best of us. How can I argue that? We all have better days and worse days. The output of any process fluctuates. Look at your yearly production and divide by the number of work days. On any single day, that number should be easy to hit, but during the year you have to deal with tardies, absences, PTO, attitudes, sickness while at work, the compressor breaks down, etc. If you or your people do the exact same amount of work each and every day, day in and day out, all year, then you are just lying to yourself and you need to keep better records. In a sense I agree that a good employee should come to work and do their job without needing an incentive. This is why I am struggling a little with this. Everyone wants an incentive program so they can make more money, but how do I do it so it isn't just charity?

From contributor E:
Get the book "The Game of Work". Incentives should be on an individual basis. The profit sharing idea has more problems than benefits in my opinion. You will find that for everyone who likes profit sharing, there are three others who don't. What do you do when there is no profit? Whatever you do, the key is to get agreement with the program. It can be worked out. The question to ask: What is the unit of measure?

Piece work is also good but has its problem as well. In California, I think it is illegal. Also consider that if any bonuses are earned during overtime hours you will have to pay 1.5 times the bonus as well on the portion that was earned during that time. This is in California, and Iím not sure in other states. But whatever you come up with run it past a labor attorney. Before you try a monetary incentive start tracking hours on jobs and operations. Maybe start out with some sort of small non-monetary incentive to test the waters and gain agreement with the idea and the tracking of time. Another aspect of this is that it will sharpen up your business as this process will force you to look hard at your operation and your workers and bidding practices. Your workers will want you to avoid garbage work and bring in more good work - which is much easier to estimate when considering the time required.

From contributor F:
One way to standardize your output, or assembly, is to create an assembly line of work steps - all timed to a conveyor. The worker at each step will be proficient and efficient and his/her work steps and motions will be well thought out and organized for optimum production geared to the time allocated with the slow moving conveyor. Now assembly is predictable and can be more easily scheduled.

From contributor G:
In my shop I offered a cruise for the employee and spouse, paid for the company, if we reached a gross sales goal. I would pay for the tickets. If they wanted to upgrade the cabin, get a coke card, drink, gamble, etc, it was on them. We are on track to exceed the goal. I tried the individual incentives but that didn't work. One employee told me it didn't count since it was not guaranteed. I asked for feedback and they liked the cruise and said they would like to do it again next year. I'm in a port city and we have 3 or 4 day trips that leave on Friday and return on Monday. We planned to go in February. The cost was approximately $850 a couple.

I told them it would change to a profit margin goal instead of a sales goal. One thing I noticed was the employees tended to monitor each other. They knew if one person slacked off on a consistent basis, the whole shop might miss the incentive. When I was in management in corporate America I learned everyone has a different button that needs pushing. Some need financial rewards. Some need public recognition. Some need private atta-boys. The bigger the staff, the more you have to work at finding the buttons.

In the case of the cruise, those who would rather not go will be paid an equivalent. It's up to them. Besides, the wife really likes the cruise when the business pays for it.

From contributor E:
I have also seen the group bonus become a disincentive. The good guys say they are carrying the ones who aren't motivated, and the ones who aren't motivated aren't going to be motivated no matter what. Consequently production goes down. The group bonus has merit but something to think about.

From contributor F:
Motivation isnít a simple cause-effect deal. A good manager must carefully assess his reward structure, his particular situation, and have contingency as a point of view. If he can bring this into his/her management, the more effective the motivational program will be. To put it another way - people tend to follow those in whom they see a way of satisfying their personal goals. The more a manager understands what motivates his employees as individuals, and reflects this in his managerial actions, the more effective leader he will be.

Ideally incentive plans are a carefully constructed wage structure determined by job evaluation. Time study sets the production standard at a level that allows an average worker, who applies himself, to make additional money above the base rate - typically 15 - 25%. This is what provides the impetus for one to work harder under the incentive program. Incentive plans establish a direct relationship between performance and reward.

It is unrealistic for management to assume that employees will respond to this opportunity to earn more by producing more. They know once everyone does this that management is most likely to review its time-study findings and up the standards. There are many reasons and examples I could give as to why incentive plans generate conflict and can be deficient in practice. Iíve spent years dealing with this paradox. In my post above I give the true cure for managing for optimum performance/productivity. The speed of production is set by the machinery whenever possible and employees will accept this. However, when the work isnít so much mass production this becomes more difficult to apply, and the managers understanding of individual motivation and correct standards becomes more important.

From the original questioner:

To contributor F: What do you mean by having a contingency point of view - actions you take if the incentive goals are not met? You suggest a moving assembly line. In our current facility it would not be feasible. We make cabinet doors. Are you familiar with the machinery and process used in a 30 person door shop? There are so many restraints that I don't see how it would be feasible without going totally computerized with bar codes, etc. So many things currently get done in such a way as to keep the job together and not spread out from the beginning to the end of the shop. We do control flow by having a controlled amount of material between stations, controlled by either the number of tables, or the length of roller conveyor between stations. This makes for a very quick visual check that everything is moving evenly. Empty or overflowing conveyor lines indicate an imbalance, and we respond by moving people around, working overtime, etc. Only in a text book or a moving conveyor system will you have the RF machine, table saw, panel shaper, assembler, wide belt, edger, finish sanders, orbit sander, and Quality Control all working at the same pace, without slack or waste. Controlling amounts of material between stations as we do works somewhat as a cardless Kanban - everyone knows that they are trying to clean out their incoming line, and fill up the outgoing line, and the supervisors have to have the foresight to move people around where and when they are needed.

I put a lot of thought into the incentive plan again this weekend and had it finalized and in effect on Tuesday. Effective this 4th quarter only, I will make changes as we learn what works and what doesn't. Based on what several people suggested, I set the trigger level just beyond what will safely provide a minimum financial return in all but the most unusual circumstances. The payouts are stated as a percentage of income for the month (more accurately greater than 2% x hourly rate x hours work for the month, for example) for achieving a given goal. There will also be quarterly profit sharing. If they hit their goals, there will, in most cases, be a profit to share. I did it, and there is an enthusiastic response from everyone. Tomorrow is another day, and we will see what happens.

From contributor G:
Contributor F brings up a good point. In CWB this month is an article that has a 4 man shop producing something like 2 million this year. They are as automated as it gets. Now they are looking at robotics. I hate to say it but with the workforce shortage and lack of commitment from the majority of workforce that is out there, maybe this is the way to go. At least it would solve the production problem of staff working at 1/2 the rate of management.

From contributor F:
"I will make changes as we learn what works and what doesnít" - this is a contingency point of view. A computer driven manufacturing program would most likely benefit you. While I'm familiar with Kanban -a Japanese term meaning signal, I chose to have a program written to exactly fit my needs. I canít tell you how much it improved my business.

My most successful bonus plan not only addressed meeting production standards but also included attendance, tardiness, overtime attitude, and others. If the criteria were met each week then the next week the employee received a .50 per hour bonus on their check. It was deemed a bonus and the criteria had to be met each week to receive it. It improved attendance, attitudes and the meeting of minimum work standards plant wide.

Be sure to include written performance appraisals for each employee which reflect shared vision and expectations, show areas which need improvement, and that will be a permanent record of what someone has accomplished, and most importantly, influence future performance. Any type of incentive program is only part of a business management plan and without all the others in place it will be minimally successful. I'm talking about things like job descriptions and specifications, evaluations, and expectation of team involvement, training, cross-functional cooperation and understanding of objectives.