Many would agree that it is wise to implement an effective incentive program (IP) that actually increases productivity and lowers costs. However, very few companies actually have implemented such an effective IP, especially one that affects every group within an organization (including production, design, sales, and support). This article highlights the key aspects for implementing an IP for all groups.
I must reemphasize the word “effective.” An IP is not effective if it does not actually increase productivity and lower costs on a consistent basis. According to industrial engineering consultants Mitch Fein and Fred Myers (both of whom hold PhDs), most companies experience a more than 42% gain in productivity by properly measuring productivity, setting realistic goals, taking corrective action in response to unacceptable practices, and rewarding individuals. Fein and Myers emphasize that, if normal level output consistently equals an average value, anything beyond that value should split the cost of labor evenly between the employee and the company. For every dollar saved, 50 cents should be distributed to the employees, and 50 cents should be saved for the company. Three things are happening at once: The company’s cost is lowered, its total volume is increased, and the employees are rewarded for exceeding the average productivity level. Every company administrator should desire this mutually beneficial situation because it reduces the cost of labor and helps increase sales due to the higher productivity.
To motivate individuals to exceed the average output, one must keep in mind the individuals’ perspectives. Common sense indicates that an individual has a greater influence over one worker’s output than over that of a large group. Why would anyone believe that having a large group in the same IP pool would have much influence on an individual? (1 of 30 vs 1 of 3)? You’re only fooling yourself if you think this does not have a big influence on the end results. Smaller groups have greater impacts on the individual group members’ motivation and effort.
The actual payout needs to occur on a timely basis so that the employees link the reward to the immediacy of their efforts. A once-a-year profit sharing program does not have any influence on daily output and should not be considered an IP. TDC suggests that IP has a meaningful effect when hourly employees are paid once per month and salaried employees are paid quarterly.
Proper measurements are the hardest aspect of IP for most companies to tackle. Without proper, reliable measurements, your IP will fall apart before it begins. Always reward the behavior that you wish to influence. For each group, here are the measurements that TDC recommends:
- Production – Use man-minutes, R.E. or S.U.—nothing else! For further explanation, please see http://todd-drummond.com/time-standards/
- Sales – Use gross margin dollars (sales – direct costs = gross margin). Why reward salespeople if the company does not gain from a sale? By the way, a sales commission and an IP are actually the same thing, but TDC recommends that it is based on gross margin, not total sales.
- Design – Most people have the most difficulty agreeing with what TDC recommends in this category, but if a company wants its designers to be properly motivated and to actually lower the direct cost of manufacturing, shop labor, and materials, designing prior to manufacturing is critical. Reducing costly errors should also be taken into account. TDC recommends a commission based on the total gross margin dollars the designer has created. More accumulated gross margin dollars indicates greater output and reduced direct costs. (It’s simple.) A designer can save a company tens of thousands of dollars simply by properly optimizing each truss design, but optimization is always the first thing a designer forgoes when pressed for time.
- Support – Regardless of who support personnel are helping, this team shares in the actual incentive payout of the supported group. A simple flat percentage of that group’s payout works fine in most cases. Again, do not lump every support group together.
These are the basics of an effective IP that has already been used successfully in many component companies. If you think that IP is too difficult to maintain, if you have tried it unsuccessfully in the past, or if you need to implement other practices before you can implement an IP, allow TDC to remove all these superficial barriers. An effective IP should be part of every company’s ethos, as it can lower costs, increase capacity, and build better employee relations.
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