Chapter 10

Implementing Productivity Improvement Programs

Gaining Competitive Advantage

• Problem: Lincoln Electric—How John C. Lincoln motivated his workforce to ensure the company’s success

• Solution: Implemented an Employee Incentive Program– Linked the company’s reward and recognition system

to it’s goals.– Contributing workers shared in the proceeds– Rewarded workers for turning out high-quality

products efficiently while controlling costs

Gaining Competitive Advantage

• Solution: Implemented an Employee Incentive Program– Production workers are paid according to the number

of “pieces” or product unit they produce that are not defective

– Year-end bonus system that gives all workers the opportunity to nearly double their base wages

– Size of bonus check depends on employee’s performance

– Evaluated twice a year on four criteria: output, quality, dependability (attendance and punctuality) personal characteristics (cooperation and sharing with others)

Gaining Competitive Advantage

• Lincoln Electric also provides stock options.

• Given shares of company stock based on annual profit

• 1992—workers increased base pay by an average of 75%, earning an average annual income of $45,000 (twice as much as counterparts in other companies)

• 1,000 unsolicited job applications a month

Gaining Competitive Advantage

• The incentive program built competitive advantage at Lincoln Electric by:– Turnover rate among employees surviving the

first two months is less than 3%– Productivity rate is two to three times greater

than that of its competitors– Maintained a stable price structure, despite

the high salaries it pays– Done all with no lay-offs

Linking Productivity Improvement Programs to Competitive Advantage

• Productivity Improvement Programs– Organizational interventions designed to

improve productivity by increasing employee motivation

• Extrinsic rewards—such as pay raises and bonuses

• Intrinsic rewards—come from within—good feeling one gets from successfully completing a challenging assignment

Improving Worker Productivity

• Goal is to increase productivity– Significant affects on production, quantity,

quality, and efficiency– MetLife introduced its productivity

improvement program in 1998, the companies return on equity was 7 percent—in two years it jumped to 10.5%

Programs are successful due to motivating ees to engage in appropriate job behaviors

Expectancy Theory

• Expectancy theory—a motivation theory that focuses on the effort-to-performance and performance-to-reward links (Discuss figure 10-1 page 302)

• Ees will be highly motivated to the extent at which they perceive:– Their efforts will lead to successful job performance– Their successful job performance will lead to

outcomes or rewards they value– Greater perceived probabilities that effort will lead to

successful performance and that successful performance will lead to a valued reward, the greater the motivation

Expectancy Improvement Programs

• Successful productivity improvement programs are able to establish a clear connection between ee efforts and valued rewards—ees must believe that they can gain valued rewards by working hard (i.e. Lincoln Electric’s program)– Enhances recruitment efforts and retention

rates

Pay-for-Performance Programs

• Pay-for-performance programs—Productivity improvement programs that link financial rewards to successful job performance (ee rewards are linked directly to performance)– Linking rewards to performance also makes sense

from an expectancy theory perspective—efforts are not rewarded then there is little incentive for performing (i.e. general increase for everyone) –(Discuss on the Road to Competitive Advantage—10-1 page 304)

Pay-for-Performance Programs

• 1990 about 50% of all U.S. companies used some type of pay-for-performance system

• 2000 the figure rose to 80%• Believe is that these programs can significantly

increase ee motivational levels (Owen-Corning—Ohio manufacturer—WAKE UP TWO OHIIO COMPANIES—WOW!!!—utilize stock options and profit sharing—decreases ee’s guaranteed annual base pay, but provides them with large bonuses if the company performs at or above target levels

Potential Problems with Pay-for-Performance Programs

• Create legal problems—if the program is administered unfairly—violate Title VII of the Civil Rights Act—bigoted employer could deny a minority ee a well-earned pay raise—discrimination charge

• Discuss Standards for Effective Pay-for-Performance Programs—group discussion

• Motivational Standards– Effort-performance links—perceive they can reach desired

performance levels engaging in appropriate behaviors– Performance-reward links—rewards tied to successful job

performance

Potential Problems with Pay-for-Performance Programs

• Discuss Standards for Effective Pay-for-Performance Programs—group discussion– Value of reward—valued by ee– Timeliness of rewards—rewards follow shortly after the desired

behaviors

• Cost-Benefit Standards– Performance-organizational mission links: the performance

being rewarded should be directly linked to the achievement of the org’s mission

– Cost efficiency—Productivity gains from the program must more than offset the cost of the rewards

Merit Pay Plans

• Merit Pay Plan—a pay-for-performance program that grants ees annual pay raises based on their levels of performance (performance is measured on an appraisal instrument)

• Merit pay guide-chart—a chart that shows the size of a merit pay raise associated with each level of job performance (Discuss Exhibit 10-2 page 306)– Supervisors determine individual’s merit increase

(focal vs. anniversary)

Merit Pay Plans

• Strengths:– Merit pay plans establish effort-performance

and performance-reward links (under ee’s control)—however merit budgets in the U.S. have been around 3% for many years) –ees know what the reward is if the chart is publicized

Merit Pay Plans

• Weaknesses:– Firm’s performance appraisal system often

impedes the effort-performance link– Isolate individual performance against that of

team– Supervisory ratings are often flawed and don’t

reflect ee’s actual performance levels– Discuss how ee’s feel about merit pay—

Exhibit 10-3

Merit Pay Plans

• Weaknesses:– Fail to establish a clear performance-reward link– Sometimes supervisors give merit increases that are

not based on performance—manager is dependent on a direct report due to their specialized expertise or when they threaten to appeal to upper management

– Fail when ees do not value the rewards offered by the company—merit pool is not unlimited

– Performance-reward link is hindered when supervisor are reluctant to make distinctions between members within their units (Top performer vs. lower performer—what is the merit % difference?

Merit Pay Plans

• Weaknesses:– Lag that occurs between behavior and reward—get a

raise once a year—little incentive to work hard throughout the year (PSICOR grants raises quarterly—supervisors can give spot bonuses)

– Not very cost efficient—once earned it becomes part of the base pay

– Hinder productivity if these plans fail to reward behaviors that contribute to organizational goals (Sears commission plans based on gross revenues at its auto repair stores—unnecessary repairs

– Competitive behaviors—will I help my co-worker?

Recommendations for Merit Pay Programs

• Ensure that managers are willing to make objective assessments of their ees’ performance

• Measure an ee’s performance on the basis of job behaviors that have a proven impact on the success of the business

• Make payouts quarterly, not annually (how realistic –administrative burden

• Communicate performance expectations to ees• Train managers to properly implement system

Recommendations for Merit Pay Programs

• Think big—the program must pack a wallop. The reward must be large enough to make a difference—Top ees should receive a 10-15% increase

• Make pay increases public—monetary value and the status and prestige it conveys

• Don’t deliver rewards as a salary increase; use bonuses—salary increases become annuities—Bonuses should be delivered regularly—Variable Pay

Recommendations for Merit Pay Programs

• Deliver rewards as soon as possible after the desired behavior takes place—Instant or spot awards

• Make sure individual performance can be measured accurately—Ideal measures are influential, objective, easily communicated, and inclusive of all the important behaviors the organization wishes to stimulate

• For program to work, ees must believe management’s claim that performance will be fairly rewarded

Piece Rate Plans

• Piece rate plans—Pay-for-Performance programs that base an individual’s wages on the number of “pieces” or product units he or she produces

• Straight piecework—a piece rate plan that pays workers a set amount for each unit produced

Piece Rate Plans

• Strengths:– Ees know exactly what they must do to earn

the reward they desire– Unlike merit pay plans, the performance

standards set in piece rate plans are objective and thus cannot be influenced by supervisory bias

– Rewards are tied directly to performance—higher outputs result in higher pay

Piece Rate Plans

• Weaknesses:– Great deal of pressure on ees to produce—

many people feel uncomfortable in that environment—financial reward derived from high productivity may not be great enough to offset the stress some workers experience under this type of reward system

– Performance-organizational mission link—not all behaviors encouraged by these programs contribute to the org’s mission

Gainsharing

• Pay-for-Performance Plans that offer employees a cash award for meeting or exceeding team based goals

• Features of a gainsharing plan– Org has productivity goals that can be achieved

through effective teamwork– Ees receive cash bonuses of goals are met– Productivity is measured by an explicit formula with

objective measures– Ees are encouraged to submit suggestions for cutting

production costs or increasing productivity

Gainsharing Plans

• Strengths– Effort-performance and performance-reward

links are strong because ees know what needs to be done to trigger a payoff

– Link performance with org’s mission– Promote teamwork—rewards will be greater

when all ees work as effectively as possible– Cost-effective—productivity goals are met,

everyone wins—in a bad year you have no payout

Gainsharing Plans

• Weaknesses:– Ees may perceive that rewards are unfairly distributed

(group project some students do more on a team project than others)

– Ee suggestions for improving efficiency may dwindle over time—down the road ees run out of ideas

– Gainsharing plans suffer if payouts are inflexible, especially in volatile environments where unexpected changes in the formula factors can make the formula obsolete (increased labor costs)

Gainsharing Plans

• Recommendations:– Management must orient the company culture to one

of respect, cooperation, and open communication—Listen, go out and talk to ees, and communicate honestly with ees

– Plan designed so that the payout is dependent on factors the ee can control, such as shipments, payroll costs, customer satisfaction, and quality

– Management must meet regularly with ees to share information and ideas and gather suggestions

Profit Sharing Plans

• Profit Sharing—pay-for-performance plans in which a portion of the company’s profits are contributed to individual ee accounts– Deferred plans—individual’s profit sharing

earnings are distributed at retirement– Distribution plans—company distributes each

period’s earnings as soon as the profit-sharing pool is calculated

– Combination plans—portion immediately remainder awaits future distribution

Profit Sharing Plans

• Strengths:– Designed to improve productivity—ee’s interests are

compatible with employers’ goals– Greater sense of ownership—identify more closely

with the organization—goals and work harder to achieve them

• Weaknesses:– Marginally address effort-performance reward links– Not always cost efficient—profits result of something

other than their performance– Deferred plans—not well timed for motivation

Employee Empowerment Programs

• Ees a greater voice in decisions about work-related matters– Give suggestions to exercising veto power

over management decisions, to making the decisions themselves

– Improve productivity through ee empowerment programs

– Improve productivity because the process leads to better decisions

Informal Participative Decision-Making Programs

• An empowerment program in which managers decide just how much decision-making authority ees should have in each instance

• Strengths:– Positive impact on productivity—tailors the

amount of ee empowerment to the specific situation—make decisions as good or better than their managers because they are closer to the process

Informal Participative Decision-Making Programs

• Weaknesses:– Success hinges on whether ees want to participate in

decision making

• Job Enrichment: an employee empowerment program in which jobs are redesigned to be more intrinsically rewarding (Discuss Exhibit 10-6 page 321)– Combine tasks– Establish client relationships– Reduce direct supervision– Increase identification with product/service

Job Enrichment

• Strengths:– Many have enriched dull jobs—makes jobs less

automated, therefore making them more interesting and rewarding

– Enrichment leads to improvements in productivity, quality, absenteeism rates, and retention

• Weaknesses:– Jobs become less repetitive and routine, production

may become less efficient (enrichment would be ill advised in situations where the loss of efficiency cannot be offset by productivity gains from increased motivation

Quality Circles

• An employee empowerment program in which a team of six to twelve employees meets regularly to identify and resolve production problems within their unit

• Strengths– Get valuable input from ees– Improve communication– Increase motivation

Quality Circles

• Weaknesses:– Used as a quick fix and not address the real problems

underlying poor productivity, quality, and ee morale– Use of quality circles often creates an “insider

culture,” where non-circle members become jealous and hostile towards circle members

– Operated improperly; companies do not pay enough attention to who is selected for circle membership, what projects they do, and who should act on their recommendations

Continuous Improvement Programs

• Programs that attempt to build quality into all phases of the design, production, and delivery of product or service by empowering workers to trace product or service problems to their root causes and redesign production processes to eliminate them

• Self-managed work teams—a form of ee empowerment in which teams of six to eighteen ees from different departments work together to produce a well-defined segment of finished work

Continuous Improvement Programs

• Training for self-managed work teams:– Technical skills (cross training)– Interpersonal skills—team members must

communicate effectively, both one on one and in groups with each other and groups outside the team

– Administrative skills—must perform tasks formerly handled by supervisors (keep records, report procedures, budget, schedule, monitor, hire, and appraise performance of team members

Self-Managed Work Teams

• Strengths:– Effective because they empower ees to make

decisions that affect their day-to-day business lives

– Provide greater flexibility (produce small lots, customizing products to increasing demands (flexible work practices with workers moving from job to job—cross training (auto, aerospace, electrical equipment, electronics, food processing, paper, and steel industries)

Self-Managed Work Teams

• Weaknesses:– “turf battles” (department rivalries)– Absence of a supervisor (who handles human

relations problems?)– Workers lack sufficient time to handle some of

the traditional supervisory responsibilities (interviews, training/orienting new ees

– Difficulty with performance appraisal process—use peer instead of supervisory appraisals