With the global economic crisis supply chain organizations are looking for any way they can to drive better performance with minimal if any investment. Many supply chain management (SCM) are considering sharing the value in SCM productivity gains between the company and workers in the form of incentive pay programs. The theory is that if workers benefit from improving productivitythey will be more motivated to worker harder, and smarter, to achieve gains. Indeed a motivated work froce is far better than the oposite, but incentive pay is not new, and companies should learn from history what works, what doesn’t and more importantly what risks this path has. To achieve productivity improvement it is important to motivate the workers to improve. However, any form of incentive pay comes with pros and cons, and execution of the incentive pay process must address a few things:
- While most people assume that incentive pay programs are “compensation” programs they are as much, if not more, “motivation” programs and workers whether factory workers, sales people, distribution center people or executives will quickly determine what the parameters of the program are that benefit them most and this will be the prime motivator of their day to day behaviors. For example, tell a sales person they get an extra bonus for selling more of product A and they will be motivated to push product A in lieu of other products. Tell a distirbution center worker they get more money if pick volume productivity goes up and they will indeed strive to improve pick volume productivity. This is the good news. The bad news is that too often while one metric goes up, another goes down, or sales of one product increases while another decreases; pick volume increases but pick mistakes increase, worker injuries increase and put-away productivity declines. Most organizations have experienced the negative side of incentive pay. This is not to say that incentive pay programs are bad, but that you must understand the prevalence of cause and affect relationships between good and not so good behaviors created by shifts in motivation caused as you roll out incentive systems. For example years ago I was working with a warehouse operation that was based in a very old three story building where goods were moved between floors using an antiquated and very slow freight elevator. This warehouse operation instituted an incentive around total work completed in a shift. Well this company had significant differences in demand patterns between it’s fastest and slowest moving items and their goal was to keep slow movers on the third floor, fast movers on the ground floor. Well lo and behold with in a short period of time after instituting the incentive pay program their slotting patterns were thrown to the wind and they had C & D items scattered around the first floor because workers were reluctant (demotivated) to use the elevator unless absolutely necessary. This company had implemented a strong WMS but within weeks their inventory was completely out of control primarily because the incentive system motivated workers to not put goods on the third floor regardless of what the system said. The slowness of the freight elevator would negatively impact their ability to do as much as possible in a shift so they would look for the first available open location and put the goods there.
- Secondly workers must feel they have some control over the productivity metrics for them to buy into the incentive system. Using sales as an example many sales organizations have tried to move to profitability based compensation but sales people argue that they have no control over the cost side of the ledger so they should not be held accountable for profitability. They will argue they can drive sales and sales revenues but if cost-of-goods sold is out of whack they are penalized. Indeed over zealous discounting might affect profitability but many will argue that still doesn’t allow them to control profitability. So in a D/C environment if workers feel that their activities will not directly relate to an incentive metric they will be less inclined to support the endeavor. If say over all productivity improvements are the goal then the workers must feel they can by in large control of productivity and that some out side party is not negatively impacting their metrics.
- While simplicity is normally preferred over complexity it can cause problems in an incentive pay environment. Factories were historically supporters of incentive pay but many found that while one metric, say volume produced could be moved up through incentives, other metrics say for example quality went down. The answer is to say that multiple metrics needs to be in balanced (volume of X, quality of y, customer satisfaction of Z) to achieve the incentive goals; however this introduces complexity and too much complexity and the result can be just the opposite of the original goal and all metrics suffer.
- To employees incentives become contracts and they, more often than not, view this as guaranteed, though variable, compensation assuming they meet their obligations. Organizations must be prepared to stand by these agreements regardless of circumstances and this is often easier said than done. For example if the company sets a goal based on a certain size work force and that work force is reduced either through attrition or management decisions and productivity declines because of this workers will fight for what they believe is their due because they could not control managements hiring or firing practices. Like wise if at the begining of the year workers were promised an incentive and they believe they achieve the goal and they are not compensated they will protest vociferously. Mid-year changes are also frowned upon.
- Trust and transparency are absolutely critical to success. If workers are to be paid on a metric they need to see these metrics and believe that these are being honestly reported. Any deviation from this will cause workers to lose faith. Having a strong supply chain performance management or analytics tool is important for providing this transparency to workers. Many SCM organizations still have to collect productivity information manually and run this through spread sheets which is an administrative nightmare. I would recommend companies adopt a SCM analytics tool if this is the path they choose to pursue.