Having His Say: Steamed About Incentive Pay

Jun 14, 2006 8:58 PM  By

I just read the first part of the two-part article on incentive pay in the June 7 O+F Advisor and wanted to commend you on its content. With few exceptions, our experience has been quite parallel to the conclusions ARC has gleaned from the survey. I do believe, however, that there’s more to the story, especially when it comes to implementation.

ARC’s conclusion that “…on average these [LMS and standards-based] solutions had a payback period of less than one year,” is accurate, but doesn’t tell the whole story. In our view, the secret of success with pay for performance programs very often lies in the nuances. Take ARC’s observation that 73% of its survey respondents reported “productivity gains” of between 10% and 30% or more. While that’s laudable, it misses the point. Unless excess hours generated by incentives are eliminated from production operations, no savings are realized and there is no cost reduction. Greater efficiencies are the means, not the goal.

Another subtle but important point flows from the goal of realizing “the optimum potential of a set of assets.” In fact, based on our experience, no one knows what that full potential is in humans and all of us have had personal experience in misjudging the peak of individual human potential in the folks we’ve hired. It’s important to design any incentive program so that it doesn’t arbitrarily limit improvement potential. Even better, design the program to motivate and excite the workforce to achieve exceptionally high goals. How well employees are motivated is a major factor in the amount of success an incentive program will realize.

While we’re talking about goals, it’s important to note that, even in facilities with engineered labor standards (ELS) and a labor management software (LMS) package in place, there is a surprisingly large savings opportunity to be seized. In one of our recent implementations, the client already had experience with engineered standards and LMS software as cited in your article. That not withstanding, in the first five months, the client has seen annualized savings of more than $4,000 per full-time equivalent employee (FTE – a worker with 2,080 hours worked annually). The point is that the margin of gain, even with all those components in place, may still be unexpectedly high.

The ARC survey apparently also contains the recommendation that an incentive be implemented only on top of standards and only after all employees are “up to the targeted standards.” Two comments on this point. First, why isn’t a standard just that – i.e. a minimum acceptable level of performance? In many instances we have seen this practice, but have found little justification for it. If the target is 100, then 85 or 90 should not be acceptable. By allowing substandard performance, lowered expectations become the norm and efficiencies are lost permanently.

Second, companies who have do not have either ELS or LMS in place, but whose metrics are credible can also achieve major productivity gains and ROIs of well under 1 year. One company’s experience (more than 5 years) across its entire network, without either ELS or LMS, has now exceeded $9,000 per year per participating FTE and has long ago paid for its investment.

Finally, the most successful companies using incentives plan and implement for the long haul. Quick payback does not begin to equal the savings to be realized from a multi-year commitment to the program. These companies identify an internal champion and empower that person to assure that the program continues to receive the care and feeding warranted. This will also protect the program from local management “improvements” that threaten the health of the Golden Goose.

RonHounsell is president of Cadre Logistics Services, part of Denver, CO-based Cadre Technologies, a provider of WMS systems to the 3PL market. For more information, go to www.cadretech.com.