Incentive Pay in the Warehouse

Jun 07, 2006 8:15 PM  By

This is the first in two-part series on providing incentive pay to warehouse workers. This week, we’ll discuss the results from a recent survey on incentive pay by Dedham, MA-based consultancy ARC Advisory Group and Milwaukee-based supply chain execution provider RedPrairie. Next week, we’ll focus on how you can implement an incentive program in your warehouse. Hint: if you have a warehouse management system, you’re halfway home.

Want to achieve better efficiencies in your distribution center? You might try offering performance incentives. A recent survey by Dedham, MA-based consultancy ARC Advisory Group noted that incentive programs in the warehouse have yielded striking gains in productivity.

More than 60% of respondents achieved productivity gains between 10%-30% over a two-year period using performance incentives. Another 13% achieved productivity gains exceeding 30% over that same period.

These programs have also resulted in other benefits such as increased employee satisfaction which leads to improved retention. The majority of logistics managers are satisfied with their programs.

The programs that made the greatest gains in productivity achieved their results by:
–Basing incentives on targets for individual employees;
–Basing their targets on granular labor standards;
–Linking the payment of productivity incentives to a requirement that employees maintain a predefined level of quality and safety.

The results of this study were not surprising. In a previous study of labor management systems (LMS) based on labor standards ARC found that on average, these solutions had a payback period of less than one year.

ARC would recommend that companies that choose to build incentives on top of granular labor standards implement the program in two phases. In the first phase, employ no incentives. Bring the great majority of employees up to the targeted standards. In the second phase, use incentives to reward employees willing to exceed expected work levels.

Real-time performance management (RPM) involve setting targets based on an understanding of the optimum potential of a set of assets, the provision of ongoing dynamic feedback, feedback and training for employees operating below acceptable levels of performance, and rewards applied closer in time to the performance that an organization wishes to encourage.

The positive results achieved by companies using incentive pay in the warehouse raises the question, “If incentive pay programs are so good, why aren’t more companies using them?”

Survey respondents had a variety of fears and concerns. Their top two concerns were that they could not collect accurate data on an individual associate’s performance and that the program would not be fair. Some respondents felt it would not be fair to have incentives in some areas of the warehouse but not others, or in some warehouses but not others, or in the warehouses but not in other facilities like factories.

The most frequent reason companies chose not to pursue incentive pay in the warehouse was that they lacked accurate performance data.