Incentive Pay in the Warehouse, Part II

This is the second in a two-part series on providing incentive pay to warehouse workers. This week, we’ll focus on how you can implement an incentive program in your warehouse. Last week, we discussed results from a recent survey on incentive pay by Dedham, MA-based consultancy ARC Advisory Group and Milwaukee-based supply chain execution provider RedPrairie.

Incentive programs for the warehouse, implemented in a variety of ways, have resulted in striking gains in productivity. These programs have also resulted in other benefits such as increased employee satisfaction.

The best programs that made the greatest gains in productivity are associated with:

  • Incentives based on targets for individual employees;
  • Targets based on granular labor standards;

The payment of incentives for increased productivity should be balanced with the need to maintain quality and safety. Productivity incentives should only be paid if a sufficient level of quality and safety are maintained.

ARC is a strong proponent of real-time performance management principles. These involve targets set based on an understanding of the optimum potential of a set of assets, an appropriate balancing of goals, the provision of dynamic feedback to associates on their productivity, and the quality of their work, and the provision of ongoing feedback and training to associates not performing at an acceptable performance level. Rewards should be applied closer in time to the behaviors that an organization wishes to encourage. Rewards provided infrequently will prove less effective.

A company invests in assets – like people – to execute on their business plan. The assets and process are designed to have the capacity to do a certain amount of work. If this capacity is not used, it is wasted and lost forever. Detecting such waste requires a dedication to comparing performance against the work that should have been performed. Warehouses that have installed labor management systems based on granular labor standards have a true understanding of the optimum potential their labor force can work at. An incentive program built using a real-time labor management system employing granular labor standards offers a potent form of real-time performance management.

Performance targets based on labor standards consider the specific characteristics of a given piece of work, recognizing the exact travel distance required, the movements required for the task (e.g., that an order pick from the chest-high “golden zone” will be incrementally faster than a similar pick from the lowest row of racking), the number of pieces, the size and weight of the items, and the speeds of fork lifts, pallet jacks, or other equipment used.

Labor management software dynamically calculates specific goal times for each task based on this granular analysis of the labor involved. Actual performance is reported against these goals times by individual operator, specific activity work area, or customer. Feedback can be real-time to an operator via an RF terminal, or it can be made available at various intervals throughout the day. Dynamic performance management systems will out perform static systems. Being able to compare performance against the target on an ongoing basis, and then seeing high performance reflected in increased pay during the next pay period, provides superior motivation to a workforce than more static forms of performance management.

Goal times are determined by the calculation engine based on how fast an operator using the best method to achieve a task, and moving at normal speeds, should take to complete it. Because the calculation is based on best methods, workers achieving subpar results should not be assumed to be lazy. Instead, a manager should observe their work and train them in best methods.

ARC recommends companies that choose to build incentives on top of granular labor standards implement the program in two phases. In the first phase, use no incentives. Rather bring the majority of employees up to the targeted standards. In the second phase, use incentives to reward employees willing to exceed expected work levels! This methodology compensates employees for becoming more productive without paying anyone for less than optimum performance.

ARC’s previous research into labor management systems based on granular labor standards showed that on average these solutions had a payback period of less than one year. ARC has investigated a wide range of supply chain solutions and the average payback is close to two years for many of these solutions. ARC considers payback in less than one year to be the “gold standard.”

Steve Banker is an analyst at Dedham, MA-based consultancy ARC Advisory Group.