Copyright 2000 - Ed Montemayor

Developing Group Incentive Plans:

An Organizational Change & Development Perspective

Module 17 - 2Copyright 2000 - Ed Montemayor

Group Incentives - OverviewThe issue =

“Connecting employee pay and business results”– Employee and organization share same fate – Reinforces continuous improvement– Support / promote employee involvement– Support / promote teamwork

Group incentives are ... ... variable pay ... based on objective / quantitative results ... a means for employees to SHARE in

the gain from improved performance ... distributed to all in a certain group

(team, department, facility, division, etc...)

Module 17 - 3Copyright 2000 - Ed Montemayor

Group Incentives - Overview (Cont.)Why do organizations install group incentives?• to improve business performance

– 15-20% increase in productivity– $2200 per employee per year (“or more”)

• to improve the performance - reward linkage to foster teamwork to improve communications• to improve morale• to create an empowering environment, support EI

= supported by research like “CARS” Consortium for Alternative Reward Systems ACA sponsored

Module 17 - 4Copyright 2000 - Ed Montemayor

Logic Behind “Gain-Sharing” Group IncentivesConceptually, gain-based incentives involve...

Results

Baseline

Gain EconomicValuation

$$$Bonus

Org’sshare

Employees’share

Payout Reserves

pool

FinancialPerformance Fund

Availability

Module 17 - 5Copyright 2000 - Ed Montemayor

Scanlon planTotal gain=(expected - actual) labor cost

Employee share = X% of gain

Multi-cost gain-sharingTotal gain= add(expected - actual) for several costs

Employee share = X% of gain

Current Profit-sharingTotal gain=(expected - actual) for profits

Employee share = X% of gain

Productivity goal-sharing

If productivityexceeds 20/hr

$300 bonus

Multi-goal-sharing

For every goal met

add 1% of pay to bonus

Financially-valued goal-sharing

See Figure 2

GA IN

GO AL

Labor productivity Multiple costs Financial resultsFUNDING SOURCE(S)

Res

ults

-pay

off l

ink

A Taxonomy for Group Incentive Plans

Module 17 - 6Copyright 2000 - Ed Montemayor

Cell 1 Example (accounting measures): Labor productivity Gainsharing - Scanlon

Historically: Labor costs = 20% of "Sales Value of Production" (Net Sales ± Inventory Changes)

This quarter:Sales Value of Production =$7,072,500.00Expected Labor Costs $1,414,500.00 (20% of above)Actual Labor Costs Payroll $940,640.00 (70%) Benefits $403,135.00 (30%) $1,343,775.00 Gain $70,725.00

Organization's share (½): $35,362.50Employees' share (½): $35,362.50 or 3.75% of Payroll

Module 17 - 7Copyright 2000 - Ed Montemayor

Cell 1 example (operational measures):Labor productivity Gainsharing - Improshare

Product

A

B

C

Production(x1000 units)

Payroll (work) hours

Baseline / 1000 u Expected

23.5

15.3

76.1

135

176

56

23.5 x 135 = 3172.5

15.3 x 176 = 2692.8

76.1 x 56 = 4261.6

Total = 10126.9

Actual hrs = 9625

Gain = 501.91/2 Gain = 250.95

(2.6 % of Actual hours)

Module 17 - 8Copyright 2000 - Ed Montemayor

Cell 2 Example: Multi-Cost GainsharingSales Value of Prod. $3,460,000Allowed costs (81%) $3,024,540Actual costs Labor $589,070 Materials $1,540,840 Energy $314,390 Other $519,740 $2,965,040

Gain $59,500

Employee share (35%) $20,825Reserve (1/5) $4,165

.. to be distributed $16,660

Module 17 - 9Copyright 2000 - Ed Montemayor

Cell 3 Example: “Profit Sharing” - Lovelace, CO

• Performance = combination of(a) Net revenue, and (b) service quality

• Provided...– Revenues > Expenditures, AND– Per capita expenditures < last year's

• Citizen's satisfaction survey ---> Bonus size Satisf: 85-100% --> bonus pool = 4% Net Revenue Satisf: 70-84% --> bonus pool = 3% Net Revenue Satisf: 60-69% --> bonus pool = 2% Net Revenue

[Avg.. bonus = $2000 per year]

Module 17 - 10Copyright 2000 - Ed Montemayor

Cell 5 Examples: Multi-Cost Goal-SharingArco Chemical

Monthly goal value

Propylene yield 3 pts.Isobutane yield 3 pts.Steam consumption 2 pts.Fuel losses 2 ptsTBHP quality 6 pt.Waste disposal 4 pts.SPC charting 4 pts.Customer complaints 6 pts.Etc.. ......

Each point = a certain % of base wages

Quaker Oats

Raw material yieldbasic goal 0.5%challenge goal 1.0%

Conversion costsbasic goal 0.5%challenge goal 1.0%

Quality goalscomply w/specs 0.5%reduce complaints +0.5%

Safetyachieve 2 of 3 goals 0.5%achieve all 3 goals 1.0%Incidence rateSeverity indexDays lost

†: from Gainsharing by J. Belcher

†

NON-COST MEASURES!!

Module 17 - 11Copyright 2000 - Ed Montemayor

• Goal Sharing bonuses will be based on the number of payable points scored in a given period.

• The bonus will be a fixed dollar amount for each point scored.

• Financial results will determine the maximum number of payable points.

• Performance in key operational results will determine the actual number of points scored.

• For each measure we may score up to 10 points.

• Doing better than the “baseline” (the average for the last 12 months) will result in the first point scored.

• Doing as the “best in class” level defined for the measure will result in 10 points scored.

• Performance between these two limits will result in a proportional number of points scored

M E A S U R E S

Baseline1 point2 points3 points

10 points9 points

Operational Scorecard

LaborProductivity % Scrap Solder PPM ........

80%80+ %

82+ %

84+ %

96+ %

98 - 100%

0.90%

0.85% or less

0.80% or less

0.50% or less

0.45% or less

300

300 or less

270 or less

240 or less

60 or less

30 or less

0.90% or less

4 points 86+ % 0.75% or less 210 or less

Cell 6 Example: Financially-valued goal-sharing

Module 17 - 12Copyright 2000 - Ed Montemayor

Labor hoursper case

Supplies per case

Savings pool

Employee share

Calculate sharing rate

Pati

ent

sati

sfac

tion

Clinical Quality

87%88%89%

95%96%

70% 100%

50%

0%

10%

35%

Sharing Rate Table

One More Twist...Multi-Cost Gain-Sharing Plan with Multiplicative Formula

Module 17 - 13Copyright 2000 - Ed Montemayor

One More Twist…Second Example:Carrier’s plan

Material Utilization savings+ Plant Efficiency savings+ Supplies Efficiency savings+ Schedule Attainment savings= Total Savingsx Quality modifier= Total Gainx 50% base employees’ share= Employee Share of Gains+ Safety savings pool= Total bonus pool

Quality modifier(% goal) 70% 0.00 80% 0.10 85% 0.35 90% 0.60 95% 0.90 98% 1.00 100% 1.10

† †: from Gainsharing by J. Belcher

Module 17 - 14Copyright 2000 - Ed Montemayor

Scanlon planTotal gain=(expected - actual) labor cost

Employee share = X% of gain

Multi-cost gain-sharingTotal gain= add(expected - actual) for several costs

Employee share = X% of gain

Current Profit-sharingTotal gain=(expected - actual) for profits

Employee share = X% of gain

Productivity goal-sharing

If productivityexceeds 20/hr

$300 bonus

Multi-goal-sharing

For every goal met

add 1% of pay to bonus

Financially-valued goal-sharing

See Figure 2

GA IN

GO AL

Labor productivity Multiple costs Financial resultsFUNDING SOURCE(S)

Res

ults

-pay

off l

ink

Once Again, a Taxonomy for Group Incentive Plans

Module 17 - 15Copyright 2000 - Ed Montemayor

Developing Group Incentives = An Initiative in Organizational Change & Development (OCD)Definition of OCD:

“a top-management supported long-range effort to improve an organization’s problem-solving and renewal processes through more effective and collaborative diagnosis and management of organizational culture, with an emphasis on formal work team, temporary team, and inter-group culture with the assistance of a consultant-facilitator and the use of theory and technology of applied behavioral science, including action research” (p.17).

French, W.L. & Bell, C.H. Jr. 1990. Organization Development (Fourth Edition). Englwood Cliffs, NJ: Prentice-Hall.

In the same vein, the deployment of a group incentive usually represents an effort:

supported by top-management intended to improve an organization’s

results by changing culture and work

processes at the team and inter-group levels

(with an emphasis on communications, goal-setting, information and feedback, integration and cooperation, employee participation, and rewards)

sometimes with the assistance of a consultant-facilitator, and

following an action research model.

Module 17 - 16Copyright 2000 - Ed Montemayor

An OCD Perspective on the Development of Group Incentive Plans

Phases in action research 10 stages in deploying groupincentives

Establish need for change Stipulate business and HR

strategies to guide incentiveplan design

Explore client organization Determine organizational

readiness and build supportfor incentive plan

Contract about interventionscope

Define incentive plan scope:duration, eligibility, andrelation to base pay

Diagnose and examinealternatives

Choose between operationaland accounting resultmeasures Select plan type (see page 5) Define key plan parameters(see page 21) Determine initial baselines andupdate criteria andprocedure Plan simulation and fine-tuning

Intervention Plan communication and start-up

Stabilization Plan administration andrenewal

Module 17 - 17Copyright 2000 - Ed Montemayor

Strategic Alignment: Business Purpose for Group Incentive From the following list of result areas, choose the four most

important for XYZ, Inc. and then rank them (1-4) in terms of their relative importance.

Total volumeLabor costCost of materials / wastePlan utilizationCustomer satisfactionProduct returns / rejectsOn-time & accurate deliveryCycle time

Top 4? Rank G O A L

Module 17 - 18Copyright 2000 - Ed Montemayor

Strategic Alignment: HR Strategic Purpose for Group Incentive

From the following list of HR goals, choose the four most important for XYZ, Inc. and then rank them (1-4) in terms of their relative importance.

Support employee involvementPromote teamworkLink ‘ee rewards to business resultsLink ‘ee pay to our ability to payImprove business performanceFocus ‘ees on key prioritiesMotivate the right behaviorsBecome more competitive in total pay

Top 4? Rank G O A L

Module 17 - 19Copyright 2000 - Ed Montemayor

Success Factors Based on Experiences in OCD and in Developing Group Incentives

(1) Create a sense of importance for the project and build strong and pervasive commitment among all levels of employees affected.

(2) Provide vision: articulate how the group incentive and its formula express the organization’s mission and strategy.

(3) Assign responsibility clearly: use a design team comprised of knowledgeable, respected, and motivated individuals.

(4) Include individuals who are opposed (or not enthusiastic) about the idea of a group incentive in the design team.

(5) Promote interaction among different employee groups (for example between employees in technical support and operations units).

(6) Plan for short-term wins: verify the economic environment is conducive to improvements in the results measured by the incentive formula.

(7) Ensure changes associated with the group incentive are institutionalized. Devote enough time and attention to help employees assimilate changes in

behaviors and work systems associated with the new group incentive. Provide for ongoing employee involvement and participation in decisions. Communicate, communicate and communicate more!

(8) Make the incentive plan dynamic: group incentive plans need to be managed like any other system.

Module 17 - 20Copyright 2000 - Ed Montemayor

10 Stages in Deploying Group Incentives

Stipulate business and HR strategies Determine organizational readiness and build support Define incentive plan scope Choose between operational and accounting measures Select plan type Define key plan parameters (see next page) Determine baselines and update criteria Simulation and fine-tuning Plan communication and start-up Plan administration and renewal

Module 17 - 21Copyright 2000 - Ed Montemayor

Ten Key Parameters in Group Incentive Plans Threshold variables or criteria Measure selection Formula type: Additive or multiplicative? Bonus pool (gain-sharing) or bonus (goal-sharing) formula Reserve or time-smoothing mechanism Criteria for individual employee payoffs Caps on payoffs? Payoff delivery: frequency, vehicle, etc. Special employee cases

part-time employees temporary employees employed for less than full payoff period separations before payoff

Employee involvement system