Sharing the Wealth – HRD’s Role in Making Incentive Plans Work

Employees do a better job when they’ve got a piece of the business,” declares a Chicago and Northwestern Railroad ad in a recent Business Week. It goes on to suggest that, since C&NW em¬ployees own the business “down to the last spike,” they work a little harder, smile a little wider, frown less, take more pride in their jobs, control costs better and are more profitable, in-novative and productive than people at other railroads.

Though C&NW is an extreme example, a number of organizations are coming to see the point the C&NW ad makes: Employees do perform bet¬ter when they have a piece of the action.

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A recent National Science Founda¬tion study investigating worker motivation, productivity and job satisfac¬tion tends to confirm this growing management belief. The study, con¬ducted by Katzell, Yankelovich, Fein, Oranti and Nash, examined over 300 behavioral science studies dealing with productivity and job satisfaction. It concluded that increased productiv¬ity depends on two propositions.

First, “…the key to having workers who are both satisfied and productive is moti¬vation, that is, arousing and maintain¬ing the will to work effectively—hav¬ing workers who are productive not because they are coerced but because they are committed.” And, second, “Of all of the factors which help to create highly motivated/highly satisfied workers, the principal one appears to be that effective performance be, rec¬ognized and rewarded— in whatever terms are meaningful to the individ¬ual, be it financial or psychological or both.”

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Engineer Mitchell Fein, Hillsdale, NJ, developer of the Improshare Plan— a productivity improvement system— suggests that the two propositions make complete sense, are ir¬refutable and yet, by and large, are exactly the opposite of what most managers do. “Managing policies are based on coercion in practically all plants,” claims Fein. “Workers are seldom rewarded financially for more effective performance. The realities at the work place diametrically oppose what is needed to raise job satisfaction and motivation.

Though unintentionally it works out that most workers are generally penalized for doing a better job, so they oppose management’s objectives. Manage¬ment senses the antagonism, and its managing and control systems are designed to operate in a hostile environment, to apply pressure and coercion to workers, to get them to do more.

“Workers readily see that if they assist in raising productivity, some of them will be penalized; if they improve productivity, reduce delays and wait¬ing time, reduce crew sizes, some will be displaced and the plant will require fewer employees. They receive no fi¬nancial gains for their efforts, nor are they persuaded that increased com¬pany profits will benefit them in the future. What employee will assist in raising productivity, only to be penalized for his diligence?”

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The real folly of this “lose-lose” approach to managing productivity improvement is even more apparent when one realizes that such antagonism to productivity improvement is far from endemic to organizations. “Exempt” employees—executives, administrators, professionals and salesmen— are treated differently. A manager does not work himself out of his job by superior performance, nor is a salesman’s security threatened because he sells too much. An engineer does not cause the layoff of other engineers by being too crea¬tive. Instead, these employees anticipate rewards for their creativity and effectiveness.

“When workers excell and raise productivity, the company benefits and management is pleased, but the workers do not benefit,” Fein con¬tinues. “On the contrary, in the short term, their economic interests are threatened, and some suffer loss of income.

When exempt employees are more effective, they are covered with glory; their economic security is en¬hanced, not threatened. Ironically, the relationship between workers and management actually provides work¬ers with the incentive not to cooperate in productivity improvement.

Without realizing it, all that most companies offer their employees for greater dedi-cation and for raising productivity is the opportunity to reduce their earn¬ings and job security. No wonder workers oppose productivity im¬provement. The system operates per¬fectly to demotivate workers. A more effective system could not have been designed to cause workers to oppose management’s goals.”

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The NSF study team suggests six critical ingredients of systems that ef¬fectively raise job satisfaction and worker motivation. Heading the list is “financial compensation of workers [which] must be linked to their per¬formance and to productivity gains.” The NSF study found that when work¬ers’ pay is linked to their performance, the motivation to work is raised, pro-ductivity is higher and they are likely to be more satisfied with their work.

A study of over 400 plants in the United States found that when these plants instituted work measurement, productivity rose an added 42.9%. The average increase from no-measure-ment to incentives was 63.8%.

Most managers know that pay tied to productivity will motivate higher performance. From two-thirds to three-quarters of all the sales forces in the United States use incentives. Ap-proximately 78% of manufacturing companies have executive bonus plans; the median bonus for the three top executives averages 42% of their base pay.

A study of executive com¬pensation of 1100 companies listed on the New York Stock Exchange found that companies with formal incentive plans for their executives earned on the average 43.6% more pretax profit than did the non-incentive companies.

By any measure, pay tied to productivity is the most powerful motivator of improved work performance. Yet only 26% of United States workers work under financial incentives. In some industries, such as basic steel and sewn products, incentives cover over 80% of the work force; in many industries, no incentives are em¬ployed. Few non-manufacturing oper¬ations are on incentive.

Why the limited use of financial in¬centives for workers in the United States? There are’ several reasons:

•Some managers are concerned that incentives will diminish their abil¬ity to control the operations and, over a period of time, that incen¬tives will deteriorate, causing labor problems.
•Some managers believe that pro¬ductivity improvement is largely created by management efforts; there is no need to share productiv¬ity gains.
•Management’s-rights advocates believe that improvement is best shared periodically as increases in wages and benefits.

Though there may be some merit to these arguments, it is undeniable that, from floor sweeper to president, all increase their productivity when their pay is tied to performance.

Source : Training Magazine January 1979

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