Summary

Engstrom Auto Mirror Plant is a privately owned business, operating since 1948, located in Richmond,
Indiana. They are a relatively small production and distribution company within the mirror
manufacturing industry supplying mirrors for trucks and automobiles. In May 2007, the plant faces a
crisis due to many factors, a main one being that business and sales were declining for the second year
in a row since 2005. In the following year, plant manager Ron Bent laid off 46 of his 255 employees. Bent
encountered issues with the remaining employees as productivity was declining, concerns of product
quality arose, employee morale was at its lowest in years and key customer business relationships were
at risk.

This wasn’t the first downturn Engstrom dealt with; in 1998 they faced a similar situation where Bent
implemented the Scanlon Plan, an organization-wide employee incentive program, which leads the plant
to a turnaround. For 7 years, employees received the Scanlon Plan bonus, however in 2006 bonuses had
stopped and associates hadn’t received one in 7 months. Bent is forced to reevaluate the plan and
determine how to motivate employees, increase productivity, product quality and ultimately sales or
Engstrom could shut down for good.

Organizational Issues

Engstrom Auto Mirror Plant had been successful for nearly 50 years until the late 1990s. During this
time, the plant became unprofitable and was struggling to stay in business. Production lines were being
redesigned to incorporate new technology, increasing production time which caused frustrated
customers in addition to losing some. In 1998, the plant manager at that time decided to resign. He
lacked the knowledge and expertise, of the new technology, needed in order to quickly solve problems.
The union was changing, becoming more assertive and he wasn’t willing to adapt to or work with them.
In addition, low employee morale and productivity spread throughout the organization. Ron Bent was
then hired as the new plant manager assigned to turnaround Engstrom and save the company. In order
to do so, Bent implemented the Scanlon Plan, an organization-wide incentive program, which was the
main contributor for the plants improved morale, productivity and profitability, making the organization
successful again.

Fast forward to May 2007, Bent is facing a similar company crisis. The numbers are decreasing again;
sales are dropping because of slow productivity and product quality issues are occurring. He is nervous
that he could lose one of the plant’s top accounts with Sam Martinez, manager of the assembly line at
the Toyota plant, if his workforce couldn’t pick up the pace and ensure the quality of all products were
on target. On the other hand, employees have been complaining for months, getting more and more
hostile and fed up with the Scanlon Plan. Their enthusiasm and satisfaction decreased overtime.
Suggestion rates dropped precipitously, down from hundreds to 50 a year. And two consistent themes
were heard in worker complaints: distrust of bonus calculations and question of fairness (Beer et. al.,
2008). Morale issues were retuning and Bent needed to do something fast before it was a downward
spiral with no saving.

Looking back through the years, Bent tried to find a cause for all this mayhem. He focuses his attention
on the Scanlon Plan. The reactions from the employees weren’t a surprise to Bent; he knew that the
plan couldn’t maintain itself. It requires up keeping and a “shot in the arm” whenever the organization
needs it. However, before he could do so the industry took a hit in 2005 negatively impacting sales and
company culture. Layoffs occurred in mid-2006 decreasing 18% of the workforce. By January 2007,
employee dissatisfaction was steadily increasing, suspicions of theft began and the remaining employees
hadn’t received a bonus in 7 months. Bent internally struggles, going back and forth on how the plan
could have failed if it worked for so many years and turned Engstrom around the first time. He had to
reevaluate, giving himself 3 options to sustain productivity and product quality until the downturn was
over: modify Scanlon, get rid of it, or look for alternative solutions.

Analysis

The only way to turn the company around long term doesn’t have as much to do with a bonus plan as
you think it would, especially since Bent puts so much emphasis on it. Whether Engstrom keeps the
Scanlon Plan, modifies it, or gets rid of it; it is a chunk of change to a business versus the impact of high
performance, productivity, quality and profitability. Incentive plans, if implemented correctly, do
influence employees. However, the more important aspect of the Engstrom crisis is employee morale
and the Scanlon Plan doesn’t really solve this issue, instead, it acts as a bandage covering the issues up
rather than fixing the root causes. Basically, the dissatisfaction, hostile environment and negative
atmosphere are causing insufficient performance and product quality. As stated by Herb Kelleher in
David Sirota’s and Douglas Klein’s (2013) book; “…there is only one key to profitability and stability
during either a boom or bust economy: employee morale.”

Bent got lost in the numbers and the Scanlon Plan rather than focusing his attention on the employees
which is the most important factor in a successful business, aside from the product(s) or service(s) a
company is selling and the quality. Without people, a business couldn’t function or be profitable. The
Scanlon Plan definitely has its concerns but the next turnaround and long term success of the plant lies
within the Three-Factor Theory of Human Motivation. At Engstrom 3 critical elements of employees are
missing: equity, achievement and camaraderie. The theory proposes that employees need these 3
elements in order to be satisfied which is the origin for an enthusiastic workforce. Understanding the
three sets of goals, and establishing organizational policies and practices that are in tune with them, is
the key to high workforce morale and firm performance (Sirota & Klein, 2013).

When Bent was hired, he used an incentive program, the Scanlon Plan, as the tactic to turnaround
Engstrom instead of actually identifying any underlying organizational issues causing the plant to
become unprofitable in the first place. He assumed it was due to the new technology implementation,
increasing demands from the union, and poor leadership. This was the first mistake, thinking he could
encourage and make employees produce more by rewarding them with bonuses for the long term
which in turn will boost employee morale. A Scanlon Plan, Bent thought, was the best for Engstrom,
given the challenges that the plant faced: “With Scanlon, workers are receptive to new methods and
new machinery because they feel they are a part of the company-wide program. When you’ve
established a Scanlon plan properly, you’ve also built a good communications network throughout your
organization” (Beer et. al., 2008). Incentive programs do work to increase performance and Engstrom
did have a turnaround but this was only a short term fix; it should not be used to solve the issues the
plant was enduring, alone.

To establish the underlying organizational issues, let’s first take a look at equity, which is defined as
being treated justly in relation to the basic conditions of employment (Sirota & Klein, 2013). The 3 needs
in order to attain equity are physiological, economic and psychological. Sirota (2013) states that these
basic conditions are not related to the position or performance of an employee, rather, they are
expected by virtue of the employment relationship. Satisfaction with pay is lower on the list compared
to other aspects of work; employees want to be fairly treated, they want to feel safe and secure in their
positions, and they need to be able to trust management. Overtime, employees began to distrust
management and the Scanlon Plan because they reduced the bonus ratio 4 times in 5 years becoming
unreliable and untrustworthy despite the explanations provided. They didn’t understand the complex
bonus calculation to begin with and accused the company of “playing with the numbers” to negatively
impact them through decreased bonuses while the organization benefited. Some months employees
received a low bonus even if they exceeded their production goals causing them to question it.
Especially because they used to measure achievement by total units produced prior to Scanlon. When
workers assume that the company is deliberately withholding information, the void is filled with
paranoid thoughts about what is really going on. This is a sure way to poison the relationship between
management and its workforce (Sirota & Klein, 2013). In addition, associates began to question the
fairness of the plan and felt that supervisors should receive less because they don’t work as hard. As a
result, associates became dissatisfied with particular characteristics of the plan and lost their
enthusiasm. They stopped suggesting ideas which is why Bent saw the drop from hundreds to 50 a year.
Enlisting the willing cooperation of a workforce in achieving the aims of an enterprise is impossible
unless people have a sense of elemental fairness in the way they are treated (Sirota & Klein, 2013).

Job security came into question when the industry downturn occurred. Employees would immediately
wonder if they would be laid off. This decreased morale even more. Bent did address possible layoffs,
the decreased performance and the possibility of the plant shutting down. The communication style and
how it was relayed to employees by Bent should have been carefully and strategically planned versus
the way he describes telling associates of the news. People react strongly to a loss of security and the
lost sense of fair treatment that comes with it in circumstances such as these. How companies deal with
job security is one of its defining characteristics in its employees’ eyes. It is a defining characteristic
because, in addition to its economic effects, a decision to lay off people sends a message to fundamental
importance to the workforce about the way the company views its people: not as assets but merely
costs (necessary evils) (Sirota & Klein, 2013). Layoffs took place in June 2006 reducing the workforce by
18%. Employees were emotional and divided the plant. The company’s approach to coping with current
business difficulties and its vision for building a successful future are key elements of what needs to be
communicated to the workforce. Bent didn’t create a plan or communication to remaining employees,
which is critical. As Sirota & Klein state (2013) survivors’ morale is both a cause and an effect of business
inefficiency. A downsizing that’s handled poorly in terms of employee treatment has a negative impact
on employee morale and, therefore business performance. The remaining employees didn’t receive a
bonus in 7 months and Bent assumed that the growing dissatisfaction, distant manager-associate
relationships, and the onset of theft issues were due to this. Equity, would disagree. It is the lack of
providing clear communication, a plan, a vision of where Engstrom is heading and the surviving
employees’ role in it.

A sense of basic equity in the employment relationship serves as the foundation on which high
employee morale can be built; the powerful need to feel proud of one’s accomplishments and the
accomplishments of the organization is then freed to drive behavior toward high performance (Sirota &
Klein, 2013). This leads right into the next element of the 3 factor theory, Achievement. It is described as
being proud of organizational accomplishments, personal accomplishments that are important and well
done, and receiving recognition for it. Sirota & Klein (2013) analyzed 6 primary sources of achievement:
challenge of the work itself, acquisition of new skills, ability to perform, perceived importance of the
employee’s job, recognition received for performance, and working for a company of which the
employee can be proud. Engstrom hasn’t been performing, sales and profits are decreasing, employee
productivity issues are increasing and product quality is low. Since the layoff, Bent hasn’t provided a
future projection of the company and employees lack perceived importance of their job because they
don’t know how their role fits in the bigger picture, especially because coworkers in the same position
were recently let go. In addition, employees don’t feel that they are able to perform because of the
workforce reduction, it created more work for them and with less people there is less productivity. Bent
thinks the workers had become accustomed to the plan’s substantial bonuses, perceiving the additional
hundreds of dollars as part of their regular compensation. Therefore, when the bonuses stopped, the
workers responded with anger and suspicion, as if something that rightfully belonged to them had been
taken away (Beer et. al., 2008). They are frustrated and fed up with the plan because management
hasn’t reduced goals that were set prior to the layoffs since there are less workers now. Employees are
not confident that productivity goals are attainable, losing interest and a sense of pride of their role and
company. What mattered to them previously and being able to do good work, doesn’t matter to them
now playing a part in the product quality issues Bent has been encountering as well as decreased
performance.

Pride comes both from the employees’ own perceptions of accomplishment and from the recognition
received from others (Sirota & Klein, 2013). Although the Scanlon Plan is a performance based incentive
plan rewarding employees for meeting or exceeding production targets, Engstrom severely lacks
individual or group employee recognition which is vital for the plans success. In general, for gainsharing
plans to be successful, organizations need to have rewards for honoring individuals and groups under 4
conditions; they must be truly special, given infrequently, given publically, and signifies appreciation
from both management and peers. The plan doesn’t recognize when employees or teams do great work
outside from meeting productivity numbers. Therefore, this could lead employees to be under the
impression that the company doesn’t care about anything else the employee/team does good work on
except for when it generates profit for the organization and as a result, employees may feel
underappreciated. Receiving recognition for one’s achievements is among the most fundamental of
human needs. When managers do not bother to acknowledge high levels of employee performance, the
effect is discouraging to most employees and devastating to some (Sirota & Klein, 2013).

The last factor to achieve satisfaction and an enthusiastic workforce is camaraderie; to have warm,
interesting, and cooperative relations with others in the workplace (Sirota & Klein, 2013). When things
are working properly, teamwork and knowledge sharing typically improve in Scanlon organizations:
collaboration fosters innovation and creativity, which in turn drive improvements in productivity,
thereby ensuring the payment of bonuses. The culture in a Scanlon plant also typically becomes more
change-friendly, as workers have the opportunity to make more money by changing the status quo for
the better (Beer et. al., 2008). However this was not the case, the atmosphere negatively changed at the
plant, becoming a hostile environment at times and employees were unfriendly towards one another.
During monthly meetings the energy was charged and the surroundings became anxiety driven. Inherent
conflicts of interest exist where one party’s gain equates to the other party’s loss. Numerous issues in
labor-management relations are of this kind. No one should expect workers to participate gladly and
collaboratively in being downsized, outsourced, or offshored (Sirota & Klein, 2013). People naturally
want to work together and camaraderie is achieved when social and emotional needs are satisfied. The
quality of social relationships in the workplace-its “social capital”-is of great importance, not only
because of the general need people have for camaraderie, but because cooperative relationships are
critical for effective performance and, therefore, for a sense of achievement in one’s work (Sirota &
Klein, 2013).

Alternatives & Solutions

Bent is open to ideas and suggestions. It would be easy to share thoughts with Bent and provide him
with the research and a plan that that supports the solutions being proposed. Bent thinks that the
fundamental issue at the plant is the lack of employee motivation. However, after analyzing the plant,
the main issue is productivity and more recently product quality concerns. The 3 factor theory states
that employees want to work. They want to achieve things that are important to them as well as the
company they work for. Bent mainly believes that the Scanlon Plan is failing and that is why employees
are not motivated, but he does visit the possibility of other organizational factors briefly. Bent asks:
Could he revise Scanlon in some way that worked better during a downturn? Could he try to identify and
change organizational factors that might be undermining Scanlon at the plant? The answer is that the
Scanlon Plan doesn’t need to be changed. It is organizational factors and economic decreases stated
previously, that is causing the crisis at Engstrom. Although the economic downturn can’t be controlled,
there are certain strategies, techniques and organizational influences from top management that can
ease the pain of the downturn by creating an environment that exhibits equity, achievement and
camaraderie.

Bent and top management need to come up with a clear and direct communication strategy to address
the question of fairness and management distrust that originated prior to the industry downturn of the
Scanlon Plan. He needs to show employees how the bonus plan works rather than just sharing data on a
piece of paper because many employees don’t understand it which is causing those issues. He should
take the time to show that he cares about the wellbeing of his staff. For example, team building
exercises would be great to help foster business relationships in a positive way. When employees
consistently see and feel that the organization is investing time, energy and effort in addition to the
organization acting on what they are saying, employees will begin to build that trust in management
again. Further, the layoffs need to be addressed and Bent and management need to provide employees
with a vision of the future state of the organization and acknowledge how important the employees are
to the future success of the company, the management team and the role they play in it. This will help
to increase and ease the negative feelings of job security that the employees are feeling. There is no way
that the value of, say, informal recognition or greater job authority can be substantial or long-lasting if
people feel mistreated on the basic equity issues (Sirota & Klein, 2013).
Also, employees want and need to feel appreciated for the jobs that they are doing and the good work
that they are providing. Bent needs to ensure this is communicated but he also needs to implement it
into the company culture which will build the lack of camaraderie back up. Bent feels strongly about not
having an individual recognition system, however, it is vital to attain the need of achievement. The
Scanlon Plan lacks in this aspect. Monetary rewards can’t substitute for other areas that are lacking in
organizations or for uncontrollable events, such as the economic and industry downturn. The
recognition system should recognize exceeding performance publically, should be for really outstanding
work that doesn’t occur often, and signifies appreciation from coworkers, management and the
company as a whole. Being able to achieve personal and organizational goals, taking pride in it and
receiving recognition are needed to acquire the sense of achievement. Once these needs are met,
camaraderie should come at ease. The hostile environment will decrease and become in time, an
enjoyable place to work. Over time, cooperation and collaboration will increase because employees will
be satisfied with their work, feel appreciated and their needs will be met. It is key to continue to revisit
and evolve an action plan as the company grows, changes or evolves. These 3 needs should be met over
time, which will increase satisfaction and ultimately create an enthusiastic workforce encouraging high
performance and morale.