Developing Group Incentive

Plans:
An Organizational Change &
Development Perspective

Copyright 2000 - Ed Montemayor

 Group Incentives - Overview
The 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...)
Copyright 2000 - Ed Montemayor
Module 17 - 1
 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
Copyright 2000 - Ed Montemayor
Module 17 - 2
Logic Behind “Gain-Sharing” Group Incentives
Conceptually, gain-based incentives involve...

Financial Fund
Performance Availability Org’s
share
$$$
Results Bonus
pool
Employees’
share
Gain Economic
Valuation
Payout Reserves

Baseline

Copyright 2000 - Ed Montemayor

Module 17 - 3
 A Taxonomy for Group Incentive Plans

FUNDING SOURCE(S)
Labor productivity Multiple costs Financial results

Scanlon plan Multi-cost gain-sharing Current Profit-sharing

G Total gain= Total gain= add Total gain=
Results-payoff link

(expected - actual) (expected - actual) (expected - actual)

A labor cost for several costs for profits
I
N Employee share = Employee share = Employee share =
X% of gain X% of gain X% of gain

Productivity Multi-goal-sharing Financially-valued

G goal-sharing goal-sharing
O If productivity For every
A exceeds 20/hr goal met See Figure 2
L $300 bonus add 1% of pay
to bonus

Copyright 2000 - Ed Montemayor

Module 17 - 4
 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 =$7,072,500.00
Expected 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): $35,362.50
Employees' share (½): $35,362.50
or 3.75% of Payroll
Copyright 2000 - Ed Montemayor
Module 17 - 5
 Cell 1 example (operational measures):
Labor productivity Gainsharing - Improshare

Production Payroll (work) hours

Product
(x1000 units) Baseline / 1000 u Expected
A 23.5 135 23.5 x 135 = 3172.5
B
15.3 176 15.3 x 176 = 2692.8
C 76.1 56 76.1 x 56 = 4261.6

Total = 10126.9

Actual hrs = 9625

1/2 Gain = 250.95 Gain = 501.9

(2.6 % of Actual hours)

Copyright 2000 - Ed Montemayor
Module 17 - 6
 Cell 2 Example: Multi-Cost Gainsharing
Sales Value of Prod. $3,460,000
Allowed costs (81%) $3,024,540
Actual costs
Labor $589,070
Materials $1,540,840
Energy $314,390
Other $519,740 $2,965,040

Gain $59,500

Employee share (35%) $20,825

Reserve (1/5) $4,165

.. to be distributed $16,660

Copyright 2000 - Ed Montemayor

Module 17 - 7
 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]

Copyright 2000 - Ed Montemayor
Module 17 - 8
Cell 5 Examples: Multi-Cost Goal-Sharing
Arco Chemical Quaker Oats
†
Monthly goal value
Raw material yield
basic goal 0.5%
Propylene yield 3 pts. challenge goal 1.0%
Isobutane yield 3 pts. Conversion costs
Steam consumption 2 pts. basic goal 0.5%
Fuel losses 2 pts challenge goal 1.0%
TBHP quality 6 pt. Quality goals
Waste disposal 4 comply w/specs 0.5%
pts. reduce complaints +0.5%
SPC charting 4 pts. Safety
Customer complaints 6 pts. achieve 2 of 3 goals 0.5%
Etc.. ...... achieve all 3 goals 1.0%
Incidence rate
Each point = a certain % of base Severity index
wages Days lost
†: from Gainsharing by J. Belcher

Module 17 - 9
Copyright 2000 - Ed Montemayor
NON-COST MEASURES!!
 Cell 6 Example:
Financially-valued goal-sharing
• Goal Sharing bonuses will be
based on the number of payable
points scored in a given period.
Operational Scorecard • The bonus will be a fixed dollar
amount for each point scored.
M E A S U R E S • Financial results will determine
Labor the maximum number of payable
Productivity % Scrap Solder PPM ........ points.
Baseline 300 • Performance in key operational
80% 0.90%
results will determine the actual
1 point 80+ % 300 or less
0.90% or less number of points scored.
2 points 82+ % 0.85% or less 270 or less • For each measure we may score
up to 10 points.
3 points 84+ % 0.80% or less 240 or less
• Doing better than the “baseline”
4 points 86+ % 0.75% or less 210 or less (the average for the last 12
months) will result in the first
9 points 96+ % 0.50% or less 60 or less point scored.
• Doing as the “best in class”
10 points 98 - 100% 0.45% or less 30 or less
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

Copyright 2000 - Ed Montemayor

Module 17 - 10
 One More Twist...Multi-Cost Gain-Sharing
Plan with Multiplicative Formula

Labor hours Supplies

per case per case
Sharing Rate Table

Clinical Quality
70% 100%
87% 0%

Patient satisfaction
Savings pool
88%
89% 10%

Calculate 35%
sharing rate 95%
96% 50%

Employee
share

Copyright 2000 - Ed Montemayor

Module 17 - 11
 One More Twist…Second Example:
Carrier’s plan
†
†: from Gainsharing by J. Belcher
Quality modifier
Material Utilization savings (% goal)
+ Plant Efficiency savings 70% 0.00
80% 0.10
+ Supplies Efficiency savings 85% 0.35
+ Schedule Attainment savings 90% 0.60
= Total Savings 95% 0.90
x Quality modifier 98% 1.00
100% 1.10
= Total Gain
x 50% base employees’ share
= Employee Share of Gains
+ Safety savings pool
= Total bonus pool
Copyright 2000 - Ed Montemayor
Module 17 - 12
 Once Again, a Taxonomy for Group Incentive Plans

FUNDING SOURCE(S)
Labor productivity Multiple costs Financial results

Scanlon plan Multi-cost gain-sharing Current Profit-sharing

G Total gain= Total gain= add Total gain=
Results-payoff link

(expected - actual) (expected - actual) (expected - actual)

A labor cost for several costs for profits
I
N Employee share = Employee share = Employee share =
X% of gain X% of gain X% of gain

Productivity Multi-goal-sharing Financially-valued

G goal-sharing goal-sharing
O If productivity For every
A exceeds 20/hr goal met See Figure 2
L $300 bonus add 1% of pay
to bonus

Copyright 2000 - Ed Montemayor

Module 17 - 13
 Developing Group Incentives = An
Initiative in Organizational Change &
Development (OCD)
Definition of OCD: In the same vein, the deployment of a
“a top-management supported long- group incentive usually represents
range effort to improve an an effort:
organization’s problem-solving and  supported by top-management
renewal processes through more  intended to improve an
effective and collaborative diagnosis organization’s results
and management of organizational
 by changing culture and work
culture, with an emphasis on formal
processes at the team and inter-
work team, temporary team, and
group levels
inter-group culture with the
assistance of a consultant-facilitator (with an emphasis on communications,
goal-setting, information and
and the use of theory and feedback, integration and
technology of applied behavioral cooperation, employee participation,
science, including action research” and rewards)
(p.17).
 sometimes with the assistance of a
consultant-facilitator, and
French, W.L. & Bell, C.H. Jr. 1990. Organization  following an action research model.
Development (Fourth Edition). Englwood Cliffs,
NJ: Prentice-Hall.
Copyright 2000 - Ed Montemayor
Module 17 - 14
 An OCD Perspective on the
Development of Group Incentive Plans
Phases in action research
Establish need for change
Explore client organization
Contract about intervention
scope
Diagnose and examine
alternatives
Intervention
Stabilization
Copyright 2000 - Ed Montemayor
10 stages in deploying group
incentives
 Stipulate business and HR
strategies to guide incentive
plan design
 Determine organizational
readiness and build support
for incentive plan
 Define incentive plan scope:
duration, eligibility, and
relation to base pay
 Choose between operational
and accounting result
measures
 Select plan type (see page 5)
 Define key plan parameters
(see page 21)
 Determine initial baselines and
update criteria and
procedure
 Plan simulation and fine-tuning
 Plan communication and start-
up
 Plan administration and
renewal Module 17 - 15
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.
Top 4? Rank G O A L
Total volume
Labor cost
Cost of materials / waste
Plan utilization
Customer satisfaction
Product returns / rejects
On-time & accurate delivery
Cycle time
Copyright 2000 - Ed Montemayor
Module 17 - 16
 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.
Top 4? Rank G O A L
Support employee involvement
Promote teamwork
Link ‘ee rewards to business results
Link ‘ee pay to our ability to pay
Improve business performance
Focus ‘ees on key priorities
Motivate the right behaviors
Become more competitive in total pay
Copyright 2000 - Ed Montemayor
Module 17 - 17
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.

Copyright 2000 - Ed Montemayor

Module 17 - 18
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

Copyright 2000 - Ed Montemayor

Module 17 - 19
 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
Copyright 2000 - Ed Montemayor
Module 17 - 20