Performance Measures and

Reward Systems, Trust, and

Strategic Change

Robert H. Chenhall
Kim Langfield-Smith
Monash University
 Outline
 Preamble
 Introduction
 Strategy, Trust, & MCS
 CIGGC Background
 Phase 1: Introduction of Change & Gain
Sharing (1980 – 1990)
 Phase 2: The Socio-Technical System (1991
– 1995)
 Analysis
 Summary & Future Research Directions
 Preamble
The History of Cultures:
The History of Organization
Anthropology & Sociology

The History of Strategic Change and The Development of

a Performance Evaluation and Compensation Scheme

•Based on Gain Sharing

•Manufacturing Company
•Over 15-year period
 Preamble (cont’d)

 Time
 1980 – 1990  Performance (but the rate of
improvement declined over the final 5 year)
 1991 – 1995  introduce additional
administrative arrangement based on self-
managed teams
 Innovation
 Using conventional agency concept to aligning
the objectives of employees & owners to explain
the evolution of MCS and structural
arrangements
 Preamble (cont’d)
 Theory
 Using theory of trust  understand gain-
sharing scheme & structural changes
 Data
 Oral histories, archival data, & historical
documents (official sources & prior studies)
 Introduction
Acquiring new technologies,
Strategic change
skills, organization form

TRUST High level of cooperation

•Share expectation
•Mutual respect Employees
Managers
•Collaboration
•Exploit new strategies
 Introduction (cont’d)
 MCS  provide information to assist in
formulating & implementing strategies
 Trust is apparent in organization when
employees & managers hold common values
& principles
 MCS design perspective: system must be
appropriate for the form of trust within
organization
 Introduction (cont’d)
 The aims of study
 It adds to the limited research examining the
effects of performance evaluation &
compensation schemes at the shop-floor level
 Studies the evolution of control systems over
time
 The study employs theories of trust to gain
insight into how to synergies or
incompatibilities between trust & control
system may affect organizational performance
 Introduction (cont’d)
 Organizing
 Examine the role of trust in sustaining change
& the implications for the design of MCS
 Recount the implementation of a formal
performance measurement & gain-sharing
reward systems at manufacturing (1980 –
1990)
 Describe the company’s experiences (1991 –
1995) when introduced team-based structures
to encourage personal trust
 Strategy, Trust, and MCS
Operations Strategic priorities

Innovations:
•High quality
•TQM
•Reliable delivery
•JIT
•Low cost
•Value Added

One element in advancing cooperative approaches to strategic change

initiatives is development of trust
Strategy, Trust, and MCS (cont’d)
 Trust & Strategic Change
 Trust is a psychological state comprising the
intention to accept vulnerability based on
positive expectation of the intentions or
behavior of another
 High level of trust is important to strategic
change  reduce uncertainty about attitudes
& value of others, develop predictability in
relationship, produce cooperation, solve
problem, uncover innovative solution
 Developing trust: by personal & organization
Strategy, Trust, and MCS (cont’d)
 Strategy, MCS, & Trust
 Mechanism of MCS  performance measure
which align individual's behaviors with the
strategies & goals of the organization
 Organizational trust doesn’t require that
employees share organizational values
 Personal trust involves commonality of values
providing individuals with an understanding
about how other will act & behave
 Strategy, Trust, and MCS (cont’d)
 Gain Sharing & Organizational Trust

MCS Organizations’ strategies

Performance Incentive •Trust

measurement systems •Improvements

Encourages
Gain sharing + employees
•Motivate employees
•Develop implicit commitments
Strategy, Trust, and MCS (cont’d)
 Proposition 1:
Formal performance measurement & reward
systems, based on gain sharing, support the
development of organizational trust &
consequent improvements in organizational
performance
 Strategy, Trust, and MCS (cont’d)
 Gain Sharing & Personal Trust Development

Personal trust Innovative strategic

Development

High level Explore opportunities

Improvements
in performance
•Performance measurement (gain sharing)
•Reward systems
Strategy, Trust, and MCS (cont’d)
 Proposition 2:
 Formal performance measurement & reward
systems, based on gain sharing, inhibit the
development of personal trust & consequent
improvements in organizational performance
 CIGGC Background
 Formed in 1975, located in Sidney
 CIGGC produced aluminum cylinders & filled
welded steel cylinders with fiberglass
 CIGGC licensed the aluminum manufacturing
process from Luxfer in the UK
 CIGGC’s export markets were Japan & other
countries in Southeast Asia
 Phase 1: Introduction of Change &
Gain Sharing (1980 – 1990)
Parent company Early 1980s, employee strikes & absenteeism

Hired

New GM

Improvement

Introduce the Common Interest Program (CIP), 1983

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 Phase 1: Introduction of Change &
Gain Sharing (1980 – 1990) (cont’d)
 Implementation – a 12 month trial

Support
Shop-floor & Union Gain-Sharing program

Success

Recognized
 Phase 1: Introduction of Change &
Gain Sharing (1980 – 1990) (cont’d)
 Performance Improvements Through Gain
Sharing
 No strikes, absenteeism feel, & staff turnover
dropped
 Union represent that Gain Sharing give
confidence in interest
 Phase 1: Introduction of Change &
Gain Sharing (1980 – 1990) (cont’d)
 Opportunities for Expansion & Strategic
Innovation
CIGGS’s market
•Labor bonus declined!!!
Expansion •Introduce VAM

Domestic Export

Limited Technological improvements

•Introduce TQC & JIT

•Reduce lead time
•No strikes, little absenteeism, fall turnover
 Phase 1: Introduction of Change &
Gain Sharing (1980 – 1990) (cont’d)
 Employee Reactions to Change
 VAM didn’t go down very well
 Level of trust declined due to VAM

 Performance Outcomes During Phase 1

 At overall, 1981 – 1990, company records:
 Return on fund (↑ 700%)

 Productivity (↑ 220%)

 Labor turnover (↓ from 20% to < 5%)

 Lead time (↓ from 24days to 6days)

 Inventory level (↓ 72%)

 Absenteeism (↓ from 15% to 3.5%)

 No strikes between 1982 & 1990

 Phase 2: The Socio-Technical System
(1991 – 1995)

•Innovative
Needs •Creative
Competition in export markets
•Continuous improvement

Management Consultant & TTC

introduce team-based structure
Phase 2: The Socio-Technical System
(1991 – 1995) (cont’d)
 The Socio-Technical Approach
 Using TRUST (Team Responsibilities, Unity,
Social, Technical) as a comprehensive report
 The Influence of Financial Rewards
 Not all employees had committed to the new
programs
 The majority of employees maintained a keen
interest in achieving maximum financial
rewards from gain sharing
Phase 2: The Socio-Technical System
(1991 – 1995) (cont’d)
 Developments in Performance Measures
 Socio-technical initiatives increasing employee
empowerment & need for strategic change
 Performance measures assessed progress in
social changes (employee satisfaction, team
self management)
 Changes in Compensation Systems
 The compensation system to recognize new
skills acquired within teams
 Management & employees agreed with the
new remuneration system
Phase 2: The Socio-Technical System
(1991 – 1995) (cont’d)
 Outcomes of Phase 2
 Improved productivity, quality, lead time
 Export sales accounted for 70%
 Mix of skill within teams
 10% of workers dissatisfied with the new
arrangements
 Analysis
 Developing an Initial Contractual Framework
for Trust
 MCS theory suggest the mechanistic
performance evaluation suits setting rich in
opportunities with high levels of certainty
(quantified & relatively predictable)
 Employee perceived the performance
measures to be fair & adjusted to reflect
changing work condition
 Analysis (cont’d)
 From Contractual to Organizational Trust

The Benefit of Programs

Attention for the
business environment!!
Financial + Intrinsic

Gain sharing + Trust

Supporting Proposition 1
 Analysis (cont’d)
 The Move Toward Personal Trust
 Teams provided basis to develop personal
trust
 The socio-technical system suggest that
personal trust had not developed sufficiently
 Analysis (cont’d)
 Impediments to Developing Personal Trust

Performance measurement system Compensation

Linked

Mechanistic form of MCS Gain Sharing

Trust Perspective
 Summary & Future Research
Directions
 Summary
 This paper is essentially exploratory,
investigating performance measurement &
reward systems at the shop-floor level
 Mechanistic control system based on financial
rewards (gain sharing)
 Using theories of trust to explain the evolution
of gain sharing & structural arrangements at
CIGGC
 Summary & Future Research
Directions (cont’d)
 Limitations
 Single case analysis (lack of generalizability)
 Using data from CIGGC to examine the
theories of trust

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 Summary & Future Research
Directions (cont’d)
 Future Research
 Using theories of motivation to understanding
gain sharing & trust relationship (at different
form of trust)
 Broader sample of organizations

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