How to design team incentives
A plan in which production standard is set for a specific work group, and its member are paid incentives if the group exceeds the production standard.
Firms increasingly rely on teams to manage their work. They therefore need incentives plans that encourage term work and focus term member attention on performance. Many world-class facilities, such as those run by some major automakers, rely almost exclusively on team and facility-wide incentives. Team (or group) incentives plans pay incentives to the team based on the team’s performance.
The main question here is how to reward team’s performance. On approach is to tie rewards to some overall standard of group performance such as total labor hours per car. Doing so avoids the need for a precisely engineered piecework standard (in terms of wheels installed per hour, for instance) One company established such an overall standard for its teams. If the firm reached 100% of its goal the employees would share in about 5% of the improvement (in labor costs saved). The firm divided the 5% pool by the number of employees to compute the value of a share. If the firm achieved less than 100% of its goal, the bonus pool was lower. The results of this plan in terms of changing employee attitudes and focusing teams on strategic goals – were reportedly extraordinary (Employers also use such team incentives to improve top management team performances.
Some set an engineered production standard based on the output of the group (again, such as in terns of wheels installed per hour, for instance). This approach can use the piece rate or standard hour plan, but the latter is more prevalent. All members then typically receive the same share of the team’s incentive pay. Occasionally the employer may want to pay all team members according to some other formula. For instance instead of paying everyone on the team based on how well the team as a whole does, pay everyone based on how well the best well the best team member does. This counterintuitive sounding option may take sense when an employer has reason to believe the new team incentive plan might de-motivate high performing team members (who may not covet being paid based on the team average). Thus, a team incentive plan at Levi’s reportedly failed when high performing workers suddenly found their rewards reduced to a lower team average.
Pros and cons of team Incentives
Team incentives often make sense. Project teams publish books, assembly teams assemble cars, and new product teams launch new products. Performance here reflects not just individual but team effort. Team based incentive plans reinforce team planning and problem solving, and help ensure collaboration. In Asia in general and Japan in particular the tendency is to reward the group – to reduce jealousy to make group members indebted to one another and to encourage as sense of cooperation. Team incentives also facilitate training, since each member has an interest in getting new members trained as fast as possible.
The main disadvantage is that a worker’s pay may not be proportionate to his or her personal efforts. As at Levi’s this may de-motivate top workers. Workers who share in the teams pay but don’t put their hearts into the effort (what economists call free riders) are a related problem. Solutions include having team members commit in writing to putting the goals of the team, before their own, and basing part of each worker’s pay on individual (not just team) performance.
Organization wide incentive plans are plans in which all or most employees can participate and which generally tie the reward to some measure of companywide performance. Also called variable pay plans, they include profit sharing employee stock ownership (ESOP) and Scanlon / gain sharing plans.