Designing Team Incentives

Firms increasingly use teams to mange much of their work. In such cases, they need incentive plans that both encourage teamwork and focus team members’ attention on performance.

Team or group incentives to the team based on the team’s performance. One way to do this is to set work standards for each team member and then calculate each member’s output. Members are then paid based on one of three formulas: (1) All members receive the pay earned by the highest producer, (2) all members receive the pay earned by the lowest producer, or (3) all members receive pay equal to the average pay earned by the group. A second approach is to set an engineered production standard based on the output of the group as a whole: All members then receive the same pay, based on the piece rate for the group’s job. This group incentive can use the piece rate or standard hour plan, but the latter is more prevalent.

A third option is to tie rewards to goals based on some overall standard of group performance such as “total labor hours per final product.” Doing so avoids the need for a precisely engineered piecework standard. One company established such an incentive plan 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.” Each work team them received two goals, and if the team achieved both goals, each employee earned one share in addition to his or her base pay. If the teams achieved one goal, they each got half a share. The results of this plan in terms of changing employee attitudes and focusing teams on strategic goals were reportedly extraordinary.

Pros and Cons of team Incentives:

Team incentives often make a lot of sense. Much work today is organized around teams—project teams publish books, assembly teams assemble cars, and new-product teams launch new products. Performance here reflects not just individual but team effort, so team incentives make sense. Team-based plans reinforce team planning and problem solving and help ensure collaboration. In Japan, one rule is, never reward only one individual. Instead, Japanese companies reward the group to reduce jealousy, to make group members indebted to one another, and to encourage a sense of cooperation. Team incentives also facilitate training, since each member has an interest in getting new members trained as fast as possible.

The other advantages of incentive payments are: reduced supervision, better utilization of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover and increased output. Further more, systems of payment by results would, if accompanied by improved organization and work measurement, enable firms to estimate labor costs more accurately, than under the system of payment by time. This would facilitate the application of cost control techniques like standard costing and budgetary control.

Apart from the benefits cited above, incentive packages are a very attractive proposition for management because they do not affect employers’ contribution to the provident fund and other employee retirement benefits.

The main disadvantage is that a worker’s pay may not be proportionate to his or her own efforts, which may de-motivate hard workers. Workers who share in the team’s pay but don’t put their hearts into the effort can be a 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.