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© 2012 Material Handling Industry®. Copyright claimed as to
audiovisual works of seminar
sessions and sound recordings of seminar sessions. All rights
reserved.
Welcome to Session #224
Sponsored by: Presented by:
Brian Ehlenberg
Director of Operational Excellence
and
Richard Paddack
Practice Director, OEX / WFM
You Get What You Pay For: Variable-Based Workforce
Compensation
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Today’s Economy
Are you getting what you are paying for from your
work force?
Should you just pay an hourly wage, add group
incentives, or have individual activity-based
compensation (ABC)?
Where can you apply these programs in your supply
chain – just inside the four walls of the DC or as
well as transportation, retail, customer service?
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Session Highlights
A review of traditional hourly pay programs, pros
and cons to the workforce and company
Types of incentive programs, and how each may
be applied to the business
What makes up component-based pay program,
how to make it fair
How do incentives work, when to implement and
the true impact productivity utilization and safety
How to put together an ABC program, what to look
for both good and bad
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A case-study in ABC
A high-profile private fleet was facing a labor crisis:
labor costs are rising, productivity falling
The high labor costs represented “low hanging fruit” and
potential for 3PL takeover to execs
The results are staggering:
30% increase in productivity
98 drivers doing the work of 120 drivers, with 8 less
trailers
Company now saves $1,000,000 annually
$450,000 in reduced labor costs
$650,000 in equipment maintenance, administration &
overtime
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Additional Case Study Insights
Accident-rate frequency actually dropped
Communication was considered paramount to
the success of the program
Turnover is only 5% a year now
Technology (on-board) was considered critical
to the success
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Traditional Pay Programs
Hourly wage
Tenure, annual increases, other escalators
Piece-rate / Miles & Stops
Unit based pay programs based on budgets
Corporate-level bonus programs
Not to be confused with gain-share
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Assumptions in Incentive Programs
Company’s overall performance depends on the
performance of individuals and groups within the
company
Individuals and groups differ in level and quality
of contribution to the company
Company should reward employees based on
their relative performance to attract, retain and
motivate high performers
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Challenges to Incentive Programs
“Doing only what you get paid for” attitude
Lack of cooperation between employees and groups
Lack of control employees have in program
Difficulty in measuring true performance
Lack of communication creates
resistance to change, credibility
issues, and stress in workforce
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Types of Performance Pay Programs
INDIVIDUAL TEAM BUSINESS
UNIT
COMPANY
Merit Pay Bonuses Gain Sharing Profit Sharing
Bonuses Awards Bonuses Stock Plans
Awards Awards
Piece-Rate or
ABC
Micro-level Macro-level
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Gain Share Programs (partial)
Scanlon Plan (oldest)
Based on historical ratio of labor costs to sales value
of production
Rucker Plan
Based on ratio of labor costs to production value
(actual net sales +/- inventory changes, minus
purchased materials and services)
Improshare Plan
Measures changes in relationship between outputs and
the time (input) to produce them
Custom Plans (numerous)
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Some examples of Gain Sharing
Improshare Plan Rucker Plan
Scanlon Plan
Things to consider:
Employee payout %
Deficit reserve
Maintenance of program
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Some Pros / Cons to
Team Incentives & Gain Sharing
Fosters group cohesiveness
Facilitates flexible workforce
Reliably measuring team
performance
Elicit employee input
Increase cooperation through
common goal
Subject to fewer measurements
Free-ride effect
Intergroup competition leads to
decline in overall performance
Social pressures can limit
performance
Protects low performers
Management to labor conflict
Pros Cons
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Activity-based Compensation (ABC)
A method of paying based on value-added activities
Focuses workforce to talk, think and act based on
dollars
Hours, Percent of Standard, Delay Time, Units/Hour,
Cost/Mile, Cost/Stop: what’s this in $?
Work elements, delays, breaks, and productivity are easily
represented in actual dollar values
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Some Pros / Cons to
Individual Incentives & Pay Programs
Pros
Individuals are goal-oriented
Financial incentives can shape
goals
Plans can fit the culture within the
organization
Performance rewarded is easily
repeated
Cons
Tying pay to goals may promote a
narrow focus (may be a desire of
program)
Individual plans may work against
corporate goals
May promote inflexibility
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When to apply a particular plan?
Individual
Contributions of individuals is accurately identified
Job demands autonomy
Group
Difficult to single out who did what
Tasks &objectives foster entrepreneurship in self-managed
groups
Corporate-wide
Company is small to midsize, technology not widely used
Do not operate multiple facilities with varying performance
Demand for products / services is stable
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Benefits of Activity-based Pay
Employees focus on completing value-added
activities
Become aware of lost-time (ext. breaks, talking, etc.)
Rewarded for above average performance
Become‘self managing’: alert management to
barriers in productivity
Morale improves
Focus changes from “How long am I at work?” to
“How much work can I complete today?”
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How Does ABC work?
Values for each activity are calculated using
Engineered Labor Standards, coupled with activity-
based compensation matrix and each employee’s (or
position) wage rate
Integration of pay calculation system into existing
technologies to capture the activities one completes
during the pay-period (WMS, On-board TMS, POS,
T&A, etc.)
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What makes up ABC?
Event Pay
Applies to events that have a specific value: start of
shift,
paid breaks, end of shift, pre and post vehicle inspections
Unit Pay
Applies to the production or key volume indicators of work:
size of order, travel distance, equipment used, etc. May
also
include a “Gain Share” for safety, quality, etc.
Delay Pay
Applies to activities such as meetings, clean-up, battery
changes, store delivery delays, etc.
Paid at the normal wage rate, but not applied if doing event
or unit pay and is not eligible for “Gain Share”
We will address “Gain Share” as an inclusion to ABC in just a
minute
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Additional Types of ABC
Non-ABC Job Pay Activities that do not have Engineered Labor
Standard: returns,
inventory counting, etc.
Fixed Delays and Breaks Assignment of specific time to certain
event pay variables: battery
changes, pre-shift/trip inspections
Overtime Pay Typically ABC will increase by the same overtime
factor that is required
by state and federal regulation
Safety Net / Deficit Pay This may be an earnings protection put
in place when earnings for a pay
period fall below an employee’s goal earnings
Deficit funding and payment is applied as part of the proportion
of the %
of payout
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Gain Share as part of ABC
To include Safety and Quality at a higher level than
individuals, these components are often handled as
a gain share for teams, facilities, or the company
Additional incentives are paid for above baseline
performance in areas such as:
Lost time injuries, mis-picks/shortages, vehicular
accidents/tickets, on-time arrival, etc.
Often part of the Deficit / Safety Net funding
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A Roadmap to Incentives
Establish the “right way” to perform activities through best
practices and preferred methods
Communication programs and leadership training for
front-line
supervisors/managers to ensure culture alignment
Development of Engineered Labor Standards to establish
performance baseline (average)
Systems selection, design and implementation to ensure right
technology for initiative
Effectively use preferred methods and coaching to get
workforce to baseline
Creation of ABC and incentive programs to reward
performance above baseline and overcome plateau-effect
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Flywheel of Success
It starts with focus on the
value-stream
Over-communicate, build the
leadership skills of front-line
management
The order of the steps is as
important as the steps
themselves
Complete Operational Excellence Program
Workforce Management
Program
Best Practices
Eng. Labor
Standards (ELS)
Tracking &
Reporting Software
Change Mgt
Incentives
Forecast
Planning
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You Get What You Pay For
You cannot manage what you do not measure
But at the same time, you cannot manage all that
you measure
Understand what motivates the workforce
Pay and salary are the largest driver of motivation
Others include: Direct financial benefits, Indirect
financial
benefits, schedules, amenities, job security,
feedback/coaching, status/recognition, sense of
duty/purpose
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Open Forum / Q&A
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© 2012 Material Handling Industry®. Copyright claimed as to
audiovisual works of seminar
sessions and sound recordings of seminar sessions. All rights
reserved.
For More Information:
Speakers:
[email protected]
[email protected]
Home Page: www.peachstate.com
Visit MODEX 2012 Booth #900
