Poor incentive sysytems hurt businesses.

Incentives: Poorly constructed plans make business fail

Why do bad incentive systems go on?

Attracting and retaining the top talent is an important priority for companies.

 In that regard, employee incentive programs are a popular strategy. While incentive programs can be incredibly effective, if they are not devised and employed properly, they can do more harm than good to the company. That is why poorly constructed plans make business fail. They also reflect your organizational values.

Poorly constructed plans are what makes a business fail.

One company I worked with didn’t properly utilize an incentive system. They had 22 stations set up to manufacture its product. Work was divided among the stations and the product moved from station to station every four hours. That meant that the work at each station had to be balanced, so it took no longer than four hours to complete the tasks assigned at each station. If that did not happen there was a delay in the entire plant until the slow station completed its work. Or, the item was moved to the next station with work still left to be done.

The labor estimated and budgeted for each custom item was set exactly the same. That is not right.  Custom means doing something different with varying items that require different amounts of labor. According to the estimator and the company’s executives, that was not necessary. To make matters worse there was an incentive system in place.

The incentive system wasn’t set for the workforce as a whole. Certain workstations were designated as incentive stations. If they completed their work in less time than was allocated, they were paid a bonus. As the time to complete was four hours, and if those workstations did theirs in just two hours, they received a bonus choice of either additional pay or leaving work early. If they left early, how could the line move when there was no one at the empty station to receive and work on the next item?

Our job as outside advisers was to increase overall production for a 25% increase in productivity.

We tackled this by implementing something we had done at another company with similar circumstances to this one. We had created a system where time and labor standards were developed for each workstation, depending on the work required and details for a particular product.

As each job entered each station, our program calculated how many people were needed to complete the work in the time needed to keep the line moving. The workforce had to flex based on the amount of work at each station. As we had successfully implemented this before, we knew it could work. However, our client saw it as too burdensome; after using it for a month or so, he went back to using the same crews regardless of the work involved.

We also devised a new incentive system to replace the current one.

A bonus that would be paid either monthly or quarterly to the entire factory based on the overall productivity for that timeframe. As an example, the executives wanted to finish 2.5 units per day. Based on a 20-day month, that equated to 50 units per month. If they actually completed 60 units per month, they would take the labor budgeted for those jobs and pay it as a bonus to the entire workforce. At $5,000 per job and10 additional jobs completed, that was a bonus pool of $50,000 for the month. The company could distribute it however they wanted, but everyone shared and it cost the company $0 because the labor cost was budgeted and was paid only for the work done. This idea was rejected because the owner and his production vice president felt it was too complicated and wasn’t going to be paid on a weekly basis.

They continued with their current incentive system.

By basically changing nothing, no increased production was realized and they continued to lose money. This is a great example of a poorly constructed and utilized incentive system. Productivity was lower, profitability was down and yet incentives were being paid to only certain people. This is a recipe for disaster. And you can see why poorly constructed plans are what makes a business fail

Incentives can be very powerful.

When good behavior gets rewarded it usually gets repeated. It’s a fact of life that people work harder – and smarter – when they know their increased efforts will have a direct impact on their wallets. It is also a part of Agility by Leveraging the skills of your employees and rewarding them. Other advantages include:

  • Clearly defined goals: Incentive programs lend clarity to work objectives. People are much more likely to achieve a certain goal when they know exactly what’s expected.
  • Increased employee retention: Incentive programs give employees a sense of control over their incomes. When they work harder and smarter, they see better results.
  • Improved productivity: When properly developed and employed, companies can dramatically increase productivity. This in turn should lead to increased customer satisfaction and improved company profitability.

When incentive systems are poorly devised and employed, they come with their own set of disadvantages, such as:

  • Poor customer service: Sales-based incentives can motivate employees to do the wrong things, such as establish unbalanced work flows. This then delays production, causing products to have quality issues or to not be completed on time. The result is an unhappy customer or consumer.
  • Built-in limitations: Incentives tend to work best with repetitive tasks. They lose effectiveness when the required skills increase.
  • Resentment: Incentives that are seen as unfair can lead to resentment, and undermine teamwork. Employees may resent coworkers who achieve goals with less effort (and fewer hours). When it comes to team-based incentives, employees may resent coworkers who are seen as doing less than their fair share. Incentives can also motivate employees to undermine each other’s efforts rather than work as a group to achieve company goals.
  • Manipulation: There are many different metrics companies can use to measure success. The metric that has the most impact on incentive pay will be the metric that gets the most attention. That may or may not be in the best interest of the company.
  • Businesses need only to make a certain production of items based on forecast or actual sales. When employees meet their assigned production, they may idly wait for others to finish, start something new to keep them busy, or be laid off until more work is available. Meanwhile, they have been paid an incentive. None of these scenarios are very practical and increase the overall cost of producing the product.

These are reasons why poorly constructed plans are what makes a business fail.

Image result for images of bad incentive systems

A well-conceived incentive system will greatly benefit the business.

 In a group setting, a team of folks work together with the goal of becoming more productive. Their higher output over time means the operating cost decreases, resulting in increased profitability. By sharing that added profit with employees, they are incentivized to make further gains. There is a balance of production and they are paid only for completed, quality products. They work together to achieve overarching goals and there is an expectation they will meet a minimum standard. The company must be profitable overall to support this system. Usually they are, but if not, then a bonus should not be paid.

Incentivizing people is noble, if not practical. In a variety of circumstances it is a good idea, but it must not allow people to take advantage. It also must have benefits that outweigh the costs. If you are not sure that’s how it will work, don’t institute one. Otherwise, you will learn why poorly constructed plans are what makes a business fail.

19 thoughts on “Incentives: Poorly constructed plans make business fail”

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    1. Peter Christian

      Too many companies set bonuses that are not fair to their employees or leave people out. What I am trying to get at is that if you set a plan make sure it is fair and makes sense.

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