Making the Investment in Team-Based Pay Work — Idealism vs Reality David A. Boyle, C.M.C. Presented at the Implementing Performance Incentives
This paper is dedicated to the premise that employee incentives are a good investment for both unions and organizations when trying to focus productive efforts in the workplace. To convert an incentive plan into a good investment takes work, much work, however, in order to reach the required acceptance level between the parties in order to achieve the desired impact in the workplace. There are many considerations before incentive effectiveness can be achieved and dealing with these considerations is a tremendous challenge to the parties, both union and management in the context of: • TRUST, • ABILITY TO COMMUNICATE, • READINESS TO RESOLVE ISSUES TRUST is tested at the design, implementation, measurement and payout phases in order to work out the operating difficulties of an incentive plan. The incentive plan by its basic design must contain a productivity contingency to qualify for payment and must define the dollars available for distribution. Ability to communicate ABILITY TO COMMUNICATE is a fundamental skill necessary at all stages of employee incentive development, acting as a foundation for the Trust building in the workplace. We believe there must be a joint commitment on the part of labour and management to discuss issues from all perspectives. Issues will inevitably develop, and should be accompanied by the commitment to keep talking until issue clarity is reached. It cannot be emphasized enough that incentive success is linked to clear, frequent communication. READINESS TO RESOLVE ISSUES is the critical factor to making employee incentive plans work so that Trust is reinforced. A lot of what we are going to present today is based on real life issues in real life situations. The issues resolved vary from the academic to the absurd, but they reflect the reality of the labour/management relationship in the organizations described. This paper addresses the pre-existing opinions brought to the table. The incentive methods actually experienced by the bargaining agent, organization and their representatives play an important role in making incentive plans a good investment. There may be official positions put forward by the union or the corporation, the representatives sitting around the table may have their own agendas and levels of comfort with incentive systems and their role in employee, union member pay programs. Examples of issues affecting comfort include: • Group measurement versus individual results measured • Nature of the goals and standards set • Impact on the bargaining unit from improved productivity • Pay out contingencies, separate cheques, sent to home • Timing of pay outs, Christmas or RRSP season • Timing relative to expiry of the existing contract • Growth cycle of the business and its industry • Is plan inside or outside of agreement? We shall also need to address transition and implementation issues starting with the rationale for introduction of a new pay system with incentives and the definition of "what is in it for me?" Many issues can be implied from the new or changed behaviours expected. How will the measure of these behaviours affect resulting payout and will failure to perform challenge personal job security? Will over performance create job loss for the bargaining unit? A bit of incentive history Hopkins & Mawhinney [6] (pp.10-13) point out that the key purpose of incentive plans is to motivate, but that over time there has been evolution and much discussion of about what motivates. 17/18 th century A hungry worker is the best Stimulate cooperativeness to increase productivity 19 th century $ make men work harder Piece work motivates Best paid worker is most productive 19/20 th century Profit sharing—produce more at less cost Gain-sharing—50/50 split of gain 20 th century Bonus for higher output Bonus for exceeding standard Bonus for value of contribution Competitive peer social forces motivate Now that we are at the very end of the 20 th century what lessons have we to pass on to our heirs in the 21 st. We will find that for incentives to work they need to be easily understood, easily measured and developed with an open, non-adversarial relationship between union and management. Academic economists are now paying attention to the incentive issue and the complexity these academics add is somewhat scary. Weiss [8] discusses increases in "wage rigidity", "quit propensity" and suggests that higher wages increase unemployment rates, while incentives improve security for the remaining few workers. If we can't get past the adversarial issue and the academic economists, we are wasting our time on incentives. We are all at a conference called "Implementing Performance Incentives with Union Partners" with the emphasis on PARTNERSIP. We must be ready for incentives! A starting point The future is coming! The future is coming! The future is coming! As sure as we are sitting here, the future will challenge every assumption that we have made in drafting the incentive plan for our organization and bargaining unit. It is critical in the beginning to be very aware that we all bring assumptions and expectations to the table and that a concerted effort needs to be made to avoid "assumptive mistakes". Constructive attitudes must be developed from the start. A code of conduct needs to be developed between the parties, including: • Speaking up and out, feelings and facts need to be expressed before they build into conflicts and sabotage discussions. • Being optimistic about what unions and mangers can accomplish if they work at it. • Expressing what matters to you the most and not losing touch with what you want. • Connecting with other managers, unions and advisors who can generate ideas that will make our plan work, work better. • Recognize that overcoming blockages to discussion are steps towards making this plan work better over time. Typical plan goals Plan goals frequently start with a list of desired deliverables, expectations for the program being designed, such as: • Attract and retain high-competence workers • Control and predictability of fixed production costs • Focus employee attention on improving methods, processes • Foster co-operative efforts to improve production • Motivate people to generate ideas, to work as a team • Emphasize work behaviours which improve job security and business success Deliverables or expectations frequently are initiated by the organization's management alone. Unions by and large tend not to be the first to propose the introduction of variable incentives unless there is a clear precedent in sister bargaining units within an industry. In fact, unions often come to the table reluctantly when variable pay plans are proposed. History shows that management often prepares variable pay plans unilaterally, often presenting them to the union as a fait accompli. Classical positions are then taken. Unions tend to resist: • the move from seniority to performance focus • the move from brotherhood to differentiating individuals • competition among production cells • the timing relative to the contract renewal • the basis of measurement • changes to headcount • contingencies to payout • variability of payment • being the trend setter in the industry Steven Gross [5] (pp. 226-227) affirms the management right to propose and design variable pay plans for application to union members but he does suggest union involvement in designing the components, especially the measures to be chosen. He also mentions that management can make it easier for union representatives to communicate and sell the incentive plan to members where: • Incentives can be paid retroactively if certain productivity levels are reached • Guarantees are provided so that employees won't be worse off • A business case is made that productivity improves job security To encourage union/management acceptance of a variable pay environment it is incumbent on the parties to read each others' mindset so that a partnership is possible and not blocked at the starting gate. Fortgang [4] (p.137) suggests the following listening pattern for getting beyond what is causing the blockage in the first place: Instant Reactions Listening for Clues Why? What's missing--skills, language support? How? Strengths--are they using them? Does this make sense? Motivation--where will it come from? Do I agree/disagree? Language--are they saying what they mean to say? Do I like/dislike this? Is this right/wrong? Needs--are they in the way? Values--are they being honoured? Is this good/bad? Personal or professional development--What's needed? Can I connect this to what I know? Behaviour--is it new for them? Readiness of the organization or union to accept variable pay is not automatic. A deliberate process needs to be addressed. We suggest that managers and bargaining agents use the following questionnaire as a guideline: Readiness Questionnaire Are you Ready? Be prepared to monitor results--to follow up Be prepared to identify inequities and close gaps Be prepared to communicate, openly, frequently WILLING Are the parties committed to plan pay outs? Are the parties ready to change their destructive behaviours? Are the parties prepared to try new things? ABLE Parties are able to seek advice & support to achieve the changes needed Parties are patient in taking action to reach goals Parties are able to look longer term for a win Parties no longer blame unions or management for problems Parties focus on reaching desired results and behaviours If your workplace has 2 or more negative ratings, Union and Management representatives need to identify the attitudes that need to change to make the incentive plan work. Belcher [2] (pp216-221) discusses a number of key priorities which help to build readiness for incentives in an organization. In brief: 1. Demonstrating management commitment to change 2. Increasing employee involvement 3. Increasing information sharing, communicating 4. Building the feelings of trust 5. Increasing the use of teamwork 6. Building job security 7. Building supervisory awareness and support 8. Building union awareness of the potential in incentives In essence improved organization readiness is based on learning together to cope with the shared goals of improved productivity and job security. Contract issues When your organization and union are ready to proceed, there is a fundamental question to ask: "What is the relationship of an incentive plan to the collective bargaining process?" The Dean of Variable Pay, John G. Belcher Jr. [2] (pp.33-35) states flatly that a variable pay plan should be designed and administered outside the collective agreement to get the win-win attitude in place rather than the usual adversarial approach. It is also true that incentive plans are subject to many external influences which may require frequent amendment to keep productivity responsive to competitive pressures. Belcher does go on, however, to describe the need for union and management to agree to enabling language for the contract to build the consensus process whereby plan features are added, eliminated or amended. To avoid the inevitable level of suspicion Belcher emphasizes that there is no reason why a union and management cannot learn about variable pay jointly and participate together in the planning stage. Any need for a consultant? Many organizations have expressed the value of consultant intervention in this joint learning process in the role of facilitator. "Don't allow unions or management to do anything to each other!" The experienced consultant can assist in creating a balanced perspective based on facts and research and guide the project towards a focused set of beneficial objectives. Mediation and conflict management input would also be useful. Here is a checklist of contributions a consultant can make for maximum benefit: • Keeps perspective in balance • Adds objective information • Inserts ideas to aid resolution of difficulties • Inserts vision and leadership • Actively rejects blaming behaviours • Keeps discussion at a constructive level • Keeps discussion on the high road, with integrity • Facilitates definition of respective responsibilities, union and management • Emphasizes what needs to be communicated to plan participants What type of plan works? To get plan acceptance several events have to occur: • Organization readiness • Management and union agreement to intent • Workable measures of performance developed • Perceived fairness to participants We have already discussed the readiness and intent issues but the bottom-line in every incentive plan rests in the understanding of the participants. The fatal mistake of incentive plans is a design which is complex, "too cute" to be trusted or understood by the beneficiaries, the plan participants. The most common plans active in the unionized workplace are of four types in increasing order of use: Appreciation plans The employee receives shares based on performance and contribution to the workplace. These shares appreciate over time based on profitability and market forces Gain sharing plans The incentive is generated when unit performance exceeds a threshold of revenue or cost. Any gain produced by passing the threshold is shared among the company and plan participants according to an agreed to formula, such as 50/50. Value-added plans The incentive is generated based on the improved profitability arising from work process improvements agreed to by the company and the union Short-term incentive plans The incentive is paid out as a direct result of exceeding a measure, or measures, of productivity improvement. Choosing the right plan for your workplace Choosing the right plan for your workplace is no easy decision or process. We have already introduced the issue of readiness and the need for both management and union representatives to come to the table with an open mind ready to develop a joint focus which satisfies, in part, business and job security objectives. Arahood [1] (pp. 28-29) outlines the many steps involved in developing an incentive project. Boyle [3] outlines the principles used when the incentive is focused on the team. In brief the resulting project must address the definition of which employees are eligible, the expected importance of individual and/or team effort, the agreed to measures and expected impact on workplace productivity. The usual priorities include defining the specific "team" destined to receive the incentive, e.g. production cell, shift or all in the workplace. Job security issues arising out of the improved productivity will need to be addressed. Are the incentives contingent on a productivity measure, profitability or share value? Is there any requirement for the unionized employees to develop a new set of skills in order to qualify for the incentive? Is there a cap placed on the size of the incentive? Recent market and business school attention to team development has brought out a few interesting issues affecting team productivity: One of the key elements in team productivity is the recognition of the peer ability, indeed expectation, to teach one another to overcome blocks to continuous improvement or specific bottlenecks in productivity. The question is how to reflect this desired and adaptive behaviour in the incentive. A few examples follow: Productivity measures (% bonus paid)
Cost formula concept (% bonus paid)
Gain matrix Warehousing Cost Formula
With all of these issues and questions one can easily see that a plan has the tendency to grow increasingly complex. Complexity occurs if the union and management focus on too much detail rather than keeping their eye on the key behaviour change or where specific productivity improvement required for maximum pay out does not generate an improved benefit to the employee. Plans can also become complex if too much effort is directed towards overcoming potential abuses, such as double-dipping and benefits received even when absenteeism is greater than the norm. Negotiation is the key to simplicity Negotiation must start with the objective of plan simplicity and the parties must be prepared to compromise in plan selection, to define measures and to eliminate obstacles to fair administration. The keys identified by Kohn [7] (p.126ff) can be used to overcome failure attitudes by:
What we intend—we create! Throughout this paper we have attempted to give you a pragmatic discussion of the issues at hand and the suggestions that come from our experience in dealing with incentives, organizations, unions and partnership relationships. The premise of this conference is right on! Unions and Management can become partners. We do not, however, underestimate the complexity of making the incentive partnership work. Hard work is ahead of any incentive development partnership because the incentive plan must be straightforward even if the process is not. Start simple then evolve a relationship and a plan to meet your needs. Let your test of:
begin! 1. Arahood, Dale A. Installing Management Incentive Bonus Plans. Weaton IL, Incentive Compensation Publications, 1994 2. Belcher, John G. How to Design & Implement a Results-Oriented Variable Pay System. New York, AMACOM, 1996 3. Boyle, David A. "Recognition & Reward of Teams--10 Basic Principles". HR Intelligence, Volume III No.19, Federated Press 4. Fortgang, Laura Berman Take Yourself to the Top. New York, Warner Books, 1998 5. Gross, Steven E. Compensation for Teams. New York, AMACOM, 1995 6. Hopkins, Bill L., Mawhinney, Thomas C. Pay for Performance: History, Controversy, and Evidence. New York, Haworth Press Inc., 1992 7. Kohn, Alfie Punished by Rewards. New York, Houghton Mifflen Company, 1993 8. Weiss, Andrew Efficiency Wages—Models of Unemployment, Layoff, and Wage Dispersion. New Jersey, Princeton University Press, 1990
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