Everyone’s Incentive – Avoid Making Your Incentive Program a Bottom Line Burden

Many in both labor and management would agree that incentive programs for warehouse employees on engineered labor standards (ELS) are beneficial to all parties involved.  They provide financial motivation for employees that demonstrate the ability to perform their job at a consistently high level.  Employees achieving at a consistently high level equates to shorter overall operating spans, and potentially lower payroll costs.  At what point, however, does your incentive program turn into a burden on your bottom line?  The answer to that question, numerically, is best answered by your management team.  The answer to that question, conceptually, is what we will explore today.

In the ELS environment, when an employee is consistently performing at an exceptional level, it’s time to explore the reasons why.  “Exceptional performance” will differ slightly, depending on your labor management system (LMS).  If you’re operating with a discrete engineered labor standard with a LMS such as FLEXdlsTM, exceptional performers should be considered those that are consistently at or above 120%.  In an LMS that is less discrete, such as JDA/RedPrairie®, Manhattan, or Infor WMS (formerly EXceed), performance at or above 125% warrants some investigation.

In our experience, exceptional performance levels are most often the result of one of the following conditions:

  • The operating conditions have changed and the ELS is no longer reflective of the environment
  • The operator is not completing the tasks using the prescribed methods
  • The operator is not performing all required parts of the task
  • The operator is an exceptionally skilled employee, working at an exceptionally high pace for most or all of the shift.

The case of the exceptionally skilled employee is the only condition in which the incentive is working properly and both parties are benefiting.  In the remaining examples, the employee is benefiting at the expense of the company.

By not performing the job as intended, the employee receives his/her incentive pay based on performance but often impedes or delays other associates in the process.  The overall result of the “exceptional performance” is slower or possibly more work performed by the remaining associates.

If the employee is performing at the exceptional level because the job has changed and the measurement has not, it is likely that the cost savings associated with the operational changes are not being fully realized due to the increase in performance incentive pay outs.

In all cases, it is necessary to investigate the root cause of the exceptional performance and respond to each case accordingly.  In the cases of operator performance, this can be done by your management staff on a case by case basis.  If you suspect that your ELS may no longer be representative due to operational or environmental changes, contact your Industrial Engineering team, or another IE professional to perform an audit and determine the corrective measures necessary.

Here are some simple quick pointers for a healthy incentive program:

  • Review your daily operations reports for exceptionally high performances just as you would look for those below acceptable performance.
  • Have a cap on performance based incentives to avoid reinforcing the wrong behaviors
  • Structure your program to ensure that it in reflective of the “big picture” by including quality and accuracy measures
  • Audit your incentive program annually to ensure it is working as intended
  • Have your ELS audited regularly – every 12 to 18 months – to ensure that it is accurate and representative of your operating environment 

A healthy incentive program is intended to reward associates for their hard work and dedication to the organization.  It is imperative that the program be monitored and managed to ensure that it maintains the overall desired results and does not have unintended consequences on your bottom line.

Greg Melroy is a project manager at West Monroe Partners’ operations excellence practice.  Learn more about our workforce optimization services

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