"...I have a great interest in various incentive systems, particularly those of the "Merit Pay" variety. Could you share your experiences and opinions?" P.N., Minnesota

THE INDUSTRY ADVISOR

THE WISDOM OF MERIT PAY

By Gene Levine - www.genelevine.com

  Progressive management is going beyond the straight incentives paradigm and no longer accepts as gospel the idea that just individual incentives always provides the best motivation and improved attitudes – in relation to the dollars spent. As empowerment suggests, production is not the only thing needed from workers and workers have wants and needs far beyond money. Straight incentive systems appear to be failing at an alarming rate causing increased willingness to seek out viable alternatives, among them merit pay plans.

Straight incentives are rigid, merit pay is not. Merit pay plans can be designed to stress quality, attendance or any other measurable factor you wish to improve. Merit-factor incentive pay plans use merit elements selected independently of a worker's output.

Workers need to understand and believe that a incentive-merit pay plan is being substituted for the old straight incentive system in order to:

1. Stimulate productivity
2. Provide them with the opportunity for increased earnings
3. That the plan's design will be changed as the factory's needs, in terms of motivational objectives, change.

In determining if a merit pay factor plan is for you, perhaps the most difficult question to answer is, "Will it help me better achieve my factory goals?" This can be answered only by examination of the particular group of circumstances present in the given factory at a given time. If the rate and allowance structures are sound, the incentive spread is wide enough (15% or more over guarantee) and reasonably attainable, quality standards are accurate and adequately defined, but the system is not producing the desired level of incentive earnings, something is evidently amiss. It may well be that the employees are being paid for an inadequate mix of factors – that motivation for sheer productivity alone is no longer enough.

At first glance, it might appear that merit pay plans would increase payroll costs – at least initially. However, one of the greatest opportunities to reduce production costs is through stabilization of your work force and maximizing the potential of the workers already employed. Training costs continue to mount with the result that you should look at the loss of each production worker as a minor crisis.

The risk of experimentation with compensation factors is minimal. In a few cases where management lost its commitment – because the installations had not improved motivation as rapidly as expected – factories returned to the straight incentive system with little or no difficulty. If experimentation is decided, the question then becomes one of selecting a better alternative to straight incentive and which will stand the best chance of succeeding. How is this determination made and how do you switch to another incentive plan?

With the introduction of computerized payroll and on-line production tracking systems, many alternative direct labor incentive plans, that would have been administrative nightmares without a computer, are now feasible. Although there are many promising plans, this article will deal only with what are referred to as "Incentive Merit Pay Plans," or, as I will now call them, "Merit Plans." These merit plans retain the primary productivity features and advantages of the straight incentive plan while injecting merit incentives.

Merit plans have been used by some of our industry’s leaders since the 70s. They are a natural for teams, groups cells or modules. The common denominator of all these combined merit plans is the relationship between incentive wages and several rated performance factors, with productivity invariably remaining the primary consideration. The merit factors which may warrant incentive payment almost always include defined attendance standards and quality levels. Additionally, attitudes which affect the employee's total contribution to the company are also often considered. Seniority, cross-training, housekeeping, waste containment, safety and suggestions, etc., while not merit factors – in this article – have been easily incorporated into merit plans I have installed.

I ask you, is production all you want from your workers and if not, why not pay for the "total" contribution? These combined plans provide the best motivation for superior performance when operating within the framework of a variable base rate system (although I know of successful plans using a single factory-wide base rate).

A hypothetical example of a variable base rate range (wage and salary structure) resulting from the application of the job evaluation process to a group of  machine operator jobs is shown in Figure 1.

FIGURE 1

BASE RATE RANGES

In this manner, the incentive pull works not only laterally within the rate range of the worker's own skill level, but vertically as well in that the best workers in job classes (skill levels) I and II may aspire to promotion to higher skill level jobs. (Note the 15-½ % spread between the maximum rates for Skill levels I and III).

Under this particular application of a merit plan, the new worker who successfully completes his/her training period is advanced from the trainee rate for the skill level of his/her job ($5.00, $10.20 or $10.60 per hour) to the minimum hourly base rate for that skill level ($10.20, $10.40 or $11.20 per hour). Beyond this point, the manner in which the incentive payment is applied may take several forms.

After variable base rates, you can pay for other factors as shown in all the following three -(3) figures. The first example as shown in Figure 2 would be to use annual performance reviews of the worker's success in meeting predetermined standards on work factors which have been agreed upon – say; productivity, attendance and workmanship. You would assign each of these three factors point values for various levels of performance. The employee's advancement to the next higher step in his/her skill level depends upon his/her combined performance in the selected factors equaling or exceeding a certain number of "performance points." Figure 2 illustrates how productivity and merit factors of workmanship and attendance might be rated under this merit plan.

Figure 2

HOW TO USE APPLY VARIOUS
PRODUCTIVITY AND MERIT FACTORS
INTO THE PLAN

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