At one of my prior companies (Integrated Management Systems), we used Pay for Performance (PFP) extensively to motivate employees and drive productivity substantially higher. We have worked with PFP for over 20 years and have seen both big successes and big failures with it. We like to look at pay for performance as nuclear fuel. It can either power a city or blow it up. We have seen both sides of the picture and have learned a lot from it.
As an example of a big success, here is a brief case study on one of the operations we ran:
The operation is a large cross docking facility that processes 20,000 containers a year of inbound freight of soft line products (shoes, clothing). Prior to our involvement, the operation had 140+ temps working 40+ hours a week with lots of overtime. Temps were paid minimum wage ($7.75) and weekly turnover of the work force exceeded 30%. Labor cost per container was $237. The operation was averaging 73 cases per total labor hour measured by inbound cases processed.
Through our previous company, IMS (a 4PL labor provider) we implemented a data tracking and analytics system that was the predecessor of Easy Metrics and managed the entire workforce for the customer. We brought in our own management and general labor at $9 per hour and with pay for performance, employees could earn up to $15 per hour.
Over the next year, we increased the productivity to over 200 cases per hour. Employee wages averaged $13.50 per hour, almost 80% higher than previously. Employees averaged 35 hours a week of work and headcount was reduced to 60 employees. Over two years, we were able to reduce the bill rate to the customer to $155 per container, an $82 per container cost reduction and savings of over $1.6 million a year. The operation went from the worst in the network to the best in the network in under a year on both productivity and load quality. Employee turnover dropped to below 5% a week, which for the volatile nature of cross docking is exceptionally good.
Now for a bad example.
We made the decision to sell IMS and focus on Easy Metrics. The national firm that bought IMS struggled with the operationally involved business model and the client decided they could do it better themselves and took the operation back in house. They designed their own PFP program which misaligned the incentives of the employees to the goals of the company. As well, the company lacked the proper data tracking to make it effective. Productivity proceeded to collapse and the last we heard, internal labor cost per container were over $290, almost a 100% increase from where we left it and the management team was replaced.
Pay for Performance is incredibly powerful and I highly recommend it, but it needs to be well thought out and communicated both in the design and implementation.
Please check out our Download the Essential Pay For Performance Checklist on the subject. They go into much greater detail on both use and design.
Easy Metrics has a very powerful Pay for Performance system that incorporates our many years of experience designing and operating these programs.