The following article appears in the journal JOM, 50 (11) (1998), p. 80. JOM is a publication of The Minerals, Metals & Materials Society

Using Incentive Plans to Boost Productivity in Manufacturing

In order to help alleviate a tight labor market and boost plant performance, machine-tool manufacturing companies are using many forms of motivation bonus plans for hourly workers. Based on the number of recent expansions and new plants being developed, it seems the companies are doing well.

To increase net profits, companies in the past have leaned toward job elimination, with the theory being that fewer employees would cut payroll costs and force the remaining workers to work harder. However, in a 1996 study on downsizing by the American Management Association, results showed that in 1,441 firms surveyed, only onethird of the companies achieved both immediate and longterm cost reductions and profit increases by eliminating jobs. The rest (66%) showed no gain; some even showed a loss. Fewer than 40% boosted worker productivity by job elimination. The remaining 60% either showed no productivity gain or a productivity loss. An alternative approach to job elimination is the use of incentive plans.

An October 1997 survey of 427 companies found that almost every company was using some kind of positive-incentive bonus plan to motivate employees to raise output to meet customer orders. Of the 427 companies surveyed, 103 were machine-tool producers that used a variety of incentive plans to boost productivity and quality (Table I).

Table I. The Use of Incentive Plans by 103 Surveyed Machine-Tool Producers
	1998	1968	Change
Plan	(%)	(%)	(%)
Profit Sharing	39	31	+25
401(k)	14	10	+40
Piece Work	9	18	-50
Gainsharing	22	8	+175

In machine-tool companies, such as Cincinnati Milacron, Leblond Makino, MSC Industrial, Nardini North Amer-ica, Kearney and Trecker, Summit Machine Tool, Heidenhain, Giddings and Lewis, Hitachi Seiki, Jessen, Watry Industries, and Mazak, profit sharing is popular with executives. However, according to company reports, plant employees regard profit sharing as a reward at the year's end for company performance rather than as a daily motivator for plant production. Other studies indicate that many of the factors used to calculate profits (e.g., material costs, inventory evaluation, pricing, and transportation costs) are beyond the control and efforts of the plant employees, who have little first-hand knowledge of these factors within the realm of their jobs at the plant.

Despite these drawbacks, companies still use profit-sharing plans, primarily for two reasons. First, they tend to stabilize the employment situation for older employees. An employee who has worked for the company for ten or more years and has built up a respectable sum in the profit-sharing retirement fund is not apt to seek employment elsewhere. Second, executives like profit sharing. Since they have some control over activities that generate profits, the plan does motivate them. However, the plan has no effect on motivating the efforts of plant employees, who do not work harder or smarter as a result of such a plan.

The use of 401(k) plans is reported mainly by smaller producers of machine-tool bearings, grinders, cutting tools, CNC parts, gages, and servo-motor components. The plan operates like a profit-sharing plan, with company contributions and voluntary employee contributions put into a retirement fund. Like the profit-sharing plan, the 401(k) plan builds good will through company contributions, but does not act as a motivator for daily production effort. Higher paid, skilled employees can afford to contribute to a fund, but only a small fraction of the semiskilled or unskilled workers can afford to do so.

Why are 401(k) plans used? Again, they also tend to create stability among older employees who have built up a respectable retirement fund as a result of the plan. Second, 401(k) plans are popular with executives, most of whom can afford to contribute to the plan and gain company-matching funds. Still, the 401(k) plan is not a motivator for plant employees.

The piece work bonus system is reported to provide excellent incentives for productivity improvement, and in labor-intensive companies, such bonuses are popular with plant employees. Employees are encouraged to earn individual bonuses for daily output above the standard. Such bonuses are paid weekly, so there is no wait until year-end. This plan is used in different labor-intensive departments (not plants) by smaller producers of bearings, clutches, gears, screw-machine components, pinions, calipers, micrometers, and cutting-tool components. However, companies report that quality defects often increase because of the emphasis on quantity. The popularity of the piece-work system has been greatly reduced by mechanization.

Gainsharing, which is a payforper-formance bonus plan, has gained wide popularity, and is now used by 22 percent of producers, as compared with only eight percent 20 years ago. Some use gainsharing bonuses not only for motivating employees to improve productivity and quality, but also for eliminating losttime accidents, improving ontime shipments, etc. The plans are reported to be popular among ma-jor manufacturers of machine tools (e.g., Cincinnati Milacron, Dover Corporation, Eaton, IngersollRand, Klein Tools, and TRW). Typically, such a plan pays short-term group bonuses for production exceeding a base level. It produces a 10­17 percent annual increase in productivity and a similar decrease in the cost of waste, spoilage, rejects, and rework.

Gainsharing is a selffunded system; bonuses are paid out of gains. Whenever the work force earns monthly bonuses, the company also benefits in the exact same degree. For example, one company reports that it required about 10,000 worker hours a month to produce about 100,000 machine-tool components. If the workforce understands that by working harder or smarter they can turn out the next 100,000 machine tool components with only 9,000 worker hours (instead of 10,000), that would represent a savings of 1,000 worker hours that month. If the average pay in the plant is about $10 an hour, a gain of 1,000 worker hours is worth $10,000-shared as $5,000 to the employees and $5,000 savings to the company.

For more information and articles on how gainsharing can be applied to your company, contact W. Imberman, Imberman and Deforest, 1740 Ridge Avenue, Evanston, Illinois 60201; telephone (847) 733-0071; fax (847) 733-0074; e-mail IOMB@aol.com and DEF@aol.com.