Designing a Variable Pay Plan
You have been brought in as a compensation consultant for MiniMite Company, which makes high quality electrical distribution devices for commercial applications. The products are relatively quick to produce, with the plant producing several thousand different products a day. The products are relatively inexpensive and the industry is very competitive, so the profit margin on each product is small and all production costs must be kept low. The company has two major problems. First, it has been lagging behind the competition in developing new products. Second, its existing products are more expensive to produce than the competition's equivalent products.
About two years ago, the company hired 2 people to create a new research and development department to develop new products with larger profit margins, but no new products have been developed by them. Neither person seems very motivated to perform, although they seem to have the technical knowledge necessary to be effective. In addition, in an attempt to improve its productivity, about two years ago the company also shifted to a team-based method of production where production workers function as a self-directed work team in producing a complete product (i.e., the workers are empowered to make many decisions in this system). All workers must be able to do all of the tasks necessary for the production of the device. (Previously, the production process was an assembly line where each worker did a specific task all day, every day as part of a traditional assembly-line process.) A virtually identical production process significantly improved productivity at other plants in the same industry that make similar products. Unfortunately, despite offering cross training for all of the employees in the production process so that each person can perform all of the production process jobs, only 25% of the employees have taken the training and can perform all of the production tasks. After two years of experience, management has concluded that the new team-based production process hasn't improved productivity, although quality has improved. In addition, plant managers (first-line supervisors and their immediate superiors) have not been happy with the new team-based production method because they believe they have lost the power to control their employees and yet they are being held ultimately responsible for plant productivity.
The company pays production employees a base pay reflecting a "match" pay policy. The production workers get regular, across-the-board annual increases each year based on a variety of factors, but there is no true merit pay because it would cost too much if base pay increased every year. The company also offers a profit-sharing program in which all employees can earn up to 1% of their base pay in year-end profit sharing payments in the form of company stock.
The company wants you to develop a compensation system that might help it address its problems.
The current situation at MiniMite Company is that the company makes large numbers of high quality electrical distribution devices for commercial applications. The company must keep costs low, develop new products and reduce the costs of existing products. The company's efforts at developing new products with larger profit margins have failed. The restructuring of the production process from an assembly line process has not been fruitful. The attempt at cross training has yielded unsatisfactory results. The company's pay policy is not related to productivity and does not motivate employees to work hard or improve performance. There is a high base pay, and across the board increases are given every year.
The company wants improvement in productivity by redesigning the compensation system. The base pay is the ...
This answer offers cogent arguments relating to a new compensation system