HRM 324 Week 3 Designing Incentive Plans Example

Rewarding Defect-Free Parts, Not Just More Parts: A Gainsharing Plan for the Molding Floor, a Team Bonus for Tooling and Commission Rules for Sales at Northfield Precision Plastics

[Student Name]

University of Phoenix

HRM/324: Total Compensation

Week 3 Assignment

[Instructor Name]

[Date]

Northfield Precision Plastics and all plan figures are composites written for a model paper; incentive concepts and research findings come from the sources listed and are stated generally.

For years, Northfield Precision Plastics, the composite Minnesota molding company, paid machine operators a monthly bonus based on parts produced per shift. Output rose, but so did scrap and customer complaints: operators ran presses faster than validated settings allowed and passed borderline parts to meet counts. A medical customer issued a corrective action request after finding flashing, thin excess plastic at the parting line, on a batch of housings. An incentive is a message about what matters, and Northfield's bonus told operators that quantity mattered more than the quality its customers were paying for. This paper redesigns the company's incentives.

What Research Says About Incentives

Pooling dozens of studies, Jenkins et al. (1998) showed that pay incentives went hand in hand with more output while showing no reliable link to better quality. Lazear (2000) showed that switching windshield installers from hourly pay to piece rates raised output substantially. Together the findings suggest that incentives work powerfully on what they measure and can neglect what they do not.

Rewarding A While Hoping for B

Kerr (1975) documented how organizations routinely pay for one thing while expecting something else. Northfield rewarded parts produced while hoping for defect-free parts. Operators responded rationally to what was paid, as any group of employees would. The lesson is not that incentives fail, but that the measure must include what the company actually values.

Matching Plans to the Work

Molding is interdependent work: setup technicians, operators, material handlers and inspectors all affect output and quality, so individual incentives would set them against one another. Tooling engineers work as a team on each new mold. Sales representatives work largely on their own accounts. The plan types follow the work: a plantwide gainsharing plan for production, a team bonus for tooling and individual commissions for sales.

The Gainsharing Plan

Gainsharing shares savings from better performance against a baseline. Northfield's plan measures two things each month: labor hours per thousand good parts and scrap dollars as a share of material cost. Baselines come from the previous year's averages. When labor hours per thousand good parts fall below baseline, the value of hours saved, at the average wage including benefits, goes into a pool. When scrap falls below baseline, half of the material saved goes into the pool. Only good parts count, so speed that creates scrap reduces the pool.

Sharing the Pool

Fifty percent of the pool is paid to employees and 50 percent retained by the company. The employee share is divided among all hourly production employees in proportion to hours worked, paid monthly, with 20 percent held in a reserve to cover months below baseline and paid out at year end. If, in a month, the plant saves 1,200 labor hours worth $38 each and $20,000 of material, the pool is $45,600 plus $10,000, about $55,600, and employees share about $27,800, roughly $77 each for 290 production employees after the reserve is set aside.

Line of Sight

Plantwide measures reduce each person's sense that their actions matter, so the plan is reported by shift and by press cell on displays in the plant, even though payouts are plantwide. Operators can see how their cell's scrap and hours compare with baseline each day.

The Tooling Team Bonus

Tooling engineers design and build molds for new parts, and delays or defects in molds hold up launches. The team bonus pays up to 10 percent of base pay each quarter, half for delivering molds on schedule and half for first-pass yield, the share of molds that produce acceptable parts without rework at qualification. A mold delivered on time but failing qualification earns nothing for the schedule portion.

Revised Sales Commissions

Sales representatives earned 3 percent of revenue on all orders, which encouraged chasing large, low-margin automotive orders. The new plan pays 2 percent on automotive revenue and 4 percent on medical device revenue, reflecting the strategy and margins, with a quarterly bonus for new medical accounts. Commissions are paid on gross margin above a floor, so price discounts reduce the commission.

Funding and Caps

Gainsharing is self-funding, since it pays only from measured savings. The tooling bonus is budgeted at about $120,000 a year. Total incentive payouts are capped at 12 percent of base pay for production and 15 percent for tooling, protecting the company if baselines prove too easy.

Safety as a Guardrail

Production incentives can tempt employees to bypass guards or skip lockout steps to keep presses running. Northfield's gainsharing plan therefore includes a safety gate: any month with a lost-time injury or a confirmed safety rule violation in a cell reduces that cell's displayed results and triggers a review, and the plantwide payout is reduced if recordable injuries exceed the prior year's monthly average. The gate signals that savings won through unsafe shortcuts are not savings at all.

Resetting Baselines

Baselines will be reviewed annually. Raising them every time employees improve would feel like a penalty for success, so increases will be modest and announced in advance, with capital investments in new presses adjusted for separately.

Communication

Plans fail when employees do not understand them. Northfield will hold meetings on each shift explaining the formulas with examples, post monthly results and invite an employee committee to review the gainsharing measures.

Measures for the First Year

The company will track scrap rates, labor hours per thousand good parts, customer complaints and corrective actions, mold delivery times, first-pass yields, the mix of medical and automotive sales and employee understanding of the plans in a short survey.

Conclusion

Northfield's old bonus rewarded quantity while hoping for quality. A gainsharing plan that counts only good parts and shares scrap savings, a tooling bonus tied to schedule and first-pass yield and commissions weighted toward profitable medical work align each incentive with what the company values. Research shows incentives change behavior powerfully, which is exactly why they must measure the right things.

References

Jenkins, G. D., Jr., Mitra, A., Gupta, N., & Shaw, J. D. (1998). Are financial incentives related to performance? A meta-analytic review of empirical research. Journal of Applied Psychology, 83(5), 777-787. https://doi.org/10.1037/0021-9010.83.5.777

Kerr, S. (1975). On the folly of rewarding A, while hoping for B. Academy of Management Journal, 18(4), 769-783. https://doi.org/10.5465/255378

Lazear, E. P. (2000). Performance pay and productivity. American Economic Review, 90(5), 1346-1361. https://doi.org/10.1257/aer.90.5.1346