7 Considerations In Establishing Incentive Pay Plans

As pressures mount to drive the minimum wage to $15 or more per hour, we expect that businesses will need to adopt incentive plans or bonuses to drive more productivity. More than 50% of total cost of fulfillment is labor. More companies will utilize an incentive pay plan as part of their pay structure.

An incentive pay plan is a ‘bonus’ pay over and above their hourly wage that an associate can attain if they meet certain pre-set requirements or criteria. Incentive pay can be productivity based, quality based, safety based, etc. While an incentive pay plan can be beneficial, there are 7 considerations that need to be understood beforehand if the pay plan is going to be successful.

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  • Collecting key performance data. Many companies do not collect and report employee performance today. This is the first step. Research what it will take to put in place accurate collection of data in departments within the fulfillment center (e.g. picking, packing, receiving, replenishment, returns, etc.). This will need to include payroll costs. Adoption of engineered labor standards will make the productivity reporting and incentive pay plan more accurate. Take for example order pick batches. Single line order batches are fast to pick; whereas multi-line batches are slower and more complex. Multi-line orders may require the best pickers. An engineered labor standard for picking takes this into account these differences where simple units per hour picked does not.
  • Process improvement required. In the process of evaluating the benefits of incentive pay for a specific function, will it only work if you improve the process first? Trying to build sophistication on top of poor processes and systems may not be fruitful or advisable.
  • Criteria for bonus pay. Incentive pay plans need to have well thought out criteria. Incentive pay plans need to have criteria or requirements on which to measure an associate so that the pay is objective and not subjective. The criteria chosen needs to be challenging but it also needs to be achievable. One of the worst things that can occur is when the criteria is not fair to the business or the associate. This will either cause the company to pay out more for savings than they are receiving, or on the flip side, the associate will lose focus and motivation if they know it is impossible to reach the set criteria.
  • Pay for increased performance. Know how much money the associate is truly saving your business. When determining how much incentive you would like to award your associates for accomplishing a set requirement(s), it is imperative to know how much the associate is truly saving you by hitting those criteria. Once you have determined how much money is being saved, do not exceed the breakeven point of your savings (obviously).
  • Incentives tied to team or group performances. If a portion of the incentive pay plan is tied to criteria achieved by a group or team, you may need to do some creative solutions and coaching so that there aren’t adverse effects. How will you structure incentives when a team has to accept inexperienced people or under-performing associates? Additionally, how does an individual that outperforms the team get compensated?
  • Where can you get the most benefit? In many operations, the largest payroll expense is in picking, packing and shipping customer orders. That would be our vote to investigate how much additional productivity can be gained with incentive pay. Start in one function with high performance employees first.
  • Don’t make the plan too complicated. If it is difficult for an associate to understand how they are getting paid an incentive; or a supervisor has trouble explaining the plan, you probably have made the plan too difficult. Remember, you are trying to get more achievement out of the employees. If they feel they are being gamed; or if it can’t be a “win/win” for both sides, chances are the plan will fail.

Exciting times are ahead as we look to improve productivity in customer contact and fulfillment centers. Incentive pay plans should be one of the strategies you investigate and adopt to keep reducing your costs. Without more productivity, increased wage rates will invariably reduce profits.

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