Manufacturing is experiencing a surge in digital transformation, yet nearly 70% of firms are unable to move past the pilot stage (LNS Research). Often this is due to a lack of balance between technology and a skilled workforce. Eliyahu Goldratt’s “The Goal” emphasizes the importance of both identifying bottlenecks and fostering self-correction in people and processes.
As frontline worker roles evolve, qualities like initiative and problem-solving become crucial. Labor shortages are requiring organizations to lead, develop and nurture their employees for profitability. To ensure success, leadership must take a strategic approach and facilitate self-assessment and readiness for change.
The Pay-for-Performance (PFP) model is a potential solution that fosters these qualities in workers. PFP can be a catalyst for change by offering a practical and sustainable approach to employee development, commitment and satisfaction. A well-designed PFP model encourages regular feedback discussions between employees and managers that set the foundation for employee development. Commitment is garnered as worker’s contributions are validated by linking efforts and increased compensation. And individual goals are aligned with company objectives, thereby creating a greater sense of purpose. Satisfaction increases due to a sense of fairness among employees. This can lead to increased trust in the company's leadership and a more positive work environment.
New Hope - Embracing Change for Improvement
The phone rang one day, and a key customer explained their biggest challenge: workforce turnover of 20% coupled with the industrial market labor shortage was killing productivity and profits. Retaining good talent became their primary focus. They were considering pay-for-performance but had the following questions:
1. What technologies are available to help solve the turnover problem?
2. What scoring dimensions should we use to create a fair and equitable system?
3. How do we effectively link PFP to corporate goals to ensure companywide alignment?
4. What data sources are available and how do we tie in these disparate systems?
5. How can we minimize maintenance and manual data collection through automation?
The first step in developing a PFP system involves ranking and weighting performance standards based on their importance to the overall objective. Standards should be aligned with the company’s mission statement, strategic goals and metrics to easily assess the program’s impact.
Examples of performance standards that are often used in PFP scorecard design:
The resulting scorecard should objectively measure performance and can be developed for individuals, a cell or team, a continuous line or segment or a specific piece of equipment. The scorecard should reflect both effectiveness and fairness to ensure employee buy-in. Effectiveness can be measured objectively if PFP is tied to corporate goals and KPIs. Fairness can be subjectively observed by management and performance reviews and quantified through periodic employee satisfaction surveys. Employee retention and new-hire rates, along with trend data indicating employee progression along the pay curve, are additional yardsticks for measuring scorecard success.
Some system integration is required to extract data from appropriate sources. For example, the attendance metric should be readily available from the existing HR system. Each dimension has a specific weight that contributes to the overall score, resulting in a Level 1, 2 or 3 pay grade. Note that the efficiency dimension may be prohibited by some union shops as pay cannot be tied to productivity.
Recipe for Pay-for-Performance Success
To increase the probability of success and sustainable gains, organizations should:
1. Start with a serious evaluation and assessment of pain points and dissatisfiers. Interviews with frontline workers and maintenance teams can identify real-time issues hindering productivity. Surveys and discussion sessions with operations management can uncover broader topics that identify gaps between departments leading to inefficiencies. Senior management should weigh in on where the company is falling short on key business priorities.
2. Establish clear goals aligned with the front office. Company leadership should collaborate across the operation to develop Key Performance Indicators (KPIs) that will enable measurement of performance improvement. These KPIs will be unique to the business and may include metrics for quality, downtime, safety, customers, products, etc.
3. Involve employees in the design, implementation, and evaluation of the PFP model. Top-down implementations are often unsuccessful. The creation of a PFP model should start with ‘the why’ and be clearly communicated throughout the organization. Why is this important? Why now? What’s in it for me? Once the organization is receptive, group sessions can solicit input from key stakeholders and employees to inform PFP model design.
4. Conduct a pilot program to gain early feedback. A short term (typically 90 days) pilot program is recommended to assess the system. To reduce angst, compensation could be held at existing levels while demonstrating the effect to each individual had the PFP been in place. This ‘soft launch’ can be used to create a clear picture of the effects of the new system while gathering feedback on employee attitudes.
5. Expect and plan for iterations to improve results, commitment, and enthusiasm. Adjustments may be needed to PFP dimensions, weighting, or pay levels based on results. Is the PFP delivering measurable impact to the KPIs? Is the system driving the expected behavior? Are frontline workers more empowered and engaged? Open dialogue and regular communication will ensure that the program is driving results for employees and the company.
It is critical to overcommunicate during the entire process to reduce anxiety and move employees and management along the change curve.
Long-term Benefits of PFP
Successful PFP implementations yield tangible results. The aforementioned customer reduced workforce turnover from 20% to 6% in less than six months. Profitability has increased by at least 5% and has been sustained for over seven years. Their top customer has awarded them Supplier of the Year four times.
Beyond financial gains, the organization experienced heightened employee motivation, morale, and engagement, fostering a positive and collaborative culture.
Important prerequisites for PFP include (1) openness to change, and (2) readiness for change. Organizations best suited for PFP exhibit a willingness to change whether triggered by a catastrophic event, new leadership, labor shortage, or competitive pressure. Willingness is not sufficient, however. The organization must also be ready and that means understanding that transformation demands patience, empathy, communication, and commitment throughout the organization. Status quo defenders need not apply.
While PFP may not be a one-size-fits-all solution, its strategic application can be a powerful tool for attracting and retaining top talent, resulting in a win-win scenario for both company profitability and workforce satisfaction.
