Team-based compensation systems and organizational productivity

Nelson

Mr. Nelson

This special report presents a study on team-based compensation systems to: analyze different issues, problems and benefits associated with implementing this kind of reward program in an organization. as, we are presenting case studies of: a few companies, where team-based compensation programs were implemented. With these studies, we try to analyze the changes that were observed in: the productivity and efficiency levels of the employees.

The team-based business structure started gaining in popularity during the late 1980s. This was the time when a number of Japanese companies were successfully implementing this system into various departments. An example of this can be seen in 1990 with, 594 of the Fortune 1000 companies using this approach. As this was signifying the shift that occurred in the way businesses were adapting their strategy. By 1999, this figure further increased in to nearly 80% of the Fortune 1000 companies, who implemented the team-based pay system in their departments. Though these figures don't imply that this was being adopted by most organizations, it does mean that this system was used at some point in the majority of corporations. Over the past few years, use of team-based compensation system in business has rapidly increased, and lots of companies are now successfully implementing this program. as, they are using this to: motivate their employees and increase their productivity levels. (Pizzini)

There are a number of ways in which teams are structured or created. Many times, a team is made up of different groups of multifunctional employees (just to accomplish a particular task). However, the best example of team work can be seen in a manufacturing sector, where employees work on a permanent basis to manufacture a particular product or provide a service. A number of organizations implementing the team-based compensation approach will execute layered structures. This is when an individual, will receive their base salary and a bonus decided by specific goals achieved by the team. In some team-based compensation programs, each member gets the same bonus if the team achieves the set target. In this case, a bonus pool is created for the team in advance. However, there are other team-based compensation programs that are self-funded. as, the bonus is paid to the members of the team from: the savings (due to meeting their targets or goals).

The reasons why companies implement team-based incentive programs vary from one organization to the next. as, some create team-based compensation programs to: strengthen changes in the business strategy or production process. While other businesses implement these programs to: strengthen operational philosophy inside their organization. As a result, these incentive strategies are designed to motivate team members to work in a cooperative manner. (Garvey)

Phelps Dodge's Team-Based Compensation Program

Another example where a team-based compensation system is working well is the Phelps Dodge North American mining operations. as, there are more than: 4200 employees that are engaged in these activities; at six locations across North America. The team-based compensation program was implemented at Phelps Dodge with intention to: change the employees' mind-set that they are a salaried workforce (rather than hourly paid staff). In this program, team members receive a base salary as well as extra incentives for completing the target set by the team of specific mining locations. as, the team goals are defined by: the members and not the management. The incentive system is regularly updated to: make it the best for the company and each team member. (Garvey)

Lantech: An Unfit Case for Team-Based Compensation System

Lantech is a machinery manufacturing company operating in Louisville, Kentucky. They are one example where team-based compensation systems did not work at all. In the U.S., Lantech has a workforce of nearly 290 people. They first tried using this approach in 1980s. as, the management grouped them into: small teams and gave everyone the freedom to decide how different members of the team would be paid. The intent was to: receive positive results from this move and see how team members could rise above their own personal interests. However, this it did not work at all for the company. Some members began to bring their friends onto the team (in order influence the decision making process). Within a few months, negative results started to come in from this practice. This is important, because it is showing the drawbacks of using this approach, when trying to address the overall challenges facing an organization.

Despite the setbacks that were occurring, another attempt to implement a team-based compensation system was tried after a few years. This time employees' compensation was to be decided by: the base salary, individual incentives centered on performance, and finally the team based incentive program. However, this system could not provide good results for the company, as money became the ultimate issue for the team members (which was affecting the decision making process). It also resulted in an increased competitive rivalry among business units. Ultimately, the company revoked this system which had already given it huge pains in terms of financial losses. Then, they tried to implement the companywide profitability-based bonus program. This is when they started using non-monetary rewards, with its employees to: invoke a sense of belonging inside their organization. (Garvey)

Effectiveness of Team-Based Compensation Systems

Various studies on team-based compensation systems have been conducted in the past, and most have demonstrated that changing an organization's pay structure from: an individual-based compensation system to team-based one can bring highly positive results for the organization. There might also be sharp increase in efficiency of: employees and the productivity / profitability of the business. It is not necessary that team-based compensation will deliver results in: each department or company where it is implemented. However, this system has been found to back up the initiatives, by which results can be delivered inside an organization.

Determining Factors for Team-Based Compensation

There are a number of factors which make a company / division fit for implementing a team-based compensation system. Some of the most notable include: task interdependence, mutual monitoring, group size and intra-group variation in productivity.

Task Interdependence

Teams are created when there are possibilities of gaining advantages of: productivity or efficiency improvements that result from teamwork and cooperation. Task interdependence describes the extent or degree, to which members of a team trust each other, in order to accomplish their task. Any job having larger degrees of task interdependence is more beneficial from: teamwork, coordination, and communication.

Usually in cases of high degrees of task interdependence in a job, it becomes difficult for anyone to establish a direct relationship between: the work output for the individual and the efforts of team members. For example, in a healthcare facility there is always a team of physicians to accomplish the surgery or other complex processes. In emergency rooms, a number of individuals (i.e. staff nurses / physicians / others) work together as a team to take care of the patient. Contrary to this, in outpatient services there is less task-interdependence for physicians. However, intra-group coordination is still required to: improve the quality of service and the reputation of the department. (Pizzini)

Mutual Monitoring

It is advantageous to use team-based compensation programs where: members can participate in and are allowed to conduct mutual monitoring of each other. This helps in inducing peer pressure and thus lessening the chances of free riding (from select individuals). Group members can also impose explicit or implicit penalties on those who do not perform well in the team structure. as, the penalties can include: fines or even expulsion from the group.

Group Size

Studies have shown that group size also has an impact on: the effectiveness and performance of the team. With increases in: team size, the performance, mutual monitoring and effort levels of the team members' improving. as, the size of 5 to 20 is considered to be the best for a team to: achieve the desired productivity and efficiency levels. (Pizzini)

Intra-Group Variation in Productivity

Studies on team-based compensation programs demonstrate that these approaches have a greater effect on team performance, when members possess: similar abilities and work ethics. As high-ability team members do not wish to work under team-based incentives, if there are low-ability members included. In the same ways, high-performing members wish to select only those individuals as a part of team, who share similar in abilities as their own.

Problems Faced in Setting up a Team-Based Compensation Program

A problem that arises in implementing a team-based compensation program is: employee rejection due to "slackers" or team members that are not motivated. as, don't wish to put in the hard work in: achieving the team goals and are more than likely interested in receiving a pay check. This is a major concern for other team members and it is hindrance in implementing the team-based pay programs. However, this issue can be tackled by introducing layering bonuses for the team and its members. For example, those individuals who contribute the highest in: achieving the team goals can be paid the largest amounts of compensation. However, an important point to consider when implementing this reward system is: that perfect performance measures should be in place to evaluate the effectiveness of each individual.

A very important thing to keep in mind when implementing team-based compensation programs is that money is not always a motivator. as, there are many examples of companies where an incentive-based compensation program has failed, because of employee indifferences. Sometimes the incentive programs were much too complicated for them to understand. as, many employees thought of it as: an entitlement rather than a reward (that was to be earned). Therefore, it should always be remembered that there might be members of different teams, who would love to receive a pay check, without putting forth the effort to: obtain the higher forms of compensation.

When you step back and analyze the different team-based compensation programs, it is clear that they cannot be expected to provide perfect results. This is because these kinds of approaches must be: adapted to the organization itself and managers must utilize flexibility when applying these strategies. That being said, if they are used in the proper context, then you could see a dramatic improvement in: the amounts of productivity and profitability in the organization. Two good examples of this can be seen by looking no further than: Zeneca Ag Products PLC and Phelps Dodge. This is significant, because it is showing how this strategy is helping to redefine the way businesses are tackling the various challenges that they are facing.

One of the reasons why, is because this helping a variety of organizations that are taking a more egalitarian approach through: embracing a number of different elements. To include: task interdependence, mutual monitoring, group size and intra-group variation in productivity. These different factors are important, because they can be used to help an organization be able to: motivate their employees and increase the overall amounts of productivity at the same time. Once this occurs, it means that an entity is able to adapt to the various challenges that they have been facing and they can overcome them.

However, it is also important to note that some organizations have tried to use a more entrepreneurial approach with this strategy. In these kinds of situations, they are ineffective at addressing the problems of the organization and motivating the staff. Therefore, a basic approach must be used that will take into account the kind of organization and if it can be able to address the underlying challenges. At the same time, managers must understand that no system is perfect and that there will be certain elements that will not work well for everyone. If this kind of focus can be taken when implementing this strategy, this will help to: increase the productivity and profits. Once this takes place, it means an entity can be able to more effectively adapt to the various challenges they are facing.