Employee Compensation Strategies in Manufacturing

Introduction

The manufacturing sector is undergoing a remarkable transformation on many fronts. To a considerable degree it is changing because of pressures brought about by the economic downturn (CompuData Systems, 2009). Manufacturing itself remains a critical part of the global economy, but many factors are forcing it to adjust toward becoming a leaner and more adaptable sector. It is widely known that many companies moved their manufacturing operations to other countries to lower personnel costs. But those actions did not negate the fact that the sector also had to look inward if it was going to address issues of positive returns (Tropman, 2001, p. 31).

Our company's efforts seek to find a new way forward by examining employee compensation in order to entice new types of workers and to keep the ones we have aligned with our needs as those needs change over time. Traditional manufacturing situations have often been seen as similar to the way construction or even professional engineering businesses operate: on the basis of specific projects or production patterns (Wang, 2004). This involved maintaining a workforce with many different types of employees across all skill levels and degrees of commitment (Tropman, 2001, p. 31). For the most part, employee compensation packages were fairly standardized except at the level of high-end management. Now serious consideration is being given to how compensation resources might be better targeted to reach across the full complement of employees we have or need, and how to ensure those employees want to stay with us (Westman, n.d.).

In light of this exploration, we offer an overview of the history of employee compensation packages with attention to how personalized models emerged starting in the 1970s. We then examine three variations that have affected our company and may guide us forward. The first, which mostly reflects our current approach, is merit-based. The second uses incentives instead. The third is essentially a continuation of a menu-driven option that allows for uniquely personalized components. The information provided here is intended to generate a discussion about where our company stands now and how we can develop our own hybrid model that could serve as a guide for the broader manufacturing sector (Vivekananda et al., n.d.).

History of Compensation Packages

The old pay model, which has been broadly accepted across history, assumes five main elements. Tropman offers a summary of these factors in a chapter titled "From Old Pay to Total Compensation" (2001, p. 8). Base pay, regular merit increases, benefits, a few perks (often unique to a particular company), and other occasional gratuities are these elements. In combination, these were thought to be most effective in attracting the right people, retaining top performers, motivating all employees, and making the company appear competitive (Wang, 2004, p. 15). Theories dating back to the late 1950s viewed these combinations of employment conditions as either "dissatisfiers" or "satisfiers" — elements that kept people sufficiently content, while something more unique had to catch their attention, often even beyond money alone. Generating more satisfiers and fewer dissatisfiers would make the work environment more attractive and presumably more productive (Wang, 2004, p. 19).

By about 1971, forward-looking commentators began to see the situation differently — as something more specific to particular workplaces. Expecting to grow performance based on production characteristics alone seemed unrealistic, especially given growing awareness of how humans learn and interact with their environments. A person's interactions help them mature and advance in unique ways, and so it became important for human resource management to recognize and respond to this. As Tropman reiterates from the writings of others from that era, there is much danger in assuming cookie-cutter answers to personnel expectations (2001, p. 4). Menu-driven preferences for compensation packages offered one way to let employees choose what was best for their personal growth:

"This roiling of the waters of need creates a pressure for choice. Choice is everywhere today, in the workplace no less than in the supermarket. Employees are increasingly looking at their paycheck the way they look at their market basket — they want some say in what goes into it. They want the chance to configure, within reasonable limits, their own rewards systems" (Tropman, 2001, p. 6).

From today's business perspective, however, the situation has evolved much further. As the world shrinks and we can see more clearly how companies actually function, compensation considerations are being reviewed and found to be far broader than generally accepted. Manufacturing businesses are no different (Vivekananda et al., n.d.). The challenge lies in achieving two goals: rewarding various skills across the entire company while giving employees a voice and sense of involvement in the company's success. As Scott and McMullan note: "In response to the economic crisis, employers are concerned about keeping employees engaged after they have suffered through wage freezes, lost bonuses, increased work demands and downsizing. Motivating employees under these circumstances while recognizing that once the economy improves top talent may leave for other opportunities has created a new corporate battle cry: employee engagement" (2010, p. 1).

Companies make hiring decisions for many reasons, and why people stay or leave is becoming increasingly difficult to judge. Companies like ours need to go step by step through our different employee levels to sort through what is known and determine how to extend the kind of tailored compensation that was once reserved for top executives to other employees as well. The many layers of skill in a modern workforce are more important today than ever before (Tropman, 2001, p. 31).

In our business, the era of creative compensation has not only arrived but begun to settle in (Wilkie, 2003). We often recognize that we need young people with core math, science, and technology skills who are nonetheless willing — or need — to begin at entry level and work their way up, even if more quickly than in a traditional full career arc. As our impact becomes more global, we may find ourselves involved in critical investor and financing considerations, many of which require different types of senior fiscal managers who bring their own viewpoints on compensation and incentives (Barton and Laux, 2010). It is important for companies to stay focused on the full scope of employee needs, not just on top management compensation. Skilled employees must be rewarded appropriately and creatively if they are to remain committed from entry level through career advancement.

Merit Pay

Merit pay-based strategies typically correlate compensation with job performance after the fact. The assumption is that if one works more efficiently or effectively, better and more valuable rewards and recognition will follow (Wang, 2004, p. 15). Part of the reason we have traditionally used this approach is that the items we produce are essentially project-specific. We design, bid, and manufacture items based on our best estimates of ingredient costs, the steps involved, and the required manufacturing elements. The price, within allowable parameters, is then negotiated. As a business, we constantly evaluate what was promised and seek to ensure compliance while reducing costs. If we happen to perform better than expected, the resulting savings can be used to augment core compensation through special recognitions, bonuses, or other perks. Merit pay is very much a backward-looking approach (Wang, 2004). Success breeds bonuses as well as other types of personal motivators. For the most part, this is how we currently operate, and most of our personnel are compensated according to outcomes that reduce our projected costs.

Conclusion

The manufacturing sector faces poor growth prospects going forward. Companies like ours have used basic merit and incentive methods in the past to reward our employees, just as other manufacturing companies have done. Now, however, we are being challenged to find other ways to ensure that our compensation package reaches across more employee levels and encourages new generations to join and to stay.

Westman suggests several points worth considering. He argues, for example, that the best companies will likely be examining a much broader range of ways in which merit and incentive elements can work together. Companies need to be more aggressive about seeking unique ways to motivate employees, many of which can be discovered simply by asking employees directly what they want and what their expectations are for contributing to the company's work processes. There is substantial evidence to suggest that this level of involvement is far more viable today than in the past, and that it can make merit and incentive choices even stronger.

A 2009 white paper on the effects of the economic situation on the manufacturing sector recommends cautious and even conservative considerations regarding health, prescription, and other job perks for businesses that must struggle to remain competitive (CompuData Surveys, 2009). Other assessments take a different view, suggesting that it may be possible to be aggressively more innovative (Westman, n.d.). Employee compensation and benefits strategies are evolving, and companies like ours are positioned to examine highly inventive options and consider how they might fit into our standard practices. If done correctly, we can learn from the top-heavy mistakes of others and begin fundamentally valuing those qualified employees whose contemporary skills offer us something for today and tomorrow.

References

Barton, H., & Laux, J. (2010). Executive pay inefficiencies in the financial sector. The Journal of Applied Business Research, 26(4).

Carpenter, S. (2007). Design the right compensation plan for your business. Entrepreneur.

CompuData Surveys (2009). The real effects of today's economy on the manufacturing industry.

Scott, D., & McMullan, D. (2010). The impact of rewards programs on employee engagement. WorldatWork.

Tropman, J. (2001). Old pay to total compensation. Chapter 1.

Vivekananda, A., et al. (n.d.). Compensation — An analysis of manufacturing firms.

Wang, S. L. (2004). Incentive compensation: Bonusing and motivation. Carnegie Mellon University / MIT.

Westman, D. (n.d.). Innovative employee compensation packages to motivate employees.

Wilkie, D. (2003). Added benefits. Engineering Inc., July/August.