Profit free essay sample

Research Report Improving Productivity by Instituting a Compensation Plan Presented to: ABC Manufacturing, Human Resource Department Assessment Code: RWT1 Student Name: Student ID: Date: January 24, 2013 Mentor Name: Table of Contents Executive Summary3 Introduction5 Research Findings5 Performance-Based6 Profit Sharing7 Gainsharing8 Recommendations10 Conclusion10 References12 Executive Summary ABC Manufacturing Co. , Inc. is a small company with 120 full time employees. We produce aluminum doors and windows. Although we are highly successful, we find that it can be difficult to retain our valued employees. Human resources has decided to evaluate several compensation plans and see if any options exist that can help retain employment and improve productivity. It seems that all successful compensation plans have four main qualities: 1)Goals that are clear 2)Goals that are challenging and attainable 3)Regular feedback on job performance 4)Cooperation between employees and managers When deciding on possible options for the company to consider, these four factors were taken in to account. After investigating numerous compensation plans, I narrowed it down to three possibilities: 1) Performance-based 2) Profit sharing and 3) Gainsharing. Performance based compensation plans are monetary rewards that are based on individual performance. The performance norms are based on general ideas of what is acceptable for each job position no matter if the goal is too high or too low for the employees in that position. Bonuses are paid out on a regular basis. Each job goal can be easily manipulated by employees by downplaying job responsibility. This plan has a tendency to encourage risk taking by employees. It can be seen as acceptable to cut corners to increase bonus size. In my opinion this is not the appropriate plan for ABC Manufacturing Co. , Inc. Profit sharing is a plan that is based on the success of the company. The bonuses are funded through company profits and only when companies have profits. These bonuses are normally paid on an annual basis and the amount cannot be counted on from year to year. Employees have difficulty figuring out how to calculate their bonus and also how they can improve the possibility of company profits. It is found that this plan has little impact on employee behavior, which means that it would not affect productivity. Because of this I don’t believe that this is the appropriate choice for our company. Gainsharing is a plan that shares in company performance successes. It creates a partnership between the employees and the company and encourages an open communication between the two. The bonuses are paid monthly and calculated by using a specific formula that is created by management. Employees are educated on the formula and on the plan as a whole so that there are little to no questions about future pay and how to obtain it. This plan promotes employee involvement and because of this I believe that it is the plan for ABC Manufacturing Co. , Inc. We are looking for a plan that will improve productivity and will improve employee retention. By improving employee involvement within the company, you will increase the likely hood of retaining that employee. Since the plan is based on improved productivity, then we are almost guaranteed a success in that area. To get this success I believe that we must start with three steps: 1)Interview Employees 2)Create Formula )Educate Employees With a little time, effort and company-wide help, I believe that we can create an environment of openness, creativity and productivity. Introduction As a member of human resources in ABC Manufacturing Co. , Inc. , I have been asked to find a possible option for a company-wide compensation plan. I have also been asked to make a suggestion on which plan is most appropriate for our company and our company goals. At this time our compan y would like to save money by retaining our current employees and by increasing productivity. Research Findings Dave Ramsey has been known to say (2011), â€Å"What an organization spends money on is what they value† (p. 275). He also goes on to state that if you feel that your employees are a valuable part of the company, you need to pay them as if they are (Ramsey, 2011, p. 275). When an employee feels appreciated, they will have a longer, more productive career with the company. According to Ross Blake (2006), it is estimated that it can cost a company anywhere from 50% to 150% of an employee’s annual salary to replace them. If an employee makes $40,000 annually, it is estimated that it will cost $20,000-$60,000 to replace that employee. These amounts include recruiting, interviewing, orientation, training and loss of expertise (Blake, 2006). So what methods can we use to retain our valuable employees? It is believed that compensation plans are a legitimate way to express appreciation in employee’s productivity and efforts and an excellent way to retain employment. Some of the main reasons to institute a compensation plan are (Vivekanand, p. 2): OIncreased employee morale and motivation OImproved employee performance OIncreased employee productivity OEnhance employee efficiency OReduction in employee turnover OIncreased company commitment So what must one do to create a successful compensation and performance plan? There seem to be four areas that need to be present no matter what plan you chose. One of the first steps that must be considered is the clarity of the performance goals that the plan is based on. The employees must be able to understand what they are being judged on so that they can anticipate the results of their daily work. This means that there must be a written plan and everyone from management to manufacturing must be educated on this plan. This will ensure that there are few misunderstanding among employees and management. Another step is that the goals must be challenging. Create goals that allow employees to grow and feel accomplished once they reach the goals. An important part to a challenging goal is that it is attainable. If the employees feel that they cannot reach the goal, that the goal is impossible, then they will eventually stop trying. The third step is that there needs to be regular feedback on employee performance. This will allow employees to take this feedback and improve on it so that they can reach their goal. If an employee cannot rely on regular feedback they can feel that the goal is unattainable. The last important step is to allow cooperation between employees to achieve the goals. Employees need to be able to work together to meet their goals and by doing so it builds commitment to each other and to the company itself (Stack, 2000). Thinking about the preceding steps, I have chosen to focus on three specific plans: OPerformance-Based Compensation OProfit Sharing OGainsharing Performance-Based Performance based compensation is a monetary reward that gives employees feedback on their measurable performance at work. A performance based goal should be like any other goal, it should be attainable and challenging so that it provides incentive (Pinto, 2005). Employees are normally asked to assess the amount of work they do on a given day so that a base level of work can be created. Management will then decide what the work goals will be for each individual employee. Once management creates these individual goals, they are communicated to each employee so that they understand what is expected of them. They must also understand the performances that are being assessed and how each of these performances will be assessed (Stillwell, 2002). When management is creating the base level of acceptable performance, they must consider two things: company performance and employee performance (Mora, 2010). You want to calculate the minimum amount of work that employees can perform that will allow the company to still make profits. If the minimum amount of employee performance is too low, the company can be paying out benefits for increased employee performance, but be losing money in overall company performance. By taking this into consideration, the company can guarantee that the employees increased performance will also increase company profits. There are some challenges with the performance-based compensation plans. It can be very hard to judge what individual performance levels should be for each employee. You will find that some employees will automatically go above and beyond the call of duty at work while others will do the bare minimum that allows them to still get paid. Because an important part of goals is to have them be challenging, this can make it difficult to set a minimum performance for a job. It can also be common for employees to falsify their job responsibilities and performance so that their goals are set at a lower level. Another problem can be the fact that big rewards can encourage some employees to take big risks. If it is perceived that an employee can cut some corners to ensure a larger pay out, they will do it without a second thought. Cutting corners can reduce quality and lead to possible harm which will eventually increase company costs. This tends to contradict the goals of a compensation plan. Analysis: I believe that a performance based compensation plan would have some positive and negative effects on our manufacturing company. Performance based compensation plans seem to have definite goal clarity which is an important part of setting up a successful plan. Once the employees and management evaluate each job position, it should become clear what is expected for each position to become profitable. Because of the job clarity and the individual nature of this plan, it should be easy to give each employee individual feedback on their positions. Our company would have to make sure that the feedback wasn’t just in the form of a bonus check. There would have to be an employee evaluation for each position and a regular time line that these evaluations were conducted. Some of the problems that I see are the fact that it can be difficult to create a challenging yet attainable goal for each position. Management would have to make sure that we took enough time to honestly evaluate the position so that we have accurate information to set our goals. I believe that one of the biggest problems is the fact that this type of plan would produce competition between employees instead of cooperation. It seems that an environment of competition would actually hinder performance. If employees are more worried about how the person next to them is doing, they are less likely to be concerned with their own performance. It also seems that this could lead to an atmosphere of doing just enough to be better than the guy next to you instead of doing the best job possible. Profit Sharing Profit sharing is when a company designates a portion of their profits to a pool that is dispersed back to the work force (Stack, 2000). The profits are funded completely by the successes from the company and are only paid out when the company experiences these successes. The amounts are normally paid out on an annual basis, but can also be paid out whenever the company sees fit. In this plan, the management decides when the profit will be paid out and how much will be paid (Masternak, 2009). Vaden Bos (2010) determined that there are three steps that need to take place when implementing a profit sharing plan. You must begin by determining the purpose of your profit sharing plan; is it to retain employees through a retirement plan or to motivate them through a cash plan. After determining your purpose, you must create the formula that you will use to calculate your plan pay outs. A common amount is to pay out 10-15% of the company’s pre-tax profits. It is also common for companies to set a specific revenue target that must be reached before the profit sharing comes into play. You then need to educate your employees about the plan. If ndividual employees have difficulty understanding how they can influence and improve profits, this can undermine the benefits of this style of compensation. By educating them on the pay-out formula and when it comes into play, you are giving them more influence over their environment. Stack (2000) has found that one of the main negative consequences of a profit sharing plan is the fact that employees cannot count on being paid every time the company see s profits. They also have difficulty calculating the amount that they will be paid. This can create an environment of distrust between the employees and the management. Another area that can cause negativity is the actual amount of profit that is paid out. The company must make sure that the profit sharing payouts aren’t too high, making up a higher amount than the employee’s annual pay or too low so that employees aren’t excited about it (Blencoe, 2002) Analysis: When looking at the profit sharing plan, I see more negative than positive attributes. I believe that it would be difficult to give each employee goal clarity. Management would have to set a goal for each job position so that company profitability would be inevitable. They would also have to make sure that they could create goals that are challenging and attainable. The only problem is that as long as the company is profitable, it doesn’t matter if each employee reaches their individual goals. This plan doesn’t have a true feedback plan either. When your employee feedback is whether or not they receive an annual bonus check, an increase in productivity is less likely to occur. Employees can’t rely on the bonus to happen every year, so they lose faith in the compensation plan. This plan also ignores employee cooperation and input which can determine whether a plan is successful or whether it will fail. Gainsharing Gainsharing is when an organization seeks higher performance by involving its employees in the outcome of the company. It does so by enabling them to have a say in ways that the company can increase profits and productivity and reduce error and waste. As the performance increases, the employees are included in sharing in the company’s financial gains. The organization measures employee performance and shares any saving that might result with employees through a pre-determined formula. The profits are normally paid out on a monthly or quarterly basis. This process works best when the performance and productivity can be measured (Masternak, 2009). According to Imberman (1995), gainsharing can improve plant performance and productivity while cutting costs by reducing errors and time wasting. When employees know that their bonus relies on some sort of gain then they will strive to achieve that gain. By focusing on increasing productivity by reducing errors and time waste, you essentially eliminate the need to cut corners. The goal is not entirely on profits, it’s also on personal and team goals. And when you train your employees on the criteria that you are using to determine the goals and the formula that you are using to calculate the pay out, employees will be more motivated to participate (p. 75). Cotton (1993) says that a gainsharing plan can only be successful when the employees are completely informed on how it will work and the formula used to calculate the compensation amount (p. 10). When employees don’t understand the plan, they are more apt to feel that it is unfair or unattainable and to stop working for the end pay out. When this happens, your plan has failed. You also need complete participation by both the employees and the management. Allow the employees to vote on whether or not the plan should be implemented once they have been given information about the plan. But doing so, you will be helping your employees take ownership over the gainsharing plan. This will help to guarantee success. You must also have management agree to carry out the plan no matter what. Employees must feel confident that if they earn their bonus it will be paid out (Cotton, 1993, p. 110). Cotton (1993) also states that gainsharing programs have three common factors. 1)Focus on reducing production time and reducing expenses not on profit or sales. 2)They are financial bonuses give to the employees involved when productivity is improved. 3)They are a â€Å"formal, supplemental system aimed at individual departments, plants or companies (p. 89). There are quite a few benefits of a gainsharing plan, but Cotton (1993) really focuses on two. The first is that it can be a great way to help keep your employees involved in how the company is doing (p. 91). If employees understand what the goals are and the formula for the payout, they are more likely to keep an eye on these goals and make adjustments if they are not met. It is also encouraged that employees bring new ideas to management that have the possibility to save time, reduce waste, or increase productivity. If employees feel that their ideas are being heard and better yet, making a difference, they are more likely to feel responsibility in the outcome. They want the company goals to be reached. Second, Cotton (1993) focuses on how this plan can encourage management to keep employees up to date on the company’s successes and failures (p. 91). If employees are given feedback on the how the company is doing, they can make the changes needed to improve that area which, in turn, will improve everyone’s bottom line. This also gives employees the opportunity to bring new ideas to management about how to improve areas that are not meeting the goals that were set. Analysis: One of the most important parts of the gainsharing plan is the fact that employee cooperation is a major factor. If we started this plan by discussing employee ideas on ways to increase productivity, reduce time waste and reduce production errors, then employees will be more invested in the plan as a whole. It will also make it easier to set the goals for each employee position. Once this happens, the company can set goals that are clear, challenging, and attainable. The fact that the employees have individual goals but that pay out relies on increased production will create a camaraderie between the employees instead of competition. Employees are then encouraged to succeed in their position, but to also help everyone else to succeed. Recommendations I believe that ABC Manufacturing Co. , Inc. will find great success by introducing a gainsharing plan to our company and employees. After reviewing some of the most popular compensation plans, this seems to be the most logical and positive of the ones reviewed. I believe that being a small manufacturing company with 120 employees; we will be able to utilize this plan to its fullest. And with a little planning we can find great success. Some of the first steps that I believe we should take are: 1. Interview Employees: We would want to start by interviewing employees about their positions and what it entails to perform it properly and timely. By taking this information and looking at the average amount of product that they can produce in an hour, you can determine what elements you need to add into your formula. This also will give human resources some ideas of what manufacturing believes will help improve production costs. 2. Create Formula: Human resources will need to decide exactly how we would like to calculate the percentage of pay out for the gainsharing plan. One way is to look at total # of work hours saved for a given number of units produced. We can also compare labor cost and sales values. Another decision that will need to be made is what percentage of profit will go to the work force and what percentage will go back to the company. It seems that the percentages can range from 25% to 75%. This area will need more calculation and consideration by management before it is brought to the workforce. . Employee Education: Once we have our formula for calculating our company bonuses, we will need to educate the employees on this new plan. I suggest that we take time to educate the different areas of manufacturing so that they know what their production goals are and so they have a complete understanding of the whole gainsharing plan. We need to make sure that the employees completely understand the f ormula and how the company goes about calculating their bonuses. They also need to understand that by suggesting different way to improve productivity, they can increase their bonuses. Conclusion In conclusion I believe that to solve the problem of employee retention, improved productivity, reduction of errors and a reduction of waste time we must institute a compensation plan. To produce a successful compensation plan, human resources will need to create a plan with specific employee goals, goals must be challenging yet attainable, there will need to be a regular source of performance feedback, and there must be a sense of cooperation between the employees and management. With these four things in mind I chose to look at three plans. Of the three compensation plans that I investigate; performance based, profit sharing and gainsharing, I believe gainsharing to be the most logical. If we take our time creating our gainsharing plan, we should see great success within our company. We will need to have close contact with our employees by gathering information about their position and any suggestion that they may have for company improvement. We will need to spend time looking at different cost and expenses so that we may come up with a formula that will give a fair amount of bonuses to our employees and improve productivity at the same time. We will also have to take great care in educating our employees about the plan. We want them well versed in the actual formula and how the payout are calculate as well as the fact that they are encouraged to share any ideas with management. I believe that this choice will improve employee/company relation and improve profits at the same time. References Blake , R. (2006, July 24). Employee retention: What employee turnover really costs your company. WebProNews, Retrieved from http://www. webpronews. com Blencoe, G. (2002, Novemeber 10). Implement a profit-sharing program. Retrieved from http://www. smartbiz. com Cotton, J. (1993). Employee involvement: Methods for improving performance and work attitudes. Newbury Park, California: Sage Publications, Inc Heffernan, M. (2012, September 14). Why performance related pay doesnt work. Moneywatch, Retrieved from http://www. cbsnews. com Imberman, W. (1995). Improving plant performance through gainsharing. JOM, 4 (7), 57. Retrieved from http://www. tms. org/pubs/journals/jom/matters/matters- Masternak, R. (2009). Gainsharing or profit sharing: The right tool for the right organization. Retrieved from http://www. hr-guide. com/data/G44301. htm Mora, V. (2010, April 04). Performance-related pay models. [Web log message]. Retrieved from http://www. blogs. payscale. com Pinto, J. (2005, July 01). Performance based compensation. Automation world, Retrieved from http://www. automationworld. com/performance-based-compensation Ramsey, D. (2011). Entreleadership: 20 years of practical business wisdom from the trenches. New York, NY: Howard Books. Stack, J. (2000, November 01). The problems with profit sharing. Inc. , Retrieved from http://www. inc. om/magazine/19961101/1864. html Stillwell, L. (2002, December 16). Performance-based compensation increasingly popular. The business review, Retrieved from http://www. bizjournals. com Vanden Bos, P. (2010, April 19). How to build a profit sharing plan. Inc. , Retrieved from http://www. inc. com/guides/2010/04/profit-sharing-plan_pagen_ Vivekanand, A. , Achuthan, A. , Kiruthigha, E. , Veena, S. , Raja, S. , Sharma, S. Compensatio n: An analysis on manufacturing firms, Retrieved from www. scribd. com[-gt;0] (AAT 29050937)(p. 2) [-gt;0] http://www. scribd. com