What defines an effective program and why do so many fail? Effective productivity incentive programs are defined by three key aspects. First, individual employee’s efforts are properly rewarded. If he/she is one of 2 to 4 people in a small group, that one person has a much bigger impact on the small group than being one in a group of 30, where efforts are easily hidden. When everyone is grouped into one large pool, individual employees realize that there is very little difference in impact between 100% and 70% effort. Second, their individual small group’s productivity can be properly measured with clear realistic goals that can be achieved on a daily basis. In other words, if the type of order changes from a simple project, high quantity, and with minimum complexity versus project with complex configurations, they are still able to achieve the daily incentive payout. Last, but certainly not the least, is the program has to be worthwhile for the employees. A good rule of thumb is an extra 2 to 3 dollars for every hour they achieve the incentive goals. If you are missing any one of these three key aspects for your productivity incentive program, you are wasting your time and money.

Okay, some of you are really excited about paying or receiving the 2 to 3 dollars more every hour for meeting productivity gains. Every industrial engineer is taught that when there is a dollar saved beyond the common output levels, the cost of labor savings should be split 50/50. That means for every 2 dollars in savings, 1 goes to the employees and 1 goes to the company. Please remember that the 2-dollar labor savings would not have been achieved if the employees did not go beyond the standard output levels. You get more productivity, less labor cost, and more profit margin dollars for every order that they achieved the greater output. When properly implemented, the standard gain is about a 42% increase in output. (Source: Case studies from industrial engineering consultants Mitch Fein and Fred Myers published in Motion and Time Study for Lean Manufacturing 2001.)

So how does one implement such a productivity incentive program that was previously defined? Well, first start tracking the individual groups. You must actually measure how many production units that each small team achieves in their daily shift. You will need to do this by handwritten tracking or invest in software that can count the individual units coming off the workstations. You need to know how many units that were actually completed by the team (for example, 7 of a run of 12 were completed in actual time versus expected time). It is imperative to record at this detailed level. Either record the information by handwritten paperwork (timecards) or by implementing shop labor-tracking software that automatically counts each unit at each workstation, tracks each employee’s time, and compares everything to the expected time units. Such as software program would be well worth the investment.

After establishing the capability of tracking in detail the expected versus the actual time units, consider multiple payout options. First, decide if it is best for your group to evenly divide the payout among the individuals in each group based only on their logged time or weighted against the individual employee’s hourly pay rate and their logged time, so the higher wage earners would receive a greater share. Second, the payout is based on the labor cost savings or the estimated units versus actual units multiplied by a dollar amount. I recommend setting up a well-defined spreadsheet to calculate the results from the handwritten paperwork, or you could simply click a button on the software that is able to quickly calculate these results.