Compensation in the Lean Enterprise

Below is an interesting question that many companies struggle with their efforts to motivate and provide incentives for their employees.

The Question 

“We have implemented the Lean principals in our Manufacturing area and are now set up in cells, but we have come across a problem with compensation.  Presently we pay for job worth as determined by salary surveys and internal evaluation methods.  But our manufacturing workers are no longer doing only one job.  We don't want to go to complicated skills based pay system either.  Can anyone share what they have done?”

The Answer

If I understood the question correctly, it may be time to reconsider variable compensation based on individual performance.

As you correctly note, a complicated skills based system takes a lot of energy and may not be worth it (unless you are using it to drive cross-training and flexibility).  A number of companies I have worked with have taken different approaches to this problem.  Those that seem most successful have taken two approaches:

One is a “Scanlon System” type approach where detailed performance (and profit) details are shared and compensation beyond a reasonable base level is dependant on performance and is shared equitably with ALL of the employees.  Assuming the base pay level handles differentials in skill sets and responsibilities this seems to work well.

The other approach breaks the additional compensation for performance into team areas – so if this team performs well they all share equitably in the results.  This works pretty well for the group but can have the unintended consequence of causing teams to compete against one another for resources and (gasp!) not be focused on the customer.

Each of the above has plusses and minuses.

We need to remember that Deming (and others) were/are against the idea of subjective appraisal systems.  I suggest you get a copy of “Punished by Rewards” by Alphie Kohn.  This is the best work I have seen to date that examines human motivation in the workplace, classroom and dinner table.  It contains exhaustive references to other works and studies for more information.  Even though there is little in Alphie’s book directly tied to manufacturing and Lean, he does heavily refer to Deming and others.

Basically, he does a good job of helping us understand and differentiate between extrinsic and intrinsic motivators.  Extrinsic motivators can be (all too often) only forms of manipulation – do this and you get that.  Intrinsic motivators come from enjoying the work through, among other things, having a say in the work and how it is done (an underpinning of Lean teams).

The takeaway is this – pay does not make the top five in most satisfaction surveys.  Make sure the pay is fair.  If bonuses or variable compensation are going to be used, it must be done so that it is perceived to be even-handed and not subject to capricious, subjective “appraisal” results.  Then do the hard part – make sure intrinsic aspects are maximized.