I am the biggest possible fan of merit-based pay raises and performance based compensation.  In these days of poor cash-flow, it’s tough to give out raises.  And ironically, it is now when people are more likely to want a raise.  This is because your employees haven’t been given a pay boost in a while and now are hankering.  But our plight hasn’t improved much.  At least, it hasn’t improved enough to give back to the employees to the extent that you can make up for lost time.

Enter the bonus system.  Suppose that giving a bonus meant that you got more in return?  Then the extra outlay of pay would be a genuine investment; give out $5 and get back $10.  Then I suppose that you’d be silly not to give out a “raise”.  But today, I think that we should analyze the bonus systems and perhaps extract a few flaws.  Whenever there is a bonus earned, you – the business owner – must be the ultimate winner.  That can’t be hard to understand.  There is simple no point to rewarding someone with $10 for saving you $9.  Completely pointless.  I admit that you didn’t need me to tell you that, but I think that it’s happening sometimes and you are possibly unaware.  Read on…

  • A presser has 250 shirts to press.
  • The presser makes $11.50 per hour
  • The presser has a bonus plan in place that pays her an extra dollar if she attains a production rate of 50 shirts per hour

If the presser makes the bonus by pressing 50 shirts per hour, she works 5 hours and gets paid $12.50 for those hours –  $62.50 for the day

If the presser works sub par and presses at the rate of 42 shirts per hour, she needs to keep at it for 6 hours.  Although there is no bonus because she has failed to attain 50 shirts per hour, her gross pay is higher because she worked 6 hours (for $69) and she didn’t have to work as hard.  Furthermore, 6 hours is not a long day.   To add insult to injury, I recently saw this scenario in a drycleaning press room and the pressers made it even worse for the plant owner.  They cheated their piece count (surely they were counting pieces in the Neanderthal fashion; tallies on a clipboard) to make it appear that they were attaining their production goal when they actually were not.  In the end, they were working the 6 hours, rather than 5 but still collecting their bonus.  They won in two ways; they didn’t have to work hard and they still got their bonus, grossing $75.  The budgeted amount was $62.50.  Three pressers in collusion. Five days a week.  Let’s call this an even 10 grand per annum.

Now let’s extrapolate that:

You have 2 single-buck shirt units, 2 pressers and 2 support people.

You reason that the bonus structure is well worth it because if the pressers work faster, you will save on the hourly pay of the support people as well as utility consumption.  Let’s see:

  • 500 shirts to do in total
  • Expected PPH goal: 50 shirts per hour
  • 5 labor hours for each of 4 people
  • Everybody makes $11.50
  • Pressers bonused as previously described; $1 per hour for attain 50 shirts per hour.
  • Ideally, the labor cost per day is $11.50 x 10 plus $12.50 x 10, $240.
  • Labor cost per piece is 48 cents

Let’s say the pressers work at the average rate of 42 shirts per hour.  Now everybody works 6 hours and nobody gets a bonus:

  • 500 shirts to do in total
  • Actual PPH: 42 shirts per hour
  • 6 labor hours for each of 4 people
  • Everybody makes $11.50
  • The labor cost for the day is $11.50 x 24, $276.
  • Labor cost per piece is a little over 55 cents per shirt. (and your plants costs are higher)

The problem with these examples is that there is no motivation for the employees to attain the bonus level because they would make less money!  Nobody wins here.

A client and I recently had a telephone conversation about a bonus plan that he just put into place.  He explained that he offered all of his pressers an extra $40 per week (again, an extra dollar per hour, in effect), if they attained their pressing productivity goals. Just like a snap of a finger, all the pressers attain their goals!  I doubt it and I can prove fraud rather easily.  First of all, most of these pressers (there are 4), generally are at or near their goals, so there probably isn’t a need at this plant.  Let’s look at the numbers.  This plant, like all of my clients’ plants, measure their efficiency by monitoring  Piece Per Labor Hour (PPLH).  After the implementation of this bonus system, total plant PPLH increased substantially.  This makes sense – to a certain extent.  After all, PPLH is the most accurate monitor of labor efficiency and labor savings is best measured that way.  But in the final analysis, the employees must be getting paid LESS, not more!  This is simply because they will work faster and, because of this, due to pure mathematics, they will work less hours! If this isn’t true, the bonus system works for the employees, but it works against you.  Now, admittedly, its true that increased productivity, can have a bigger picture viewpoint.  For example, better customer service, trucks getting out on time, shorter plant time to save utility costs and other such things.  But, for the sake of simplicity, let’s assume that these are not issues.  If you implement a bonus system, generally speaking, in most all instances, your pressers will make the same pay and your savings will come from shorter plant time and the reduction in the hours of non-bonused support staff.  Let’s demonstrate that in an example:

Assume that everyone makes $10 per hour.

This plant does 5000 shirts per week, 2 double-buck shirt units.

1 washman

4 pressers

3 people in IAB (Inspection, Assembly, Bagging).

As wrong as it is, everyone works a 40-hour week. (8 employees x 40 hours = 320 hours, $3200).  This is equal to 15.6 PPLH.  Very poor and you know it.  You heard from me, or somebody like me, that you should be running your shirt plant at 28 PPLH.  If each of your double-buck units is responsible for half of the 5000 shirts and the pressers are pressing for 40 hours, then their average productivity rate is 62 shirts per hour.  This is extraordinarily poor and you know that too.  You need a way to incentivize your pressers so that they press 90 shirts per hour.  If they did, your plant production time would be reduced to 28 hours and, in theory, your total department hours would be cut to (28 hours x 8 people) 224, saving nearly 100 hours per week.  Cool!  The pressers currently each make $400.  In order for them to not get a pay cut, you would need to pay them more to work faster.  If you, somehow get them to press 90 shirts per hour for the same $400 per week, you would save 12 hours per week from the other 4 employees, assuming that you get them to work 50% harder for no additional pay, and assuming that your inspection, assembly theater can handle 180 shirts per hour as easily as it handled 120 shirts per hour.  Assuming all that, which is a heck of an assumption, you would save 48 hours x $10; $480.  I have a sneaky suspicion that this would blow up in your face somehow.  You’d probably save $150 when all is said and done.  Maybe nothing.  Monitoring productivity would be critical and failure there would be catastrophic.  And, by the way, you’d be paying your shirt pressers over $14 per hour for doing what they should have been doing for $10.

If everybody is bonused like the pressers, your payroll cost is back up to exactly $3200; exactly where you were.  Do the arithmetic.  You may save utility and plant costs, but if you attain anything less than exactly 180 shirts per hour – which is not easy – your bonus plan backfires and your cost goes up, not down!  Ouch!

So what is wrong?  And what do you do?  It’s easier than you think, but its non-linear thinking.  But I’ll try to make it linear by using bullet points

  • You hired Betty 15 years ago as a presser.
  • There was plenty of work.
  • She, and her peers, pressed 35 pants per hour.
  • She worked 40 hours per week; 7-3:30, 5 days a week.
  • One week’s work, simply flowed into the next week’s work
  • As us baby-boomers moved out of the drycleaning customer age bracket, pieces dropped off
  • The work simply expanded into the 40-hour work week.
  • Betty has, slowly but surely, marched downward to 22 pants per hour.
  • And her pay has increased, just because she has been around for 15 years.

Betty is not to blame.  Management has allowed this to happen.  The problem with bonus systems is that we want to reward our employees for doing what they should have been doing all along!  Instead, we should be penalizing them when they fail to attain goals.  And we should have been doing that right away. The gap between the non-bonused rate and the bonused rate needs to be greater.  This is the only way to assure that the bonus is worth working for from the employee’s vantage point.

Let’s revisit the first example in order to illustrate this:

You have 2 single-buck shirt units, 2 pressers and 2 support people.

  • 500 shirts to do in total
  • Expected PPH goal: 50 shirts per hour
  • 5 labor hours for each of 4 people
  • Everybody makes $11.50
  • Pressers bonused as previously described; $1 per hour for attain 50 shirts per hour.
  • Ideally, the labor cost per day is $11.50 x 10 plus $12.50 x 10, $240.
  • Labor cost per piece is 48 cents

Let’s say the pressers work at the average rate of 42 shirts per hour.  Now everybody works 6 hours and nobody gets a bonus:

  • 500 shirts to do in total
  • Actual PPH: 42 shirts per hour
  • 6 labor hours for each of 4 people
  • Everybody makes $11.50
  • The labor cost for the day is $11.50 x 24, $276.
  • Labor cost per piece is a little over 55 cents per shirt.

Now let’s say that everybody makes $11.50, unless they do less than 50 shirts per hour.  In which case, everyone makes $8.00.  That might seem evil, but, after all, you bought equipment that can do 50 shirts per hour and that’s what you bargained for.  Now the math looks like this:

  • 500 shirts to do in total
  • Expected PPH goal: 50 shirts per hour
  • 5 labor hours for each of 4 people
  • Everybody makes $11.50
  • The labor cost per day is $11.50 x 20 hours, $230.
  • Labor cost per piece is 46 cents

Let’s say the pressers work at the average rate of 42 shirts per hour.  Now everybody works 6 hours and everybody falls into “duty pay” rate:

  • 500 shirts to do in total
  • Actual PPH: 42 shirts per hour
  • 6 labor hours for each of 4 people
  • Everybody makes $8.00
  • The labor cost for the day is $8 x 24, $192.
  • Labor cost per piece is a little over 38 cents per shirt.

In this case, your cost per piece is less because their pay is substantially less, but your plant cost is higher.  In effect, they punched you and you punched them right back.  It’s easy for this to lead you straight to the piecework type of pay, but this will not help you attain a certain productivity level, it just keeps your costs from getting out of hand.

The penalty for non-compliance is what is lacking; You’ll pay $12 per hour for 35 pants per hour, but if you press 22 pants per hour, well, that’s ok.  I’ll still pay you $12 per hour.  This is why we are in the shape we are today!

The lesson is to think very carefully before you institute a bonus plan.  It might not accomplish what you wish for.  They can be very tricky indeed.
“If you do what you’ve always done, you’ll get what you always got!”