Reference no: EM13817029 , Length:

The question of whether to pay Charlie's Spot-Out Services employees an hourly wage or an incentive of some kind has always intrigued Charlie Chandler.

His basic policy has been to pay employees an hourly wage, except that his managers do receive an end-of-the-year bonus depending, as Charlie puts it, "on whether their stores do well or not that year."

However, he is considering using an incentive plan in one store. Charlie knows that parts washers should clean about 25 bread basket-sized parts per hour. Most of his do not attain this ideal standard, though. In one instance, a washer named William was paid $8 per hour, and Charlie noticed that regardless of the amount of work he had to do, William always ended up going home at about 3:00 p.m., so he earned about $300 at the end of the week. If it was a holiday week, for instance, and there were lots of parts to clean, he might average 22 to 23 parts per hour and so he'd earn perhaps $300 and still finish each day in time to leave by 3:00 p.m., so he could pick up his children at school. But when things were very slow in the store, his productivity would drop to perhaps 12 to 15 pieces an hour, so that at the end of the week he would end up earning perhaps $280, and in fact not go home much earlier than he did when it was busy.

Charlie spoke with William several times, and while William always promoted to try to do better, it gradually became apparent to Charlie that William was simply going to earn his $300 per week no matter what. Though William never told him so directly, it dawned on Charlie that William had a family to support and was not about to earn less than his "target" wage, regardless of how busy or slow the store was. The problem was that the longer William kept washing each day, the longer the pressure washers, boilers and compressors had to be kept on to power his machines, and the fuel charges alone ran close to $7 per hour. Charlie clearly needed some way short of firing William to solve the problem, since the fuel bills were eating up his profits.

His solution was to tell William that, instead of an hourly $8 wage, he would henceforth pay him $0.33 per item washed. That way, said Charlie to himself, if William cleans 25 items per hour at $0.33 he will in effect get a small raise. He'll get more items done per hour and will therefore be able to shut the machines down earlier.

On the whole, the experiment worked well. William generally power washes 25 to 35 pieces per hour now. He gets to leave earlier and with the small increase in pay, he generally earns his target wage. Two problems have arisen, though. The quality of William's work has dipped a bit, plus his manager has to spend a minute or two each hour counting the number of pieces William washed that hour. Otherwise, Charlie is fairly pleased with the results of his incentive plan, and he is wondering whether to extend it to other employees and other stores.

Questions:

1. Should this plan be extended to parts washers in the other stores?

2. Should other employees (cleaner/spotters, pressers, customer services) be put on a similar plan? Why or why not? If so, how, exactly?

3. Is there another incentive plan you think would work better for the parts washers? Describe it.

4. A store manager's job is to keep total wages to no more than 30% of sales and to maintain the fuel bill and the supply bill at about 9% of sales each. Managers can also directly affect sales by ensuring courteous customer service and by ensuring that the work is done properly. What suggestions would you have to Charlie for an incentive plan for store managers?