Introduction
The incentive system of compensation at Lincoln Electric has not been working well as evidenced by the case. However, there are various alternative solutions which can salvage the situation. These include the objective and subjective performance measures which provide various solutions in determining which incentive systems are suitable for this company.
Objective performance measurements
The performance measures are determined by both controllable and uncontrollable factors and this places the employees at a disadvantage as their compensation package may be affected adversely by factors beyond their control. For instance, employees at the Lincoln Electric factory are paid according to the quality of pieces they produce. In case they are hospitalized for several months and at the same time the stock prices and profits fall their income is greatly reduced.
To cater for employees whose compensation is at high risk the company should have a standard pay. In addition, the pay by piece policy should stay in place only for products that are manufactured above the set target. This way workers will be well compensated incase of uncontrollable factors and this would work extremely well in areas that are prone to natural disasters like Japan and Indonesia. As Lincoln Electric expands worldwide, it needs to revise its incentive system as it ventures into disaster prone areas where the uncontrollable factors affect productivity. An objective performance measurement faces challenges especially where many tasks have to be measured. Some are hard and others easy to measure and this causes an alignment problem. There is also a problem with interdependency where individual effort is hard to measure within a group effort.
The type of performance measurement at Lincoln Electric is objective-based thus experiencing the controllability, alignment and inter- dependency problems. However, Lincoln Electric management can work with the objective performance measure to determine the best compensation and a practical incentive plan. To deal with the controllability problem, the management can try to harness or influence those factors that are causing this problem in the system (Hall, 2001).
This would work best especially in new markets where they have been using other incentive systems and compensation methods. If the employees feel that they are unable to perform at the desired level due to issues affecting the suppliers, the management can influence the suppliers to become more effective in the delivery of raw materials. This can be done by developing incentives that will motivate them to be timely and organized in their deliveries. This eliminates the intensity of the uncontrollable factors in case the per piece work rate pay is to be introduced. In addition, this should be reinforced with other intrinsic awards so as to motivate the employees.
Targeted incentives cause the alignment problem as the performance measure being used is narrow and targeted to controllable behavior but misaligned with value creation in the organization according to Hall (2002).These types of incentives are not aligned as they cause change in behavior to influence the outcome of the performance measurements. According to Kaplan and Norton (1992) people get what they measure and that is how targeted incentives present the alignment problem in performance measures.
To prevent the alignment problem with the Incentive system at Lincoln Electric, the management can use narrow performance measures combined with other incentive measures that do not distort performance or behavior (Hall, 2001). Interdependency problems are caused by either narrow or broad performance measures in pay performance compensation package. This is mainly due to individuals being responsible for the group performance and this poses a great challenge to the management on how to measure performance among the workers.
Subjective Performance Evaluation
Subjective performance measures the total value contribution by an individual to the company as well as the performance criteria. These include leadership, cooperation or team work, mentoring and pleasantness among others. Lincoln Electric could use this to measure value creation by the employee to determine the relevant compensation method for them all over the world. It is a little hard to implement as it needs a dedicated evaluator to do the determination.
Subjective performance evaluation combined with numerical ratings can provide differentiation in the evaluation of the workers performances. Another criterion to get the determination is the use of the vitality curve that has 3 categories to measure that are categorized as follows; vital 10%, top 20% and bottom 10%. According to Welch and Byrne (2001) this makes it possible to remove the worst performers in the company. This has a disadvantage as it may weed out late bloomers and new comers to the company who may be taking longer to learn the ropes.
However, there are various challenges that face this method according to Hall et al. (2000). The managers implementing this method may favor the people they work closely with as they have more information to evaluate them as compared to those they do not know. This method is also likely to poison the culture of the company and also promote gaming of the system. Other specific methods of incentives or rewards system include merit pays which are based on the last performance where the employees get an annual pay increment; these are determined through appraisal systems. Lincoln Electric’s management can also introduce reward systems that boost the morale of the workers as all employees enjoy recognition.
References
Hall, B. (2001). Incentives and controllability: a note and exercise. HBS Journal, 3, 801-334.
Hall, B. (2002). Incentive Strategy within Organizations (Excerpt): ObjectivePerformance Measurement and Subjective Performance Evaluation. Presidentand Fellows of Harvard College: Massachusetts.
Hall, B., Lazear, E., & Madigan, C., (2000). Performance pays at Safelite Auto Glass(B). HBS Journal, 7, 800-292.
Kaplan, R. & Norton, D. (1992). The balanced scorecard – measures that drive performance. Harvard Business Review, 70 (1).
Welch, J. & Byrne, J. (2001). Jack: straight from the gut. Warner Books: New York.