Original incentive plan
The original compensation plan consisted of three elements: base pay, an individual attendance bonus, and a piece-rate bonus linked to the team’s output.5 Base pay consisted of a daily salary, which varied according to seniority and skill-level. To reduce absenteeism, which is problematic in the maquiladora industry, workers received a monthly attendance bonus. This portion of pay was mainly fixed and accounted for approximately 70% of a worker’s total earnings. The remaining portion was contingent upon each team’s performance. Each team was rewarded on the basis of piece-rates and worker pay was proportional to the number of locks produced daily by each team; resulting cash bonuses were calculated on a weekly basis and shared equally among members of a team.6
A follow up question is why did this firm decide to make changes to the compensation plan? Management pointed out several limitations with the existing plan. First, the consensus was that piece-rates were only partially effective in motivating teams to raise productivity consistently across all teams in the factory. Therefore, productivity for the plant was less than optimal. Although some teams were highly productive, in particular teams consisting of more senior workers were more cohesive and motivated to work harder to earn higher bonuses, the same level of productivity was difficult to achieve consistently for many teams. To illustrate, I refer the reader to Fig. 1, which graphs the factory’s monthly productivity. Clearly, it can be seen that productivity in the months preceding the changes to the incentive plan was low; it averaged around 60%.
The problem with low productivity was further eroded as a result of high turnover and absenteeism at the plant. Effort levels were generally sub-optimal for teams experiencing high turnover. The frequent arrival of new workers tended to retard production, resulting in lower output levels and smaller bonuses for these teams. As a result, workers were not motivated to work as hard to raise output. Additionally, it was evident hat the attendance bonus was not succeeding in reducing absenteeism. Besides harming productivity, absenteeism also made it difficult for teams to adhere to a group norm to monitor and enforce good behavior among themselves (reduce shirking, enhance cooperation, etc.). Hence, it was imperative to find an alternative solution to reducing chronic levels of absenteeism and turnover.