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Total quality management and drawbacks of incentive systems: fact or fallacy?

Over the past few decades a new management philosophy has evolved. This new concept, normally referred to as total quality management (TQM), emerged in Japan in the 1950s mainly with the help and lectures of W. Edwards Deming when the Japanese were struggling to rebuild their economy after the devastation of World War II. They were adept at manufacturing a large variety of products, but they were generally of inferior quality.

Deming introduced the concepts of statistical process control (SPC). He also demonstrated that higher quality leads to higher productivity, increased profits, greater market share and more jobs. The result has been great progress and leadership in Japanese products on the global scene.

The road to total quality starts with the involvement of all employees in an organization, since the most valuable resource is the brainpower of its employees. It is imperative that their input and involvement be incorporated in the management process to approach total quality.

Deming has developed and advocates his 14 points to the implementation of TQM. One of his principles is the elimination of work standards and quotas as they have been used since the beginning of the industrial revolution in the early 1900s. During this period of great industrial prosperity and advancement, work standards played a major role in the motivation of workers. Do they have to be eliminated or do they simply need to be modified to better represent reality and the needs of today and the future?

Incentive systems

Work standards are and have been the basis of the development of incentive pay systems. These work standards are developed by engineers and/or consultants who evaluate and study the jobs in question or use standards developed from comparable jobs in other factories. Although it appears that the days of worker exploitation as it once existed are far behind us, the problem of developing fair and equitable work standards is still a difficult goal to achieve in light of rapidly changing work conditions brought on by automation in the factory and the need to be ever more responsive to rapidly changing market conditions.

A study by R. Rice found some of the effects of wage incentives. The following question was asked: "What effects are your wage incentives getting?" The results are compiled in Figure 1.

From this exhibit it is obvious that incentive pay systems have a positive effect on productivity, costs, employee morale and supervisory effectiveness. However, its effect on quality is somewhat mixed.

According to studies by Barnes and Hesse quoted in professional literature, "Wage incentives, on average, raise the efficiency level from 60 percent to approximately 120 percent (standard efficiency being 100 percent)." Therefore, with this kind of improvement in productivity, it is hardly difficult to ignore pay incentives as a means to responding to the global competition facing all our industries.

The philosophy underlying a typical incentive system is that a person is paid for performance as judged against a standard. If performance is superior to the standard then an incentive is paid to the worker in addition to a base salary. Many different forms of wage incentives have been developed in the past depending on the situations and needs. Individual, group and organizational incentive plans have been used with various degrees of success. Nash and Carrol predicted that in the future, a greater number of individuals will work under some type of group incentive systems. This trend can be used as an indicator of the increased interdependence among employees.

In a recent study, Globerson and Parsons asked industrial engineers (commonly involved in the installation of incentive systems) to state their general preference with regard to the optimal group size. Only 27 percent of those who used incentive systems and nine percent of those who did not were in favor of individual incentive systems. In other words, the majority of industrial engineers surveyed were in favor of group incentive systems. The most frequently preferred group size was five to 10 employees.

Some of the advantages of group incentive systems are the following:

* Motivates coordination to improve overall performance;

* Easier to set up and revise;

* Increases cooperation between employees and management;

* Adapts greatly to indirect labor because they can be included in group; and

* Creates pressure on low performers to improve their performances.

An organizational incentive system is one by which the individual's incentive depends on the overall organizational performance. Employees are encouraged to contribute ideas on how to improve operations and the company in turn rewards employees with a "bonus" based on savings in improved performance. This type of incentive system has also been called gainsharing.

There are various reasons why companies would establish an organizational incentive system, and the major ones are listed below:

* Simple and inexpensive to install and maintain;

* All employees directly and indirectly included; and

* Can be installed within a short period of time and therefore can have an immediate impact on performance.

One of the major drawbacks of an organizational plan is the low motivation at the individual level; an individual or group can find themselves performing very well but rewarded very little if the overall organizational plan that exists has different characteristics. A differentiation between the incentive systems is shown in Figure 2.

Pay incentives with TQM

The principles of TQM advocate the involvement of employees at all levels of the organization in the improvement of quality and in all aspects of process improvement. Traditionally, pay incentives have been designed by engineers and/or consultants with very little involvement from the employees at all levels of the organizational structure.

For example, in a recent study about the effectiveness of pay systems by Schwarz, it was found that such systems that involve employees in their design were more highly correlated to worker motivation and satisfaction than were programs designed by management. In other words, the application of worker participation as espoused by the TQM principles has positive effects on the success of pay incentive systems.

By and large, an organization that utilizes the Deming quality principles to set up pay incentives and utilizes worker participation should be successful in obtaining excellent quality at reduced costs. Well-designed pay incentive systems should motivate employees to improve the process using the PDAC principle used by Deming followers. Quality and productivity need to be built in the equation to become a world class producer concerned about global competition.

Based on historical information about TABULAR DATA OMITTED TQM, it would appear that group incentive systems of five to 10 employees are better for communication and would be more appropriate in a TQM environment.

Although there is no guarantee that an incentive system will be successful, the probability of success can be enhanced by paying attention to the following key points:

* The system should permit earning an incentive which is perceived to be of significant value. A study by Globerson and Parsons found that the average incentive paid by companies using incentive systems equals 23 percent of the base salary. The minimum, satisfactory and exceptional monthly incentives were 14 percent, 26 percent and 41 percent respectively. Therefore, it is important that an incentive system, if it is to be successful, be based upon incentives which the employees perceive as significant;

* The system should be simple to understand. Since incentives require the company to pay money, employees may suspect that the company manipulates the numbers. Employees should be able to calculate their own incentive; if the system needs to be more complex to include the quality issues, the company should educate the employees on how it is calculated;

* Performance criteria included in the incentive should be within the control of the group;

* Sufficient motivation for all the involved parties is needed to properly maintain the incentive system;

* The supervisor needs to be highly motivated to maintain the system. The supervisor can cause a system to fail by manipulating the reporting systems or by generating a negative environment to the proposed incentive system. As one of the principles of Deming is to include all levels in the management process, it is imperative that the supervisor be included in order to produce a cooperative environment;

* In situations where unions are representing the employees, they should also be included in the process of establishing pay incentive to guarantee better cooperation;

* The incentive system must be continuously maintained; and

* The jobs employees do must be such that they can clearly tie their efforts to the reward received.


The present push toward high quality is a well known and accepted element in the competitive environment. For years Americans have developed products which were well accepted in the global market. However, the Japanese, with the help of people like Deming and Juran, have developed superior standards of quality. Because many in North America were not primarily concerned about that aspect, Americans have had great difficulty in achieving similar quality. However, as demonstrated by companies such as Motorola, it can be done if we concentrate on that aspect.
Set-up Cost high moderate low
Maintenance Costs high moderate low
Individual Motivation high moderate low
Level of Cooperation low medium high
Percentage of Coverage low medium all
Frequency of Feedback daily weekly monthly
Potential of Frustration low medium high

In a recent special edition on quality by Business Week, it was reported that at a recent conference in Tokyo, J. M. Juran, the noted American quality control consultant, made a rare prediction. He declared that America is about to bounce back. In the 1990s, he said "Made in the USA" will become the symbol of world-class quality again. Even if the U.S. does not actually catch Japan, he expects big gains in competitiveness. "When 30 percent of U.S. products were failures versus 3 percent for Japan it was an enormous difference. But at failures rates of 0.3 percent and 0.03 percent it will be difficult for anyone to tell."

In many industries and organizations, failure rates as low as the ones being targeted in high-technology industries are not required by customers and may indeed increase manufacturing and service costs to achieve. Once we have achieved standards of quality that our customers expect, anything over and above is a feature that the customers will not want to pay for.

Therefore, after the quality standards demanded from our customers are achieved, they will take it for granted and they will then turn their attention and buy products from the low-cost producers. Productivity will then become very important again as world-class producers try to achieve a balance between quality and productivity. The benefits of incentive pay systems as a method to motivate employees, to increase productivity and to reduce costs can certainly be helpful in regaining global competitiveness. However, in order to make pay incentive systems work well, special care and attention will have to be taken to install them with quality, as one of the important control elements, not just quantity output. Also, they will have to be installed the quality way with input from everybody, not only industrial engineers and/or consultants as was the case in the past.

B.P. Pelletier is an executive director at Conexco International Inc., Bathurst, New Brunswick. Pelletier is currently working on his M.B.A. at the University of New Brunswick, where he received his B.Sc. in civil engineering with honors. His work experience includes other executive, managerial and industrial engineering positions in Canada. M.A. Rahim, Ph.D., is a professor of quantitative methods at the University of New Brunswick. Rahim has earned a B.Sc. and M.Sc. in statistics, a D.S. in operations research, a M.Sc. in systems theory, and a Ph. D. in industrial engineering. He has published several articles in scientific journals in the areas of production, inventory and quality control and has been a visiting scholar to Japan, Malaysia, Taiwan, India and Bangladesh. He is a member of IIE, TIMS and ASQC.

For further reading

Barnes, R., Motion and Time Study, New York: John Wiley & Sons, 1980, 7th edition.

Globerson, S. and R. Parsons, "Multi-factor Incentive Systems: Current Practices," National Institute for Decision Science Proceedings, Toronto, Canada, November 1984.

Hesse, L.A., "Wage Incentives Eliminate Zamble Time," Industrial Engineering, July 1977.

Nash, A. and S. Carroll, The Management of Compensation, Brooks/Cole, 1975.

Rice, R., "Survey of Work Measurement and Wage Incentives," Industrial Engineering, July 1977.

Schwarz, R., "Participative Decision Making: Comparing Union-Management and Management-Designed Incentive Pay Programs," Group and Organization Study, Volume 14, no. 1.

"The Quality Imperative," Business Week, Special Edition, November 1991.


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An average professional is almost always better than a talented amateur.

Irwin W. Kabak, Ph.D., P.E. is a professor of operations research at the New York University Stern School of Business and an independent consultant in management and industrial engineering. He is a life member of IIE.
COPYRIGHT 1993 Institute of Industrial Engineers, Inc. (IIE)
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Title Annotation:Incentive Systems; includes related article
Author:Pelletier, B.P.; Rahim, M.A.
Publication:Industrial Management
Date:Jan 1, 1993
Previous Article:Organizational culture and its relationship to tqm.
Next Article:Examining the U.S. experience to discover successful corporate restructuring.

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