—David Lewin is the Neil H. Jacoby Professor of Management at the UCLA Anderson School of Management. He is also the faculty director of the Anderson School's advanced program in human resource management. This op-ed appeared in the New York Times on Feb. 24, 2014.
We hear a lot these days about novel types of compensation aimed at retaining and motivating employees: laundry and dry cleaning, housekeeping, fitness facilities, on-site child care, etc. It’s as if what were once specialty concierge services provided only by high-end hotels are now a feature of the workplace – and some companies actually call them "concierge services." To the extent that such concierge services actually increase employee retention and enhance employee performance, they contribute positively to overall organizational performance. In other words, their value exceeds their cost.
But only some firms in some sectors, notably high-tech, use these types of compensation. At most employers in most industries, other practices predominate – and some of the most interesting focus on pay. Two widespread examples are piece rates and gain sharing, both commonly found in manufacturing. A piece rate plan ties pay specifically to the quantity and quality of an individual’s output. An employee who is paid a piece rate thus in large part controls how much he or she will be paid, and the company pays only for the employee’s actual output. This pays off for companies because it ties compensation to performance and because it makes pay more of a variable cost and less of a fixed cost. Piece rates are also used for salespeople (called commissions) and for investment bankers handling mergers and acquisitions (called professional fees).
A gain sharing plan is much more collectively or communally oriented. Under it, workers offer recommendations for improving work processes, including workflow, inventory control, and equipment and technology maintenance. If these recommendations are in fact implemented and lead to either higher productivity for the same cost or the same level of productivity for lower cost, two-thirds of the "gain" (or savings) is shared with every employee in the facility, from top management to the lowest-level jobs. The other third is retained as a return on capital.
The resurgent, widespread use of piece rate and gain sharing compensation strongly suggests that these arrangements provide substantial value over cost to companies, and that employees appreciate the pay – perhaps more than they would appreciate laundry services.
