One relatively neglected area in the literature on logistics and distribution concerns the payment mechanisms and incentive schemes that are used within the industry. Having looked at the broad roles and responsibilities of the logistics manager and director, it is interesting to gain a better understanding of the grass-roots position related to the type of payment systems that are commonly used.
There are a number of different types of payment mechanism. These can be broadly divided into the three main systems of daywork, piecework and payment by results. These three systems are illustrated in Figure 10.8. Daywork is a method of payment based entirely on the hours attended at work; piecework is payment entirely related to the amount of work under- taken; and payment by results is a mixture of these, providing a basic wage plus a bonus based on work undertaken.
The main payment systems can be summarized as follows:
• daywork (also known as graded hours, fixed day, etc) – this is based entirely on the hours worked;
• measured daywork – this consists of a basic attendance wage plus a bonus for achieving a given level of work performance;
• stepped measured daywork (stabilized incentive scheme, premium payment plan) – this introduces ‘steps’ in the measured daywork scheme, so providing additional incentive;
• merit-rated bonus scheme (incentive bonus scheme) – this is a bonus scheme on top of a basic wage, but it is not productivity related;
• piecework – payment is entirely based on the amount of work completed;
• payment by results – in its purest form this is piecework, but usually it is a results-based payment on top of a basic wage;
• commission – this is a piecework or payment-by-results scheme, but is based on effort and achievement (eg sales, cost savings); this is a common type of management bonus scheme;
• group or plant-wide schemes – these are collective bonus schemes based on collective performance, which could be related to costs versus sales, increased output or improved efficiency;
• fringe benefits – these are various non-performance-related add-ons covering such items as holiday pay, Christmas bonus, subsidized canteen, clothing allowance, etc;
eventually, these types of benefit can become taken for granted;
Figure 10.8
Daywork
Performance Pay
Piecework
Performance Pay
Payment by results
Performance Pay
The main types of payment mechanism, showing the relationship between performance and pay
• profit-sharing scheme – this is related to the company profit, and is aimed at fostering employee interest in the company;
• share schemes – these are usually limited to managers and directors, though there are some notable company-wide share schemes;
• team working – these are rewards for small groups, usually used for management teams;
• annualized hours – these are formalized systems that treat working time on the basis of a number of hours per year rather than hours per week; they have become recognized as useful schemes where there is a distinct seasonal or peak nature to the work and thus are matched to the needs of the business to meet customer requirements and are popular in warehouse operations.
For motivational financial schemes it is important to distinguish between schemes that provide an incentive, reward or bonus, because they can have a varying impact on workforces.
The main differences are:
• Incentives. These stimulate better performance in the future because they are payments for the achievement of previously set and agreed targets. Incentives tend to have the most direct impact on employee behaviour and motivation because the conditions of payment are known in advance.
• Rewards. These recognize good performance in the past. They are likely to have a less direct impact on behaviour and motivation due to the level of uncertainty of the amount of the payout.
• Bonuses. These are rewards linked to performance but paid out in a lump sum.
Clearly, the applicability of these methods of payment varies considerably from one type of distribution company to another, and from one type of distribution job to another.
Productivity-related incentive schemes are only valid in operations that will benefit from schemes of this nature, ie where increased worker effort will mean an increase in output. For many distribution operations, the need for accurate, timely order picking may far outweigh the number of picks made per picker per hour. Additionally, it is likely to be both dangerous and illegal to propose a driver incentive scheme that gives additional payment for the speed with which the work is completed!
It is worth emphasizing two particular aspects related to payment schemes, and to show how these vary according to the type of scheme operated. The first is the relationship between different schemes and financial incentives. This is illustrated in Figure 10.9. In contrast, Figure 10.10 shows the extent of supervision required for the different schemes. One is the direct converse of the other, indicating the high levels of supervision required for payment schemes that offer strong financial incentives. The relevance of these different schemes for distribution is best summarized according to the main breakdown of distribution personnel – drivers and warehouse staff.
Figure 10.9
High financial
incentives High financial
incentives
Low financial
incentives Low financial
incentives Piecework
Payment by results
Merit rating
Measured daywork
Daywork
Hierarchy of payment schemes in relation to financial incentives
Figure 10.10
High
supervision High
supervision
Low
supervision Low
supervision Daywork
Payment by results
Merit rating Measured
daywork
Piecework
The extent of supervision required for different payment schemes
Drivers are most likely to be paid on hours worked or hours guaranteed – some form of daywork. There may also be a special rate for the job, based on work experience or driving qualifications. In terms of incentive, a form of ‘job and finish’ might be operated, giving extra leisure rather than extra cash as the incentive. Financial bonuses might be offered as a form of payment by results based on such things as miles/kilometres run, cases delivered, etc.
Once again it must be emphasized that any bonus payments are prohibited if they endanger road safety.
Warehouse staff are also likely to receive remuneration based on hours worked or guaranteed.
In the more controlled environment of a warehouse, daywork is likely to be measured. Addi- tionally, there are likely to be different rates according to different job functions (fork-lift truck drivers, pickers, etc). Merit-rated bonuses based perhaps on attendance might be offered, and certainly productivity-related bonuses are likely to be very common, based on cases picked, pallets moved, etc. Measured performance schemes are operated based on work study stand- ards for specific tasks. In addition, as already indicated, many companies are now introducing annualized hours because it can lead to a much more efficient use of the labour force.