Pay-for-Value Employee Programs

by Dean Prigelmeier, President of Proactive Technologies, Inc.

Everyone is aware that the United States trade agreements with other countries and regions facilitated a substantial movement of good paying U.S. manufacturing jobs to lower-wage labor markets in other countries. The effect of the loss of middle-income jobs on consumer consumption, and subsequently industrial investment and growth, has been increasing in its significance and the connection to sustained GDP growth has become more evident.

In the short run, a lower-wage workforce reduces direct labor costs and allows corporations to realize higher earnings, but as the lower-wage workers form unions and demand higher pay for their labor those advantages start to diminish. As nations start to codify safety and environmental regulations, the advantages to relocation shrink. After adding in the logistical costs, disjointed supply chain challenges and socio-political instability corporations start to look for even lower-wage labor markets for relocation – a temporary solution.

It may have seemed to be the only immediate reaction to the need to improve quarterly reports, but what if there was an alternative to relocation? Would an option where the inevitable outcome is simple and predictable be attractive enough? Would a mass exodus of manufacturing jobs even materialize?

“When Proactive Technologies performs a job/task analysis on a job classification for a client to set up a structured on-the-job training program, task-based best practices for all of the critical tasks of the job, one of the next steps of the process is to take inventory of the incumbent workers to identify which of the tasks both the employee and their manager agree the worker has been mastered. This leaves the un-mastered tasks, representing the “gap” to be closed which should be the focus of structured on-the-job training.”     

The one example given indeed cuts direct labor costs. The question is whether the NET rewards of any short-term benefit looks as attractive and is sustainable over the long-term.

Another, more pragmatic, way to cut labor costs in the U.S. can be to increase the capacity of each worker in order that the labor dollar is worth more. In our informal, haphazard world of worker training it is quite possible that a department of 10 workers might have a collective capacity of 40 -50 %. The sad fact is that most managers do not know what their workers haven’t had a chance to learn if the process of training is unstructured and undocumented. If no historical data exists to measure a worker’s development, what improvements can be made? Employee wage increases can be unwarranted and become just an implementation of a policy.

More sadly still, in the example of a department of 10 workers, several may have been in their job classification a long time – 5, 10, 15 years or more. It is quite common to find that someone forgot to teach the incumbent workers a surprising number of critical tasks. Once the width and depth of the gaps in the organization are revealed, the employer usually wants aggressive intervention to close them after the initial shock wears off. The employer usually finds that these employees who have mastered a subset of tasks to justify their continued employment are eager to learn and master the rest of the tasks (or in some cases learn the right way to perform tasks taught previously by an unreliable trainer).

It does not take advanced math to understand the cost to the company of underutilized capacity when projected over the length of time it existed. If the average departmental capacity is 50%, it can mean that 50% of the wages paid in that department might be non-productive. Paying every worker a full wage with incremental increases but not knowing what that wage buys is counterintuitive for business-minded managers. It also makes cutting labor costs through layoffs or relocations, in lieu of a credible alternative, an attractive target for accounting departments when they are pressured to improve profits.

When Proactive Technologies performs a job/task analysis on a job classification for a client to set up a structured on-the-job training program, task-based best practices for all of the critical tasks of the job, one of the next steps of the process is to take inventory of the incumbent workers to identify which of the tasks both the employee and their manager agree the worker has mastered. This leaves the un-mastered tasks representing the “gap” to be closed, which becomes the focus of structured on-the-job training.

More explicitly and simply, this approach follows the following procedure:

1. Job/Task Analyze Every Hourly Job Classification for the Critical Tasks;

2. Assess Incumbent Works to the Task List to Identify Each Worker’s Gap;

3. Drive Incumbents, New-hires to “Full Job Mastery”

If this model is adopted, a “pay-for-value” policy can be implemented for new-hires to ensure the employer is paying the worker only for the capacity that can be derived. Each new-hire can be hired to a “base wage,” then “incentivized” to learn and master the remaining tasks of the job. An incremental wage increase can be given for every Job Duty (i.e. a grouping of tasks such as Administrative tasks, Operate Equipment tasks, Quality Control tasks) mastered. Once all of the duties are mastered for a job, the job is mastered and justification for that wage level documented. Wage increases beyond that can be made based purely on merit as it was intended.

In this model an employer is paying a justified wage for each employee for the level of capacity they have reached and a structure is in place for every employee to reach that level.  Incumbent workers are driven to full job mastery as well, so any wage rate increase going forward is justifiable. Labor costs are reduced and proportional to capacity.

There are other measures of cost reduction to consider by implementing this process. The accelerated transfer of expertise^TM through structured on-the-job training reduces the time necessary to develop workers and therefore the costs. Increased worker capacity will make it unnecessary to hire automatically when new contracts are signed. Reductions in scrap, rework and malperformance through better worker quality and quantity output lowers cost per units produced and/or services performed. Reduction in safety incidents due to a better quality workforce decreases costs and potential legal liability issues, as well. Implementing a culture of continuous worker improvement offers returns that affect the overall operation in positive ways.

Unfortunately the Pay-for-Value worker development model may not stop accounting departments from pushing for the “relocation to lower wage markets” option, but at least they would have done so after the maximization of existing labor capacity efforts have been exhausted. Once they can quantify the investment made to develop the local workforce, the value of the investment and the many returns on investment, they will be measuring it against the total costs of repeating the effort in another location and determining if it really makes sense.