The Group Incentive;

 

Suppose you had a company in which each and every employee had the power to undermine your competitive position. That was the problem at Riley Gear Inc., a maker of precision gears, in North Tonawanda, N.Y. The solution was to create a compensation system that gives all 75 manufacturing people and the 15 other employees a significant financial stake in the overall success of the company.

The system is known as gain-sharing, and it is built around monthly productivity targets. Every order that comes in to the $6-million business is broken down into a series of production steps, which are assigned hourly rates related to the capabilities of the equipment and the complexity of the work. These rates are then used to create a "blended" productivity target for the company. The amount that Riley puts into the bonus pool each month depends entirely on the achievement of the companywide target, which in turn depends on the workers meeting, or exceeding, their goals.

In the two years the system has been in effect, Riley's hourly workers have earned 3% to 4% a year in extra compensation -- over and above the annual increases of 3.3% provided in their three-year union contract. President Tom Lowry thinks that bonuses of 8% to 10% a year are well within reach "as long as the productivity is there." He's also talking about adding nonfinancial rewards, such as extra vacation time.

Of course, there are trade-offs involved in paying plantwide bonuses. "If you have superb performers, you can't really recognize them," Lowry notes. Nevertheless, he believes the benefits of the system outweigh its liabilities. "There's a lot of peer pressure. People know that if we get the cost reductions, everyone gets something. And they understand it's a competitive market, and we're all in this together."