North of Eaton, Ohio, we turned off US 127 and came upon a large 1970s rambler-style house with rustic wood exterior siding and vaulted ceilings. “Are we staying with my parents?” Scott grumbled, having grown up in just such a house in suburban Portland, Oregon.
“Welcome to the Whispering Oaks Bed & Breakfast!” announced Paul, having arranged this night’s lodging. “B& B owners always want to talk to you,” Scott snarled. “I hate that.”
Inside, the friendly proprietor showed us to our upstairs bedrooms. “There are two bedrooms down this hallway, and one over there,” she said, smiling. “The bathroom is here.”
Mike panicked, scarred by distant memories of his own childhood home, in which he shared a bathroom with his three sisters. “Just the one bathroom?” he asked. “For all three of us?”
As Scott and Paul played 8-Ball and drank beer from cans in the rec room, Mike stayed upstairs to plot strategy. “First awake is first to the bathroom,” he figured, “Paul’s usually up at 6: 00. But he’ll be fifteen minutes early to try to beat me, so I have to be up fifteen minutes before that . . . 5: 30 it is.”
Paul woke at 6: 00, went for a quick run, showered, and found Mike waiting at the kitchen table. Breakfast was a rich quiche casserole, which, Mike guessed, contained double the calories and quadruples the cholesterol of his normal weekly diet. The meal was rich in conversation as well, as our hostess grinningly peppered the two with questions about our upcoming day.
“You look terrible,” Paul said to Mike, as our hostess excused herself to fetch more scones for the table. “Sleep OK?” “A little stuffy in my room,” Mike replied, unwilling to admit that his scheming had led to insomnia.
Meanwhile, Scott outsmarted them all, staying in bed until well after both had showered and breakfast had been cleared. He grabbed a quick coffee, tersely thanked the hostess, and we were on our way.
Later that day, we met with Thom Gerdes, CEO of Plastic Moldings Company (PMC), at his office on the outskirts of Cincinnati. PMC manufactures plastic components, mostly for tier-one automobile suppliers and, increasingly, medical equipment makers.
The company’s headquarters occupy about 4,000 of the 60,000 square feet in the facility where PMC once manufactured. They now do the production at a factory eighty-five miles away in Shelbyville, Indiana, and at a joint venture facility in Mexico, so most of the Cincinnati space sits empty. A moustached wiry man of about sixty, Thom— who looks like a young Walter Matthau, or a gentle Charles Bronson— explained the business as we sat at a round conference table in his office.
“Our business is technical manufacturing,” he began. “The common thread is plastics, but our markets have evolved over the years. In our recent history, we have been primarily in the automobile industry, particularly in underhood engineering applications.
“We’ve also developed a medical devices business. Our technology is high-heat, esoteric materials that are uniquely qualified to be implanted during surgery. Some of these high-heat materials are self-lubricating, they’re durable, and they’re nontoxic. As an example, we make suture anchors for soft-tissue repair in shoulders, elbows, and knees.”
Thom told us how he came to lead the family business. “My involvement was not by plan. I was the first in my family to graduate from college, and I got engaged at the end of my junior year at the University of Cincinnati. I was thinking seriously of going to law school, but I needed to make some money. It was shortly after The Graduate had come out, so people were always quoting the famous advice to Dustin Hoffman to go work in ‘plastics.’”
Since taking over the company, Thom has slowly and steadily responded to the market forces that have thwarted so many American manufacturers. While PMC’s products were commoditized when he got into the business, the product line has steadily gotten more advanced and differentiated. “Our business is technical manufacturing. Our magic dust is the process technology,” he said.
Even with this specialization, Thom explained, the companies he supplies drive a very hard bargain. “Because of the sophistication of the purchasers, the negotiated contracts often have price-downs built in. We know going in that we are going to have to reduce costs by two or two and a half percent a year.”
“It is like day-to-day, hand-to-hand combat.” Thom ruefully described the pressure from his customers. “It’s very difficult.” Given these tough negotiations and the future price reductions they have agreed to, it is absolutely essential for PMC to continue to generate manufacturing cost savings while making their cutting-edge products. How do they do it?
Thom reported that incentive bonuses, which run about 7 percent of monthly pay for production workers, are a big part of the story. “The guys on the line are on a shared incentive based on global cost measurement. Our people suggest lots of different ways to reduce cost— running faster, ‘lean’ activities, changing a material, utilization of space. The plan is plant wide for the 150 people who work there. The workers at the plant get 50 percent of any savings that are generated.”
Paying workers for cost reductions makes perfect sense for PMC— otherwise, the company wouldn’t be able to afford the contractual discounts. But we were initially skeptical of his team-based, rather than individual-based, pay-for-performance system. PMC wants employees to think hard about ways to cut costs, but it’s unclear how strong the incentives associated with this plan would be. To see why, think about an innovative PMC employee who comes up with an idea that can save, say, $ 3,000. If that idea is implemented, the employees at the plant get $ 1,500. With 150 workers at the plant, however, the innovator’s share is only $ 10; the other $ 1,490 goes to his co-workers. An innovative employee may decide it’s not worth the trouble to push new ideas. Because the benefits arising from any individual’s action are shared with all, employees reduce effort and try to “free-ride” on the efforts of others.
Despite this potential free-rider problem, other factors can make team-based pay better than individual-based incentives. First, it can make sense to tie pay to a team’s output when interaction among workers is productive. The example above imagines a single worker coming up with a cost-saving idea, but in PMC’s case, it appeared that the best cost-saving innovations happened when employees worked together. “It’s not a silver bullet, but little incremental improvements” that were most rewarding, according to Thom.
A second reason to use group-based pay is “mutual monitoring.” While JR chooses to monitor his workers himself (with cameras in the garage) to keep them motivated, PMC’s group pay plan provides incentives for workers to watch over each other, saving managerial costs. “Some people are highly motivated because that’s who they are,” Thom reports about his employees. The team-based incentive plan gives them something else to do— encouraging their co-workers to be more productive.
Keeping the bonus top-of-mind is critical for the team based plan, Thom says. “They receive the bonus monthly. It’s all measured and displayed graphically so everyone can track it as it goes along.”
For now, Thom says, “This is the best incentive we have ever had at the factory.” But the free-rider arithmetic gets more problematic as companies grow and the gains from innovation are shared among a larger group. A group of 150 employees is already pretty big and, if the PMC factory grows, the company will have to think about whether to tailor specific incentives to smaller segments of the factory. Learn more about how to use group pay to drive common goals only at the University Canada West, one of the best universities in Canada.