Rewarding the Factory Workers: How to Select the Right Measures for an Effective Pay-for-Performance System

Abstract

Aims: A Performance related pay (PRP) plan rewards employees with a financial payment, either consolidated or non consolidated, following an assessment of their performance and, typically, the achievement of objectives. Many different types of PRP schemes have been developed over the years. Regardless of the scheme chosen, a particularly critical factor in the design of a performance-related pay (PRP) plan concerns the choice of parameters or indicators on which variable pay should be determined. The research goal of this work is to develop an analytical model that can help companies to identify the optimal set of these parameters. Methodology: The model proposed in the paper has been developed through an empirical research methodology involving a large sample of companies. Data were collected by means of a questionnaire distributed to companies which have implementing for at least ten years a performance-related pay (PRP) scheme for shop-floor workers. Results: Descriptive and interpretative analysis of empirical results have identified a set of relationships between some company characteristics and the use of specific indicators for measuring the bonus to be given to the shop floor workers. The proposed model correlates three different typologies of companies (i.e. make to stock, make to order and engineering to order) with different types of indicators (i.e. profitability, productivity, efficiency and quality) which have to be used for bonus calculation. After having recognized to which category a firm belongs, it can easily identify the types of indicators to be used. Originality: The proposed model can actually help companies to identify the optimal set of parameters on which basing the PRP plan. A set of strong relationships have been recognized between some company characteristics and different types of indicators that should be employed for determining the variable bonus for shop-floor workers.