Managers face two challenges when designing measures to evaluate the performance of individual employees: (1) designing performance measures for activities that require multiple tasks and (2) designing performance measures for team activities.
Most employees perform more than one task as part of their jobs. Marketing representatives sell products, provide customer support, and gather market information. Manufacturing workers are responsible for both the quantity and quality of their output. Employers want employees to allocate their time and effort intelligently among various tasks or aspects of their jobs.
Consider mechanics at an auto repair shop. Their jobs have two distinct aspects: repair work—performing more repair work generates more revenues for the shop—and customer satisfaction—the higher the quality of the job, the more likely the customer will be pleased. If the employer wants an employee to focus on both aspects, then the employer must measure and compensate performance on both aspects.
Suppose the employer can easily measure the quantity, but not the quality, of auto repairs. If the employer rewards workers on a by-the-job rate, which pays workers only on the basis of the number of repairs actually performed, mechanics will likely increase the number of repairs they make and quality will suffer. Sears Auto Center experienced this problem when it introduced by-the-job rates for its mechanics. To resolve the problem, Sears took three steps to motivate workers to balance both quantity and quality: (1) The company dropped the by-the-job rate system and paid mechanics an hourly salary, a step that de-emphasized the quantity of repairs. Managers determined mechanics’ bonuses, promotions, and pay increases by assessing each mechanic’s overall quantity and quality of repairs. (2) Sears evaluated employees, in part, using the number of dissatisfied customers, the number of customer complaints, and data gathered from customer satisfaction surveys. (3) Finally, Sears used staff from an independent outside agency to randomly monitor whether the repairs performed were of high quality.
Many manufacturing, marketing, and design problems can be resolved when employees with multiple skills, knowledge, experiences, and perceptions pool their talents. A team achieves better results than individual employees acting alone.* Many companies reward employees on teams based on how well their teams perform. Team-based incentives encourage individuals to help one another as they strive toward a common goal.
The specific forms of team-based compensation vary across companies. Colgate-Palmolive rewards teams based on each team’s performance. Novartis, the Swiss pharmaceutical company, rewards teams based on the company’s overall performance; some team-based bonuses are paid only if the company reaches certain goals. Whether team-based compensation is desirable depends, to a large extent, on the culture and management style of a particular organization. One criticism of team-based compensation is that it diminishes the incentives of individual employees, which can harm a firm’s overall performance. Another problem is how to manage team members who are not productive contributors to the team’s success but who, nevertheless, share in the team’s rewards. Survey evidence suggests that a majority of employees are not motivated by team-based bonuses once team size surpasses five. Familiarity with team members is also important in sustaining the value of team-based compensation.