Case Analysis – The Best-Laid Incentive Plans

This paper seeks to answer two questions from the case entitled `The Best-laid Incentive Plans` by Steve Kerr. The first one is to identify relevant metrics while the second one is to discuss the potential incentive and disincentive characteristics of your metrics.

Questions and Answers:

Identify relevant metrics

The relevant metrics being used by Harim were efficiency and cost reduction which are focused on employees and company activities rather than on the customer. This fact is based on Harim’s plan to bring down costs which had caused the placing for savings on all the factors that could influence cost (Kerr, 2003). As proof it was commented that the company has found itself paying out bonuses but still the profitability of the company did not improve (Kerr, 2003).

Discuss the potential incentive and disincentive characteristics of your metrics.

The potential incentive characteristics include the fact the employees are given out bonuses for having produced savings. Producing saving could be beneficial to the company as this will enable it to have funds for growth as well as sustaining its working capital requirements.

On the other hand, the potential disincentive characteristics include the fact that the program is not fully understood by the employees as to the real purpose of the cost reduction and how it would redound to their benefits.  Another disincentive characteristic is that it is more employee-focused than customer -focused which contributes to employees not understanding why they are the targets. The program also assumes that the organization was not working hard enough while the employees know that it is not the usual case in most companies. This has the effect of affecting the self esteem of people in the organization and necessary their job morale.

The program lacks a clear definition of the criteria for success. By failing to explain the cost reduction program the employees may not understand the bottom line effects of the program. This could make them think that eventually it could result to their losing their jobs since their jobs also have cost to the company. The employees not seeing the big picture will be confused and this could cause them to lose their loyalties to the company and this could be more disastrous for the company.

The metrics program of Hiram focuses on the intermediary steps and assumes that such enhancements will make a positive impact on the bottom line (Kerr, 2003). By falsely assuming that short term positive impacts will result, the opposite could result because the employees cannot understand the direction that they are taking. Or although it could produce positive result in the short run, the long term success is actually being sacrificed.

It may be argued that although the long term objectives or goals are broken down into short terms objective, focusing on the short objective may create more problems. To illustrate, although less employees could mean less labor cost, it could also mean less customer service and customer loyalty, which is usually built over long term but could be lost in an instant by failing to address their short term needs as customers can switch anytime.

Another disincentive characteristic is its failure to link with corporate strategy of marketing. Although the quality and cost of provided services need to be controlled at manageable levels the need to have more satisfied customer are equally if not more important. By measuring only the amount of cost that will be saved without relating with amount of revenues that will be lost, the company is in a losing game from which it is clearly missing the point of any incentive program or performance metrics.

Conclusion:

Performance should first be measured in terms of revenues before using cost reduction for the essence of going into business is using up assets and resources to generate revenues that expected to be higher that could cover up the expenses. Hiram’ program failed in this aspect.

Reference:

Kerr, S. “The Best-Laid incentive Plans”, Motivating People, Harvard Business Review Case Study, 2003