Cost Savings and Incentives Gone Awry

My father used to work as an industrial engineer for a major defense contractor. He witnessed the impact of perverse incentives that cost savings initiatives can have on the workplace.
A manager implemented a suggestion box, with someone assigned to read the suggestions. Good suggestions would be implemented and rewarded. Few if any suggestions were implemented, and there was suspicion that the person reading the suggestions was taking credit for a few while pocketing the award. Then came payback – a campaign of suggestions to get rid of the “suggestion box” and the job of reviewing them, since it wasn’t generated the expected cost savings.

That is a story of what industrial engineers would like to think of as a bygone era. Unfortunately, these same types of problems occur today.

I’ve witnessed inflated cost savings pronouncements for six sigma projects and process improvement initiatives. This was due to the promised rewards of a percentage of the cost savings given back to the project managers. The company then implemented a control policy; if these changes save you this much money, you’ll get the bonus, but the money you say you’ll save will come out of next year’s budget.
A company rewarded those who found savings and improved quality with incentives. And motivated employees did find many ways to save money and improve quality. However, the small budget for incentives was quickly depleted. As a result, the number of suggestions dried up.
At another employer, employees were rewarded for putting suggestions in the suggestion box. Some ideas were good. Some ideas were bad. Management acted on a few safety related issues, but it failed to reward ideas, so they stopped receiving them. To garner more input, they offered a reward for the best ideas. Unable to decide on “the best”, they decided to pick on suggestion at random. The volume of suggestions increased, but the quality went down.

What are the takeaways of these experiences?

1. Solicit suggestions from everyone, at all levels.
2. Review each one seriously.
3. Reward good ideas, not just those that save the most money or come from top managers.
4. Give rewards in a timely fashion to those who have earned them, and distribute them in a fair, consistent manner.
5. Be careful before you change your incentive plan, or you’ll destroy the incentive for employees to give suggestions in the first place.

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2 Comments

  1. Have you ever thought about publishing an e-book or guest authoring on other blogs?
    I have a blog centered on the same subjects you discuss and would
    love to have you share some stories/information.
    I know my viewers would appreciate your work. If you’re even remotely interested, feel free to send me an email.

    • Yes, I do write for other blogs sometimes. What did you have in mind?

      Sincerely,
      Tamara Wilhite, the IE in IT blogger for the IIE

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