Optimisation of employees’ motivation under critical consideration of variable compensation systems within the logistic department of LIGAPRODUCTION GmbH & Co. KG


Examination Thesis, 2015
43 Pages, Grade: 86%

Excerpt

Contents

1 Introduction
1.1 Introduction to the chosen organisation
1.2 Examination of the increased challenges of competition
1.3 Identification of an appropriate research question
1.4 Definition of the topic
1.5 Developing and implementing a new bonus wage model for LIGAPRODUCTION

2 Theories on individual motivators and incentive systems for boosting efficiency
2.1 Motivation theories
2.1.1 Principal-agent theory
2.1.2 The X and Y theory
2.1.2.1 Theory X
2.1.2.2 Theory Y
2.1.3 Leader-member-exchange (LMX) theory
2.1.4 Herzberg’s two-factors theory
2.2 The concept of bonus pay
2.3 Theories of individual bonus pay models
2.3.1 The Halsey bonus pay system
2.3.2 The Rowan system
2.3.3 The differential piece rate method
2.3.4 The quota or bonus system
2.3.5 The Bedaux system

3 Evaluation of the current situation in the logistics department of LIGAPRODUCTION GmbH & Co. KG
3.1 Evaluation and interpretation of employees’ satisfaction and overall working motivation
3.2 Current wage model for LIGAPRODUCTION GmbH & Co. KG

4 The ability to implement different bonus systems in the logistics department of LIGAPRODUCTION
4.1 Evaluation of key figures as a base for the bonus system
4.1.1 Productivity
4.1.2 Quality
4.1.3 Internal facility management
4.1.4 Work accidents and absenteeism
4.2 Quarterly premiums
4.3 Analysis of individual key figures for the bonus system
4.3.1 Productivity
4.3.2 Quality
4.3.3 Internal facility management
4.3.4 Absenteeism and work accidents
4.3.5 The quarterly premium dilemma
4.4 Assessment of advantages and disadvantages of individual bonus systems given the situation at LIGAPRODUCTION
4.4.1 The Halsey bonus pay system
4.4.2 The Rowan system
4.4.3 The differential piece rate method
4.4.4 The quota or bonus system
4.4.5 The Bedaux system

5 Implementation of a bonus wage system at LIGAPRODUCTION GmbH & Co. KG
5.1 Structure of the new bonus system based on the example of the logistics department of LIGAPRODUCTION
5.2 Beneficiaries

6 Conclusion

References

List of abbreviations

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List of figures

Figure 1: Composition of remuneration (Own illustration 2015)

Figure 2: Hygiene factors and motivators (Herzberg et al. 1993)

Figure 3: Grade character of the Halsey bonus (Böhrs 1980)

Figure 4: Grade character of the Rowan bonus (Böhrs 1980)

Figure 5: Hourly earnings courses (Löffelholz 1993)

Figure 6: Structure of the used KPIs to meassure the achievement of a bonus payment (Own illustration 2015)

List of tables

Table 1: Information asymmetries (Dillerup and Stoi 2008)

Table 2: McGregor's X-Y Theory (Olfert 2006)

Table 3: Classification of factors (Herzberg et al. 1993 and Drumm 2000)

Table 4: Motivation/hygiene factor combinations (Herzberg 2003)

Table 5: Results of the employee satisfaction questionnaire

Introduction

1.1 Introduction to the chosen organisation

LIGAPRODUCTION is a full-service provider that designs, plans, produces and distributes high-quality point-of-sale (POS) items, such as shop-window campaigns, in-store elements and store-construction elements. The company also conducts event productions. Together with our mother company LIGANOVA, an event and marketing agency, we offer unique custom-made items and prototypes as well as large-series productions with worldwide logistics for our national and international clients. We guarantee maximum flexibility and reduced transactions costs while ensuring efficient production for our clients. These benefits stem from our concentration of six different production workshops under one roof, ultra-modern infrastructure and integrated processes and information technology (IT) systems. Throughout the project, our project management team maintains continual contact with our clients and supervises all production workshops. The internal logistics department consists of two handling facilities of approximately 6.000 sqm. Its services include the entire field of logistical campaign planning, including packaging planning, picking and packing (P&P), global shipping, customs declaration and, if required, a montage of promotion elements all over the world.

The remainder of this chapter examine the increased challenges of competition within the global logistics market and examines therefore the importance of employees as human resource of an organisation. Chapter two presents an analysis of several motivation theories and furthermore the development of individual bonus pay models. Next, in chapter three, the evaluation of the current situation and motivation in the logistics department of LIGAPRODUCTION as a quantitative data research takes place. Chapter four contains the evaluation of key performance indicators as base for the determination of a bonus system and later on the assessment of advantages and disadvantages of individual bonus systems in the logistics department. This thesis concludes by the implementation of the new bonus wage system and thereof by presenting the structure of this system as well as the beneficiaries in chapter five. The conclusion in chapter six finally gives a brief outlook on future developments and possibilities.

1.2 Examination of the increased challenges of competition

To remain competitive in the current game of international logistics, continual improvements in quality and increases in productivity are of the utmost importance.

As the potential of automation and economization become increasingly exhausted, the importance of people is reemerging; human labour is one of the company's most important resources, a precious commodity. According to Bontrup (2008), employees' knowledge and abilities provide companies the key competitive edge in the global market.

This shift also changes the way the worker is viewed. Following Dilcher and Emminghaus (2010), modern personnel management no longer regards the worker as a pure production factor, but rather as a human resource, bringing not only his or her labour but also unique skills to the company. This approach facilitates the radical optimization of a vast number of business processes.

For a company to succeed, employee motivation is key (Sheldrake 2003). This new paradigm changes the way in which remuneration serves as a motivator. Money, even in new incentives systems, remains at the forefront as an extrinsic motivator. Nevertheless, remuneration systems are increasingly being designed to promote and reward intrinsic motivation.

1.3 Identification of an appropriate research question

After analysing changes within the labour market, we deduced several research questions which have to be considered in managing the increased importance of human resources for organisational success.

1. Analyse the impact of employee motivation on organisational performance
2. Identify models to increase the satisfaction of employees
3. Critically evaluate the use of bonus payment models within the chosen organisation
4. Develop a set of recommendations to implement a variable compensation model to increase employees’ working motivation

1.4 Definition of the topic

The central tool of commercial compensation policy, which is the focus of this thesis, is variable remuneration in the form of an incentives system. This performance-based pay method involves a bonus being awarded in addition to the base should the company’s standard performance level be exceeded in quantitative and/or qualitative terms (Shields 2007).

Figure 1: Composition of remuneration (Own illustration 2015)

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Because the performance-based pay system is used exclusively for permanent employees, this thesis does not examine temporary or outside employees.

1.5 Developing and implementing a new bonus wage model for LIGAPRODUCTION

Variable remuneration occupies an important place as a motivational tool; therefore, the first portion of this thesis generally addresses the conceptual bases of motivation. The thesis later examines different bonus pay models and their implementation in the logistics department of LIGAPRODUCTION. This thesis aims to locate a uniform model framework applicable to all corporate locations, analysed on the basis of the logistics operations carried out by LIGAPRODUCTION (LPRO) for LIGANOVA (LNOV). Based on this analysis, this thesis will submit proposals for improvement.

2 Theories on individual motivators and incentive systems for boosting efficiency

This chapter contains the introduction and analysis of individual motivation theories according to their possible influence of working motivation. Furthermore this chapter describes the concept of bonus payment systems and extends this description by the evaluation and assessment of several individual bonus pay models.

2.1 Motivation theories

2.1.1 Principal-agent theory

According to Wöhe (2008), the principal-agent theory focuses on employer-employee relationships and their successful realization. These relationships are fundamentally based on a principal “P” (employer) delegating tasks and expertise to an agent “A” (employee). Through this delegation, the principal seeks to realize his or her interests.

However, following Jex and Britt (2012), this theory deals only with the micropolitical approach to conflicts of interest between principal and agent. This conflict, conceptualized through a contract of whatever wording, is characterized by asymmetrical information. The analysis is conducted from the perspective of the principal, who is at a disadvantage in terms of information and is unable or unwilling to remedy this disadvantage. This asymmetry is generally attributed to the agent behaving in a fundamentally opportunistic manner; he or she will unscrupulously use every advantage to his or her benefit (Schreyögg 2008).

Lussie (2012) and Wöhe (2008) distinguish three types of informational asymmetry:

Hidden characteristics: The agent fraudulently conceals deficiencies and risks of which the principal is unaware. This concealment can result in the agent using his or her information for deception (moral hazard), or it can result in the wrong agent being selected (adverse selection).

Hidden action: The P is aware only of the results, not of the manner in which the service was rendered, i.e., the agent has latitude to deceive the principal.

Hidden intention: After making irreversible advance payments, the principal is now dependent on the agent, who can use the dependence for extortion ("hold up").

To minimize damage to his or her wellbeing, the principal has several options. These options range from signalling (agent establishes his or her performance ability, e.g., through employment references), screening (additional gathering of information, e.g., through aptitude test) and self-selection (multiple contracts are offered to the agent; his selection reflects his hidden characteristics, e.g., deductible levels on insurance policies). Following Dillerup and Stoi (2008) and Schreyögg (2008), another option involves sanctions, including incentive systems (e.g., profit sharing).

According to Shields (2007), agent theory favours the incentive system because it roughly reconciles the parties’ interests and makes the agent’s opportunistic behaviour less likely. In most cases, these measures entail high costs; therefore, it is always expedient to weigh the costs against the benefits.

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Table 1: Information asymmetries (Dillerup and Stoi 2008)

2.1.2 The X and Y theory

According to Kreitner (2009), McGregor’s 1960 employee management theory proposes two opposing views of humans and provides implications of these views. One view holds that human beings dislike work, while the others asserts that human beings are seeing a deeper sense and satisfying their needs within their work. These views of humanity are highly simplified assumptions regarding members of organizations; based on these assumptions, specific guidance emerges for designing human resource management systems. The fundamental difference between the two views of humankind represents a transitional phase in management practice. During this transition, management styles became increasingly participative or delegative, according to Scholz (1994) and Wöhe (2008) and specified by Miner (2005).

2.1.2.1 Theory X

The first part of the theory is based on the assumption that humans have an innate aversion to work, therefore making it necessary to compel, drive or manage subordinates. Basically, people are motivated by outside forces because they are not willing to perform without extrinsically directed measures, such as wages or sanctions (Dillerup and Stoi 2008).

Guided by theory X, McGregor holds traditional views on both management in general and human resources management from the perspective of corporate management and supervisors. He establishes and describes the principles of authoritarian management, thereby remaining essentially consistent with the assumptions and views of working behaviour held by Taylorism.

2.1.2.2 Theory Y

In contrast to theory X, theory Y claims that employees are internally motivated if they can identify with corporate goals. Following Werner and DeSimone (2012), the employee views work as a source of satisfaction and takes pleasure in performance. The employee’s most important incentive to work comes from within: he or she pursues fulfilment through self-realization. Superiors should therefore create working conditions that motivate people, such as increased self-determination, wider scopes of responsibility, and group and project-based work.

According to Armstrong (2002), this view of humanity is a prerequisite if management is to transfer tasks and responsibilities to employees. The assumptions held by theory Y mirror those of the human-relations concept. However, it is often overlooked that McGregor in no way promotes fully suspending control or abolishing material incentives as a consequence of theory Y. Instead, he seeks to widen the perspective and allow new incentive systems.

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Table 2: McGregor's X-Y Theory (Olfert 2006)

With regard to Maslow’s Hierarchy of Needs , theory X would fall under the lower priority needs, while theory Y would occupy the higher priority needs (Brooks 2006).

McGregor is clear on the issue of employee motivation, recommending that decision makers assume theory Y’s view of humanity when dealing with employees, thus creating the appropriate framework conditions for realizing this view (Mullins 2005).

Applying theory Y results in more decisive achievement of corporate goals and higher employee satisfaction. Conversely, superiors who apply the “incorrect” view of X actually cause their subordinates to behave according to those expectations (McGregor 1973). If the superior succumbs to the assumption that a subordinate fundamentally does not wish to assume any personal responsibility, then he or she will not afford the employee any degree of autonomy, depriving the subordinate of any opportunity to act under his or her own responsibility. It becomes a self-fulfilling prophecy, reinforcing the superior’s assumption that subordinates decline personal responsibility. Following Scholz (1994), the results differ when the assumption is reversed: if the subordinate wishes to assume no responsibility whatsoever (theory X), he or she will not necessarily enjoy acting under his or her own responsibility when granted a degree of autonomy (theory Y).

2.1.3 Leader-member-exchange (LMX) theory

According to Torrington et al. (2011), Sahin described the relationship between supervisors and subordinates in his leader-member exchange (LMX) theory. This theory states that supervisors develop unique relationships with individual subordinates. The quality of these relationships determines how the individual subordinates are treated by their supervisors. According to Mullins (2005), Sahin’s LMX approach can be seen as a derivation, in the widest sense, of McGregor’s X and Y theory. High-quality relationships develop between supervisors and subordinates when managers apply theory Y. These high-quality relationships result from the greater independence and responsibility given to individual subordinates, which demonstrates deeper trust. In contrast, managers who apply Theory X must supervise single subordinates more closely, which maintains a strong distance between the supervisor and subordinates and a low-quality exchange relationship.

Though LMX is generally accepted as an addition and further development of McGregor’s X and Y theory, Sahin’s approach also faces several points of critique. For example, Werner and DeSimone (2012), Jex and Britt (2012) and Gagné (2014) note that Sahin overlooks the organisation’s social context when considering the development of high- or low-quality relationships.

2.1.4 Herzberg’s two-factors theory

Following Scholz (1994) and Miner (2005), the two-factors theory is a popular labour motivation theory resulting from an empirical study on the causes of work satisfaction conducted by Herzberg, Mausner and Snyderman in the mid-1960s. In this study, people were surveyed concerning “critical” moments and experiences during working hours that differ from events in everyday life.

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Figure 2: Hygiene factors and motivators (Herzberg et al. 1993)

Following Armstrong (2002) and Miner (2005), Herzberg’s theory can be understood as an extension of Maslow's Hierarchy of Needs. According to Maslow, all motives act in the same direction: First, a need arises. Upon recognizing this need, the individual attempts to satisfy it only to discover a new need. In contrast, Herzberg's theory assumes the existence of two groups of motives or factors as its name suggests.

Meanwhile, Scholz (1994) identifies factors related to the content of work (motivators or satisfaction factors) on the one hand, and factors concerning the work environment (hygiene factors or dissatisfaction factors) on the other. The terms “motivators” and “hygiene factors” are used below.

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Table 3: Classification of factors (Herzberg et al. 1993 and Drumm 2000)

Motivators are able to increase work satisfaction, without detracting from work dissatisfaction. In contrast, hygiene factors can reduce dissatisfaction in any case, yet are unable to create satisfaction. According to Wöhe (2008) as well as Dillerup and Stoi (2008), a neutral state of experience, known as “non-dissatisfied”, would result should all of these extrinsic factors be sufficient. It should be noted here that, to Herzberg (1993), the levels of satisfaction and dissatisfaction constitute two completely independent dimensions, each ranging between the extremes of “not satisfied” to “satisfied”.

From his findings, Herzberg (1993) derived a motivation theory: the existence of positive manifestations of motivators supports the pursuit of work satisfaction, thus causing motivation to boost performance. In contrast, the existence of positive manifestations of hygiene factors may reduce work dissatisfaction, and there are four possible combinations of the two factors:

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Table 4: Motivation/hygiene factor combinations (Herzberg 2003)

Following Drumm (2000) and Kreitner (2009), the validity of this thesis implies that hygiene factors are ultimately suited only for creating the necessary basic conditions for rendering performance. Thus, good relationships with co-workers serves only as a basic condition for rendering performance, because a limit value is quickly reached after which no further performance incentives result even when relationships improve. The exact opposite occurs with motivators. According to Herzberg (1993), motivators have unlimited power to increase satisfaction and can be applied without limit value.

Expanding upon his thesis, Herzberg devised two different views of humanity which take exception to classic management theories (Drumm 2000). While Adam no longer seeks satisfaction in his work, but is driven only to avoid what is unpleasant, Abraham is the creative one who seeks self-realization and satisfaction in work.

Despite being one of the most influential motivation theories in management science, along with Maslow’s hierarchy of needs, the two-factors theory is open to some criticism. For example, when examining individual factors, it becomes clear that the people surveyed saw the causes of their satisfaction to lie mostly within themselves and the causes for their dissatisfaction to lie primarily with others (Gagné 2014; Grint 2005). Above all, this finding is reflective of protection from punishment rather than motivation.

Miner (2005) added to this criticism by noting the fact that motivators and hygiene factors function differently depending on the situation. Motivators can quickly become hygiene factors should they become matters of course. Conversely, hygiene factors can become motivators if they have been lacking for an extended period. Categorization thus depends on the individual’s background experience and values as well as those of the company.

Drumm (2000), along with Werner and DeSimone (2012), noted that these empirical results were only partially confirmed in a number of subsequent studies, and they are therefore still disputed. Herzberg himself immunized his theory in that he gathered the results of tests employing the same methods as confirmation, yet classified the studies employing different methods that do not support his theses as non-rebuttal.

Ultimately, this theory makes no deeper contribution to solving the problem of motivation, given that if the motivators function as assumed, then their effects on a particular employee would depend too greatly on situational needs and attitudes. Campbell (1970) is by all means correct in his assessment that, while representing a major step in the field of motivational science, the two-factor theory has fulfilled its purpose and can be retired in dignity.

2.2 The concept of bonus pay

As a rule, a business person does not employ his subordinates for social reasons, but rather hoping and expecting to generate added value and contribute to achieving corporate goals, (Lynch 2012; Johnson et al. 2005). The reverse is also true: the employee has expectations for his or her activity and the employer, the primary expectation being the satisfaction of his or her needs. Following Dillerup and Stoi (2008), from the viewpoint of the business person and his or her employees, performance must pay, and additional effort and expense exceeding expected performance must be remunerated accordingly.

As a performance-oriented remuneration method, the bonus pay system is based on the underlying idea that there is a connection between extraordinary performance and payment. According to Armstrong (2002), the goal is to achieve a higher level of work motivation while simultaneously having the option of providing the employee with feedback on his or her performance. Succinctly stated, the underlying idea is that of paying for work performed and not for “just being present”.

With regard to the principle of wage computation as well as the combination of possibilities thereof, bonus pay is a highly heterogeneous and multifaceted type of pay. Dillerup and Stoi (2008) have stated that it is preferable to use bonus pay when it is either uneconomical or difficult to ascertain piece rates, or when they simply cannot be calculated.

[...]

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Details

Title
Optimisation of employees’ motivation under critical consideration of variable compensation systems within the logistic department of LIGAPRODUCTION GmbH & Co. KG
College
European College of Business and Management (ECBM) London
Course
Human Resource Management
Grade
86%
Author
Year
2015
Pages
43
Catalog Number
V315830
ISBN (eBook)
9783668158320
ISBN (Book)
9783668158337
File size
740 KB
Language
English
Tags
ECBM, MBA, DSM, motivation, bonus scheme, compensation systems
Quote paper
Maxim Weinmann (Author), 2015, Optimisation of employees’ motivation under critical consideration of variable compensation systems within the logistic department of LIGAPRODUCTION GmbH & Co. KG, Munich, GRIN Verlag, https://www.grin.com/document/315830

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