CASE 1

PAY AND TOTAL INVOLVEMENT AT EVEREST DOUBLE GLAZING

INTRODUCTION Some of the best ideas in business come about from a carefully planned and well executed initiative. Others occur by pure chance. A routine decision concerning a minor policy detail suddenly turns into a major strategy with significant outcomes. This case study is one such example. When these innovations in reward were introduced in the late 1980s, it was not the main intention to totally align pay schemes with organizational objectives, but that is how it eventually worked out. Moreover, the gains to the company and to the employees were substantial. BACKGROUND TO THE COMPANY Everest Double Glazing began life in 1965 and immediately grew at a phenomenal pace so that the turnover had reached 60 million by 1980. Originally set up by four entrepreneurs, the capital constantly needed to supply this high growth necessitated an outside investor and the company became a subsidiary of RTZ PLC in the early 1970s, although retaining the same highly successful management team. The company had tapped the need of the rapidly growing property owning market to help protect inhabitants from the scourges of draughts, condensation and rotting timber windows. The original product had been a secondary single glazed window but this was followed by a range of double glazed entrance and patio doors and, by 1980, completes replacement double glazed windows. As competition grew in this expanding market, it was clear that the customer's needs had to be met with an even wider product range. The frames could be timber or aluminum; the aluminum could be grey or white painted; the glass could be toughened or incorporate any number of leaded or Georgian designs. The most important feature of the entire market place was that each contract was unique. British construction methods had determined that there were no standard sizes for doors or windows except in new houses and these rarely incorporated double glazing. Every job, therefore, had to be made to measure and manufactured to order. Having signed up for the contract, the customer would be given an estimated delivery time which varied between 5 and 16 weeks depending on the product, the time of year and the current production backlog. The key elements of the contract from the customer's viewpoint was that it was of high quality (no scratches, no condensation, operated smoothly) fit for the purpose (it was the right made-to-measure size) and delivered within a reasonable time, preferable that quoted at the time of sale. These elements had always been part of the conscious production agenda but had not been reinforced until the early 1980s. A pause for breath from the apparently insatiable public in 1979-80 had thrown a number of companies in the industry into financial trouble and it was recognized that only those driven by quality as well as efficiency would survive and prosper. FACTORY OPERATIONS By this time, Everest had expanded to 10 factories in 7 locations. Rather than expanding the factory at their base site in Cheshunt, near Hertford, for reasons principally concerned with the heavy distribution costs and the generous start up incentives in development areas and in New Towns, new factories had been opened in Scotland, Wales ( the Rhondda) the North East, Yorkshire and Northampton as well as Sitting Bourne in Kent. There was also the desire to replicate the original successful small factory team of about 100 employees. In all, there was production labor force close to 1,000.
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Throughout its short history, the board constantly looked at investing in modern plant and equipment. When the demand for toughened glass increased sharply through more stringent safety regulations on patio doors, the company was the first double glazing company to commission and operate a toughened glass plant. Each industry improvement in sealed unit manufacture and insulation was adopted as a matter of priority and shrink wrapping finished products was adopted before the competition. There was some limit to the degree of automation. The nature of the product, where every window and door has an almost infinite variety of style, shape, size and color has meant that batch or continuous production was impossible. Much of the work remained in the hands of the individual operator to cut, collate, assemble, inspect and pack the product. Despite the individual nature of the product, and the importance of teamwork in the assembly process, much of the work remained repetitive. A few experienced glasscutters were recruited but the bulk of the labor force were semi-skilled from a variety of backgrounds who had not worked in the industry before. The contract was one of flexibility where employees could be moved onto whichever job needed labor so training was a vital element. On a few occasions, this flexibility was tested by employees who wished to choose the jobs on which they worked but this was not acceptable and the clause needed enforcement as an essential part of their contract. Factory employees understood, accepted and supported this action as long as it was not enforced in an arbitrary or capricious manner. Unions existed in the Welsh and Yorkshire factories but not elsewhere. Ballots took place occasionally but, in general, there was little enthusiasm to join. There were local informal arrangements for consultation purposes, particularly over questions of bonus. INCENTIVE ARRANGEMENTS The experience of the entrepreneurial team had included 20 years in the furniture industry and they had a clear conviction that some incentive arrangement was necessary. Piecework was discounted as being too divisive and complex to operate. From an early date, a factory wide bonus scheme was operated, based on output. On balance, the schemes appeared to be successful resulting in a relatively low labor cost compared with the industry average. However, the schemes did not always operate smoothly: Earnings plateau A plateau seemed to be reached when employees appeared to agree collectively, but informally, that their earnings levels were sufficient and that they should not push any harder to increase productivity. This was despite small but continuous improvements in productivity aids. When this was discussed with the workforce, employees brushed it aside giving reasons of poor quality supplies, imbalance of workload, machine breakdown and other reasons. These excuses all did occur but in a very minor fashion and would not influence productivity improvement to any great extent. Changeover of product mix From time to time, factories had to be re-organized to meet the changing mix of product. This happened, for example, when the demand for the conventional secondary window dropped away and increased for the replacement sealed unit window. As factories carried out this change, production targets for the new products were set up that management considered quite easy to achieve. Surprisingly, they became difficult to meet even with the experienced workforce. Interim incentive arrangements, incorporating a sliding scale which took the changeover into account, hit trouble when the bonus level fell, so systems of guaranteed bonus had to operate far longer than was planned, with the resulting increase in costs. Quality The bonus scheme was essentially one of output. Inspection at each stage of production controlled, to a large extent, the quality going out the door but the inevitable pressures were placed on over-enthusiastic inspectors when production targets needed to be reached. As the market grew and the public became far more selective, the quality of the product became a much greater issue, particularly as Everest's prices
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were at the top of the range. Installers became progressively more unhappy at having to go back to a customer's house to replace a scratched glass or extrusion as it hit their own bonus. The company also lost sales through dissatisfied customers. It was time, therefore, to reassess the bonus arrangement. It clearly no longer matched the business requirements of the organization, was too narrowly focused and its motivational impact was limited. INCENTIVES IN OTHER PARTS OF THE ORGANISATION Everest had pioneered the direct selling approach employing salesmen on a commission only basis. District and regional sales managers were also on a self-employed commission or over-ride basis. By itself, this was a substantial incentive to sell. On top of this, twice a year, there was an 12 week sales contest set out in a full color brochure, supported by numerous prizes - holidays, hampers, luxury car loans, and others of equal attraction. League tables of the 100 or district sales teams performance were published each week stimulating competition. Nobody, after all, wanted to be seen in the lower grades. Given the immense success of the sales incentives, a similar scheme was introduced in the 40 installation depots. A contest was set up at first which simply measured the productivity of the installers and the surveyors. Although this led immediately to higher installation levels, it did nothing for quality. On the second attempt, the scheme incorporated measurements of customer satisfaction which included surveying within 3 weeks of sale and installation within 3 weeks of delivery to the depot. To deal with the quality issues, each replacement which needed to be ordered due to poor installation produced penalties. In the final version of the scheme, the issue of debtors was tackled. There had been a growing number of customers who had simply not paid their bills. In the vast majority of cases, this was due to dissatisfaction with some aspect of the work which had not been resolved. Into the scheme went penalties in proportion to the level of debt to stimulate the depots to put these problems right. League tables throughout the year showed everybody the performance of each depot. The prize at the end of each year was a weekend abroad for all of the depot staff and their spouses. In the first three years of the contest, the measured improvement in productivity and customer satisfaction was in the order of 30% and this was maintained in subsequent years. What had worked for sales teams thriving on competition appeared to work for other teams of staff. THE NEW FACTORY INCENTIVE SCHEME The Personnel Manager was, therefore, given the task of planning and introducing a similar contest for the group of factories. Initially, there were a number of problems to overcome: Some factories were more mechanized than others. Distribution costs were different as some delivered to the whole country, some just to their region. Some factories were multi-product, some single product. How was the issue of comparing quality to be assessed? Could other issues of customer satisfaction be incorporated? Would factory employees respond to the challenge or regard it with cynicism? The first scheme incorporated only Productivity and Quality elements. Productivity was measured by taking the factory output and dividing it by ALL the hours, not just those employees on the bonus scheme. Managers, cleaners, office staff were all included. This was to make sure every person working in the factory would become involved in the outcome. Taking evidence from the previous 12 months, simple factors were inserted for the products relating to their estimated comparative labor content. 10% was deducted for Entrance Doors, 20% for Patio doors, 10% added for replacement windows. A few extras were allowed, particularly for the detailed work involved in leaded and Georgian windows but extras were
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kept to an absolute minimum. On the issue of quality, the measure chosen was the cost of replacements identified by the depots as factory faults. It was by no means realistic as depots would rarely blame themselves for such faults, but the effect was the same for each factory. Dependent on the value of replacements each week, points were added or deducted. These points came to be crucial in determining the winners. Despite some uncertainty, no account was taken of the degree of mechanization, area of distribution or any other factors unique to a particular factory as it was considered that none of them was so crucial to productivity to alter the result. This was confirmed after consultation with the factory managers who agreed, with some minor modifications, to enter into the spirit of the contest. The first contest lasted for 24 weeks, divided into 6 x 4 weekly mini-competitions, where points for the main contest were won on the basis of 10 for the winner, six for the second place down to one point for 6th place. It was called a "Grand Prix" for obvious reasons! Employees in the winning factory for each mini-competition received 10 Marks and Spencers vouchers. (They could only win this prize twice out of the 6 mini-competitions.) A weekly league table of performance was published, arriving in the factories in the middle of the following week. THE RESULTS As the first weeks passed , it began to catch everybody's interest and the results improved steadily. By the 12th week, there had been an overall 10% increase in productivity (20% from the leading factory) and the quality measures had begun to improve. In the last 4 weeks of the contest, the leading 4 factories had upped their productivity by 30%, producing output figures way ahead of expectations or the best predictions. These improvements generated additional profits estimated at around 500,000, quite sufficient to finance a weekend in Majorca enjoyed by all 100 employees and their spouses from the winning factory. The pattern continued in the following year. A 24 week contest in the first half of the year and a hamper contest in the second half, where targets were set for all the employees in a factory to win a variety of hampers, ranging from 20 to 50 in value. Every week's production therefore counted - there could be no slacking off. The improvement in results continued, year after year. The overall performance in real terms increased from 10% in the first year to 20% in the second and 25% in the third. From there, it crept up to 35% by the 6th year. After the first year, the success of the scheme led to more company objectives being incorporated into the scheme. With the emphasis being on productivity and quality, there was a temptation to concentrate production on those products that were more straightforward and leave the more complex items to build up. Customers waiting for these items became dissatisfied when they arrived for installation later and later. Producing on time became another target. Each week, a total summary of the products manufactured behind time was published with penalties if those totals exceeded a target. Factories responded almost immediately, cutting their overdue backlogs by shifting labor to those areas of backlog and carrying out more training where it was required. Other campaigns included Factory cleanliness, with the unannounced director's visit and a materials cost saving scheme both of which gave the opportunity for more points and small prizes to be won. OUTCOMES Arising from the scheme, a number of outcomes occurred, some predictable, some surprising: Communication improved exponentially. By knowing their own performance, and knowing what the competition was doing, employees became much more focused on their output. Arising from
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the improved communication came a better understand of the corporate objectives. Employees understood when changes had to be made ; they worked together much more closely as a team for the greater good ; they did not need the management entreaties to work harder - more often than not , the greatest complaints of laziness were laid at the door of the fellow employees who were not captured by the competitive spirit. Moreover, having the medium of a weekly newsletter meant that up-to-date news on issues such as product development; holiday votes, quality improvements and a host of other features could be delivered each week. Better communication led to a great sense of trust and understanding. Letters from customers were published - some praised the excellent quality, a few were critical. A higher profile communication pattern was established with more regular visits from Directors and full meetings with all the factory employees for 15 minutes to inform them of longer term developments, answer questions and congratulate success. Problem solving having 10 factories meant that few problems were unique. Having a constantly improved product meant that there continued to be a host of production problems to solve each year. Usually that was a ' management' problem but the contest started to change this. Anything that may work to help improve the position on the league table was a stimulant to employees individually or in teams. The Engineering team rarely had to spend time convincing employees of the necessity of change. If it meant the chance of higher production and better quality, they were in favor of it. There was a rich flow of successful suggestions which could be transferred across the factory spectrum. There was a clamor for investment and factories vied for the chance of implementing new equipment for automatic sealed unit making or glass cutting. Competition also led to co-operation. The factory managers and depot managers met far more often to improve their service to each other. Quality problems were clearly explained and resolved, delivery arrangements were organized on the basis of need rather than the driver's convenience. Replacements were turned round much faster and depot complaints became far fewer. Sales personnel were invited to the factories to see the steps taken to improve the quality and to educate the sales force on technical aspects. The ' blame' culture started to dissolve. CONCLUSIONS There is an inherent artificiality about such schemes. To award small prizes, to constantly monitor performance, to continually exhort employees to do better can grate. If employees do not choose to take part, the scheme can fall flat on its face. The reason this did not happen was partly because it was a young and successful company and employees were trusting enough to be willing to give it a try and partly because there was always a light-hearted approach, despite the essence of the scheme being deadly serious. The scheme threw an interesting light on motivation. The increases in productivity arising from the introduction of the contest produced a consequential increase in the earnings from the bonus scheme. Bonus earnings went up in real terms, on average, by around 50% ( total earnings by 15%). This meant that, by 1986, 5 years into the contest, employees were earning about 20 a week extra bonus (1,000 a year), far more than the total prizes they could win in the contest, even including the weekend abroad. Why did they respond to the contest and not previously to opportunities to increase their bonus earnings? The explanation is a complex one. Firstly, there was the increased excitement and interest that the contest brought. The newsletters were devoured the moment they arrived in the factory. There was a considerable air of tension in the last week of the contest one year where 3 teams fought it out to the finish and special prizes had to be thought up to cover the disappointment of the other two teams. Kohn (1993) might
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believe that prizes devalue the intrinsic benefits of a job but all shop floor jobs (and many white collar jobs) could do with enlivening from time to time. Secondly, the objectives of the scheme made sense. Many employees themselves bought double glazing so all the pleadings on behalf of customers sounded true. They knew the market was very competitive and understood the need to succeed in a situation where there were no long-term contracts. Thirdly, support came from an unlikely source - the employee's family. The hampers were extremely popular and the family was very proud of the person who had 'won' it. The spouses who went on the weekend abroad were particularly grateful and often rather dazed by the attention they received. They had heard of nothing like this before! Finally, the scheme appeared to be fair. Most factories won something during the scheme's operation. Through a combination of good planning, research and luck, no negative factors entered to throw the scheme into disarray. No factory felt particularly disadvantaged, nor was another's success envied. The facts published each week seemed irrefutable. Being at some distance generally helped in this circumstance. In this contest, everybody was a winner. Customers had a better quality, on-time product at a time when the expression 'Customer Care' was only a gleam in British Airways Personnel Director's eye; employees earned more money and won prizes; jobs were more secure in a competitive market; the holding company had a higher dividend. POSTSCIPT There were a few losers. The factories who tended to prop up the table suffered most when RTZ decided to shed its peripheral activities in the late 1980s. The new buyer decided to concentrate production in a few sites and so a number were closed down. Sales started to suffer at around the same time and it was decided with some reluctance that the luxury of the contest could no longer be afforded. The recession in the early 1990s, which followed shortly after, hit the double glazing industry very hard and Everest took some time to recover to the level of sales of the 1980s. There were eight or so exciting years of operation. It is argued that transferability to other organizations is difficult as there are few who have such a geographical configuration. But the concept itself is especially transferable - it is a message of involvement, excitement, effective teamwork, challenging targets and an integrated system of special rewards that, added together, supported a very successful era. STUDENT ACTIVITIES (ASSIGNMENT) 1) How closely do you think this particular reward strategy is aligned to the organizational objectives? 2) Could such a contest be transferred to a one or two site setting? Set out the possibilities and difficulties if this were to happen. 3) Compare the extrinsic and intrinsic rewards attached to the competition. Evaluate both types from the viewpoint of a factory employee in this study. 4) The team at the bottom of the league table wants a meeting with you as Personnel Manager as they are no longer prepared to take part in the contest. Draw up an aide memoire for the meeting. 5) Define the dangers that may be associated with the 'Hype' of such a contest.

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Compensation & Benefits Management