Compensation Question

Question

I want to create a compensation system which takes into account two variables. Lets say I have $1M to distribute among ten employees who produce widgets. I want to compensate each employee by two variables: How many widgets the employee produces and how quickly they are produced.

For instance, if each employee produced 100 widgets, each would receive $100,000.

Employees #1-9 took 100 hours to produce these widgets, but Employee #10 took 80 hours.

How would I compensate these employees in reciprocal proportion to their contribution to the overall hours of widget making (980hrs)?

In the above scenario, I would like employee #10 to be compensated more than $100,000 and employees #1-9 to be compensated slightly less, but for all compensation to still equal $1M.

Thanks!

Answer 1

One simple solution is to adjust the number of widgets produced to reflect 100 hours of work. In your example, Employee #10 produced 100 actual widgets in 80 hours, but $100*(5/4)=125$ adjusted widgets in 100 hours. Hence the ten employees made a total of $1025$ adjusted widgets. Then, divide the compensation by adjusted widgets. \$1M divided by 1025 is \$975.61 per adjusted widget. Hence the first nine employees all get \$97,561, while #10 gets \$121,951.

Every method has flaws; for this one, an employee could work super-hard and make 2 widgets in 1 hour, and then stop. Then the bonus would be huge!

Answer 2

Answer:

One way you could reward both Volume and least time to produce the volume is by setting up target Volume and target Rate and measure the workers performance on both volume and the rate against the target. The below EXCEL image shows the compensation scheme for 5 workers from a pool of $1000000. It also gives formula to obtain each column.

Here in the above table. The target is set at 120 widgets and should be produced in 60 minutes just for example sake. I have included each worker's volume, time and the rate. The variance for each worker in terms of Volume and Rate is given. The target performance would hits an inverted variance of 240 in this example. The formula stems from the idea that the change in (VR) between the target and worker is measured

$$\delta(VR) = \delta V\times R + \delta R\times V$$

This is one way you could both reward volume and rate.

Thanks

Satish