Camp Dresser & McKee: Getting Incentives Right
Major Issues
Pfeffer (1998) said, “…Myth #5: that the most effective way to motivate people to work productively is through individual incentive compensation.” Unfortunately, this myth is what the leadership of Camp Dresser & McKee (CDM) have fallen into. The Bonus, Incentive Compensation, Promotion, and Salary Process (BIPS) is the result of CDM’s leadership falling into this trap. BIPS is a complex system with three programs for employees to be categorized: (a) Bonus Program, is for certain individuals that hold a corporate title and is tied to individual contributions and subjectively evaluated, (b) Monetary Incentive Program (MIP), for managers and tied to business objectives, and (c) non-qualifying employees, these individuals are simply evaluated once a year of a merit increase based on performance. The current CEO, Tom Furman, and former CEO Robert Marini, of CDM have mixed feelings regarding the validity of the BIPS program, giving validity to the claim made by Pfeffer.
“Variable pay plans, when properly designed and administered, do appear to enhance employee motivation” (Robbins & Judge, 2010). The key word in this quote is “properly.” The CDM incentive program is not being administered properly which is most likely due to an improper design. This is evidenced by the CEO’s questioning of the program and the statements provided by the employees regarding its effectiveness and true motivating abilities. Some of the problems with the program is its complexity, as described above, its subjectivity, and the allocation method. The reward an employee can earn is subjective to the reviewer’s point of view. There is not a clear formula to how the employee is measured to earn a bonus. The amount of a potential bonus is a limited to the amount allocated by the board. Thus if an employee receives a stellar review but the board did not allocate enough discretionary funds then the employee receives nothing. Schermerhorn, Hunt, and Osborn (2000) tell us that performance and rewards are related. Thus if an employee receives no reward for hard work this could de-motivate them and have a reverse affect on their performance for the following year. These major issues combined have caused an obvious issue at CDM such that the CEO must decide on how to handle four employee’s rewards. These employees are: (a) Joe Potter, 13 year veteran, received a two out of five performance rating, a recommended bonus of $4,000, and received $2,500 last year, (b) Maxine Salomon, 20 year veteran, received a four out of five performance rating, a recommended bonus of $7,000, and received $6,000 last year (c) Roland Simon, 20 year veteran, received a three out of five performance rating, a recommended bonus of $13,000, and received $13,000 last year, and (d) Alfredo Garcia, 4 year veteran, is not eligible for a performance rating or bonus, he is being recommended because he may leave CDM and is a star player (Nanda & Prats, 2003).
Courses of Action
To correct the major issues with the case two areas have been identified that need attention: (a) the whole system, long-term, and (b) the four employees, short-term.
To address the whole system problem, Tom Furman, CEO of CDM, could do the following: (a) stay the course and keep the current system despite the problems it has or (b) modify the system so it has more structure and other rewards that are not necessarily monetary, however, this comes with its own risks, such as, employee understanding and morale issues. If CDM stays the course the problems of the current system will continue. It is evidenced by Shermerhorn, Hunt, and Osborn (2000) and Pfeffer (1998) that if a program is not implemented correctly it is most likely not going to achieve the desired results. Modifying the system would be inline with CDM’s principle of being one team and working towards a common goal (Nanda & Pratt, 2003) by shifting the focus away from the individual fiscal gain. It would also be consistent with the advice from former CDM CEO, Robert Marini, who said that employees, may be more motivated by items such as a pat on the back, cleaning up the environment, making clients happy, and feeling appreciated. Moving towards a program that is not solely based on monetary gain and move towards intrinsic rewards is backed by Robbins and Judge (2010). Another program, suggested by Pfeffer (1998), is to use group-oriented measures, for “if you could reliably measure and reward individual contributions, organizations wouldn’t be needed.”
The short-term problem at hand also needs to be addressed, the bonuses for the four employees. For the employees that are eligible for the program, Joe, Maxine, and Roland, they could receive one of the following three bonuses: (a) more than last year, (b) the same as last year, or (c) less than last year, all based on their current evaluation. Each case to be considered separately. Giving an employee less than they received last year could prove to be demotivating. This may be an option but it is not highly recommended. Giving an employee more than they received last year may motivate them but it should be inline with the recommended amounts. Similarly, if the choice is made to give them the same amount as the previous year than it should be inline with the recommended amount.
Alfredo Garcia has been separated from the others as he is not currently eligible for the incentive program. Thus three options stand out: (a) give him a bonus, (b) promote him to make him eligible for a bonus next year, or (c) give him nothing but his merit increase, if earned. Giving Alfredo a bonus may cause conflict amongst the ranks of the other employees. This creates a potential ethical problem of giving him a bonus and not the others who may have worked just as hard. A decision to promote Alfredo to make him eligible for a bonus may provide that incentive to keep him on the CDM team. This would be supported by Robbins and Judge (2010) giving a reward other than money, the promotion. The last option is to keep Alfredo in the regular employee pool and give him a merit increase, perhaps, a larger increase to encourage him to stay with CDM.
Recommendations
- The recommendations to Tom Furman are as follows.
Joe Potter � Joe has received a bonus for the past couple of years and if they just want to keep him going they need to give him something. Considering is low performance score, the recommendation is to give him the same as last year, $2,500. This way he has received a bonus that should not de-motivate him as much as giving him nothing. On the same token, giving him less then the recommended reward may push him to do better next year. This would be inline with Shermerhorn, Hunt, and Osborn (2000) that state that “…the size and value of the reward vary in proportion to the level of one’s performance accomplishment.” Since, Joe received a two out of five rating, this bonus is in proportion with the evaluation.
Maxine Salomon � With a similar argument Maxine should receive the fully recommended $7,000. She earned a four out of five performance rating and earned a $6,000 bonus last year. The bonus is limited due to the division she works in, however, this is a problem with the system, not with Maxine’s performance.
Roland Simon � This employee has been around for quite some time and is earning a good salary and decent bonuses that last couple of years. This looks like a case in point of expectancy theory (Robbins & Judge, 2010). He knows that if he meets his goals he will get the bonus by simply doing the minimum to get, thus, a solution may be to give him tougher goals. As for the bonus, to keep consistent, he should earn his recommended amount of $13,000, the same as last year, for meeting his goals and achieving a three out of five.
Alfredo Garcia � He doesn’t qualify for BIPS, if CDM wants to keep him and thinks that money is his motivator then they should promote him and give him a merit increase. By giving him a corporate title he would be eligible for BIPS next year. This would maintain equity among the non-eligible employees and it may provide the necessary motivation to keep him onboard.
The last recommendation would be to fix the whole incentive program. A focus on group rewards, as mentioned by Pfeffer (2010), intrinsic rewards such as praise, opportunities to present papers, employee of the month may provide more motivation to the employees of CDM. Also, the allocation of the award amount could be budgeted in for each year thus limiting the variance of the bonuses. This could be accomplished through a process improvement team made up of employees and managers that evaluates the situation, analyzes the data, find and tests solutions, and creates future plans.
Lesson and Application
The biggest thing I learned is that no system is perfect. If one system was a magic bullet of employee rewards it would be used everywhere. The culture of the company, the leadership style of the managers and executive team, and the employees themselves drive what will and will not work. It is through trial and error to find a system that works with a particular company or group and that system may not work with another company. As with any system there will always be complaints and people that find the loop holes. It is management’s job to maintain equity and fairness throughout the process while keeping the business going. Having to decide on an individual’s bonus based on subjective information creates a potential ethical problem for if it was based on objective criteria a question of validity could be substantiated. I enjoyed the dynamics of the case and the information that was provided. Both of these helped make the recommendations in the best interest of the company.
References
Nanda, A., & Prats, M. J. (2003). Camp Dresser & McKee: Getting incentives right. Harvard Business School, 9-902-122, 1-20.
Pfeffer, J. (1998). Six dangerous myths about pay. Harvard Business Review, May-June, 109-119.
Robbins, S. P., & Judge, T. A. (2010). Essentials of organizational behavior (10th ed.). Boston: Pearson.
Schermerhorn, J. R., Hunt, J. G., & Osborn, R. N. (2000). Organizational behavior (7th ed.). New York: John Wiley & Sons, Inc.