Scenario:

American Credit Union is a regional financial institution that has been growing through acquisition in recent years. To lead this more complex business and guide the credit union to greater profitability, American has hired a new CEO. From day one, the new CEO believes that by incentivizing employees, she can drive greater alignment between branches and improve the performance of each individual branch.

Despite warnings from you, her VP of HR and Compensation, the CEO quickly rolls out an incentive-based pay plan during her first month on the job. Currently morale is low in the branches and employees are not sure they are being treated fairly. The CEO has recently come from a manufacturing setting where piece-rate incentives were highly motivational for line workers.

She develops the following plan:

Tellers will be paid by the number of people they assist each day using a straight piece-rate method. Using company metrics, it’s determined that on average a teller assists 20 customers an hour. The CEO knows that customers hate lines and that happy customers create more traffic and referrals for the credit union. By incentivizing tellers to work more quickly at all locations, profit will increase. Thus tellers will now be paid according to a scale of how many customers they support, with top performing tellers assisting >40 customers an hour.

You are the VP of HR and Compensation. Write a memo addressing the following 5 questions:

1. What are the major potential problems with this incentive plan? Feel free to refer to potential problems with individual incentive plans in general and/or straight piece-rate plans specifically.

2. Since employees are not sure they are being treated fairly, the CEO thinks the compensation system should be kept secret from now on – discouraging employees from telling each other how much they get paid. Do you think that pay secrecy is a good idea? Why or why not?

3. Design a new variable pay plan for tellers to address the issues you identified in question 1. This plan could involve any type of incentive or combination of incentives that could be used instead of a straight piece-rate plan.

4. In a meeting, your CEO had also mentioned another option which she chose not to pursue. In the alternative, employees would not have received variable pay. Instead, they would have received standardized pay adjustments based on seniority and cost-of-living. Present this plan as a viable alternative to your proposed plan in question 3 and specify whether you think the standardized pay increase should be based on seniority, cost-of-living, across-the-board, or lump-sum increases and why.

5. Finally, give suggestions to your CEO as to which of the two plans (which you presented in questions 3 and 4 above) she should implement and why.