The supply chain industry is facing new challenges that threaten to disrupt operations. The coronavirus pandemic has escalated already existing labor issues, creating an environment that makes it more and more difficult to meet the demands that are placed on warehouses and distribution centers.
Recent survey results highlight the continual staffing and productivity pressures that facilities face on a daily basis.
Labor recruitment and labor efficiency are listed as two of the three top challenges for warehouses today.
- 60% of warehouses report labor recruitment and/or labor efficiency and productivity among their top challenges.
- 73% of companies are shipping increased volumes and are shipping more SKUs than ever before.
- 75% of warehouses plan to increase their staff within three years.
- 72% of organizations plan to implement new processes within three years due to increased consumer demand for immediate delivery.
To meet the labor demands of today, many warehouses turn to temporary staffing firms that operate on an hourly pay model. But hourly pay doesn’t offer the incentives for higher production rates that warehouses need right now. An increasing number of organizations are turning to another compensation model that has built-in incentive pay for greater production and better quality: the productivity pay model.
What Is a Productivity Pay Compensation Model?
The productivity pay system is also known as the team-based pay model (TBP), or pool pay system. TBP is an incentive compensation system that rewards all of the members of a project or a department team with the same rate of pay. Productivity pay is based on the entire team’s performance to complete a productivity goal, such as the number of containers packed or trucks loaded.
Unlike individual pay systems, team-based pay rewards the output of the team as a whole and divides the rewards equally among team members. It’s a bold and innovative approach, but studies show that it works — and it retains more workers.
By emphasizing teamwork, you reduce the risk of favoritism while rewarding the collective effort to get the job done in the quickest and safest way possible. Employees are highly motivated to achieve high productivity and quality, and you see a higher retention rate due to the inherent camaraderie and vested interest employees have for one another.
Many companies have questions about the advantages of TBP. It’s understandable — you don’t want your best employees to leave because they’re paid the same as low performers, and you don’t want freeloaders benefiting off of your best workers. But potential drawbacks can be prevented, and the advantages far outweigh the disadvantages.
Let’s take a look at the benefits your organization will enjoy from implementing a team-based compensation model.
Download NowWhy Does a Productivity Pay Model Work?
The Team-Based Pay Method Increases Productivity
The faster new hires get up to speed, the more money the entire team can earn. The TBP model creates stronger efficiency because people are working together rather than in individual silos. If someone gets done with an easy load early, they can move over to the hard load and help out. It behooves everyone to lend that extra hand because the entire team is paid for the total production.
Team Pay Means Higher Wages Without Higher Costs to You
Data show that compensation levels across teams are higher than in traditional pay models. That means that more employees are earning more. While your highest performers may not achieve the same pay rates as an individual scheme, the pay is usually comparable. Overall this keeps turnover low and makes you a more attractive employer.
To meet the labor demands of today, many warehouses turn to temporary staffing firms that operate on an hourly pay model. But hourly pay doesn’t offer the incentives for higher production rates that warehouses need right now. An increasing number of organizations are turning to another compensation model that has built-in incentive pay for greater production and better quality: the productivity pay model.
Pool Pay Increases Employee Retention
The average cost to hire a single new employee is more than $4,000. Reducing turnover is an effective way to boost your bottom line. Organizations with team-based pay systems experience less turnover than companies that use individual pay schemes. Here’s why.
Low earners are newer employees, but they continue to get harder work, which keeps them earning less. Middle earners may not have been trained properly and struggle to reach higher productivity levels to earn more pay. Out of frustration, employees in these two categories leave. The cycle continues with every new hire.
TBP environments have a lower turnover because workers are earning higher incomes than in an individual environment. Content with their wage, a more stable operation is established.
Team-Based Pay Builds Stronger Leadership
If you’re managing in a team environment, you can’t do it from the office. TBP management involves more than just handing out a load — you’re managing the overall environment. We see this as a benefit. With team pay, managers become leaders. They’re present on the floor with their team, motivating associates and growing as leaders because they’re taking the lower performers under their wings. They invest in the company and are naturally grooming themselves for more significant roles within your organization.
Pool Pay System Creates a Healthier Culture
When managers are on the floor interacting with employees, it helps establish a stronger culture. The compensation model also creates ownership, as high performers invest themselves in low performers.
As a result, your workforce develops a team mentality as everyone shares a common goal. You have one team on the same page working together, rather than having dozens or hundreds of individuals with their own priorities.
Download NowWhat’s Wrong with the Traditional Pay Model?
In the traditional hourly compensation model, warehouse workers are paid hourly. Their goal for work is to be there for eight hours, then go home. The temptation is to be less productive and get more hours, and the warehouse pays more for less work.
To make up for that loss, employers hire additional commodity workers, who are also getting paid more for less work. The impact on the bottom line is the equivalent of driving in the wrong direction, but faster.
Commodity workers are guaranteed the same pay, no matter what kind of performance they deliver. Even when production goals are assigned to them, there’s an overriding factor — underperformance pays as well as overperformance. It’s the hours worked that matters, not production or quality.
It’s no wonder that the industry sees a turnover rate of over 400 percent every year — which hikes up the costs of hiring and training new employees.
That’s the difference distribution centers are seeing when they stop treating their warehouse personnel as commodities and start seeing them as valuable resources.
Eclipse IA specializes solely in the labor component of the supply chain. We’ve dedicated ourselves to doing something about the commoditization of supply chain labor, and it’s paying off for our clients.
But what if you could cut your turnover rate by 65 percent, boost productivity, and eliminate dead time from your warehouse floor — without paying a dime more for it?
How One Distribution Center Fixed Their Productivity Frustrations
The Challenge
It was fall and the distribution center was at the height of their peak time, which would go through Christmas. The staffing agencies were behind schedule by more than 500 unworked containers. They weren’t doing the job they had been hired to do, leaving the DC in a bind. The impact was felt throughout the retail chain.
Despite plenty of staffing and multiple agencies on the scene, the staffing providers weren’t able to execute in a timely manner. The pressure was palpable, and the stress wasn’t limited to the management team — it ran all throughout the distribution center. People at every level were working 12- to 14-hour days, seven days a week, to get through that volume. The relentless pace went on for months.
The distribution center for a national retailer was using multiple temporary staffing agencies to unload freight from overseas. Despite all of that staffing power, the agencies were continually falling behind, resulting in months of sleepless nights at all levels of the facility.
The Solution
In March, the facility reached out to Eclipse IA. They were looking for a long-term partner to take over the import off-loading — someone who could provide labor that would keep up with demand and provide a measure of reliability, and do it safely and efficiently.
The distribution center had heard about Eclipse IA’s unique productivity pay model and its promise of greater productivity. Exhausted and frustrated with the standard hourly model of staffing, they decided to try a new approach.
The productivity pay model, or team-based pay model, is an incentive pay system that rewards all of the members of a team with the same rate of pay. TBP is based on their performance to complete a productivity goal, such as the number of cases packed or trucks loaded.
Unlike hourly pay systems, TBP rewards the output of the team as a whole and divides the rewards equally among team members. It’s a bold and innovative approach, but studies show that it boosts productivity — and it retains more workers.
The Result
Peak Performance
As we rolled into peak a year later, it was a far cry from the previous year. At the height of the peak, the highest on-yard container count was a full 70 percent less.
Within the first eight months, Eclipse IA unloaded over 12 million cases, surpassing last year’s numbers by 1.4 million cases within the same time frame. This was a huge success and was celebrated as such!
Real-Time Responsiveness
The distribution center sees extreme ebbs and flows of volume throughout the fiscal year. Suddenly there’s a peak and the DC needs to bump up the staffing immediately.
Eclipse uses data tracking and on-site managers to anticipate staffing needs ahead of time, and to adjust in real time. “Because our staffing managers are at the facility, they have an insider’s understanding of the client’s needs as they arise, and they know how to fill those needs appropriately”, states Dale MacAllister, VP of Operations, Eclipse IA.
Quality Communication
Eclipse’s managed team approach also means a quality of communication that the distribution center had never experienced before. Staffing managers are continually in contact with the client and offering proactive solutions to anticipated needs. This gives the DC an advantage in getting ahead of peaks and adjusting to valleys as their needs fluctuate — something they had never experienced before.
This managed team model also means that Eclipse managers know what the employees are doing at the site. They see all day long what the team is doing, and they can make real-time changes to ensure the work is getting done.
Eclipse’s hard work and commitment to our business is helping us grow as many retailers struggle to compete with online retail and changing customer habits. Thank you for all that you have done thus far. Our busy fall period is just starting. We appreciate your partnership and hard work. — VP DC OperationsDownload Now
Which Is a Better Fit for You — Productivity Pay Model or Hourly?
For companies that need to control costs and increase throughput, team-based pay delivers proven advantages. Could TBP be a good fit for your facility? For the greatest success, it’s important to have certain considerations in place.
The productivity pay model is most effective when there is a consistent and forecastable volume of work. If you don’t have consistent work for your people to do, they won’t be able to work faster to earn more and you’ll have to return to an hourly model.
You’ll also need the capability of collecting adequate data to track and measure productivity over time. There are significant differences between an 800-case, medium weight, one item per trailer unload and a 5,000 item count, 15 SKU count breakdown load. It’s important to be able to understand the details around the type of work your people are doing so you can understand productivity.
If these conditions fit your facility, then the productivity pay model could be a great solution for your company.
Eclipse IA’s Track Record of Success
Eclipse IA is on the forefront of productivity pay in the supply chain industry. Our clients count on us to keep their products moving, and their supply chains nimble and quick. We take that responsibility very seriously. With our continued investment in technology, we deliver clear reporting on productivity — and that measurable peace of mind extends to retention and safety.
Eclipse IA recently took over a site of 75 associates and moved the entire warehouse from individual pay to team-based pay. There was a group of high-performers, and our client was concerned about losing them. The transition to TBP was a tremendous success, with these results:
- Up to 35% higher wages with static costs
- 10-20% increases in pay for each site transitioned from individual pay to a team-based pay model
- 20% gain in retention
- 25% improved productivity
The challenges of the supply chain industry will continue to evolve, but all signs indicate that the demands for labor production and recruiting are only going to grow. The most successful companies will turn to innovative labor solutions to help meet increasing demands and customer expectations.
Ready to start implementing a productivity-based pay system at your facility? Our team of experts can guide you through the process, from exploration to implementation. We’ll help you think through your particular situation and provide the answers you need to determine whether the TBP system makes sense for your warehouse.