Working in teams: How to reward employees?

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Working in teams: How to reward employees?

“Maximizing employee effectiveness”

Author Karlien Hoving

Student Number s2041987

Mail Address k.hoving@student.rug.nl

Master’s Thesis MSc Business Administration

Organizational & Management Control

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Preface

This document is a Master’s Thesis, which is written to complete my Master Program (Organizational & Management Control), at the Faculty of Economics and Business of the University of Groningen. Inspiration for the subject of research was found in the courses I attended in the last year of my study.

In the context of this graduation project, I performed a case study within the company Nefit BV in Deventer (Holland). This report is written to provide insight into the design, execution and results of the research.

I would like to express my thanks to employees of Nefit BV for their participation in the interviews. Hereby I thank in particular Jolanda Brugman and Gezienus Hoving, for their help in planning the interviews and the effective communication.

Lastly, my thanks goes to my supervisor Dr. E.P. Jansen for his contribution and the large amount of useful feedback he provided me with.

Aalden, March 22, 2013

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Summary

Organizations increasingly work with teams, according to Hightower & Sayeed (1996) with the advantage that they have access to a larger pool of expertise and knowledge than individual team members. Within those teams, employees have to work together in the best interest of the organization. This study investigated how team based incentive systems influence the effectiveness of those employees.

Different types of teams are identified, namely parallel teams (are supplement to the regular organizational structure and perform problem solving and improvement oriented tasks), project teams (typically involve a diverse group of knowledge workers) and work teams (identifiable work units that control the processes involved in transforming inputs into outputs).

Incentive systems are necessary to motivate employees to behave in the company’s best interest. Incentive systems provide three benefits, they are informational (effort-directing), motivational (effort-inducing) and help with the recruitment and retention of employees.

Team-rewards foster cooperation, but only provide a direct incentive according to Merchant & Van der Stede (2007) if the individuals to whom the rewards are promised perceive that they can influence the performance on which the rewards are based. Team-based rewards may also encourage ‘free riders’, allowing them to take advantage of the success of team members.

Three group incentive systems are identified, these are partnership schemes (revenue sharing), target-based schemes (forcing contracts, profit sharing and gain sharing) and tournament-based schemes (competitive teams).

When rewarding members of a team, individual performance should not be forgotten. Employees can be rewarded based on individual contributions, in which cooperation with group members must be involved so It does not counteract cooperation.

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Page| 5 Based on this theory the central research question was developed: ”How do team-based incentive

systems influence employee effectiveness?”. This question is supported by two sub questions:

1. “How do incentives based on team performance influence the effectiveness of the employees/

team?”

2. “How do incentives based on individual performance influence the effectiveness of the

employees/team?

Currently, the incentive system of Nefit is profit sharing. When profit is made, employees receive 9% of their annual salary as a reward. The employees think this system is very outdated and does not stimulate to perform extra performance.

In answering the first sub question, the effects of the incentive system of Nefit were analyzed. To sum up, the incentive system of Nefit has the following consequences on the teams and employees:

 Employees think team performance is important

 There is good cooperation among employees

 There is no stimulus for high individual performance

 Free riders do exist

From these findings can be concluded that the incentive system of Nefit has a positive influence on the effectiveness of the teams, but it does not stimulate individual employees.

The findings for the second sub questions show that it is desirable to have some kind of reward based on individual performance. Almost all employees argued that they think a team-based reward system should be combined with a individual reward, as shown by the following quote from one interview: “there should be space for a personal part, which is a motivation to work extra hard, there must be made a difference among employees”.

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1. Introduction

“Teams are increasingly being used as primary work units within organizations” (Guzzo & Dickson, 1996). In suchteams employees work together on a common goal, in the interest of the organization. In the article of Berry (2011), a team is described as a group of individuals who interact interdependently and who are brought together or come together voluntarily to achieve certain outcomes or accomplish particular tasks.

“One advantage of groups is that they have access to a larger pool of expertise and knowledge than individual team members” (Hightower & Sayeed, 1996). As Hansen (2009) mentions in his article, internal collaboration is almost universally viewed as good for an organization. According to his article, managers must know when (and when not) to collaborate.

Once management has decided to work in teams the next difficulty is approaching: How should the

members of the team be rewarded? (Sarin & Mahajan, 2001). According to the article of Zenger &

Marshall (2000) determinants of incentive intensity for individual rewards have been widely examined, but determinants of incentive intensity for group rewards remain unexplored. For that reason this article tries to explore this subject by means of a case study.

Like Lawler & Cohen (1992) mention in their paper, team based organizations require different pay systems than do individual job based organizations. “They call for rewards based on team or unit performance, skill based pay, open communication and participation.”

It appears to be very difficult to shape a right reward system for team performance. For example, in the article of Heneman & Von Hippel (1995) is mentioned that group-based plans may also create the opportunity for low-performing employees to earn the same reward as high performers. According to that article social loafing occurs when employees withdraw their individual efforts, in the hopes that other group members will ensure the group meets its goals. These are examples of unintended consequences of group-based rewards, that managers want to avoid.

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2. Theory

This chapter contains the theoretical framework of the research. In section 2.1 first the concept of working in teams is discussed, why organizations work with teams and different types of teams are discussed. Hereafter, in section 2.2 the subject of incentive systems is introduced. What are incentive systems and what is the purpose of incentive systems? The aim of group incentive systems will be established in section 2.3, together with different systems of team-rewards and factors influencing the effectiveness of team reward systems. In section 2.4 the conceptual model of the research is presented. Afterwards, in section 2.5 the research questions which guide this research are formulated.

2.1 Working in teams

In order to be able to say something about a team incentive system, first it has to be clear what a team is. In this article a definition is used, based on the definition in the article of Berry (2011). “A team is a group of individuals who interact interdependently and who are brought together to achieve certain outcomes or accomplish particular tasks.” Chee & Yoo (2001) mention that the common underlying philosophy of successful teams is to foster cooperation among employees via several features of work practices. One feature is the research topic of this thesis, namely incentive systems for teams.

2.1.1 Why do companies work with teams?

As Hansen (2009) mentions in his article, internal collaboration is almost universally viewed as good for an organization. “One advantage of groups is that they have access to a larger pool of expertise and knowledge than individual team members” (Hightower & Sayeed, 1996). It is mentioned in the article of Irlenbusch & Ruchala (2007) that teamwork is increasingly seen as an appropriate structure to organize various labor environments.

2.1.2 Types of teams

There are different kinds of teams, used for different purposes. In the article of Lawler & Cohen (1992) different approaches to teams are identified:

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Page| 11 out of their regular organizations and placed in separate team structures with different operating procedures.

- Project teams; typically involve a diverse group of knowledge workers such as design engineers, process engineers, programmers and marketing managers. They are brought together to conduct projects for a defined but typically extended period of time. The knowledge workers apply their disparate specialties to develop innovations and fulfill customer requirements (for instance new product development teams, information system teams and new factory design teams). Project teams are assigned unique, uncertain tasks and are expected to innovate.

- Work teams; are responsible for producing a product or providing a service and are self-contained, identifiable work units that control the processes involved in transforming inputs into measurable outputs. Work teams are performing units, in which members report through the team and are responsible for the group’s performance. Work teams are found most frequently in manufacturing settings, but this design is applicable to any situation in which people are interdependent and can be made collectively responsible for a product or service (for instance production teams, assembly teams, and management teams). In order for work team members to take responsibility for the team’s performance, they must feel in control of the work processes and make key decisions about how the work is done.

Those different approaches require for different management of pay practices. Lawler & Cohen (1992) mention that team-based organizations need rewards based on team or unit performance, skill based pay, open communication and participation.

2.2 Incentive Systems

Merchant & Van der Stede (2007) mention that incentive systems tie rewards (and punishments) to the performance evaluations. According to them incentive systems are important because they inform and remind employees as to what result areas are desired and motivate them to achieve and exceed the performance targets.

2.2.1 Purpose of incentives

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1. Informational (effort-directing); the rewards attract employees’ attention and inform or

remind them of the relative importance of the result areas. Employees can direct their efforts to a result area (for instance cost, quality or customer service) that is important for the company.

2. Motivational (effort-inducing); some employees need incentives to exert the extra effort

required to perform tasks well.

3. Recruitment and Retention; some rewards are promised because the organization wants to

improve employee recruitment and retention. Either by offering a package that is comparable or superior to those offered by their competitors or linking payments to an employee’s continued employment.

In this research attention is in particular paid to the effect of incentive systems on the effectiveness of employees, the effect of their actions. Here, both effort-directing and effort-inducing benefits are significant.

2.3 Team Incentive Systems

“Reasons for using team rewards include supporting a team-based structure, fostering cooperation among team members and promoting team productivity and overcoming limitations of larger group-based plans such as gain sharing” (DeMatteo et al., 1998).

According to Merchant & Van der Stede (2007), group incentives will only provide a direct incentive if the individuals to whom the rewards are promised, perceive that they can influence the performance on which the rewards are based to a considerable extent.

Irlenbusch & Ruchala (2007) mention in their article, general wage contracts of teams are not conditioned on individual contributions (as it is the case in piece rate contracts) because contributions can neither be (easily) disentangled nor verified before a court. According to them this is one of the reasons why team members are often rewarded according to the output of the team as a whole. “Another purpose is to encourage cooperative behavior in the sense that individual team members strive for the best outcome of the whole team” (Irlenbusch & Ruchala, 2007).

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Page| 13 groups which exploit positive effects (effective employees / team) while diminishing the possible negative effects (f.i. ‘free riders’).

An intuitive approach to reduce the severity of free-riding incentives in teams is to promise relative rewards to the best individual performers in the team (Heneman & Von Hippel, 1995). These are also called ‘tournaments’. “The idea is that the additional competition for rewards between team members induces them to exert more effort which would align the individual interests with the responsibility for the common good” (Irlenbusch & Ruchala, 2007).

2.3.1 Partnership Schemes

According to Nalbantian & Schotter (1997) egalitarian partnership schemes, comparable to the voluntary contribution mechanisms of public goods theory, represent the archetypical incentive mechanism for which free-riding is a dominant strategy. “The voluntary contribution mechanism allows economic agents to make a ‘continuous’ choice, in terms of level of contributions to the group good and thus choose the degree of cooperation at a continuous level” (Isaac & Walker, 1988). Here exists the threat of free-riders in a group, who take an advantage of the success of the other team members.

Revenue Sharing

As Nalbantian & Schotter (1997) mention in their article, with revenue sharing all revenue generated by the firm is shared equally and a worker’s final payoff is his revenue share minus his cost of effort.

2.3.2 Target-based Schemes

Target-based schemes are founded by Holmstrom (1982, in Nalbantian & Schotter, 1997) as a solution to the shirking dilemma of partnership schemes. There are three possible solutions, forcing contracts, profit sharing and gain sharing.

Forcing Contracts

As Nalbantian & Schotter (1997) described in their article, forcing contracts contain rewards, but also punishments in case of bad performance. “If the target revenue is achieved the workers share in all of the revenue generated. While if the firm’s revenue falls short of the target each worker is paid a relatively low penalty wage.”

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Page| 14 Profit sharing is according to Nalbantian & Schotter (1997) a forcing contract scheme with a lower target and a penalty wage of zero. “Payments are based on a measure of organizational performance (profits) and the payments do not become part of the base salary” (Noe et al., 2010). According to that article, it may encourage employees to think more like owners, taking a broad view of what needs to be done to make the organization more effective. Increased cooperation and citizenship are expected. However, performance motivation is likely to change very little under profit sharing, since most employees are unlikely to see a strong connection between what they do and what they earn under profit sharing. Besides, the profit sharing plans are deferred, rarely are the profits paid to employees during the current time period.

Gain Sharing

Gain sharing is according to Nalbantian & Schotter (1997) a forcing contract with a target based on previous performance. “Gain sharing offers a means of sharing productivity gains with employees” (Noe et al., 2010). Here the programs measure group performance, which is likely to be seen as more controllable by employees, thus it can motivate employees. Furthermore, the payouts are distributed more frequently and not deferred.

2.3.4 Tournament-Based Schemes

“In contrast to target-based schemes tournaments make the payoffs of agents or groups of agents contingent upon relative performance” (Nalbantian & Schotter, 1997). Competitive teams is a type of tournament-based schemes.

Competitive Teams

“With competitive teams the firm is divided into teams and these teams compete for prices. The team producing the most output gets the big prize, while the loser gets the small prize. It relies on competition to motivate the workers functioning under it” (Nalbantian & Schotter, 1997). In the article is found that it is competition between work units performing the same task is one effective way to increase group effort.

2.3.5 Individual Performance in a Team

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Page| 15 the other hand, high performers in such a team may give less than their best, because the group-based pay plans do not recognize their individual accomplishments relative to the free riders. Here, it may be suggested that individual performance should not be forgotten when employees work in a team.

According to Heneman & Von Hippel (1995) such an approach requires the organization to use team-based merit pay, which rewards individual contributions to the team-either alone or in conjunction with the group-based rewards. Team-based merit pay provides rewards on the basis of individual contributions to the team. These reward plans directly reward individuals for their contributions to the group, including their cooperation with other group members, so it does not counteract cooperation.

Heneman & Von Hippel (1995) developed a three-steps-process which can help an organization establish a team-based merit pay plan to reward individual contributions to the team (see figure 2.1). First, a team mental model must be formed, which outlines how group members should operate in order to accomplish group goals. This is necessary to work effectively to link individual behaviors to group goals. This mental model is influenced by the group’s capabilities, business plans and the length of the membership.

Then performance should be defined and evaluated. Individual performance should be defined consistent with the team mental model. When team members participate in the process of defining team-oriented performance, they gain a better understanding of the process and a sense of ‘ownership’, which in turn makes them more committed to meeting the behavioral standards of the team mental model. Multiple sources can be used when evaluating performance, for example ratings of job incumbents, team-leaders and peers. When using multiple sources, the team leaders should coordinate the process by gathering the ratings, weighting the information, and providing feedback, including pay increase decisions, to the job incumbent. In the end pay increases should be provided to those individuals who contribute the most to the team.

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2.4 Factors Influencing the Effectiveness of Team Reward Systems

DeMatteo et al. (1998) found four sets of variables related to the effectiveness of team-based rewards. According to them, depending on the goals of the organization, the effectiveness of team-based rewards may be evaluated against a combination of individual-, group- and organizational-level criteria. Here, with an effective team-based reward is meant that it positively influences the productivity of the team/employees. The characteristics are displayed in figure 2.2.

2.4.1 Reward Characteristics

According to the article of DeMatteo et al. (1998) pay can motivate individuals, but in many cases (especially in team-based organizations) it does not. They mention that financial incentives can increase performance only when the system is designed properly. Therefore, characteristics of the reward system can be expected to influence the effectiveness of team-based rewards. Key features of team reward systems include the following:

- Reward size; reward size is correlated with pay satisfaction and motivation. According to

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Page| 17 group performance will be associated with higher motivation and group performance. With larger amounts of pay contingent on group performance, it is in the group’s interest to work cooperatively together to achieve higher bonuses. DeMatteo et al. (1998) also state that Zenger & Marshall (1995) and Thornberg (1992) found that larger rewards resulted in greater performance improvements.

However, team-based organizations may provide more nonmonetary rewards to team members and therefore require fewer financial incentives to be effective. In addition nonmonetary, recognition-based rewards (f.i. feedback) may be effective in team-based environments.

- Frequency of payout; “The stronger and more consistent the link between pay and

performance, the more motivational the rewards” (Goodman & Dean, 1982 in DeMatteo et al., 1998). Consequently, it is proposed that rewards should be distributed to group members frequently enough that the desired behaviors are reinforced.

- Reward allocation procedures; this is the allocation rule used to distribute the rewards.

According to DeMatteo et al. (1998), Leventhal et al. (1976) identified two distinct allocation rules that may be used to distribute rewards:

1. the equality norm; dividing the team’s reward equally regardless of differential contribution among members. Here, social harmony is maintained and cohesion and solidarity are fostered.

2. the equity norm; distributing the team’s reward proportional to the contributions of the individuals, which maxims team performance.

2.4.2 Organizational Characteristics

Several features of organizations figure prominently in the design and potential effectiveness of team-based reward systems (DeMatteo et al., 1998). These are:

- Organizational culture; organizational culture is important because it provides

employees a shared understanding of the behaviors that will be valued by the organization. It could be argued that certain cultural values tend to support the use of team rewards. Most obvious the extent to which the culture of an organization is collective versus individualistic is likely to determine how receptive employees are to reward practices based on team rather than individual performance.

- Congruence among organizational subsystems; the fit between compensation strategy

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Page| 18 that congruence among subsystems within the firm may also be critical. When incongruence exists among multiple systems within organizations conflict may be created in which organizational members are unclear as to the desired behaviors.

- Structural characteristics of the firm at the time of introduction; for the use of

team-based incentive systems a requirement is of course the existence of a team-team-based organizational structure. Another key structure variable is the size of the organization, since small size organizations may be able to introduce and monitor team reward systems more effectively than large firms. Success may also depend on other organizational interventions introduced concurrently with team rewards (f.i. TQM) which may support or cripple the team reward program.

2.4.3 Team characteristics

Characteristics of the work group are also believed to impact the effectiveness of team reward systems. These characteristics are:

- Task interdependence; task interdependence refers to the degree of task-driven

interaction among group members. As interdependence among group members increases, contributions of individuals become more intertwined, making it difficult to separate accomplishments of individual team members. As a result the use of team-based incentives may be more appropriate, since isolating the individuals is difficult. - Between- Team Interdependence; this is the extent to which team performance is

contingent on the performance of other teams in the organization or the level of integration across teams. Team-based rewards are more likely to be successful when the work of the team is relatively independent of other teams for two reasons:

1. When work is designed so that teams must cooperate, rewards that reinforce individual team performance may increase competitive behavior across teams and decrease between-team cooperation. A team may become so focused on achieving its own goals that, rather than working with other teams, it may compete against other teams.

2. Between-team interdependence may team team-level performance measurement difficult because the team’s performance may be a product of the influence of members from many teams.

For these reasons, team-based rewards will be most effective when the work of teams is relatively independent.

- Team size; As group size increases, individual performance is further removed from the

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Page| 19 attaching incentives to the performance of smaller teams may increase perceptions of individual control over performance and hence, rewards.

- Stage of group development; groups exhibit developmental phases during which

members’ relationships and collective effectiveness evolve over time. If so, the effectiveness of a team reward system may depend on these developmental factors. - Team type; it has been proposed that the effectiveness of team-based rewards will be

maximized when the pay and reward systems used are aligned with the team type. Team incentives are more likely to be effective for teams with clear measureable output or goals such as project or self-managing work teams. Similarly, team incentives may be more effective for teams with permanent assignments and/or teams whose work will continue for longer periods of time. In contrast the utility of group incentives may decrease in teams with short life spans, as in parallel teams. Also team rewards may be difficult to administer effectively in teams with frequent turnover. Research and development teams have also achieved favorable results following the implementation of team-based rewards. In general, the more a team is self-contained, has stable membership, and has clear, measurable goals, the more likely team-based rewards will be effective.

- Team composition; A key feature of composition, heterogeneity has been linked with

group performance. Team heterogeneity is important to the effectiveness of team rewards because of its potential connection with perceived inequity in teams. To the extent that members differ on performance-relevant characteristics such as ability, the likelihood of differential individual contributions increases, and with it, the chance that some members will see their contributions as disproportionate, leading to lower levels of motivation and team performance.

- Measurability of the team performance; Utilizing team-based rather than individually

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Page| 20 2.4.4 Individual Differences

Certain characteristics of individuals may enhance the attractiveness of group-based incentives thus influencing their effectiveness. While many individual differences could account for reactions to group-based pay plans, three characteristics that may be paramount include:

- Ability; Group members’ perceptions of their ability and/or contributions to the team’s

output may be a critical variable in understanding differential reactions to team-based rewards. Allocating pay based on team performance may provoke perceptions of inequity, because high ability team members may perceive that they are carrying the weight of less able group members while receiving equivalent rewards.

- Need for achievement; Need for achievement reflects both a motive pattern and value or

preference for certain types of tasks. Individuals with a high need for achievement are characterized by a competitive disposition and contest orientations to ward reward allocation. These characteristics have implications for reactions to team bonuses, where individual contributions may be diffused and expectancies less clear and more complex because need for achievement is associated with a competitive, contest orientation there may be dysfunctional consequences as the number of team members who are high on need for achievement increases within a team (f.i. they are less likely to share information and provide each other guidance). This lack of cooperative behavior decreases overall team performance. Team-based rewards are less effective in environments in which employees tend to have high levels of achievement orientation. - Individualism-collectivism; Collectivism is characterized by an orientation towards group

goals, cooperation, intense attachment to and identification with the group and concern for the group whereas individualist prefer to work alone and tend to value individual goals and autonomy. Due to their divergent orientations, team members may differ in their satisfactions with team-based incentives, with collectivists showing more satisfaction with team-based plan than individualists.

2.5 Implementation of a Bonus System

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Page| 21 1. Defining performance dimensions; it is important to clarify what the dimensions are of which

the performance must be measured (for instance profitability, customer focus or quality), so employees know what is important. If these dimensions do not correspond with the objectives of the organization, the employees are motivated to do wrong things.

2. Measuring performance; to be able to measure the performance, grades must be allocated

to the performances. Both financial (ROI, net profit) and non-financial measures (market share, customer satisfaction) are attached to rewards.

3. Setting performance targets; for every performance dimension an objective or standard must be set. These objectives influence the behavior in two ways. First, they stimulate a certain action and motivate to achieve goals. Second, these objectives make it possible for employees to measure and criticize their own performance.

4. Providing rewards (or punishments); Rewards can be divided in intrinsic and extrinsic motivation. With extrinsic rewards the employee receives something from the organization, like a pay increase, promotion or development opportunities. Intrinsic rewards like recognition originate in the employee, because he achieves the desired results

2.6 Conceptual Model

As mentioned above, incentive systems are required for the alignment of employees’ natural self-interest with the organization’s objectives. In figure 2.3 the conceptual model of the research is displayed.

There are two main concepts in the model, the team-based reward system and the effectiveness of the team/employees. As Heneman & Von Hippel (1995) mentioned in their article, individual performance must not be forgotten when employees work in a team, that is why individual rewards are taken into account. Therefore, team-based incentive systems should consist of incentives based

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Page| 22 on team performance and incentives based on individual performance. In the theory section is showed that there are variables that (positively or negatively) influence the effectiveness of the team-based reward system. Therefore, these variables are also shown in the conceptual model.

2.7 Research Questions

The aim of this research is to find out what should determine the method of group rewards and how these methods affect employee effectiveness. Therefore the following central research question is prepared: “How do team-based incentive systems influence employee effectiveness?”

To be able to answer this central research question, sub questions must be developed. Each sub question contains a concept from the central research question. The answers of the sub questions are used to compose a final answer on the central research question. On the basis of the theory above, the central research question and the conceptual model, the following sub questions are formulated:

1. “How do incentives based on team performance influence the effectiveness of the employees/ team?”

By answering this question attention will be paid to how incentives based on team performance influence the effectiveness of the employees in a team, or the effectiveness of the team as a whole. The focus shall be effect of the incentive system on the motivation of employees, their cooperation, and their knowledge about important result areas. Furthermore it will be examined if the incentive system prevents the so called ‘free riders’ and whether all team members know what is expected of them. Finally it will be explored if team-based incentive systems influence the effectiveness of employees in different types of teams the same way.

2. “How do incentives based on individual performance influence the effectiveness of the employees/team?”

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3. Research Method

A lot of research about rewarding employees is performed. However, research about rewarding employees has mainly focused on individual performance. About which reward methods in teams maximizes effectiveness of employees (and organizational performance), a lot is still unknown.

3.1 Data Collection

First, literature was used to define the research subjects, the conceptual model and the research questions. After this literature review it has been decided to perform a case study. A case study is according to Yin (2002) in Blumberg et al. (2008) an empirical inquiry that investigates a contemporary phenomenon within its real-life context, when the boundaries between phenomenon and context are not clearly evident and in which multiple sources of evidence are used.

According to Swanborn (2010), when more information is wanted about what (groups of) people perceive and decide in relation to their interaction during a certain period, a case study seems to be the optimal strategy. The aim of this research is to add something new to existing literature. There was not enough information available in academic articles to achieve that objective. Furthermore, a case study was chosen as previous experience with taking interviews within a large company was available. Through the case study it was possible to combine existing literature, with regard to the subject of team rewards, with business practice. By means of this case study it is possible to compare the perceptions of employees with the literature. Besides, a case study is according to Blumberg et al. (2008) especially appropriate for answering ‘Why?’ and ‘How?’ questions. Both the central research question and the two sub questions are ‘How?’ questions.

For this case study, the elements of analysis are the effectiveness of a team-based incentive system and thereby the effectivity of employees working in teams.

3.2 The Company

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Page| 24 Nefit has become, since the introduction of the first condensing central heating boiler in 1980, the most well-known central heating brand. The history of the company begins over hundred years ago. In table 3.1 a timeline is presented with the history of Nefit BV.

Year Activities

1897 Automatic Screw-Works NV (A.S.W.) was founded in Nijmegen (Holland). The company produced brass parts for the sanitary industry, gas taps and water taps.

1916 Mr. L. Stokvis was commissioner and stimulated to make more complex products.

1932 A.S.W. introduced the first Fasto heater.

1948 Nefit arises with Marshall-help. The name Nefit was derived from ‘Nederlands-Amerikaanse Fittingfabriek’.

1965 The American company ‘Crane’ was the owner and a standing cast iron central heating boiler was introduced.

1967 A property was bought in Buinen (Holland). A.S.W. starts tin coating heat exchangers and assembling heaters. Later on central heating boilers were produced too.

1979 There was a management buy-out and the company name was Nefit again. There were new shareholders and so Nefit originated. The activities were continued by the name Fasto BV.

1980 In response to the oil crisis Nefit introduced the first condensing boiler, called the Nefit Turbo. As being the first producer, Nefit received in 1981 the Giveg high-efficiency label.

1991 The government introduced a subsidy program for condensing boilers. To focus on this market, Nefit and Fasto became one company in 1992: Nefit Fasto BV. Until then Nefit and Fasto were part of the same holding, but still two different companies.

1993/ 1994 The shares of Nefit Fasto were sold to Buderus Heiztechnik GmbH. Due to this strategic alliance, the export increased up to more than 50% of the total turnover.

1997 Nefit Fasto celebrated the centenary.

2004 Buderus was taken over by the Robert Bosch Group. From here, the company Bosch Thermotechnik originated. Since then, Nefit BV is part of Bosch Thermotechnik.

In 1980 Nefit introduced the first condensing boiler and is since then market leader with 3 million sold appliances. For thirty years is Nefit the bestselling brand. Since the acquisition by the Robert Bosch Group in 2004, Nefit is highly recommended worldwide, through the scope of the international concern.

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Page| 25 requirements as in the automotive industry are applied, and all boilers are extensively tested. The individual test report comes along with each appliance inside the box.

The R&D center is also located in Deventer. Here, development and modification activities take place to create sustainable solutions for all over Europe. Specialist explore and develop new systems and heath concepts.

Finally, commercial activities like marketing, pre sales, sales, after sales and training take place in Deventer. Nefit intensively cooperates with the best heating specialists of the country. Yearly thousands of installers visit the training center for product education and knowledge exchange. In their daily work they can trust on extensive support from the Nefit organization.

The organizational structure of Nefit is a functional structure, with the core activities are R&D, Sales and Production. A functional structure, according to Noe et al. (2010) employs a functional departmentalization scheme with relatively high levels of centralization. According to them high levels of centralization tends to go naturally with functional departmentalization because individual units in the structure are so specialized that members of the unit may have a weak conceptualization of the overall organization mission. Thus, they tend to identify with their department and cannot always be relied on to make decisions that are in the best interests of the organization as a whole.

In appendix I you can find an organization chart of Nefit BV. Nefit BV was chosen, because the required access could be obtained. Besides, it is a large business with different departments, so several cross-functional departments and employees could be interviewed.

3.3 The Interviews

Through the case study, two sources of evidence were used, namely interviews and observation. For collecting information, a semi-structured interview was used. The interviews were scheduled with fifteen employees. Through those interviews the relationship between the incentive system and the effectivity of employees working in teams was studied.

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Page| 26 departments). Finally, employees were selected on the basis of the extent to which they can influence the performance of the company.

For the interviews two kinds of questionnaires were used, which can be found in appendix II of this thesis. The first questionnaire was used for managers, the second was used for employees. The questionnaires are based on the theory of chapter 2. The kind of questions that were asked are open questions. The interviewees were given the opportunity to provide an answer with a lot of useful information.

The interviews were performed in Dutch. During the interviews the answers given by the interviewees were written down. Afterwards, these interviews elaborated and translated on the computer. The interviews were sent to the interviewees, in order to get feedback or approval from them. After this, the information obtained from the interviews could be analyzed and used in this research.

3.4 Structure of the Research

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4. Results

Interviews are performed at Nefit BV. Here, fifteen employees are interviewed. These are employees of various departments and with different functions within the company. Two different questionnaires were used, one for managers and one for employees, these can be found in appendix II. In this section the results of the interviews performed at Nefit are presented. These results are used to discuss the sub questions.

4.1 Working with Teams

During the interviews, the employees were asked what they meant by a good team. Besides they were asked what they think an effective team is. In general the employees think a good team is a team in which everybody knows the objectives and cooperates to achieve the objectives. “A good working team is a team that knows what the objectives are, and work together to achieve them. An effective team is a team that achieves those objectives”. Employees look beyond their own tasks and complement each other. Like one interviewee said: “a good team is when everyone knows their tasks, does not work alone, but together, so take over tasks. A team is effective when you all do the same, interact and cooperate”. Others add that a good team is independent, members should take responsibility, ask for help on time, improve continuously, and are capable to perform different roles and tasks. “A good team is when every member takes responsibility, not just for their own work, and pays attention to each other, not passing away responsibilities.” Also agreements and objectives are important for an effective team. “In an effective team agreements are established in advance. One keeps the agreements and deadlines which have to be accomplished as a team and everything runs smoothly”.

Within Nefit the objectives are clear, they are discussed within every department. “Every new year the new strategy is discussed with the new objectives. Also job evaluations take place in which the performance and new objectives are stipulated together, based on the business strategy and using functional profiles.”. This indicates that the objectives are clear to the employees.

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Page| 28 The employees work in different types of teams. The types of teams employees work in are work teams (for instance production) and project teams (for example for the development of new devices).

4.2 Incentive Systems

At the moment there is an incentive system based on profit sharing. When profit is made, all employees receive a reward. This reward is 9% of their annual salary. Managers above a certain salary level, do not receive this reward. Their incentive system is based on personal and company performance, according to Bosch standards.

The reward based on profit sharing is always paid when the company makes profit. For example, when there is a target profit of 10 million and only 2 million is achieved, even then all employees receive the 9% reward. The current system at Nefit is outdated and does not stimulate to perform extra effort. As one employee said: “this system is old-fashioned, the bonus is already exercised if profit is made. Even when the business is bad, there is still a payment”.

Although, when team leaders think one of their employees performed exceptionally well, they can request for a special bonus. Management decides in the end whether this request is conceded. Moreover, the team leaders of the production department try to stimulate their employees to be involved. “At the moment there is a reward for ideas. If for example time is saved by an idea of an employee they can receive a percentage of this saving. Also other ideas can yield a bonus. Money is important so this kind of reward motivates”. There is a special box where employees can hand in those ideas. These ideas are reviewed, and good ideas (for example money-saving ideas) are rewarded with a monetary reward.

For employees working in the sales department there is a bonus system. Their bonus is composed of different elements. “The bonus of salesman consists of market share, customer growth and number of visits.”

4.2.1 Individual Performance in a Team

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Page| 29 extra work, since this is not compensated. An employee of R&D mentioned: “The current reward system does not stimulate extra performance, you always receive a part of the profit. It depends on the performance of the company”. In the engineering department the performance of individual employees is discussed every two weeks. “During this meeting the progress is discussed, using a to-do-list. The objectives are known and changes are written down.”

It can be concluded that currently attention is paid to individual performance of team members. The performance of individual employees is discussed. However, no rewards are tied to the performance.

4.2.2 Use of Performance Information

The performance information is used for performance appraisals. Supervisors of production teams use information of team leaders and information of the Balanced Scorecard. There are several information billboards which display the performance on the key performance indicators. Logistics use information about supply reliability, deviations and errors, in order to take actions. So, team performance is discussed within Nefit.

4.3 Factors Influencing the Effectiveness of Team Reward Systems

The four sets of variables which are related to the effectiveness of team-based rewards according to DeMatteo et al. (1998) were Reward Characteristics, Organizational Characteristics, Team Characteristics and Individual Differences. Here, the results relating to these variables are described.

Reward characteristics include the size of reward, frequency of payout and reward allocation procedures. For Nefit the size of the reward is not determined in the form of a fixed amount. When the company makes profit, the percentage employees receive is fixed (9% of their annual salary). This reward is distributed once a year in March or April. Here, the link between the performance of employees and the reward is not very strong, meaning that the rewards are not very motivating, as mentioned in chapter 2.

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Page| 30 The rewards are distributed according to the equality norm, the reward is equally divided regardless of differential contributions. Currently, employees are not rewarded according to their individual or team performance. As an employee told: “I do miss a stimulus. At the moment there are just agreements without an incentive to stick to them”. As mentioned in chapter 2, according to DeMatteo et al. (1998) distributing according to the equality norm has as a result that social harmony is maintained and cohesion and solidarity are fostered.

4.3.2 Organizational Characteristics

The prevailing culture of Nefit is collective. The overall culture is focused on cooperation and employees think this cooperative orientation is necessary. In particular for project teams, in which all members depend on each other. “We have work together, this is necessary. I want it to, because I am a team player.” Another interviewee described: “The culture is more towards cooperation. The work place as well. Employees are not divided by function anymore, one employee of every function is at one table. This way they can cooperate better and immerse themselves in each other.”

Exceptions are the sales, HR and production departments, where the employees are more individualistic oriented. A worker of the HR department mentioned: “we work quite independently, but we do know what we want to achieve together. We have our own piece of work though.” Employees of the sales department are also more independent. They have their region in which they work, for which they are accountable. Therefore they are more individually focused. “Employees in the production department are more on their own. They have their tasks and they perform those tasks, the current production system does not allow to help each other.”

The organizational structure of Nefit is functional. The employees perform their own sets of tasks. This structure is usable in a large firm like Nefit, where 700 workers are employed.

4.3.3 Team Characteristics

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Page| 31 Besides, sales is also dependent on employees of other teams. They are dependent on logistics for instance, for on-time delivery. And they rely on the production department for good quality products. Many other teams are also very dependent on the performance of other teams. For instance production is dependent on the engineering department for right materials and equipment. Besides they need logistics for the storage of the produced boilers. So the between-team interdependence is also high, making team-based rewards difficult.

The size of the teams is different. There are teams consisting of 60 people (production teams), but also teams composed of 4 employees (engineering). This means that the line of sight between pay and performance is less clear for production staff than for the other employees, who have a higher perception of individual control over the performance and hence, rewards.

There is a small degree of heterogeneity within the teams, in the sense of different backgrounds and experience. “There are for instance immigrants with a different background. There is also a difference in intelligence, resulting in differences in how flexible people are and whether they think along.” Generally education levels are quite similar within a team. As one employee said: “we have different interests and background and thereby knowledge n different areas. But we all have the same basis”. Therefore there is just a small variation in abilities of the employees, resulting in the fact that the likelihood of differential individual contributions decreases. As mentioned in the theory of section 2.4.3, the chance that some members will see their contributions as disproportionate also decreases, leading to higher levels of motivation and team performance.

Most teams think that their performance can be measured properly. Every team is familiar with the key performance indicators of the company and has some kind of documentation with information about objectives. For example in the production department has a Balanced Scorecard which informs them what to do and what is achieved. The performance of projects can be measured very well. “There is documentation about what you should do, for example the quality and time.” For the HR team it the performance is not measurable, only projects which are included in the BSC. In the production department a lot of elements can be measured, like the amounts produced or errors that have been made. For Nefit it is possible to utilize team-based rewards, since it turns out that the performance of the teams can be evaluated well.

4.3.4 Individual Characteristics

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Page| 32 “when I do something, I want to do it well, properly. The most important is to achieve the desired result. Always help when someone else does not succeeds”. One employee mentions that unknowingly there is little competition in which they arouse each other.

The majority does not always want to perform better than their colleagues and thinks team performance is more important than individual performance, especially for project teams. “I think individual performance is important for the team performance. For the bonus individual performance is important, because someone else can destroy the team performance.” Another employee described it as follows: “I think team performance is more important, since it contributes to the performance of the company. Individually you contribute to the team. But if you have to choose between your own work or team work, and team work is necessary, team work comes first.” There are however some exceptions as shown by the following quote of an employee: “in the department more than half of the team is performing just as they should. In my opinion they may be motivated more.”

4.4 Effectiveness of the Employees and their Teams

In section 2.6 sub questions were developed, which all contain a concept from the central research question. The answers on those sub questions are shown in this section. In chapter 5, these answers will be used to compose a final answer on the central research question.

4.4.1 Team-Based Incentives and Effectiveness

The first sub question mentioned in chapter 2.6 was as follows: ‘How do incentives based on team

performance influence the effectiveness of the employees/team?’. In this subsection that question

will be answered.

At the moment Nefit has an incentive system based on profit sharing. This means that at the moment, only the performance of the company as a whole is important for the rewards of the employees. The interviews show that overall, the employees of Nefit thought that team performance is more important than individual performance, because that contributes to the performance of the company.

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Page| 33 However, cooperation within the teams is good. As mentioned before, the employees think team performance is important and are therefore willing to help each other.

Furthermore, the result areas which are important for Nefit (Key Performance Indicators) are well-known by the employees interviewed. Every department has his own way of showing the KPI’s to the employees. One interviewee mentioned: “In some departments the KPI’s are discussed during the performance appraisal, but employees are not judged on it”. For the employees in production the KPI’s are mentioned in the performance appraisal, but they are also visible on information boards in the production area. On these boards they can see for themselves how well they perform.

One employee mentioned are some ‘free riders’, at the moment. “Those are always there. One achieves basic performance, another performs something extra. No rewards are attached, everyone receives the same reward”. This indicates that at the moment the incentive system based on team performance does not prevent for free riders, since individual performances is not rewarded.

The experiences about knowing what is expected from them differs across employees. One employee mentioned that the job description could be more clearly. “For example with a new system, responsibilities and authorities of every employee must be made more clear”. Others think that the expectations are clear. “For every project a project definition is prepared and a project process is made. The tasks are clear and are allocated to a department, which allocates it to a person.”

Both in work teams (production/logistics) and project teams (R&D) there is good cooperation. However, there is a difference. It appears that in production free riders exists, but they are not in project teams. One employee said: “within project teams there are no free riders. Everyone wants to make sure that they contribute to the result”. This difference indicates that the current incentive system does not have the same effect on the two types of teams.

To sum up, the current profit sharing system of Nefit has the following effects on the teams and employees:

 Employees think team performance is most important

 Good cooperation exists among employees

 There is no stimulus for high individual performance

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Page| 34 From these findings can be concluded that the incentive system of Nefit has a positive influence on the effectiveness of the teams, but it does not stimulate individual employees.

4.4.2 Incentives Based on Individual Performance and Effectiveness

The second sub question mentioned in chapter 2.6 was as follows: ‘How do incentives based on

individual performance influence the effectiveness of the employees/ teams?’. In this subsection that

question will be analyzed.

At the moment there is no incentive system within Nefit based on individual performance. As virtually all employees indicated, this kind of system is not very motivating. Not every employee thinks their individual performance is rewarded enough, an employee argued that he does not think his individual performance is rewarded enough, because the pay and development is fixed. Extra work is not rewarded, which is not motivating.

There is only an opportunity to earn a reward when employees deliver extraordinary performance (performing tasks outside function area). Their supervisor can propose this to the management, which decides whether the reward is provided.

However, in the production department, employees can receive a monetary reward for ideas. For this reward they have to come up with an idea that obviously saves time and / or money. As one interviewee said: “Money is important, so this reward motivates”.

This information shows that it is desirable to have some kind of reward based on individual performance. Almost all employees argued that they think a team-based reward system should be combined with a individual reward, as shown by the following quote from one interview: “there should be space for a personal part, which is a motivation to work extra hard, there must be made a difference among employees”.

4.5 A new Incentive System

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Page| 35 With the personal objective within the team, it is impossible to benefit from the performance of co-workers. A manager mentioned: “employees must be able to distinguish themselves. The philosophy behind the new system is that the employees will perform extra effort to perform their own tasks well.” Another employee added that it is very important that the system is explained and well-interpreted by the supervisors. With connecting the bonus to cooperation, better cooperation to realize the department objectives is fostered. In table 4.1 the new incentive system of Nefit is shown.

CPrP captures in total 65% of the whole bonus. Depending on the profit a bonus factor is determined for whole Bosch. Several factors that elements are important here for the R&D departments, production department and staff departments:

 How well is Bosch (RB) performing (whole company)?

 How well is the division ‘Thermotechnik’ (TT) performing?

 How well is the division Wall hanging boilers (WB) performing?

 How is Nefit (TTNL) performing?

To every element a percentage is assigned (up to a total of 65%). For example if Bosch performs well, employees receive a bonus factor for that performance. But if simultaneously the division ‘Thermotechnik’ performs bad, one will receive no bonus factor here.

Sales already had an incentive system, but is included in this table. Fifteen percent of their new bonus is based on the bonus system they already had.

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Page| 36 PPrP captures 35% of the whole bonus and consists of three elements:

1. Department share: based on how well the department performs. For example total efficiency, quality and output.

2. Personal Share: for instance based on the number of errors and presence.

3. Overall Personal Performance Share: for example based on attitude and behavior.

A manager mentioned: “the objectives must be SMART. If they are, the system will work for every team. The system cannot be the same for every department. For example in a department where the results can be less influenced by individual workers, the part of the bonus which is based on personal performance must be changed. The part of the bonus based on departmental performance should be increased and the percentage based on individual performance reduced.”

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5. Discussion and Recommendations

In this chapter the results of the research are discussed, and some recommendations are made. At the end of this chapter, the central research question is answered.

5.1 Incentive Systems

The current incentive system of Nefit (profit sharing) does not stimulate the employees to perform extra effort. So, it is obvious that this has to change. For instance, like Nefit is planning to, introduce a new incentive system which stimulates extra effort. This extra motivation can be realized, since their reward is not only dependent on the company performance. The company (Bosch) or division (Nefit) might perform not so well, but if their team (department) does perform, they still gain a reward. Besides, this reward can even be higher when they perform well themselves.

One part of the new incentive system Nefit is working on, is based on company performance which captures in total 65% of the whole bonus. The height of the bonus depends on the performance of Bosch, the performance of the division ‘Thermotechnik’, the performance of the ‘Wall hanging boilers division’, and the performance of Nefit itself. In this new system rewards (and when necessary punishments) are thus tied to performance evaluations. This way, employees are motivated to perform well. Nefit has to align their objectives with the goals of Bosch, so that their performance is beneficial for Nefit and for the organization as a whole.

5.2 Team Incentive Systems

For employees working in teams it is also important to be rewarded as a team, in order to stimulate cooperation and effectiveness. Nefit is highly focused on team work. Also the employees are very collectively oriented and think team performance is more important than individual performance. Nefit included the rewards for team performance in the Personal performance Related Pay. The team bonus depends for example on total efficiency, quality and output of the team. Nefit should make clear objectives for the teams and evaluate the results on which the rewards are based. Besides, they have to ensure that the teams are able to influence the performance they are judged on.

5.3 Individual Performance in a Team

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Page| 38 rewards based on individual performance are also included in the Personal performance Related Pay. Personal performance is rated on basis of personal errors, and for instance presence. These are factors that employees can influence themselves, which is very important for their motivation. Nefit must make sure that the rewards are based on contributions of employees to the team, so cooperation is not at risk.

For Nefit it would be helpful to follow the three-steps-process of Heneman & Von Hippel (1995). First a team mental model has to be formed, whereby employees know how to operate to reach the team objectives. If workers decide to do extra effort then, their work is at least effectively.

Then performance has to be defined and evaluated. Defining is necessary, so that employees know where they are assessed on. For evaluation multiple sources can be used, to get the most reliable performance information. Finally, rewards should be assigned to those employees that contributed most to the team.

5.4 Factors Influencing the Effectiveness of Team Reward Systems

Other factors that could influence the effectiveness of Team Reward Systems were also discussed, in this section some recommendations with regard to those factors are made.

At the moment, employees of Nefit receive rewards independent of their performance. Their reward only depends on the performance of the company. They indicate themselves that this is not motivating to perform extra effort. For rewards to be motivating, rewards the size of the rewards must be high enough. Since almost every employee of Nefit is working in a team, also nonmonetary rewards (recognition-based rewards like feedback) are according to DeMatteo et al. (1998) motivating for employees. Therefore, feedback should be on regularly basis, where the supervisors mention less good, but particularly the good performance and show their appreciation to the employees.

Working in teams: How to reward employees?