What is Activity Based Compensation?
Activity Based Compensation is a method of paying the workforce for their value added activities and to focus everyone to talk, think, and act, based on dollars. Hours, percentages of standard, delay time, units per hour, cost per mile, and cost per stop all have their place, but are not easily converted to a dollar equivalent. All measurements with ABC are in dollars. Work elements, delays, breaks, and productivity are all represented by actual dollar values. Our reason for speaking only in dollar references is that dollars are the one common language that is clearly understood from the warehouse employee and truck driver to the CEO and Board of Directors. Employees are focused on completing value added activities, become aware of lost time (extended breaks, talking about last night’s game, etc.), and are rewarded for above average performance.
Couple MSD Engineered Standards with Activity Based Compensation and you empower the workforce in several ways.  They become more ‘self managing’. By having set goals and their pay tied to these goals, individuals will waste less time and they also start bringing up barriers to their productivity that management may not be aware of. The employees weren’t concerned before because they were paid to be at work, not for the work completed.    They will offer productivity suggestions. They have a direct interest in productivity, the more productive they are the higher their paycheck.    Activity Based Compensation helps increase employee retention by providing the employee with the ability to have some control over their workday and earnings. When an employee feels that their input and actions have a direct effect on their paycheck, their morale improves.    The employees focus changes from “How long am I at work today?” to “How much work can I complete today?”
Cost reductions from 10-25% are realistic expectations with the addition of Activity Based Compensation to your current Engineered Labor Standards.

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