Alum Tubes Ltd (ATL) manufactures aluminium cylinders that are used in a variety of products, such as scuba diving equipment, oxy welding equipment, and fire extinguishers. The company’s executives have been moving towards sustainable practices. A rewards system is being trailed to encourage cost savings, to motivate efficiency, and to support ATL its current progress through the Efficiency phase of sustainability.
The board (including the CEO) has decided to embrace sustainable practices and once ATL has achieved the successful implementation of the Efficiency sustainability phase, the goal is for it to move from this Efficiency phase to the Strategic Proactive phase of sustainability. To provide senior management’s support for this change in focus, they have changed the mission statement to the following:
To provide an intergeneration commitment to its stakeholders through the adoption of Sustainable strategies within its value chain
Information about Trial process
There are four teams in the plant, and each team has been given three quarterly cost-saving performance targets for (1) manufacturing cycle time, (2) material usage and (3) production output. Two of the work teams are organised sequentially, that is, the output of Team Scuba Assembly becomes the input for Team Scuba Finishing. There are two other finishing teams; Team Oxy Finishing and Team Fire Finishing both providing the finishing manufacturing process for their product independently of the other teams. However, Team Scuba Finishing, Team Oxy Finishing, and Team Fire Finishing do share some equipment.
The CEO made the decision not to include Team Fire Finishing in the trial cost efficiency performance-related pay scheme. The reason for this omission of Team Fire Finishing was due to it just introducing some new production technology and therefore management believes the team is facing a steep learning curve at present with this new technology and the lack of knowledge and experience would make it difficult for Team Fire Finishing to achieve any cost efficiency performance targets at this stage.
The trial cost-saving rewards system
In late 2016, ATL introduced a cost-saving performance-related pay system for January to the December 2017 year as a trial in their smallest manufacturing plant in Salisbury (a suburb of Brisbane). Each team was considered to be an eco-efficient cost centre. Employees will receive bonuses, based on their team meeting or exceeding the team’s cost savings performance targets.
A bonus pool of $30,000 has been set aside each quarter. This bonus is to be shared only among each of the participating teams that achieve their targets for the quarter and shared equally among the members of these successful teams. Teams not meeting their quarterly targets will not share any of the $30,000 in the bonus for that quarter.
The employees are excited by the new scheme. They can only gain by such a system.
Assessment of trial cost-saving rewards system
In early 2017, you have just been employed as the management accounting at ATL.
You were recently present during the following discussion about the success of the new evaluations/rewards process between Samantha Smart, a member of Team Scuba Finishing, Milton Friedman the production manager, who is responsible for all teams and production processes.
Samantha: We are now 4 weeks into the second quarter since starting the trial cost efficiency reward system that was introduced in 2017, and it is just not working. Team Scuba Assembly is sabotaging our performance. How can we meet our cost-saving performance targets when Team Scuba Assembly gives us faulty product to process? They have skimped on material, so it takes us much longer to complete our part of the manufacturing process.
This is made worse when the purchasing department orders our material far too late, so we have to wait around for deliveries.
Also, someone has been leaving the calibrator machine in such a mess, so we waste valuable time resetting the gauges before we can use it. I am sure it is a member of Team Oxy Finishing. The system is not fair. The other two teams shared in the bonus in the first quarter because they reach their targets and we did not, and it is not our fault! This quarter, I can see the same happening and the other two teams only sharing the second quarter’s bonus!
Milton: I appreciate your comments, I have just had to deal with a delegation from Team Fire Finishing who is upset because they cannot share in the cost-saving performance bonuses.
After the meeting, you discover that only the three production teams (Team Scuba Assembly, Team Scuba Finishing, Team Oxy Finishing) are evaluated on their cost-saving performance-related pay system. The purchasing department is still evaluated on a price variance analysis. The performance evaluation and reward systems are the same for other support departments.
At this initial testing stage, only three of the four work teams will participate in the scheme. If this system works well, it will be introduced into all of the company’s plants in Australia and Overseas.
After discussion with different teams and reviewing the trial cost efficiency reward system used for this cost-saving evaluation of the efficiency strategy of ATL, you believed the current rewards system would encourage teams to work in silos and not consider the overall (holistic) plan of ATL.
You decide that ATL must get this right for a number of reasons. You therefore plan:
? to demonstrate the disadvantages of the trial rewards evaluation process and the advantages of using activity-based management (ABM) techniques as part of the evaluation process.
? to use this conversation above between Samantha and Milton to highlight the disadvantages of the trial rewards evaluation process and advantages from using ABM and relevant associated measures.
? to introduce to senior staff the need to adopt a Life-Cycle Assessment of the products to reflect the proposed change of focus to a Strategic Proactive phase of sustainability.
? to implement this rewards system into the Malaysian subsidiary for the 1 January 2018 to 31 December 2018 operating year. You will need ATL to consider societal values because the rewards system may need to be modified for different stakeholders (employees or suppliers) in different countries.
Develop a sustainability business case for the board of directors (including the CEO) who are not accountants. Your business case must provide a suggestion for ATL to implement successfully the Efficiency phase of sustainability and to move to the Strategic Proactive phase of sustainability.
Incorporate the following requirements into your plan [separate your plan into four sections with an appropriate name (e.g., “Changes to the trial system” the heading for requirements 1 and 2); “Proposed cost-saving performance measures” for requirement 3, “Strategy, Vision and Organisational Culture” for requirement 4, and “Modification to accommodate Societal Values” for requirement 5]:
1. What features of the trial cost saving is performance-related pay system causing problems? Support your answer with an explanation.
2. Are the ‘team-based” cost-saving performance measures appropriate for assessing performance and awarding bonuses? Explain your answer.
3. Discuss other (more holistic) cost saving performance measures throughout ALT and other forms of incentive schemes and the performance target measures that may be more suitable for the company.
4. In your sustainability business plan about the Efficiency phase of sustainability and to move to the Strategic Proactive phase of sustainability to the board include
a) the development of new strategies for all four types of strategies (enterprise strategy level, corporate strategy level, business strategy level, and functional strategy level) and one example of appropriate measures you would suggest for each strategy level within the newly redesigned performance measurement system.
b) the communicate the drivers and benefits of environmental sustainability throughout the organisation to create a shared vision as well as to embed the sustainability culture into ATL.
5. The need to accommodate for Societal Values, particularly for the implementation of the proposed rewards system into ATL’s Malaysian subsidiary for the 1 January 2018 to 31 December 2018. The following should be included in your business plan:
a) Describe the modification/s that are needed to the new performance evaluation and reward scheme as well as the employees’ involvement (direct and through communication) in the Strategy, Vision and Organisational Culture.
b) Explain why these modifications will be needed for the successful implementation of the Efficiency phase of sustainability and to move to the Strategic Proactive phase of sustainability to enable it to be successful in other countries. Specifically, how will differences in some societal values for Australia and Malaysia impact upon your business case (in 4 above).
c) How (i.e., what changes) do you suggest in the development of a sustainability culture for employees and value chain stakeholders in Malaysia compared to Australia to overcome these differences.