Analyze the pay system at Alliston Instruments on page $465$ in the Appendix. Why is the new pay system apparently not working? Do you think that the individual production bonus system could work if some changes were made? What changes? Is individual performance pay suitable for this company? If management insists on some type of individual performance pay system, what type would you recommend?

ALUSTON INSTRUMENTS

Alliston Instruments is a manufacturer of specialty medical instruments located in southern Ontario. Manufacturing involves two types of processes. First, individual workers produce the components for the medical instruments in batches of various sizes, using a variety of machine tools and equipment. Then other workers assemble the components into finished products. Assembly is done sequentially, with each product passing through four to six workstations before completion. The quality of the products, which is crucial, depends on both the quality of the component parts that are produced and the quality of the assembly process.

It is late January $2016$ and the financial statements for $2015$ have just been released. They are grim. For the first time in the company's $50-$year history, the firm has shown a loss. The company's chief executive officer believes a lot of this has to do with production problems. The $2015$ production reports indicate that although the number of units produced per employee showed a slight increase last year, the number of defective units reached an all$-$time high. In addition, there was a high rate of wastage of raw materials and other supplies. Although total sales $($and therefore total production$)$ are down from the previous year, total labour costs are up$.$ As a result, costs per unit are at an all$-$time high.

Because you are an expert in human resources management, the CEO has asked for your help. As background for your work, the CEO briefs you on industry conditions. Until two years ago, the firm had enjoyed increasing sales over many years. It had also had increasing profits, with a record profit of over $$3$ million in $2012.$ However, in the last two vears, the medical instruments industry has become more competitive. High$-$quality medical instruments are now being produced by several Asian firms, two of which entered the Canadian market in $2013.($Previously$,$ the main competitors in the Canadian market were U$.$S$.$ and European firms, but they are not much of a problem because their products are very high priced.$)$

Because of low labour costs, the Asian firms are able to price their products attractively; however, buyers initially held back, concerned about potential quality problems. So for a while, it appeared as if Alliston's customers $($mainly hospitals and health clinics$)$ would remain loyal, even though they were themselves under pressure to cut costs, due to budget cuts. But in late $2013,$ an Asian competitor made a major