Case Application 11: RETHINKING COMPENSATION AT FIRST MERITBANK

Christopher Maurer, executive vice president for human resourcesat FirstMerit Bank headquartered in Akron, Ohio, needed to solve amajor problem in one of his departments. This particular departmenthad forty-eight employees whose job included processing customerchecks. Their job required them to input every customer’s checkaccurately with correct account numbers and dollar amounts in atimely manner. Unfortunately, they were failing to do either taskcorrectly. Incorrect inputting caused customer satisfaction todecrease. And lateness resulted in penalties from the federalgovernment bank overseers.

The employees in the check-proofing department all had less thantwo years of experience on the job. That is, this department hasexperienced a 100 percent turnover every two years. Loyalty in thisdepartment did not exist, which was creating a big problem forFirstMerit. Starting salaries for these employees was approximately$9 per hour. Employees and bank officials recognized that the jobwas monotonous. Employees would spend hours a day typing writtenamounts on checks into their computers so the checks could beprocessed. But there was an expectation that although accuracy wasparamount, speed was important, too—and employees felt that theirpay was not consistent with the expectations of their jobs. Meetingthe dual goal of speed and accuracy was something bank officialswanted to achieve, while at the same time they wanted to find a wayto encourage employee loyalty. After studying the situation, Maurerbelieved that implementing a pay-plan that provided incentives forfaster and more accurate processing would move the organizationtoward meeting its department goal.

FirstMerit’s program was relatively simple. Relying on the samecomputers employees were working on, employees would be evaluatedon their speed and accuracy. Through an extensive analysis, bankofficials determined that the minimum level of acceptableperformance would be 10,000 keystrokes an hour. Those who exceeded10,000 keystrokes an hour would receive extra pay—or pay forperformance.

Since this plan was implemented, the bank has reduced the numberof employees in the department from forty eight to twentyseven. Ofthe twenty-seven remaining employees, one averages $23 per hour,nine earn $20 per hour, thirteen are in the $15 to $19 per hourrange, and four are performing at the minimum acceptable level.Overall, twenty-two of the twenty-seven employees in the departmentearn in excess of $15 per hour—nearly double the base rate. As aresult, employee morale has increased significantly as theperformers feel like they are being compensated for their hardwork. For the bank, turnover has dropped to zero; no one has leftor needed to be hired in the department in more than three years.Customer satisfaction has also increased. And productivity is up,which is remarkable given that the department has had a 44 percentstaff reduction. Because of this success, FirstMerit is looking atways to roll out similar pay systems for other parts of thebank.

Questions:

1. Explain the type of compensation system that best describesthe pay plan at FirstMerit and why it increased employeeperformance.

2. Discuss whether intrinsic rewards might have been used toincrease employee performance in the check processingdepartment.

3. Could the same results be achieved by using a lower basesalary and piecework plan? Explain which would be more effectiveand why.

Answer rating: 100% (QA)

1 The pay plan at FirstMerit is an example of a piece rate compensation system This system ties a workers pay to their performance level In this case ... View the full answer