| |Table of Contents |Page |
|1. |Introduction to AGL |2 |
|2. |Hiring |3 |
|3. |Education and Training |4 |
|4. |Job design and Decision making |6 |
|5. |Temas and ICT |8 |
|7. |Performance: Evaluation and Rewards |10 |
|8 |Carrer-Based Incentives |11 |
|9 |Conclusion |12 |
1. Introduction
The automobile industry constitutes a significant part of the worldwide manufacturing sector. In 2008 automobile manufacturers had a combined global output of over 70 million motor vehicles, employing around 8,5 million people throughout the entire world. The AGL AG (AGL) is the largest automobile manufacturer in Europe and may be regarded as one of the top players in the worldwide automotive industry. 61 production plants around the globe, of which 15 are in Europe, enable the company to operate successfully in over 150 countries. Thereby AGL currently employs nearly 370,000 people globally (+12.3% to previous year). The company’s automotive division is engaged in the development, production, assembly and sale of passenger and commercial vehicles, trucks, buses as well as its engines and vehicle parts.
Upon completion of numerous design-, planning- and testing phases, the actual production and the assembly stage take place. Here AGL avails itself of state of the art technologies, practices, processes and human labour, in order to turn raw materials and supplies into a value-providing final product. Production and assembly processes at AGL take place in form of production streets or respectively assembly lines. A main line traverses the different production/assembly processes on which the carriage, that is the motor vehicle, gets complemented gradually. After final assembly the finished product undergoes a series of quality checks to ensure immaculate production and certain quality standards. In contemporary automobile manufacturing, production of specific component- and body parts has progressively been outsourced to highly specialized suppliers in form of so called elongated workbenches (modulization). Consequently automotive manufacturing’s value adding activities have increasingly been reduced to being much more assembly- rather than production-related. Moreover, high cyclicality within the industry and the innovative and dynamic nature of the latter as well as proceeding globalization lead to severe competitive pressures and sustained struggles for cost savings. In effect, manual labour in automobile production is increasingly being transferred into low cost regions or even replaced by continuing automatization. Noticeably, despite a steady increase in automotive production, the number of employees in the sector has been declining constantly over the last decades.
Having briefly introduced the AGL AG and its production system, this paper will report on the company’s personnel policy with regard to several key principles from the field of personnel economics. However, please note that due to the very complex nature of the AGL AG with its numerous divisions, subunits and sheer endless functions, the authors decided to limit the subsequent analysis to production workers at the final assembly stage.
2. Hiring
Despite increasing automatization in the production and assembly process of AGL, there still remain certain tasks where human workers are (at least until now) preferred or even indispensable. Those are generally tasks where judgement, flair, multitasking, abstraction, creativity, adaptation or recognition are required or where robots simply are not economically feasible. Consequently, several kinds of employees with different skills, abilities and knowledge levels are employed in AGL’s production facilities. Some of them are highly specialized (technicians) whereas others only need rather basic skills as for instance for mere assembly activities. The question arises of how AGL recruits its diverse workforce and what standards and procedures has the company in place to obviate the problem of asymmetric information associated with this transaction?
With regard to recruiting new employees, AGL faces a high amount of information asymmetry for their production related jobs that require specific skills and prior knowledge (in the following referred to as high skills jobs). Recruiting into rather low skills jobs (e.g. final assembly) however, is less affected by such information differences and adverse selection by virtue of the simplicity of the tasks to be performed.
It becomes obvious that it is very important for AGL to spell out appropriate hiring standards and to sort potential employees on basis of their skills and abilities. This is especially important for specialized jobs (foremen or lacquerers), where certain pre-acquirements are inevitable. Hiring wrong, unqualified or even over-qualified personnel might turn out to be quite costly for AGL. Mistakes or underperformance cannot be tolerated within the setting of the production street/assembly line, since productivity and output quality are mostly dependent on co-worker’s performance. Mistakes by one worker might bring the whole production process to a halt or even worse, result in a large scale recall campaign. Similarly, very high productivity of the individual does not bring about any gain if co-workers are not as productive. The resulting high downside- but comparably low upside potential is also the reason for why it pays for AGL to hire rather better qualified and less risky workers for the production of its vehicles. Moreover, rather strict labour regulations in Germany might render sorting worth the effort due to high termination costs of an employment relationship.
Hence when it comes to hiring, AGL faces the basic trade-off of low labour costs versus high productivity. In order to be able to keep up with very short production cycles common to the industry (ca. 20hrs per car), AGL prefers to take on only the most productive workers. Competitive pressures on the other hand spur continuing relocation of the industry to low- wage regions, so that in the end AGL employs on basis of cost efficiency, levelling out labour costs versus productivity in terms of output.
In order to mitigate informational asymmetries and problems with newly hired employees, AGL demands certain credentials of potential employees and expends further resources to learn more about applicant’s abilities and productivity before hiring them (sorting). Applicants for a specialized job within the production process of AGL generally need to prove that they have the knowledge and the skills that apply directly to their job. This can either be done by credentials such as craftsman certificates, interviews or favourable track records. Very important and maybe even the most effective way to screen the productivity of a potential employee for AGL production, is to let the applicant perform the job itself. For instance hiring on short term probation or testing basis first gives the company the option to only expanding the employment relationship, when the employee exhibits adequate performance (like apprenticeships). The applicant itself might facilitate the economic principle of signalling in order to reveal his true quality and thus alleviating sorting. It appears that AGL designs its recruitment procedures to encourage qualified applicants and deter unqualified ones from applying for instance multiperiod contracts contingent on performance and promised rewards.
An additional aspect to consider already at the hiring and recruiting stage, is whether the entirety of knowledge and skills (human capital) that a qualified production worker brings into the company may be augmented, refined or adapted to the organization by means of investing in it.
3. Education and Training
The AGL AG ascribes great importance to Education and training of its employees. The company’s personnel policy termed the concept of “workholder value”, expressing the fact that its employees’ knowledge and expertise are seen as the firm’s most important asset for meeting future challenges. Not only do employees account for the largest costs to an organization, but they are also the ones to keep the organization in business and produce the final product. It is up to education and on the job training to ensure that workers are trained and educated well enough to be able to perform at the most cost efficient levels without jeopardizing quality standards. Especially in the fast-changing and innovation-dynamic automotive industry, employees must have access to state-of-the-art technologies, knowledge and processing techniques thus enabling AGL to cope with competitive pressures. Therefore AGL goes to great length in providing its production workers the opportunity of on the job trainings. In fact, the company specifically established the AGL Coaching GmbH in order to accommodate for these innovation needs. Numerous programmes and seminars exist to enhance worker’s ability to perform their jobs (e.g. additional qualifications, Web Based Trainings, SAP etc). Most of such training and development opportunities are tailor-made for AGL’s special production needs and are specifically related to each individual worker’s tasks within the production process. In this, productivity within the company is raised more than that of outside firms (firm specific human capital). Nevertheless, acquired skills and knowledge are to some extend ubiquitous and might be also valuable outside the AGL AG. For instance, AGL also offers programmes that are in line with personal interests, like language courses etc. (general human capital). For the management elite as well as highly specialized workers the company established the AGL University, an institution of higher education that is to ally practical company knowledge with scientific approaches. Moreover the company runs international based education programmes, such as AGLLead, to prepare employees for global positions and challenges. The above mentioned training programmes establish a mutual relationship between company and employees that reduces employee turnover and makes AGL concerned about loosing the investments in their employees. Next to on the job training, AGL also invests in the education of especially promising (future) employees. For instance, AGL offers 10,000 apprenticeship opportunities as well as numerous traineeships, study grants and Junior Management programmes every year. Although theory suggests that paying for schooling never made sense, doing so may actually pay off for AGL. Since AGL-financed education is always accompanied by on the job training, it provides the company with low cost labour and a means to effectively sorting the best employees after the training (i.e. probation) period. However, due to the fact that credentials increase a worker’s market value, AGL appropriately adjusts wages of those workers that successfully pass the education and training period in order to retain them. Having considered AGL’s optimal sorting strategy on basis of worker’s skills and inert abilities as well as tools of how to best maintain, develop and upgrade employee knowledge, the organizational structure of AGL and the designing of specific jobs should be considered so as to utilize the company’s human capital in an optimal way.
4. Job Design and decision making
In a company with nearly 370,000 employees and operations dispersed over numerous divisions and SBUs on several continents, a well structured organizational design is indispensable for allocating decision making adequately throughout the company. More than that, specific jobs and functions in AGL’s production process have to be designed in terms of the number of decisions and tasks that they encompass as well as in terms of what skills and trainings are necessary. The amount of coordination inherent in a job is also important in that respect. AGL’s production and assembly process is broken down into different job design patterns, which can be discriminated against each other: Plain production tasks, involving repetitively passing on work to colleagues, certainly involve a coherently narrow job design. These jobs have lower decision rights, are less interdependent with co-workers, require little multi-tasking and less deep human capital. In contrast to that, there also exist more enriched job designs, applying to highly demanding tasks, like the appliance of high technology equipment (here referred to as “high skills jobs”). Lastly, foremen generally have the richest jobs in that sense, with coherently high levels of the above mentioned job characteristics.
In general discretion in a job profile is not only about utilizing central and local knowledge efficiently but also about coordinating decisions with the help of strong incentives while remaining flexible enough to innovate and adapt. AGL has been famous for its decentralized structure with regard to its product- and regional subdivisions, where more valuable information and costly specific knowledge is predominantly used for initiatives and the implementation of decisions (decision management). However, company knowledge or key decisions, as for instance strategy formulation, monitoring of the implementation or ultimate decisions (decision control) must reside with the top management and remain centralized within the company. Since the development process of a car usually takes quite some time and uses up vast investments, AGL’s production and assembly line workers decision making abilities and possibilities are seldom characterised by decision control but rather involve decision management stages. Their decisions and actions require control and coordination from foremen and managers. In this the company tries to avoid accepting false positive errors that is, adopting bad decisions by accident in favour of rejecting good ones. To illustrate this point one just has to think about what would happen if a number of cars from a shift were delivered with defective breaks or tires. Therefore the payoff regime at AGL is not quite as symmetric as we would have expected from an established company, but rather somewhat skewed towards a smaller upside and a larger downside. This in turn calls for the establishment of a rather centralized structure within the company’s production plants. As a result, rather hierarchical structures provide that lower level employees are not or less empowered to make decisions on their discretion but rather work along clearly codified steps or SOPs. Nevertheless, although authority and responsibility of the average production worker is quite low, it appears that early, technical and specific production related decisions are to some extend decentralized, followed by centralized decision making in form of ratification or monitoring by higher levels. For example high skilled technicians have more rights to decide on their own discretion. This is because their decisions are often highly complex, subjective or even experimental and require technical expertise and experience. Also time-critical production and assembly line decisions or quality inspectors benefit from decentralized structures that allow for creative decision management in order to not delay production or eliminate waste early. However when it comes to minor repetitive decisions to be taken at lower levels, also a blue collar worker at the production street might first consult his team or co-workers or rely on past experience or SOPs before reporting problems to the foremen.
Corresponding to decentralization and lower discretion of low skilled jobs at AGL is the notion of specialization. In breaking down the large and complicated production process into many specialized jobs results in significant productivity gains. This is because a narrow number for tasks allows workers to become experts in their jobs and thus enables specialized human capital investments. High skill jobs however often comprise a rather high level of multitasking, providing well trained workers with enough flexibility, opportunities for coordination and freedom to innovate and pursue more demanding assignments. Jobs designed to require higher multiskilling and higher discretion in decision making obviously involve deeper and broader human capital (i.e. skills and knowledge). In the end it is left to mention that Taylorism mainly dictates AGL’s production process and thus leads to centralization, narrowly designed jobs and low skill requirements. Foremen and highly specialized production workers pose an exception to this and therefore also tend to be more intrinsically motivated.
In general, intellectually more challenging and complex work increases motivation significantly. Higher variability in skills (tasks) required for the job as well as the ability to identify with ones task and experience personal utility from it, should elevate the meaningfulness of work to employees. Also the degree of autonomy or feedback provided will influence workers’ feeling of personal responsibility and knowledge of own abilities. In the end, existence of these job design characteristics will foster employees’ intrinsic motivation and consequently output quality, absenteeism rates and employee turnover. It becomes obvious that the design of low skilled labour at AGL’s production- or assembly lines has only limited potential to motivate workers intrinsically. Therefore other means of incentives are necessary to provide incentive alignment. A special case of job design where motivation also plays a significant role is teamwork.
5. Teams and ICT
An important factor affecting the organisational structure of a firm is the nature of the coordination problem it encounters. Coordination at AGL is especially important when it comes to the production and final assembly of automobiles along the production respectively assembly line. Not only do production workers have to coordinate the quantity and the timing as well as the quality of their output with each other, but also supplier’s deliveries have to be timed and coordinated to the production process (just-in-time). However, assembly line coordination problems do not require constant communication between all workers involved in the process (synchronization problem). The very nature of the process where the output of one worker is passed down the assembly line to the next worker who adds the next car component and so forth provides synchronization. On the other hand coordination of the type, quality, quantity and timeliness of supplies for the assembly line represent integration problems.
In the production process cars pass by individual workers at workstations each of them performing a very specific task. This type of automobile manufacturing was comes closest to what has been termed “Fordism”. Whenever the task requires more than one worker at a work station, “teams” in that sense are being formed. For instance the assembly of car-doors requires one worker for each side of the car. Nevertheless the work being performed is time sensitive, not really interdependent, repetitive and mostly highly specialized. This is why there are generally few gains from using teams at AGL’s production or assembly lines; they do not support coordination or learning. However there are some AGL production sites where autonomous work groups (self-managing teams) are being employed to assemble car bodies (lean production). These groups have authority to pull cars from the central loop into their respective working areas whenever they see fit. The team decides which members work on which part of the car (job rotation). These teams could in theory be compensated in terms of quantity and quality of their output, though they are still dependent on the overall pace of the whole assembly line. Cross- functional teams at AGL may be found instead for instance in R&D where inputs from various functions are necessary and valuable.
ICT has increasingly entered AGL’s production sites and has brought about major changes to the automotive industry, shaking up operations, corporate structures and consequently personnel economics, too. As already briefly mentioned in the beginning, First of all, ICT certainly ameliorated operational efficiency and effectiveness throughout the past decades. Better communication and information opportunities within AGL’s whole supply chain gave rise to philosophies and practices such as JIT-management, TQM and modulization, just to name a few. Also, ICT altered operating efficiency within the company by dispersing knowledge at low costs and in real time throughout the company. It is argued that ICT in this changed organizational structures, facilitating and reinforcing centralization of local knowledge (Lazear and Gibbs, 2009). Most significantly however is the effect of ICT on personnel policies and the labour force. Computers and robotics are noticeably taking over production, substituting but also complementing production workers. Robotics and computers are more predictable, reliable, quicker and less costly and more productive at certain tasks (e.g. measuring). Therefore reengineering may result in layoffs or organizational disintegration especially of narrow job designs and besides tends to narrow the jobs of remaining workers ( increased use of SOPs etc. ). Nevertheless there are also always workers that have to be able to handle the new IT properly- thus creating new job opportunities. One last merit of IT is that it facilitates employee monitoring which turns out to be very valuable when it comes to evaluating and rewarding worker’s performance.
6. Performance: evaluation and rewards
The most important factor in assessing the performance of AGL’s employees is to reflect the employee’s total impact on the firm value. AGL puts forward that no matter which position an employee fills, every worker contributes to the success of the company. Therefore, when measuring performance, AGL distinguishes between two approaches. On the one side AGL takes into account output based performance measures and on the other side the approach of measuring an employee’s input. Furthermore, AGL distinguishes between quantitative and qualitative measures. Due to the fact that AGL has many different employee segments, the company assesses their employees according to their segment. When focusing on production workers, AGL uses a more quantitative approach, which is often perceived as being more objective placing more attention on using a narrower performance measure. These measures are easier to understand and comprehend as they contain less uncontrollable risk. With regard to this AGL not only assesses the quantity of output produced but also its quality (how many incorrect parts the worker produces). Sometimes, however basing performance evaluation on output quantity is not ideal for AGL, as will be pointed out later on. Factory supervisors and middle managers of AGL being assigned to more tasks (broader job design) are assessed on a broader spectrum. Generally one can say that the broader the job an employee is assigned to, the broader the performance measure. Another reason to evaluate the different worker segments in different ways is that it is not always easy to assess the work of a middle manager or foreman in quantitative ways. Therefore, AGL uses a more subjective performance measure, including more uncontrollable elements, to evaluate its middle managers, foremen and specialists when compared to low skilled labour. In implementing subjective performance measures, supervisors and specialists are evaluated on the basis of subjective evaluation taking place twice a year.
For production workers the evaluation of performance is less complex compared to other employee segments. This may be attributed to the fact that their input and output is rather clear and therefore the measures are less distorted. A good evaluation base for this segment is the level and quality of their output; a rather narrow measure. Measures of corporate or divisional accounting ratio’s such as ROE or ROA are less suitable for this segment since those measures are influenced by many other factors outside of the control of these blue-collar workers (uncontrollables). What should be taken into account as well is the fact that not all output can be measured on an individual basis. The output is sometimes interdependent on the work of a colleague and therefore it is difficult to disentangle the work of a single worker from that of the group. In these situations the incentive paid should also be based on group or shift performance. This is the case where worker’s output quantity is limited by the overall speed of the production street or assembly line, even if they had the ability to be more productive.
The goal of paying for performance ultimately is to make each individual employee feel that (s)he is the owner and entrepreneur of the company. This spirit should become part of the employees, because this will resolve for a substantial part the principal-agent problem found on each and every level of an organization. Focussing on the production workers however leads us to the conclusion that this agency conflict if found at the productivity level of the individual worker. The employee should get the incentive to work hard and attain a high product quality level. The second is not less important than the first. Quality standards will ensure that the production process will not be interrupted due to faulty (sub-)parts. The incentives provided to the production workers should entail those two variables: level and quality of production. They should however only be compensated up to the point where it is too costly to do so. This means that the marginal benefit from a higher level or quality of production should be greater than the marginal cost from the incentive fee.
Importantly monetary rewards and pay for performance are not the only means to motivate employees in an incentive system. Another type of incentive scheme are career based incentives.
7. Career-based incentives
It is necessary for an organization to provide employees certain incentives to overcome the principal-agent problem. With the help of incentive plans a company can try to motivate employees to provide (usually) more effort. A much disregarded extrinsic motivational aspect with regard to that are long term incentives to the mere possibility of career advancements, if tied to performance. For the majority of AGL’s production workers, career prospects are limited to some extend, however not necessarily inexistent. There are three job-levels to be distinguished along the production streets and assembly lines of AGL: Lowest in the company’s hierarchy is the entry-level function as an assistant-production worker, including employees in ‘on the job’ education (trainees, apprentices etc.). Moving up the hierarchy, there exists a (senior) production worker and on a third-level the function of the foreman. This is the potential career path for most of the employees at the production department (there are cases though, where especially successful foremen made it to managers of certain production sections). Whereas higher pay differences between level one and two (deferred rewards for probation) and between level two and three renders promotion to the next higher level as very lucrative, a large pay-raise between levels three and four, a management-level, generally does not provide enough incentives to workers. This is due to the fact that apart from pay raise also other factors, like the added value of further career prospects that come from that promotion. However, there seem to exist a hurdle within AGL’s hierarchy between the production worker’s level and higher management positions. In this case the difference in degree of education is crucial. Secondly, while high turnover in between level one and two drive incentives (only the best apprentices get further contracts), lower promotion rates into higher levels because of the narrowing hierarchy weaken promotional incentives significantly. Other forms of pay for performance must be considered here. Foremen almost exclusively get recruited from the body of well-earned production workers, since this position requires a lot of trust and respect from subordinate workers and. Besides that, foremen need a certain amount of experience and specific knowledge regarding the production process. Likewise, promotions into the second level of hierarchy are usually preferred to outside hiring, due to the huge body of apprentices, students etc. that can be drawn from. Deciding which of those level 1 workers to promote, RPE seem appropriate but should be complemented by individual performance evaluation (standards) to ensure quality and reduce sabotage effects. Experienced workers are very important to the AGL group, both for reasons of quality and education. Senior production workers are used to train younger workers who participate in ‘on the job’ education programmes. However, the utility of alternative use of time such as leisure time increases for workers when they near retirement. For reasons of retaining those workers two measures are used. Next to intrinsically motivating them by expanding their job toward a teacher to the student crew, they are also extrinsically motivated by the use of seniority pay. Deteriorating productivity and thus cost efficiency might lead to early retirement or termination of the employment relationship with the manufacturer.
8. Conclusion
This paper applied several key concepts of personnel economics to the AGL AG. In doing so we have seen how the company acts as a pipeline of skills and avails itself of various tools in order to attract and sort out adequate employees for each job within the production function. Next we gained inside into how the company invests and enhances its human capital in the best possible way. Moreover we have seen how organizational settings as well as the individual job design of the car manufacturer were able to explain interrelations between the company’s incentive schemes, the level of intrinsic as well as extrinsic motivation of employees, employee performance, the evaluation of it and he resulting rewards. AGL’s personnel policy must face the challenge of integrating and reinventing all these elements on a constant basis in order to cope with the frequent innovations, increasing competitive pressures and structural change within the automobile industry. Especially the sustained growth of ICT and automatization, finding their way into automotive production processes as well as a changing awareness of the significance of work within our societies, will pose major challenges to AGL’s HR department in the years to come.
