The disadvantage of such a system is that it may lower employees’ morale if they believe the poor performance of the company is due to factors outside their control such as poor economy and they are being unjustly punished. Another disadvantage is that it may create moral hazard because some may slack, assuming others will make up for it since everyone’s compensation is based on overall company performance.
First of all, Nucor promotes within the organization which means that the employees are motivated to show performance since they have promotion incentive. Nucor publishes every single employee’s name in the annual reports which make employees feel appreciated and increase their admiration for the company. Nucor not only ties its workers’ compensation to the quality and productivity and but also involve them in profit-sharing plans. Thus, employees do not feel that management is excluding them from the profits earned by the company. Because employees’ compensation suffer due to quality problems or poor customers service, they have an incentive to maintain high performance standards and prevent problems from occurring. Management also seeks feedback and ideas from the employees and engage them in decision making processes. This makes employees feel valued and increase their commitment to the strategies and goals laid by the management. Management also often praises employees for their contributions and roles and let them know they are important to the company.
Nucor has not tried this and is right to do so. First of all, Nucor’s approach results in loyal employees who are committed to the organization and are willing to go beyond their formal responsibilities to achieve the organization’s goals. Nucor also avoids expensive termination and rehiring costs and it takes time to train employees during which their performance is below par. Another benefit to Nucor’s approach is that it is able to attract the best talent because it is perceived as a company who cares for its employees. Nucor’s approach also means that its employees understand the company culture well and there are minimum conflicts and politics. In addition, Nucor’s employees are also less likely to join unions because they trust the management and feel they are treated fairly.