Personnel agl

Personnel Policy Report

- AGL AG -

An Example from the Manufacturing Industry

Table of Contents Page

1. Introduction to AGL 2

2. Hiring 3

3. Education and Training 4

AGL Job Performance Management Course

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

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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. 15 production

plants around the globe, of which 9 are in Europe, enable the company to operate

successfully in over 150 countries. Thereby AGL currently employs nearly 330,000

people globally (+22.3% 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

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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

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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.

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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

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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

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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

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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.

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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

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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

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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

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(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

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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.

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Personnel agl

Spiritual

Transcript of Personnel agl