The Law of Diminishing Marginal Productivity - Case Study Example

Recently, Company ABC revamped its compensation and benefits program for its operations people. The new compensation and benefits program affects the salaries, wages, and benefits of all production people - those employees who are directly involved in the manufacture and production of the company's products. The most prominent revision in the company's compensation package is the awarding of incentive to a production team's productivity rather than on the individual team member's performance. At the end of each month, the team's actual productivity is measured and compared to the team's target productivity for the month, then the team is given a bonus based on how well they exceeded performance and then the team divides the bonus to its members.

The division is equal. Say, the team bonus is for $1000 and there are 5 members on the team, then each one will get $200 as an incentive bonus. By directly linking the individual employee's incentive with that individual's team's productivity performance, Company ABC virtually acknowledges that the individual has a little impact on productivity and that the team's effort has a much more significant impact. Moreover, by putting the responsibility on productivity at the team level, the company is, in a sense, giving the responsibility to the team on how to fill up slacks in the team so its productivity does not suffer.

This means that whenever a team member is absent, whether, on sick or vacation leave, the team is responsible for ensuring that the team's productivity does not suffer in spite of the absence.I think that the decision to link incentive and team productivity is a very clever decision. The new incentive program allows the company a chance to increase its productivity without significantly increasing the company's payroll expenses.Moreover, by putting the responsibility to monitor productivity at the team level, slackers or below average employees will be pressured by the rest of the team to contribute more to the team's productivity efforts.

However, according to the law of diminishing marginal productivity, the increase in the company's productivity as a result of the revision of the company's incentive program for its production employees will eventually diminish. Hence, a new incentive program alone is not enough to sustain the increase in productivity for a long time. Another strategic decision should accompany the revised incentive program.According to the neoclassical growth theory, the "real GDP [or gross domestic product] per person grows because technological change induces a level of saving ad investment that makes capital per hour of labor grow" (CFA, 2008, p. 440). Hence, a revised incentive program and an introduction of a technological change in the company's production floor will go a long way in terms of Company ABC's productivity.

Interview with several production managers and employees of Company ABC reveals that this is actually what the company did and planned from the beginning. The above relationship will eventually continue until marginal revenue equals marginal cost which in economics is the equilibrium point. Hence, management, in making decisions that impact their company’s productivity, must also know the fundamental economic concepts.