2. AGL Job Performance Management Course
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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