Reduce the Rate of Cost for the Input Used to Produce the Output

Use the same type of input and the same activities, but pay less for the unit of input employed in producing the output. A reduction in rate is equivalent to a reduction in the number of inputs for the same ICD. For example, if a person who makes $10 per hour could produce the same amount of output as a person making $20 an hour, the substitution of the $10 person for the $20 person in the process would be equivalent to cutting the number of people required to do the work by 50%.

C. Change the components of the rate of costs to reach a lower total rate:

Sometimes it is possible to break the price of a purchase into its component parts. Then the company may seek to substitute a less expensive component for a more expensive component to reduce the effective rate the company pays on its purchases.

Optional components of the rate paid: Penalty/bonus, including equity and profit shareing: Add bonus/penalty for performance:

No. Industry SIC Year Notes
1 1041 1993 Miners at Barrick can earn an extra 10% above their average annual salary of $40K if they meet monthly production quotas.
2 2820 1988 DuPont's new incentive plan will tie pay to profits. Hopes to raise efficiency by making workers feel more involved. Won't require pay cut; instead, workers will be earning less at end of 5 years due to not receiving raises. Will collect the 6% difference if meet profit goal, and will earn more if exceed goal.
3 2844 1995 Colgate-Palmolive consolidated its ad spending to work just with Young & Rubicam. But Y&R will now be paid based in part on how well its ads work. Performance measures include a subjective evaluation of creativity, sales results based on market-share growth, and the mileage it gets from the worldwide ad budget.
4 3312 1988 Nucor Steel reduced fixed pay and added incentives. Employees now have one-half of their total pay at risk, and Nucor is doing well.
5 3312 2006 Nucor Corp., a major U.S. steel company, has forged a winning work force using motivation. The company pays for performance, something other companies are reluctant and find hard to do. On average, two-thirds of a Nucor steelworker's pay is based on a production bonus, with profit-sharing layered on top of that. It can be a lucrative formula, but the risks are real. In 2005, the typical worker received $91,293; three years earlier, a steel slump left workers with $58,931. CEO and executive pay is similarly tied to performance targets.
6 3751 1988 At Huffy's bicycle plant, workers receive bonuses when productivity rises.
7 5311 1990 Nordstrom's offers sales clerks commissions, bonuses, and perks as sales incentives.
8 6300 2004 Progressive is very careful in its disclosure practice. It does not pad reserves when times are good and draw them down when earnings are lean. The company tries to give financial statement users the most accurate estimate of loss reserves humanly possible, and it rewards its actuaries based on how accurate their loss estimates turn out to be.
9 6324 2008 Centers for Medicare & Medicaid Services and other private insurers are starting to refuse payment for hospital errors. Hospital Tenet Healthcare recently signed contracts with United Health and WellPoint to get bonus payments for better patient outcomes.
10 7372 2004 MicroStrategy, after watching its stock crash and its shareholders file a class-action suit, had to turn the business around quickly. One way was to tie sales personnel's compensation to customer satisfaction ratings.

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