#1075 1950 · Herman Miller (D.J. De Pree) · Furniture manufacturing
Herman Miller tied every bonus to one visible ratio, not piece rates or profit-sharing
the problem
Piece-rate pay made workers hide efficiency gains from each other to protect their own rates
background
In 1950 Herman Miller was a small Michigan furniture maker with about 120 employees, 90% of them on the production floor and paid by piece rate — a fixed amount per unit produced. One long-time employee later recalled that "if you'd get good rates you could really make good time," and that the system bred "a lot of inequality," because workers who discovered faster methods had every reason to keep them quiet: reveal a shortcut, and management would simply reset the rate lower next time, erasing the gain. D.J. and Hugh De Pree heard Michigan State University professor Carl Frost speak on cost accounting at a Grand Rapids furniture manufacturers' meeting, and Frost agreed to install a Scanlon Plan at Herman Miller — on the condition that the De Prees themselves take part and share in the same bonus as everyone else.
Piece rates reward an individual for output today but punish anyone who shares a better method, since a faster method just gets rate-cut tomorrow — the incentive structure itself trains workers to withhold their best ideas. The other obvious fix, ordinary profit-sharing tied to overall company earnings, avoids that trap but creates a different one: profit is moved by pricing, raw material costs, and sales performance that shop-floor workers don't control, so they can't see how their own daily choices move the number, and the incentive goes slack.
what everyone would do
Most manufacturers of the era either paid piece rates, which reward individual speed but punish anyone who shares a faster method, or relied on ordinary profit-sharing, which is safe from that trap but too distant from daily work for employees to see how their own choices affect it.
what they saw
Piece rates make hiding a good idea pay off; profit-sharing is too distant to feel controllable. Track one visible ratio — labor cost against sales value — and share every dollar it improves.
the move
Installed in May 1950, the Scanlon Plan replaced piece rates with a single transparent formula: the ratio of total labor cost to the sales value of production, tracked against a historical baseline. Whenever the company beat that ratio, the resulting savings were pooled and paid out as a bonus to every eligible employee, proportional to base pay — at Herman Miller the entire savings pool went to employees rather than being split with a management reserve, as some other Scanlon implementations did. The ideas that moved the ratio came through two standing employee committees: a production committee in each department, pairing the supervisor with an elected worker representative to review and implement suggestions from the floor, and a screening committee of top management and elected worker representatives that reviewed cross-department ideas and discussed the company's financial performance directly with employees each month.
why it works
Because the ratio is company-wide and openly tracked, and because the savings from improving it are pooled and shared rather than captured by whoever found the improvement, workers have no reason to hide a better method the way piece-rate workers did — sharing it raises everyone's bonus including their own. The two-tier committee structure gives every idea a real channel to reach the ratio, so the incentive and the mechanism for acting on it are the same transparent number, not a black box workers have to trust management to explain.
the payoff
In 1974, the plan's best year, Herman Miller employees earned bonuses averaging 22.83% of base pay from savings they proposed.
where it breaks
The formula only motivates people if they can actually see and understand it, which requires real financial transparency from management and enough stable production volume that the ratio isn't swamped by factors workers can't influence, like raw material price swings or a sales slump. It also depends on management genuinely sharing the full savings pool rather than skimming a reserve, since employees who suspect the ratio or the payout is being managed against them will disengage from the suggestion process the plan depends on.
what came after
The Scanlon Plan became foundational to Herman Miller's participative culture and to D.J. De Pree's son Max De Pree's later, widely read writing on leadership, which described the relationship between management and labor the plan embodied as "covenantal rather than contractual." Though the mechanics were revised many times over the following decades, the underlying practice — engaging every worker in decisions and paying bonuses tied to a shared, visible performance measure — persisted, and Herman Miller's adoption is still cited in management literature and by bodies like the American National Business Hall of Fame as one of the earliest and most durable applications of gainsharing outside the steel and shipbuilding plants where Joseph Scanlon first developed the idea.
references
- [1]Herman Miller's Design for Growthstrategy+business (PwC), 2013strategy-business.com
- [2]D.J. De PreeAmerican National Business Hall of Fame, 2013anbhf.org