Employee discounts are a good thing for all the reasons your contributors mentioned. There is a point on the price scale that is a win/win with the employee being treated better than the best customer, and the employer being compensated a fair value for the out of pocket cost of production.

Selling at cost is too generous because in most cases cost is understated – very few companies have full absorption costing; selling below stated cost does not provide adequate reward for the risk associated with running the business. Your example of product liability issues is a perfect example of a cost related to the product but not included in the “cost” of item. The goal should be to make the employee feel special and treating them better than the best customer by offering product at less than the wholesale price certainly does that; the right price is somewhere greater than manufacturing cost but less than wholesale. The benefit to the employee is equal to the opportunity cost of selling the item to a customer for full wholesale or to the employee for discounted wholesale without costing the employer anything out of pocket.

Seconds are a problem for any business with very few options – diverters will take the merchandise and you may have some control over how it is sold, but a better option is to offer it to an informed group of consumers who can judge the quality and make an informed decision to buy….your employees. They will know that they are getting seconds, understand the reason for the downgraded status and more than likely be happy to have an opportunity to buy at a good price. You may chose to sell seconds to employees below wholesale and below the discounted wholesale you offer to employees for first line goods but you don’t need to discount below diverter price since diverter pricing usually entails buying large lots of mixed goods. Employees can be given first choice of QC failures so that they get the best of the rejects.

One final thought – the tax code allows a charitable deduction for the cost of goods given to a qualified charitable organization. However, if the company manufactures the product and provides it to a charitable organization that uses the goods in their charitable work, the donor is allowed to deduct the cost plus ½ the gross profit that would have been earned. This is not a common deduction, but it is legal. For example, if we have a clothing manufacturer who donates to the Salvation Army product with a cost of $1000 and a normal wholesale price of $1900 and the Salvation Army sells the clothing in their store, the deduction would be equal to the cost or $1000. On the other hand, if the SA distributes the clothing through a homeless shelter to needy recipients of their services, the deduction would be $1450. Giving to charity is a good thing, and if you can find a charity that needs your product to perform their charitable services, you have an ideal match.

To go with that: I think it’s important to personally distribute awards to each employee, look them in the eye and say ‘thank you’. I don’t believe in a monthly feel-good ceremony where everyone gets an award for being a human being. Yuk! I find it much more effective to walk up to the person’s workspace, in plain sight, and make it known that their contribution is appreciated.

A safeguard against questionable behavior, though, is to provide the teams with weekly incentives for improvements to the QC scores. For example: if a pod reduces the defect rate from 4% to 3% on a given product type, reward everyone in the pod $50, a gas card or a monthly bus pass. Don’t forget to reward the QC person, too – we want to keep them honest.

In some manufacturing facilities (e.g. Samuelsohnn) the brand label isn’t sewn into the garment until after QC. In this particular example, the order of operations (i.e. ops model) supports the sorting process for 1st and 2nd quality garments just prior to labeling and shipping.

If not, I would give a deep discount but limit the quantities per person.