TIME: Almanac 1993/TIME Almanac 1993.iso/time/041591/0415201.000

Text File | 1992-08-28 | 10KB | 203 lines

                                                                                BUSINESS, Page 42

Workers: Risks And Rewards


By JOHN GREENWALD -- Reported by Tom Curry/Chicago and Kathryn
Jackson Fallon/New York


    Would you risk earning less in exchange for the chance to
earn more? U.S. companies are putting that question to a
growing number of workers these days in hopes of engineering a
revolution in the way everyone, from janitor to junior
executive, gets paid. The question lies at the heart of
far-reaching new programs called pay-for-performance plans,
which typically start with reduced base wages and salaries but
reward employees with handsome bonuses for hitting production
targets or meeting other goals. "This is the hottest area in
compensation today," says Steven Gross, a vice president of Hay
Management Consultants. "Just about every major company is
examining its pay strategy."

    While employee-bonus plans have been around since the
1930s, the new programs surged in popularity during the past
decade. Faced with a massive loss of business to aggressive
global competitors such as Japan and Germany, U.S. companies
rushed to control labor costs and raise productivity. The new
plans help on both fronts, because firms that adopt them
typically pay employees bonuses only when they meet production
targets or when corporate earnings rise. Moreover, companies
often combine the programs with other approaches -- such as
encouraging shop-floor teams to plan and carry out projects --
that help give employees a sense of pride and participation in
their work.

    "Companies are saying, `I'm tired of paying simply for
time,' " notes John Hamm, vice president for compensation and
benefits at Aetna Life and Casualty. "Now they are saying, `I
want to pay for production.' " So many are saying it that 35%
of the FORTUNE 500 are experimenting with some form of
pay-for-performance program, according to the consulting firm
Sibson & Co. -- up from 7% 10 years ago.

    The roughly 4 million U.S. workers covered by such plans
are living by the ancient rule of markets everywhere: risk and
reward go together. Unlike corporate chieftains, who often
prosper no matter how their companies fare, workers in these
programs may suffer painful cuts in income when times are lean.
Uncertain pay can create problems when it comes to such mundane
matters as applying for mortgages, which usually demand
predictable annual income -- to say nothing of the impact of
variable wages on one's ability to pay back loans. But the
payoff can also be great, allowing productive employees to make
far more than their counterparts at other firms. In general,
depending on job performance and the plan's details, covered
workers may earn as little as 90% of the average salary for
comparable jobs -- or as much as 120%.

    The 160 workers at a new Corning ceramics plant in
Blacksburg, Va., earn bonuses for, among other things, pulling
blemished materials from assembly lines before they can go into
kilns. While starting workers at the plant make $8.60 an hour,
or about 40 cents less than those at Corning facilities with
traditional pay plans, the Blacksburg workers made at least an
additional 72 cents an hour in bonuses last year. Three-quarters
of that gain reflected the fact that workers met their
production targets, and the rest was pegged to improvement in
the company's financial results.

    With so much riding on their performance, employees at
Blacksburg tend to be strict with themselves and one another.
Notes Gail Simpkins, an assembly-line worker who earned $2,000
in bonuses last year: "People often say, `Watch what you're
doing! If you're throwing away something you don't have to,
you're costing me money as much as you're costing yourself
money.' "

    Yet no matter how hard employees work, variable-pay
programs expose them to the vagaries of the marketplace and
chance. Workers at a Monsanto plant in Idaho that mines and
refines phosphorus earned more than $1,800 each in bonuses in
1989 but only $255 last year when the facility had to shut two
of its three furnaces for extended maintenance and the economy
stumbled into recession. Monsanto's chemical plant in Luling,
La., pegs bonuses to how well its 380 workers meet goals ranging
from reducing on-the-job injuries to preventing air pollution.
The employees earned $1,060 each in bonuses in 1989 but just
$760 last year.

    Companies must guard against setting goals so high that
they cannot be met. Valvoline, a Kentucky-based maker of oil
additives, created a pay-for-performance plan for 1,000
employees last year but then had to tell workers it could not
afford to pay a bonus when the company missed its goal of $38
million in operating income. "People didn't like it, but they
understood it," said Randy Powell, Valvoline's human-resources
manager. Partly to avoid repeating the embarrassment, Valvoline
lowered its earnings target to $30 million this year. If nothing
else, the episode caught the workers' attention. Powell said
that before the new program, "if you asked employees, `What's
our 1989 profits and what's our 1990 goal?' they couldn't tell
you. Today 900 people could tell you what our goals are."

    Worker discontent has led some firms to jettison their
programs. In a stunning reversal, Du Pont dropped a pay plan in
February that experts had hailed as a landmark when the
chemicals giant launched it just two years ago. Under the
program, which covered 20,000 workers in Du Pont's fibers group,
employees would receive 6% lower basic pay than their
counterparts elsewhere in the company after a phase-in period.
But workers could recoup the difference in bonuses if the fibers
group met its profit goals, and they stood to receive an
additional 6% for surpassing those goals. Nonetheless, nervous
employees balked at putting so much of their wages at risk --
especially when they saw the group's profits suffering in the
recession. When Du Pont tried to modify the plan to give
employees a choice of how much income to risk, federal
regulations made the move impractical.

    Variable-pay plans often fare better in service industries
where workers are accustomed to commissions or other forms of
nonfixed compensation. Seattle-based Nordstrom, an upscale
department-store chain, pays its sales force straight
commissions in lieu of even minimal salary guarantees. "We have
people making over $100,000 a year selling suits, and a lot
getting between $30,000 and $60,000 selling shirts and shoes,"
says Joe Demarte, vice president for personnel. (Recent employee
lawsuits against the company involve unionized clerks, not
commission-earning salespeople.) The strategy has boosted
Nordstrom's sales volume and helped the company embark on an
ambitious expansion plan at a time when rival retailers are
shuttering stores.

    Young workers with little to lose may gladly embrace
incentive plans. Long John Silver's, a Kentucky-based chain of
seafood shops, launched a pay-for-performance program last
October at its 1,000 company-owned stores. The plan, which
encouraged employees to increase store business by suggesting
that customers order such items as a king-size drink or a slice
of pie, worked so well that some employees boosted their wages
more than 75 cents an hour during the first quarter, from about
$4.25. Says Wendy Lane, 23, a restaurant worker in St.
Clairsville, Ohio, who added $70 to her paycheck in March: "All
I had to do was a little bit more to make our guests happy. What
it all comes down to is that the bonus was a real motivator."

    Some industries see pay for performance as one of their
best bets for keeping jobs in the U.S. Despite a decade of
restructuring, many companies remain desperate to slash payrolls
further and get more bang for their labor bucks. "People are
beginning to understand that the world is moving ahead at a fast
clip and that global competition is so fierce that the future
of American manufacturing industries is at stake," says Lawrence
Bankowski, the Ohio-based president of the American Flint Glass
Workers Union, which has lost nearly half its 36,000 members
during the past 15 years. Concurs Mike Rohret, a human-resources
manager at a Fisher Controls plant in Iowa that is testing a
variable-pay plan: "If we didn't manufacture here, we would have
manufactured in Singapore."

    A wave of layoffs last week provided fresh evidence of
just how vulnerable jobs can be. CBS said its profits fell 73%
in the first quarter, to $23.3 million, and announced plans to
dismiss 400 workers. In Boston GTE said slack defense spending
meant layoffs for 500 of its workers at a unit that makes
military communications equipment. Grumman said the slowdown
will force it to cut 1,900 jobs. In Baltimore, insurer USF&G
said it will reduce its work force by 1,900 positions.

    Yet some experts doubt that most U.S. workers will ever
fully accept pay-for-performance plans in their present form.
"There has to be an acceptance of a downside risk, and that
seems to be the stumbling block," says Charles Peck, a senior
research associate at the New York City-based Conference Board.
"This is true of everybody -- executives too. People want money
or more money. They don't want less."

    A pay-for-performance plan brings workers and companies a
step closer to being partners -- and the only way partnerships
work is through trust. Contends Marc Wallace, a management
professor at the University of Kentucky: "Where employees
believe their managements, they are willing to put a tremendous
amount at risk to make the business go." Gaining the trust of
workers isn't quick or easy; it generally requires a concrete
demonstration of confidence in them by giving them more
authority and freedom. Many companies might hesitate to take
that chance. But if they want the benefits of a successful
pay-for-performance plan, it's the only way. For employers, as
for workers, risk and reward go together.