Employee engagement + financial incentives = a winning equation for business results

March 12, 2014

"Getting what you pay for" holds true with performance-based compensation

“You get what you pay for,” is a common adage, but one that’s far from being trite, as evidenced by several companies that have taken that wisdom to heart in creating performance-based compensation programs that deliver high levels of employee engagement and bottom-line results.

Nucor, the largest steel producer in the U.S., starting with one “mini-mill” in 1972 and having grown to over 20,000 employees producing over 20 million tons of steel in 2012, pays production employees monthly bonuses ranging from 80 percent of base pay to 150 percent or more.

Employees say, “We’re not paid on tons of steel we ship, we’re paid on Prime tons of steel we ship.” They understand it’s not just volume that matters; it’s high quality volume. They also say, “You don’t want to be the guy that lets a bad coil go out the door.” If something comes back from a customer because of a quality problem, the bonus is cut by twice the amount that would have been paid on a “Prime” shipment. And that means everyone on the team that shipped the problem product gets the cut.

What Nucor has crafted is a compensation system that results in a team working together to get high quality product to the customer, and sharing the risk should that fail to happen. What’s more, everyone on that team is empowered to shut the line down if they see a situation that could lead to a quality problem. That means everyone has to have a clear understanding of what makes for a smoothly running operation, and what events or circumstances can threaten the process.

While Nucor’s plants are not unionized, similar approaches have proven very effective in companies like Corning Incorporated where union leaders participate in committees that oversee the plans. They weigh in on the process of setting targets and help assure that employees have faith in the fairness of the formulas used to calculate pay-outs.

Corning put in what they refer to as a “Goalsharing plan” in the late 1980’s.

"...For every dollar paid out to employees in the Goalsharing plan, the company profit-and-loss statement reflects three dollars of gain... Employees are highly engaged and well aware of how their actions impact the business. They benefit financially from helping drive continuous operational improvement, and the company realizes those gains directly on the bottom line.”

Today, they have 60 manufacturing facilities around the world, each with its own plan, based on a corporate template, and tailored to the local product, market and workforce. Basically, each plant designs its own goals based on measures such as the facility’s production, quality and cost, and sets payouts which are based 75 percent on how the plant performs, and 25 percent on how well the corporation does as a whole. Goals are generally weighted to mirror a particular plant’s focus for the year. In rare cases where plant goals are not met, the payout is based only on performance of the corporation as a whole, assuming corporate performance is positive. The total maximum payout is capped at 10 percent of base pay. Goals are reset each year, so there is a continuous improvement structure in place.

“In over 25 years of experience, Corning has found, on average, that for every dollar paid out to employees in the Goalsharing plan, the company profit-and-loss statement reflects three dollars of gain,” explained Hank Jonas, Corning’s manager of organization effectiveness. “Today, Goalsharing is an integral part of our company culture. Employees are highly engaged and well aware of how their actions impact the business. They benefit financially from helping drive continuous operational improvement, and the company realizes those gains directly on the bottom line.”

The basic idea behind performance-based compensation (also known as gain-sharing) is to incentivize employees for producing products over and above an agreed ‘standard’ level by sharing the gain between the employees and the company. These plans come in many shapes and sizes, with lots of variation in how “gain” is calculated, what percentage of the “gain” goes to the employees and what percentage to the company, what specific dimensions are put in to the formula for measuring performance, and on and on. Essentially, it’s “let’s all work to make the pie bigger, and let’s all share in how that larger pie is distributed.”

There’s general agreement that the prototype for this ‘bigger pie’ approach is the Scanlon Plan. It was conceived by Joseph Scanlon, a steelworker, a professional boxer, and an International Steelworkers local union president, in the 1930’s. (It didn’t get its name until Scanlon, later an adjunct professor at MIT, hosted a conference, and a sign was put up directing people to the “Scanlon Plan” meeting.)

His plan, adopted by the Admanson Company, a steel mill and Scanlon’s employer at the time, involved a relatively simple calculation. It was based on a ratio of dollars of labor cost compared to the sold dollar value of the product, once in the hands of the customer. What the Scanlon Plan did for the companies which eventually adopted it was to give them an ever-more efficient workforce, through cutting labor hours per unit of output, or increasing output for the same number of hours.

Scanlon was working in the Depression, and working for a company on the verge of failure.  That would have meant substantial job loss, not to mention formerly productive employees finding themselves, as so many did, on the bread lines. The Steelworkers asked Scanlon, who had an educational background as an accountant, if he could come up with something that would improve workers’ efficiency and their morale, and, along the way, save the company.

The key thing that Scanlon understood, in addition to the monetary incentive– and what is currently overlooked or under-emphasized in the history books and in many of today’s workplaces– is the fundamental necessity of ‘employee engagement’ in making the plan work. Give people an economic stake in the outcome, and an opportunity to help figure out how to improve the situation, and it’s a winning formula.

Scanlon’s approach included a ‘design team’ made up of a cross section of employees and managers, who crafted the specifics of the compensation plan, and an on-going shop-floor team structure that allowed all employees to have input into solving the day-to-day operational problems in the mill.  Even today, some 80 years after its invention, the Scanlon Plan elements of employee input into both the compensation plan and into day-to-day operations are evident in the Corning and Nucor approaches.

What this all amounts to is double-barreled leverage on both bottom line and employee motivation. It provides a significant incentive that comes from tying pay to performance, and ultimately, to the quality of production output. Equally or more importantly, it delivers the benefit that accrues from asking employees “What’s working? What’s not working so well? And, what do we need to do differently?” 

It may seem obvious, but it is surprising how many businesses don’t seem to recognize that as the people doing the work, the employees know a whole lot about how to improve it. Further, when they come up with suggestions about what to change, they will almost always figure out how to make the changes they themselves have envisioned work in practice.

The fundamental lesson to be learned from the “You get what you pay for” adage is to design a compensation plan that ties economic rewards directly to employee performance in delivering ‘high quality product or service’. Then, spend a lot of time listening to and acting upon what employees say about the best way to deliver those products or services.

 Nick Bizony is a member of the Consulting Consortium at Overland Resource Group, a 30-year-old firm specializing in helping its clients achieve operational improvement through employee engagement and labor-management collaboration. He is also a founding Principal with The Lakeland Group, where he consults to major organizations in the public and private sectors, enabling them to achieve significant improvements in productivity and quality, cost reduction, and increased customer satisfaction. Nick can be reached at [email protected].

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