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Trickle Down Is Trickling Down At Work

News: Analysis & Commentary


White-collar workers all over America have learned to expect the modest raises of 4% or so that are now so commonplace. But at Hughes Electronics Corp., there's more: bonuses of up to 8% of annual salaries for employees in divisions that met certain financial goals in 1995.

Hughes isn't alone. From Wal-Mart to Pizza Hut to Deere, companies are jumping on the pay-for-performance bandwagon for the rank and file. IBM will increase workers' pay an average of 8% in 1996, partly the result of incentives tied to divisions' performance. In 1995, nearly 50% of all the companies in a survey by Towers Perrin had cobbled together some form of variable-pay plan for nonexecutives--nearly double the share that did so four years ago. An additional 26% said they were considering such plans. And a survey by human resources consultants Hewitt Associates found that companies budgeted an average 7.6% of payroll for results-sharing awards in 1995--up from 5.9% in 1993.

EASY ADJUSTMENT. Sounds good, right? But for employees, the plans are a decidedly mixed bag. Often, the more money that goes to results-sharing bonuses, the less there is for old-fashioned merit raises throughout the company. Indeed, some 20% of the businesses surveyed by Towers Perrin either reduced future merit-pay increases or froze base pay as they implemented pay-for-performance programs. An employee in Hughes's radar-systems division, which has been a mediocre performer, calls his company's incentive-pay plan "a point of terrific divisiveness."

For Corporate America, incentive-pay plans for rank-and-file employees are an easy way to adjust labor expenses during economic ups and downs. Moreover, done right, pay-for-performance plans can create double-digit productivity gains, says Haig R. Nalbantian, a consultant with benefits specialist William M. Mercer Inc.

The programs, though, can backfire. Just look what happened at Fleet Financial Group Inc., which ended its program in 1995. As part of a two-year cost-cutting effort, management at the Providence bank had created a bonus pool tied to the company's ratio of expenses to revenues and its stock price. The more costs were cut and the higher the stock rose, the more employees were supposed to gain. But when Fleet's stock price remained depressed even after the cost cuts, workers got the minimum payout--averaging $615 per employee. "Considering the blood, sweat, and tears that went into getting the bonus, it turned out to be meaningless," says one former Fleet executive. A Fleet spokesman says: "We think it was a successful, well designed program. Employees received a meaningful payment."

Fleet enraged employees, though, because Chairman Terrence Murray and other top managers received big yearend bonuses that weren't tied to the same measurements. "We were being asked to make sacrifices, but they didn't do the same," says Harrison F. Hazard, a former lending officer.

Other companies have erred by creating programs that inadvertently reward the wrong behavior. Sears, Roebuck & Co., for instance, stumbled in 1992 when it paid commissions to its auto-shop employees that were pegged to the size of repair bills. The result: overbilled customers, charges for work never done, and a scandal that tarnished Sears' reputation.

Some well-designed plans have had the desired effect. Eight times last year, Continental Airlines Inc. employees earned $65 apiece when the airline ranked in the top half of the Transportation Dept.'s monthly on-time ratings for the industry. When Continental took the No.1 spot in December, the airline upped the bonus to $100 per worker. This year, it raised the goal: Employees won't get a bonus unless Continental ranks in the top three. The incentive seems tiny, especially with workers making as much as 20% less than their industry peers. But Bob Wilson, head of the pilots' union, calls it "a big morale builder."

The question now for Continental and other companies is how to raise the bar without alienating their workers. "The kind of trust that would be needed to have these [pay plans] function long-term probably doesn't exist in a lot of companies," says Todd R. Zenger, an associate professor of organization and strategy at Washington University's business school. That's why, despite some successes, pay-for-performance plans aren't guaranteed to pay off.By Wendy Zellner in Dallas, with Eric Schine in Los Angeles, Geoffrey Smith in Boston, and bureau reportsReturn to top

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