Direct Connection - Boss's Bottom Line to Yours
Incentives give workers a piece of the action
Want to make more money? Then prepare to work harder - or at least smarter.
Corporate America is turning anew to an age-old method of motivation: money, pegging a portion of workers' pay to the bottom line.
Such incentive, or variable, pay has been bestowed on executives for years, but as competition heats up and companies try to keep wage costs in check, employers are extending bonuses to middle managers and even hourly workers.
"They're an excellent way to drive productivity way, way up," says Paul Gavejian, a compensation consultant at Buck Consultants in New York. "Incentive plans and alternative pay strategies are here to stay."
With incentive pay, part of the paycheck is fixed and part is tied to a specific company goal. It must be re-earned each year.
Businesses from computer chips to fast food see value in the trend. Nearly 75 percent of Fortune 1,000 firms offer bonus pay to workers below the executive level, up from 64 percent a year ago.
For the past two years, Sears, Roebuck & Co. has tied roughly 15 percent of pay for 20,000 sales managers and salaried workers to annual profits. "It has really helped focus people on the economics of the business," says David Wells, director of executive compensation.
Marriott's Fairfield Inn hotel chain ties 10 percent of paychecks not only to financial goals and customer satisfaction but to worker satisfaction, says Karl Fredericks, vice president of compensation.
In general, the portion of a paycheck devoted to incentives depends on the worker's responsibility. For managers, it's as much as 30 percent. For workers, the amount ranges between 5 and 6 percent.
The options vary widely. (See list, right.) The most popular are group incentives, where teams of workers get a boost for meeting a project deadline, reducing waste, or improving efficiency.
Companies favor incentive pay because it encourages employees to work smarter and act more like business owners - a key factor in increasing competitiveness.
Six years ago, Armstrong World Industries in Lancaster, Pa., rolled out a pilot program at one American plant that set goals for everything from productivity and safety to customer satisfaction. Each worker received a bonus if the plant met or exceeded the goals.
Today all seven North American plants use the plan, saving Armstrong $22 million since 1991, which the company has split with its workers.
"If we are telling employees, 'We want you to be involved in our business,' it's difficult if you don't also say, 'Part of your compensation will be impacted by that,' " says Melvin Pugh, general manager of human resources.
Some consultants say workers can earn more at companies that pay incentives.
While corporate earnings are at record levels, a recent survey by New York-based William M. Mercer predicts that most US workers will see salary gains of only about 4.2 percent in 1998 - a growth rate that has remained constant for the last five years.
"Fixed pay increases are at a fairly steady rate," says Frank Belmonte, a compensation consultant at Hewitt Associates in Lincolnshire, Ill. "Whereas, if your company has variable pay in place and you are measured against performance ... your pay opportunity is much greater."
Others say incentive pay also enhances job security.
"When a company is not doing well, variable pay declines, which reduces the company's costs and lessens the need to cut people," says John Belcher of J.G. Belcher Associates, a compensation consulting firm in Houston.
But these strategies have their critics.
Experts say incentive pay works only if employees receive competitive base salaries. Some argue that these plans foster competition among workers or departments rather than cooperation and that the concept becomes a hard sell to employees who aren't clear how their job impacts the bottom line.
"A lot of companies would say, 'We're not sure if it's effective,' " says Mr. Belmonte. "And a lot of that has to do with [whether] people are seeing the activities they're doing making a difference on the overall business performance."
And with downsizings and mergers still a factor, others say variable pay only adds another element of instability.
More Ways to Get Paid More
The categories and the percentage of Fortune 1,000 firms that use them for at least some nonexecutive workers. (Source: Buck Consultants):
Group incentives. Rewards a select group of workers for reaching preset goal (28.3 percent).
Broadbanding. Sets a few broad tiers for pay; within each tier, workers can get raises without promotions (25.1 percent).
Gainsharing. Extends profit-sharing bonuses to hourly workers or others once shut out (16.3 percent).
Team-based pay. Rewards a team of employees who share a project (13.2 percent).
Skill-based pay. Rewards workers for gaining job-related skills (12 percent).
Competency-based pay. Pays workers for how they contribute, not job title; the most-talked-about but least-used program (7.1 percent).