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1998 Service Optimas Award Profile Owens-Corning

February 1, 1998
Related Topics: Compensation Design and Communication, Variable Pay, Service, Featured Article
It's not every day that a company gets the attention of Business Week, The Wall Street Journal, Compensation & Benefits Review, CFO, Financial Executive and scads of other business publications. But, then, it's not every day that company management completely revamps its compensation and benefits programs either-and starts with a clean slate.

The HR staff at Owens-Corning, the Toledo, Ohio-based construction materials manufacturer, did just that. In January 1996 it scrapped its existing compensation and benefits programs and completely overhauled every element of them to create Rewards and Resources, a variable compensation and flexible benefits program that's tied to performance. The total remuneration program is extensive and complex, but the goals are straightforward and clear: to create a mindset that helps employees understand and see the impact of their work efforts in tangible form. What makes this package unusual is its flexibility and the fact that employees are awarded stewardship of their choices. Furthermore, it continually emphasizes the dollar-value of previously considered entitlements, changing the perception of them into sought-after benefits and valued rewards.

Moving from the past.
Not so long ago, Owens-Corning was plagued with poor sales and costly asbestos litigation that affected both cash flow and employee morale. At the same time, the company was burdened with fixed -- and costly -- compensation and benefits programs that not only affected cash flow but also created an entitlement mentality. The medical benefits were of a one-size-fits-all nature, which didn't make sense anymore because the composition of the workforce was getting younger, and the needs of the company were changing. So, in addition to improving the financial picture, a goal of senior management was to alter the mindset of employees from entitlement to performance.

In 1992, incoming CEO Glen Hiner led the creation of new corporate goals called Vision 2000. Along with targeting $5 billion in sales, he led the creation of new company core values: customer satisfaction, individual dignity and shareholder value. The entire focus of Vision 2000 was to involve employees more closely with the bottom line. Enter HR, and the new HR vice president, Greg Thomson, who would help create a remuneration package that would drive cultural change and move the organization toward its business goals.

"With Rewards and Resources, we tried to design a program that reflects those three core values and most obviously ties into the last two," says Thomson. "We started with a very simple systemic strategy that begins with the business results we want to produce. Then it used all of the human resources systems and processes as either levers for change or drivers of the business strategy."

In other words, Thomson and the HR staff looked at the business plan and ascertained the HR needs. They asked some of the tough questions, like what would the new workforce need? What type of employees would the company need to attract and motivate? What behavior did the company want to reward? The staff focused on these high-level issues first and gradually translated the business needs and the very high human resources needs into a specific direction for the compensation and benefits program.

"We looked at all the programs, threw them all in a hopper and asked ourselves how we could design an overall compensation plan that met our guiding principles," says Rick Tober, leader of Rewards and Resources. The guiding principles were to conserve cash, reduce fixed costs, provide flexibility that employees didn't currently have, be competitive in the total package (not necessarily individual pieces of the package) and encourage employee stock ownership. "We wanted to encourage and empower employees to think and act like owners," says Thomson.

By doing so, the company moved its compensation philosophy into the future. It would not provide specific benefits for employees, but would instead define the company's contribution to those benefits and allow workers to make choices based on their specific life cycle needs. It gets away from subsidies and makes compensation more equitable -- as well as tying the employees' wealth to the company's.

Creating strategic rewards.
The plan Thomson and human resources came up with has several components that are linked to company performance. Rewards come in two forms -- base rewards and resources. Base rewards, such as salary and variable rewards, depend on performance. Resources refers to all of the other elements of the remuneration plan. Among the Rewards and Resources are:

  • Global stock plan: each employee receives the annual bonus in stock, which depends on company performance, and each individual has the option to buy stock.

  • Savings and profit sharing: the savings portion that the company matches is a lower percentage than with the previous plan, but it adds profit sharing (based on company performance, not individual performance). Under the new plan, the individual may earn more in good years.

  • Cash balance plan: employees' retirement benefits were converted to an opening cash balance. The account, which has a guaranteed annual interest rate, is credited with 2 percent of pay annually and additional percentages, depending on a variety of factors, including age and years of service. Employees become vested after three years.

  • Choicemaking: handing over benefits choices to individuals is one more way to encourage employee ownership and decision making. Choices are offered in the following areas: medical and dental coverage, life insurance, disability, health-care and dependent-care spending accounts, and vacations.
In other words, Rewards are the compensation elements of benefits -- what employees receive for doing their jobs well. The Resources are the opportunities they have to save and invest as they see appropriate. The program provides a lot of flexibility and is constantly tied to the bottom-line performance of Owens-Corning.

"This is exceedingly exciting stuff," says Rick Cornwell, principal at Kwasha Lipton, who was involved in the design of the program since 1995. "It used to be that everything was guaranteed to employees. Now what's guaranteed is less than they had before. However, company communications tell them that even though they're guaranteed less on the benefits, they now have three performance-related elements -- profit sharing, stock bonus and stock options-that are brand new. If the company performs even at target levels, they'll do better than they did before, and if it exceeds target levels, they'll do much better than before." But that's not all. What's special for employees is the choice they have to use their benefits in exactly the way that works best for them.

Learning HR lessons.
Throwing out everything and starting from scratch was a challenge, but, in the end, was the best solution. "The instincts most HR professionals have is to say, 'Let's tackle these one at a time. In 1998 we'll worry about the flex plan; in 1999 we'll worry about the pension plan; in 2000 we'll worry about the savings plan and so on,'" says Cornwell. "What HR [pros] at Owens-Corning said is, 'We know we've got programs that don't support the business objectives, and why not undertake reviewing everything all at once?'"

One problem with rolling out programs year after year is that HR risks losing credibility. Furthermore, employees also tend to focus on each provision. When managers explain to employees that this is the new employment contract, they not only have to tell them what's expected of them, but they also have to tell them what their reward opportunities are.

The most enormous challenge to the HR staff was to explain the Rewards and Resources concept and convince employees of the program's fairness and viability. The HR staff worked feverishly to create and disseminate communication material that was clear and comprehensive.

"When you make sweeping changes like this and reconstruct everything all at once, it's critical that employees get the overall message," says Dwight Mills, leader of Rewards and Resources. In the early stages, people started looking at the pieces of the program and were somewhat skeptical. There was some negative reaction. (However, reaction shifted when they began to understand the program, and later as stock began to get more valuable.)

The HR staff created a raft of communications vehicles. They sent outlines to help employees see what the new program meant to them. They created a visual image of building blocks so individuals could see where the profit sharing and stock options and other compensation pieces would create their total remuneration package. There were individual charts, line graphs, meetings and more meetings. The staff even created a Monopoly-type board game that employees could play to see how their risks could produce rewards. They were intent on making the one-third rule -- one-third of the employees will be invigorated by the change, one-third won't like it at all, and one-third are in the middle -- work for them. The big challenge has been to win over the middle one-third, and to accept the idea that there will also be new blood because the plan doesn't reward employees who aren't motivated.

And, it's still difficult in some ways. "One of the hardest things during roll out and implementation was that a lot of employees still didn't understand that their old pension and their 50 percent match in a 401(k) was being replaced with the five pieces that work together as the retirement program," says Mills. "They're starting to get it, but it takes time." The staff continues to hold meetings and distribute quarterly statements so employees can see their status every quarter.

Compensation usually isn't the exciting place to be. But, as Cornwell, who was instrumental in the program and lectures to hundreds of HR audiences all over the country who eagerly want to hear about Owens-Corning's endeavor says, "This could be the greatest human resources challenge of your life. Here's an opportunity to transform the organization by making major changes to the reward structures that will affect the culture that will affect the outcome of the business." With shared understanding of the strategic business direction and how HR plays a pivotal part, Owens-Corning has become a role model in more than mere compensation. It has become a model for strategic partnership.

Workforce, February 1998, Vol. 77, No. 2, pp. 78-81.

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