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Five components of a total reward strategy.

April 1, 1995
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Related Topics: Corporate Culture, Reengineering, Recognition, Featured Article
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Prompted by brutal competition and demanding customers, companies are looking for new ways to engage employees. In doing so, they often vacillate between two approaches. The change debate often sounds like a not-so-funny take-off on the classic Abbott and Costello skit, "Who's on first?" Do you first change the culture, the "What it's like to work around here" mindset? Or, do you first change the reward system and hope everything else will work itself out?

The reason for the debate is the longstanding belief that a company can change either its culture or its rewards-but not both. Naysayers believe that an organization can't handle too much change at once. Unfortunately, they're missing the point. Just ask the employees in plants across the country who face plant closures unless they can find ways to increase quality and productivity while reducing costs. Or ask customers whose new and more complex demands aren't being met. The message-and it ought to be coming through loud and clear by now-is that companies need to make big changes.

Culture and rewards go hand in hand.
A growing number of organizations have stopped arguing and taken a different approach. They're changing both their companies' cultures and rewards at the same time. Culture, in this instance, refers to the way in which people work and how they're organized, how and by whom decisions are made, and how constructive levels of trust and respect are developed. Rewards go beyond the financial returns to include all of the things about work and working that people find rewarding, such as recognition, career development, feedback and meaningful work.

By changing their cultures without also developing a reward system, companies run the risk of sending employees terribly mixed signals and are much less likely to sustain any gains. Along the same lines, by simply changing the reward system-often in the hope that the reward system can fix the company's cultural problems-companies often end up throwing money at their problems. Consider the experiences of two companies that changed one key aspect of the organization without changing the other.

A 'round-the-clock manufacturing plant with several thousand employees changed its culture, but not its rewards. A few years ago, the company moved toward greater accountability to its business units within the plant and moved to a team-based work model. Now, there are several hundred teams in place. The company has enjoyed success with this new work design, and employees now have the tools and knowledge to make significant business decisions about such things as scheduling, quality and training.

Since the plant increased its focus on business units and teams, costs have been reduced, quality has improved and accidents have decreased. However, because the company hasn't fully aligned rewards with its new work system, there's a sense among employees that they've hit the wall. They still receive most of their pay for hours worked with an annual profit-sharing award based on the profitability of the total corporation-performance that's far beyond the walls of this particular plant. But operators and managers are frustrated because there's no link between the way people are being asked to work-that is, in business units and teams-and their pay.

"By changing their cultures without also developing a reward system, companies run the risk of sending their employees terribly mixed signals.

In another manufacturing plant, rewards have changed, but there haven't been changes in the culture. This facility has a gainsharing plan in which awards are driven almost totally by production-that is, tons of product out the door. Recent awards have added up to 40% to employees' base pay. Yet, there's been no attention given to the culture side of the equation. Employees are encouraged to work harder, but their work processes aren't becoming more flexible nor are they becoming involved in making important decisions about their work. Moreover, they don't have contact with the customers. They are driven toward production, period. And that's exactly what the facility has gotten. Yet quality is very uneven. Long-time customers are threatening to go to other suppliers whose service and quality is better and more consistent. And because employees are paid by how much tonnage is processed, production grinds on. Employees also resist any effort to change a pay plan that's been so lucrative for them. And no one works on the underlying problems. Employees are involved in achieving production, but there's more to the equation. Pay alone won't get them out of their mental rut or energize the work force to make significant changes in their work processes.

Companies increase customer focus and work in new ways.
Organizations of all descriptions are organizing themselves in ways that are simple and efficient for their customers. Some even invite customers in to help with product design and key features. For example, at Seattle-based Boeing Co., customer input resulted in important improvements in the design of new jumbo passenger planes, including wider aisles and larger storage bins.

Some companies have gone a step further by putting the people who do the work in direct contact with the people who buy the work. At a manufacturing plant operated by Bridgewater, New Jersey-based Hoechst Celanese, line employees visit customer locations to see how customers use the company's products. These visits help give employees a better understanding of customer requirements and problems. At a maker of top-quality home cabinets, line workers are actually considered the company's best salespeople. Customers who visit a Jasper, Indiana-based Aristokraft facility meet with production employees to hear first-hand about the company's commitment to quality, craftsmanship and complete customer satisfaction. It's important to recognize that the customer is directly connected to employees-the people who make and supply the product or service.

Smart companies also believe that employees with a broader view can make better decisions. They know how to please the customer and work more efficiently. Today's employees often welcome opportunities to help their colleagues, their teams and overall operations. That's why it makes so much sense for employees to learn multiple parts of the operation. For example, in one manufacturing plant, when the production process develops a bottleneck in one area, multiskilled employees from other areas help eliminate the backlog. Not only are these employees more valuable to the company, but they report higher job satisfaction and turn out better products.

Yet, while the key to flexible organizations is often increased teamwork, the team concept is neither a silver bullet nor an easy fix. It isn't enough to gather a group of people, sprinkle some magic dust on them, and say, "Poof, you're a team." Developing effective teams takes much more than magic dust. Some companies approach team- and work-system design by broadly including management, company and union staff, employees and customers. If stakeholders recognize that change is in everyone's best interest, the quality and acceptance of the plan is likely to be higher. In one manufacturing company, stakeholder meetings defined the organization's future vision and how that vision could be accomplished through significant changes in the way work would be done and the role employees would play as team members. If, for example, a team structure is put in place, a company should be prepared to back up the change effort with ongoing training and communication, as well as team-based rewards. These are important steps in maintaining a change effort's credibility among employees. One manufacturing firm that established teams concluded that it needed to devote extra resources, such as more and better training programs, to make their employees more capable team members. The company then followed up by developing a group incentive plan to reward those new behaviors and the results they produced.

Although companies still need solo contributors in some situations, very little of any organization's work is done alone these days. Now, more than ever, employees must be able to work together to achieve the complex goals most organizations require.rganizational charts today look less vertical and more like circles, spheres or other exotic shapes. Meanwhile, downsizing, information technology and employee empowerment have removed whole layers from the traditional structure. Customers don't want to wait unnecessarily for service while a sales representative seeks rubberstamp approval from a supervisor. They want an immediate decision.

Hence, the traditional job is giving way to more fluid roles in which everyone does whatever it takes to satisfy the customer. Employees are accountable to one another and, with fewer supervisors and managers, they often manage themselves.

Little wonder, then, that employee involvement has become a mainstream strategy in many organizations. The total quality movement (TQM) sparked the awareness by teaching that quality is everyone's responsibility. In his new book, Creating Strategic Change, organizational change expert Bill Pasmore, professor of organizational behavior at Cleveland-based Case Western Reserve University, argues that for employee involvement to make a real difference in an organization's performance, the issues on the table must be meaty and substantive. People must understand the business and what they can do to make a difference; they need to have both the technical and social skills necessary to participate in real business decisions.

Workplace changes have implications for rewards.
Focusing on the customer will require new ways of measuring an organization's performance. Financial performance is still important, but so are more operational measures, which are often the ones that directly link employee efforts to customer needs. So with new measures of overall organizational performance in place, the next step is to translate those measures into new reward programs for the employees.

The Consortium for Alternative Rewards Strategies Research (CARS), sponsored in part by Sibson & Company and the American Compensation Association, studied 663 incentive plans for broad-based employee groups and found that, although profit is still the most common type of measurement, quality and productivity are nearly as common. The research also indicated that by using some of these operational measures and supporting them with strong involvement and communication efforts, companies reported better results. These plans simply work better than those with a one-track financial approach and limited employee involvement.

If a company wants to foster a greater customer focus, the key is to ensure the success of a multitude of "moments of truth," those critical opportunities when an employee's actions can make a breakthrough. Those moments of truth involve everyone, not just executives or managers. That's why more companies are sharing both risks and rewards with the people who do the work. Employees have always shared in the risk, of course. They know all too well that business failures mean jobs lost. The difference today is that, in many cases, employees across the organization have an opportunity to share in the upside as well. The old standbys of hourly pay, seniority and individual merit pay have been supplemented with other plans that encourage a collective attention to the needs of the customer. At Zeeland, Michigan-based Herman Miller, for example, a product development team designed and installed a plan that rewards team members for achieving critical goals, including those defined by the customer. Once the product is launched, team members have a financial stake in its first-year commercial success. They are encouraged to stay close to the customers even after the product is introduced.

Reward systems often send a clear message to employees about "what's important around here"-that is, what the organization values. So a move toward new ways of getting work done-new skills, greater flexibility, teams-opens the door for new ways to deliver rewards. Skill- or competency-based pay design, for example, requires that the organization discover which competencies are necessary for its success, then brings that analysis down to the team or individual level and rewards for the acquisition of those skills. In this case, the organization shifts from paying for the job to paying the person for what they bring to the job. When it's combined with a way to recognize results, in either base pay or a variable element, skill- or competency-based pay can provide an important future-oriented balance.

Other companies encourage employees to broaden their experience by offering career-development pay-that is, base pay increases for moves, usually lateral, that meet the company's needs and help employees broaden their skills, but aren't promotions. This might be a change in function, such as a move from sales to marketing; a change in role, such as from manager to senior individual contributor; or a change of business unit. The key is to identify the kind of breadth the organization needs, and then be willing to reward employees for helping to achieve that breadth.

When you reward for results, there's more at work than just pay. Work content is important. For example, employees at Hoechst Celanese say they like the responsibilities of their new team-based work environment. With less supervision, these employees have more elbow room and more space to make their own decisions. The move to teams itself is energizing and invigorating for a while. But sooner or later, employees will begin to ask, "What's in it for me?" That's why a new way of getting work done must be supported by a new approach to rewards.

Reward accountability.
From the employee's perspective, the biggest change occurring in many organizations is an increased level of employee empowerment. Employees now make decisions that were once made in a far-off executive suite or in the plant manager's office. A classic example is the Saturn plant in Spring Hill, Tennessee, where any line employee can halt production to correct a problem.

In this kind of environment, the importance of hierarchy and even the hierarchy itself fades as organizations move to flatter structures.

Such changes put jobs into broad bands to further encourage exchange and mutual accountability. Organizations need to devise new approaches to career management so that the focus shifts from the position one holds to the results produced.

"Organizations can take comfort in understanding that it can take several years to put a completely redesigned culture and reward system in place."

One advantage of empowering employees is their inclusion in designing and implementing reward systems. Once upon a time, these systems were designed by experts. Later, they were designed by a team of managers.

Then came representative teams of employees. Now, a few companies have begun taking a broad approach by involving large segments of the work force at critical points. This broader involvement has resulted in higher quality plans, and greater employee buy-in and acceptance of these plans than ever before. After all, employees often resent change that's thrust upon them. They're more likely to embrace change when they're part of the process.

Ensuring the alignment between culture and rewards is, undeniably, a big job. To many companies, the whole process is simply overwhelming. But organizations can take comfort in understanding it can take several years to put a completely redesigned culture and reward system in place. They will achieve their best results by creating new ways to work, hiring more capable, flexible employees and flattening the decision-making processes, all of which must be supported by appropriate rewards.

That's what's happening at Hoechst Celanese, Herman Miller and a host of other companies. They're addressing the whole system. They've put aside the "Who's on first" question with the realization that, "We have to do it all."

Personnel Journal, April 1995, Vol. 74, No. 4, pp. 30-37.

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