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Peer Review Drives Compensation at Johnsonville

October 1, 1994
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Related Topics: Compensation Design and Communication, Featured Article
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At Johnsonville Foods, employees are talking about each other. But they aren't gossiping near the watercooler or spreading rumors in the lunchroom. This talk is encouraged by management: It's peer review.

More than a decade ago, as part of an improvement effort, Johnsonville Foods incorporated a team structure into its work environment. Within this framework, open communication and coworker feedback became vital to the functioning of the business. As employees learned to work together as part of high-performance teams, they began to incorporate the essentials of peer review into their day-to-day jobs.

Today, Johnsonville's employee feedback isn't informal, as it was in the 1980s. Instead, the Sheboygan, Wisconsin-based sausage manufacturer uses a structured peer-review process in practically all areas, including not only performance, development and dispute resolution, but also compensation.

Peer review's move into the compensation arena began four years ago at Johnsonville, with the company's approximately 400 hourly employees, or members. Tim Lenz, an employee in Johnsonville's manufacturing facility, was one of many who were frustrated with the company's hourly compensation strategy.

"There really wasn't a system anymore," says Lenz, who's now assistant coordinator for Johnsonville's Riverside, Wisconsin, plant. "When I came to the company in 1979, we had several wage scales for positions throughout the facility. These slowly deteriorated, and it had gotten to the point where no one knew how to get a raise."

Leah Glaub, member services (equivalent to human resources in many companies) coordinator at Johnsonville, agrees that the company's hourly compensation strategy wasn't ideal: "We had a system in which the squeaky wheel got the oil," Glaub says. "People would pick up different responsibilities, then go to their coaches and get salary increases. There wasn't really an established system, and this caused frustration among people."

A team of employees leads the design process.
Instead of simply complaining about the haphazard process, Lenz decided to do something about it. In 1990, he went to the vice president of manufacturing and proposed that a group of employees work together to rethink the hourly compensation system. The vice president not only approved Lenz's suggestion, he also agreed to work with the team as needed throughout the design process.

Having obtained this support, Lenz hung a note on the plant bulletin board, inviting other employees to help him try to improve the hourly compensation system. He says that approximately 12 people signed up to help. After several introductory meetings, eight of these volunteers made the commitment to be members of the hourly compensation design team.

During one of the initial meetings, the team members decided that they needed some assistance from member services. "We invited a member of our company's [HR] department to join the team, because we knew that those skills would be necessary, and knowledge about compensation would help us determine the right system for our company," says Lenz. Because the team members had little or no expertise in the compensation area, this HR person (later replaced by Glaub) was able to conduct initial research for the team and gather useful data to assist them in the compensation system's design.

As part of the research process, team members also conducted focus groups of employees at Johnsonville to determine their needs and expectations, benchmarked other companies to evaluate different types of compensation systems and talked with consultants to generate ideas.

"The peer-review structure improves employee communication regarding job descriptions, work flow, accountability and productivity."

Lenz says that one particularly helpful research project was a site visit and one-day seminar on skill-based pay sponsored by Aid Association for Lutherans, a fraternal benefits society in Appleton, Wisconsin. This seminar helped the team determine what type of compensation structure would work within Johnsonville's culture, he says.

Cumulatively, this research led the team to develop four primary philosophies for Johnsonville:

  1. Employees need to know exactly what they have to do to get a raise.
  2. Employees should have responsibility for compensation. They should be able to request a pay increase when they feel they're ready.
  3. Employees should be involved in the review process.
  4. Base pay should equal the average market rate based on traditional internal and external values.

Once these goals were articulated, the team set about to meet them. But this didn't happen overnight. In fact, because the team met and discussed the project only once every two weeks on average, the final proposal wasn't introduced until 1992. "If I were to do this again, I'd like to see the team move faster," says Glaub. She adds that part of the problem was the team's determination to introduce a flawless program: "Sometimes, you can't just sit there and [try to] make something perfect. You just have to go try it out and then start tweaking it from there."

The process was a long one, but the result was strong. After two years of work and cooperation, the team members presented management with a compensation system that directly responded to the four philosophies they had established for Johnsonville.

Lenz says that as a whole, the senior ranks approved of the team's proposal. Because he had kept management updated along the way and because the vice president of manufacturing worked with the team off and on throughout the process, there weren't any surprises during the final presentation. "A few were skeptical, but the majority were supportive," Lenz says. Therefore, after presentations to employees and a vote by all members of the work force, the new compensation system was introduced.

Peers review performance to determine pay increases.
Overall, the compensation system is what Lenz describes as "pay-for-performance." Although grounded in a traditional evaluation structure-a point factor-it's also heavily reliant on a peer-review process.

The system centers around result blocks for each of approximately 80 positions. These blocks each comprise as many as 15 separate criteria, which highlight the key requirements for each job. Lenz says that most positions have two or three result blocks that are completed in progression, but some positions have as many as five. "Our belief is that you start out with the tasks that you must accomplish to do the basic parts of your job," he says. "These make up the first result block. Once you know how to do these tasks, you progress to the skills you need to know to perform at a higher level. Finally, you go on to the results that you should be able to achieve because of the competencies that you have."

Going along with this belief is a philosophy that people should be paid for what they do, and shouldn't be restricted from learning and growing. Therefore, the company sets no limits on how quickly employees can move through their result blocks. "If someone is doing the job, we don't want to hold them back," Glaub explains. "We want to pay them what the job's worth." She adds, however, it takes employees months-and sometimes years-to work through most of the blocks: "If you have them set up right, people are going to be challenged and won't test through them too quickly."

When employees are ready to be evaluated on a result block, they must follow specific steps. On the bulletin board in each plant, there's a form to initiate this compensation change process. When an employee feels prepared to "pass" an evaluation of all eight to 15 results, he or she fills out the form, which includes the employee's name, title and team, as well as the result block to be evaluated. This completed, the employee passes the form on to his or her supervisor, or coach.

"The peer-review process is refreshing for supervisors: With the extra input from others, they feel more like facilitators and less like judges."

Together, the employee and supervisor select some of the employee's peers who already have completed the result block being evaluated and also are in a position to see the employee's work on a regular basis. These employees-plus the employee's team leader and supervisor-become the peer-review team. Glaub says that usually this number comes to four or five, but "it depends on the job and how many people that person really interacts with day to day."

For each result in the block, there is a different measurement-evaluations that range from written quizzes to timed demonstrations. "They're supposed to be as objective as possible," says Glaub. "We really are looking for proof of new competencies." She admits, however, that some results-especially in the highest result blocks-need to be quite subjective in nature. "For example, I have payroll coordinators on my team," she explains. "One of the things that they have on their last result block is that they must make meaningful contributions to project teams." Understandably, "meaningful contributions" aren't easily measured. Therefore, the peers reviewing the result block must analyze the employee's past meeting participation and come to a consensus on whether he or she met the criterium.

Glaub says that for most supervisors, this peer-review process is refreshing. "They get a lot of input," she says. This makes the performance review and salary decision easier: "The decision isn't based only on their observations-it's based on a number of different people's observations. They feel more like facilitators and less like judges."

But what do employees think about it? Lenz says that they like having more control over their salary increases. "We don't have the good-old-boy system anymore," he says. "People, for the most part, don't mind honestly evaluating their peers, because that means that they will be evaluated fairly, too, when it comes time for their result-block test."

Glaub says that if employees are uncomfortable participating in the peer review, she does what she can to make it easier for them. "If someone is having a tough time, we make them responsible for an area that's easier to measure so that they don't feel they're getting into personal issues," she says. But-in the end-peer review is required of everyone. "Since the 1980s, we've been a very team-oriented company," Glaub says. "People are used to giving a lot of feedback and being involved. If it's uncomfortable for some people, they have to get used to it if they want to work here. That's just the way we operate."

Monthly contract fulfillment determines individual bonus.
As the hourly team was completing its task, another team of approximately 35 employees began looking at Johnsonville's bonus system. Working closely with Glaub and the member services department, the team developed a monthly companywide bonus system that also requires that employees talk openly with-and about-their peers.

According to this plan, Johnsonville employees follow designated steps to receive their bonuses. The process begins with all teams, salaried members and coaches writing six-month contracts, stating their six-month goals and the ways they plan to meet them. The goals must fall into the framework of four overriding company endstates: a noticeably better product, outstanding financial results, outstanding customer service and outstanding people.

In addition, the six-month contract contains professional-development goals. These ensure that each employee continually is challenging himself or herself to learn more and provide increasing value to his or her customers, says Gene Rech, southwest regional sales coach for Johnsonville. "If you aren't at fair market value, you want to work on the skills that will get you there," he says. "If you are already at fair market value, you should include actions that will move you further ahead." Glaub says that these professional-development actions vary greatly from job to job and month to month, but examples might include reading a specific book or learning a new computer skill. "It's any action that will help you to move your position forward," she explains.

At the beginning of every month, each employee writes a contract that includes his or her actions that will help accomplish that month's goals-and eventually, the six-month goals as well. "The whole purpose is to help people focus, prioritize and manage their time," Glaub says. "The contracts really keep [employees] moving on long-term actions."

To obtain feedback on this performance, individual employees select three internal customers-or people who will be affected by the employee's work-as feedback providers each month. Through the company's electronic bulletin board system, employees send their contracts to the three customers. At the end of the month, these customers respond through surveys that provide detailed information on employees' performance.

Employees also post their contracts to a companywide bulletin board so anyone can read others' monthly goals and actions and comment on them. "We realize that people have more than three customers each month," Glaub says. "This allows for more feedback from others who may be interested. People do get comments on their contracts through this system."

Glaub says that the company teams meet at the beginning of the month to review contracts and ensure that the employees' goals are attainable. "It's the team members' role to say up front, 'Hey, I don't think you're doing enough for your bonus this month,' or 'Hey, I think it would work out better if you focused on some different activities,' " she says.

At this same meeting, the team discusses the customer feedback from the previous month's contracts. "If you do something for someone and the team thinks you could have done it better or differently, you'll receive feedback that will help you improve your performance next time," Glaub explains. Lenz adds: "If there was an honest effort and constant communication, then we use the attempt as a learning experience." This isn't always the case, however. "If you don't complete a project, your team may not give you your whole bonus," Glaub says.

This is an important aspect of the system. As it's set up, bonuses-which are based on the company's performance-are distributed monthly to teams as a whole. Each individual has a bonus target for the year, which Glaub says usually makes up 10% to 25% of an employee's base pay. However, the monthly responsibility for dividing the bonus is left to the team members, who must decide collaboratively if the individual members have fulfilled their contracted obligations. "Sometimes, employees come in below target at the year's end; sometimes they get 110% of their targeted bonus," Glaub says. "The target is established so individuals can measure their performance against a pre-established dollar amount."

Glaub says that in the event that contracts aren't complete, the team usually knows before the month's end. "Team members are supposed to come tell us halfway through the month if they're having some difficulties or if something came up of higher priority," Glaub says. "In those instances, the customers must say that it's OK that the member didn't finish the work [and fulfill the contract]." Usually, in these circumstances, Glaub says the employee will continue to work with the same customer the following month.

Lenz says that there have been cases in which team members didn't receive the bonuses expected: "We've had team members who lost some of their dollars because they didn't fulfill some of their contract obligations." This is rare, however. Why? Not only is there a financial incentive to complete tasks, but the contract also encourages hard work. "You're making a commitment when you write your contract, so you have to plan well and organize your time to get your work done," Glaub says. "People don't like to go to others and say, 'I didn't get finished.' "

The peer-review process builds bonds between workers.
As Johnsonville enters its third year of peer review for compensation, everyone agrees that the benefits are evident. For management, the process alleviates some of the pressure caused by performance reviews and salary decisions. And for employees, it creates structure and needed challenge. "It can be stressful because the bar always is raised, and you can't get into those comfort levels where you can just coast," Lenz explains. "But, there's always a lot expected of you, and your contributions are valued. Plus, everyone knows what needs to be done to get a salary increase."

In addition, Rech says that there's a better bond between employees as a result of the review process. "People know what's being done throughout their areas. Everyone knows what others are working on, and each member is accountable to his or her peers." Overall, says Rech, the peer-review structure improves employee communication regarding job descriptions, work flow, accountability and productivity. Or, in other words, peer review helps this sausage company create more than one type of link.

Personnel Journal, October 1994, Vol. 73, No. 10, pp. 126-132.

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