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Power to the Line People

May 29, 2003
Related Topics: Compensation Design and Communication, Performance Appraisals, Featured Article, Benefits
Delete the pay policy manual. Scrap the salary budget. While you’re at it,incinerate minimums, maximums, grades, ratings, and distributions. In the newworld of salary management, what’s driving corporate direction at places likeMarriott International, Inc., and Dow Chemical Company is this: determiningmarket prices and then handing the power over to the line managers.

    A look at the sheer size and scope of the vast Marriott empire offers aglimpse of why structural human resources changes in pay were an absolutenecessity. The vast $20-billion-a-year innkeeper encompasses more than 2,600properties staffed by 140,000 employees. The ubiquitous hotels in the chain ringevery major airport and city center in the country. The hotels have agreeable,familiar-sounding names such as Courtyard, Fairfield Inn, Ramada International,Residence Inn--even, of course, Marriott.

    At one time, each facility--or brand--targeted a market segment and operatedalmost as an independent company. But a decade ago, all of that changed. That’swhen Marriott adopted a radically new corporate strategy designed to manage theentire market as one business. But there was one hitch: the company’scompensation and human resources systems quickly defeated attempts to executethe new strategy. Massive change was necessary. Now, after years of large-scaletinkering, Marriott is in the final stretch of implementing a new company-widehuman resources management plan, a program that company executives say hasrevolutionized the organization’s approach to pay and performance and reshapedemployee loyalties.

    Dow Chemical also pursued a major organizational shift that required adramatic change in its human resources systems. Operating with 50,000 employeesin 170 countries and drawing 60 percent of its revenues from abroad, Dow had tomove from a function- and geography-based organizational model to one that isstructured around global businesses. That’s why the chemical company adopted aglobal salary-management process in 1998 as part of a larger effort to integrateall key human resources offerings--compensation, job levels, learning,development, and competencies--and truly globalize its workforce. Today, Dow’snew system fully supports the company’s global expansion.

    The new programs at Marriott and Dow are examples of how companies are usingsalary- and performance-management systems to realign human resources whencorporate objectives shift. The new systems don’t fit a single model, buttheir common trait is that they establish market pricing and then pushcompensation- and performance-management decision-making--with real clout--downthe line to managers. At Marriott, Dow Chemical, and other companies with newsystems in place, managers have more power over pay than ever before, and theresults are impressive.

Reshaping employee development
    Marriott executives knew that the new market-management strategy wouldimprove the company’s competitive position, but the first executives who triedto execute the concept immediately hit a brick wall. "This senior operationsvice president called human resources from Atlanta and said, ‘I have acompensation problem,’" says Karl W. Fischer, vice president forcompensation, communications, and performance management at Marriott’sheadquarters in Washington, D.C. "A team went down and looked at the problem,and we saw that it was much broader than compensation. Our human resourcessystems were not supporting the new direction the company wanted to take."

    The company needed leaders and managers who could manage across brands toconsolidate the company’s command over an entire market. Moving managers fromone hotel to another and encouraging lateral career steps would help to buildthe workforce required for cross-selling. "But because each brand had its ownapproach to pay, performance management, and career development, our associatessaw themselves as employees of the brand first and then as employees ofMarriott. They wouldn’t move," Fischer says. "They focused on buildingtheir careers within a specific chain, such as Courtyard, and within a specificfunction, such as sales and marketing, or front-desk operations."

    The revolution at Marriott began when Fischer and the human resources team"threw out our cookbook of detailed compensation policies and procedures,"herecalls. "Then we installed a far more flexible approach that focuses ongiving managers the information and training they need to make good businessdecisions in the context of pay." The team designed and tested the new programat 30 properties in the Atlanta area, collected feedback, made modifications,and then launched it nationwide for 14,000 managerial and professional salariedemployees. Fischer will introduce it to hourly supervisors in late 2003 andearly 2004, and to the remaining 100,000 hourly employees in 2004 and 2005.

    The new system integrates compensation, performance management, and careerdevelopment. "It was designed and built to integrate all three so that theyreinforce and support a particular corporate strategy," Fischer says. Tojump-start the program, the company paid employees a lump sum if they took a jobin a different Marriott chain or discipline. "Now we have more movement ofmanagers between brands and disciplines than we have turnover, which we considervery much a success," he says. "Employees are broadening their experiencebase." In 2002, the company stopped the lump-sum payments because movingbetween properties and between jobs had become part of the corporate culture."What we were trying to accomplish actually became the norm," Fischer says.

    Managers now wield enormous power over pay. Each job has a market referencepoint--the competitive rate for that job in a specific market--and managers canpay an eye-popping plus or minus 25 percent from that reference point. Forexample, a front-desk position might have a market reference point of $43,000,but the manager has the discretion to pay from $32,250 to $53,750 for the job,according to the experience and performance of the specific employee.

    In addition, when an employee moves to a position with a higher referencepoint, the manager has the discretion to give the employee an increase of 0 to15 percent. "In the old world, we paid a 5 percent promotional increase foreach grade," Fischer says. "In the new world, we have no grades." Marriottprovides managers with a decision model and internal equity reports so they cansee detailed data about pay for every employee in a particular job. Supervisorsreview the pay decisions. Decisions that fall outside guidelines triggeradditional operational and human resources review.

"When we move a group of employees into the new system, they first receivecommunications from their line leader, not from human resources, so theemployees understand that this is not a human resources program, but a Marriottprogram."

    "When we move a group of employees into the new system, they first receivecommunications from their line leader, not from human resources, so theemployees understand that this is not a human resources program, but a Marriottprogram," Fischer says. Then each employee receives six hours of training onthe new program, follow-up communications, and a personalized statement thatshows exactly how he or she fits into the new career bands and competencymodels. "We train both managers who supervise employees and the individualemployees in the same program," he says. "There’s no black box, nosecrets. It’s important to have both managers and individual associatesunderstand all aspects of how this works."

    The company’s total compensation costs have not changed. "The goal wasnot to save money, but to give managers more latitude and to ask them to applymore judgment," Fischer says. Marriott’s turnover rates for employees in thenew program are lower than the industry average, and that translates to thebottom line. Forty percent of Marriott’s managers have worked their way upthrough the ranks. Employees gain broad skills and experience within hotelmanagement by working at different chains and in a variety of functions.

    "We outperform our competitors in our industry, and this human resourcesapproach is part of the reason why we do," Fischer says. "The new systemallows us to retain people and have a superior leadership team over time. Withinour industry, we’re perceived as having the best leadership team, and this newsystem drives that. It’s a competitive advantage because you can’t build itovernight." Human resources management now fully supports the broadercorporate strategy, which includes the ability to cross-sell among brands--avital part of the company’s success.

    "Now people perceive Marriott as a company that focuses on providing peoplewith a lot of opportunity and support, and we view that as a competitiveadvantage," Fischer says. "It takes many years to develop the tools and theculture to achieve those results. If we decided tomorrow to pay everyone abovemarket, that could be our competitive advantage, but a competitor company couldcopy that in a minute. Creating an environment of opportunity is much harder toduplicate."

Globalizing the workforce
    After years of rapid globalization, Dow Chemical Company also faced a majororganizational shift that required a new approach to human resources and salarymanagement. The company wanted to move away from its national and regionalstructure to a global model. "Our objectives were to enable leaders all aroundthe globe to manage all aspects of pay across borders in a simple and seamlessmanner, and to empower employees to reach their full potential within thecompany through an open and transparent system," says Greg Comeaux, directorof global compensation and benefits. "The need for change stemmed from theactions taken by top management; the solution was developed by human resourceswith top management approval."

    Dow’s managers now determine pay levels for their employees, including basepay, bonus, and long-term incentives, in a global exercise held each January.They set pay increases with no mandated minimums or maximums, no performanceratings or distributions, and no salary budgets. "The issues of currency,pay-line movement, and pay distribution relative to performance make traditionalbudget-setting counterproductive," Comeaux says. The goal is to set pay forlarge groups of employees at a market-median position, relative to a premiergroup of companies, with as much individual differentiation for performance aseach manager feels is appropriate.

    A second-level manager approves the pay levels set by each line manager. Theplanning and approval processes utilize an in-house electronic planning toolfueled with employee data from Dow’s global database. Dow publishes a set ofguidelines for global pay planning each year before the start of the planningexercise, and provides general guidance to managers making pay decisions.

    "We could not easily or successfully run a more traditional, less automatedcompensation system given the global organizational model that Dow now employs,"Comeaux says. Managers consistently rate the pay-planning process at Dow as oneof the company’s best human resources processes, and employees give the systemhigh marks for its transparency. "The company believes that the system’stransparency enables employees to focus their time and attention on productiveactivities that benefit themselves and the company," he says.

Creating a performance culture
    KoSa, a global manufacturing company with headquarters in Houston and 7,500employees, brought in a new management team in 1998 to transform the companyfrom an old-line entitlement culture to a cost-conscious, pay-for-performanceorganization. Human resources received a clear mandate to reduce labor costs andimplement a performance-based pay system, and gave line managers the power toget results.

    KoSa eliminated its 21-level salary structure, all job-rating systems, formalpay ranges, and broad-based incentives for all salaried employees. It now usesone-paragraph capsule summaries for benchmark positions and provides 25th, 50th,and 75th percentile ranges for each position, updated annually. Line managersreview employee pay on the basis of the updated pay data. Incentive pay isdetermined by individual contribution, as judged by the supervisor, with payoutsranging from zero to amounts that are greater than base pay. Junior managers mayreceive larger payouts than senior managers.

    "It is not so much the amount of incentive that distinguishes the system,although it’s richer at the top end than market norms, but rather theinsistence on a high degree of differentiation and the fact that the supervisoris allowed to exercise judgment without dependence on formulas," says PeterSparber, KoSa’s global director for compensation and benefits. The newmarket-pricing system has netted four-year cost savings of more than 12 percenton U.S. base pay alone while maintaining a voluntary turnover rate of less than5 percent. "By any internal or market measures, the new system has made acritical contribution to KoSa’s success," Sparber says.

    "We clearly are trying to create a market-based culture where employees areexpected to think economically and get results," says Walt Malone, vicepresident, KoSa global human resources. "To do this, you must develop yourtalent based on the skills required to outperform your competition. And you mustcompensate employees according to their contributions to business results.Supervisors, through the administration of our performance-management system,play a key role in connecting compensation to business results."

    Howard Risher, senior consultant, Fox Lawson & Associates, has closelystudied the pay systems at Marriott and Dow. He says that managers are in thebest position to make day-to-day salary decisions. "Only managersunderstand the contribution or value of their people and which employees theycannot afford to lose," he says. "Only managers can decide when a job is notcorrectly valued. And if we believe the argument that people are a source ofcompetitive advantage, then managers need to be able to use their peopleresources to meet the demands of the business."

    Throwing out formal salary budgets may be a more radical step than mostcompanies are prepared to take. At the same time, maintaining a rigiddistribution of the budget may thwart attempts to provide managers with thepower they need. "When managers are limited to the budgeted increase dollars,that represents a tight control," Risher says. He and other business leadersunderstand that surrendering control is the first step in effectively creatingchange.

Workforce, June 2003, pp. 70-75 -- Subscribe Now!

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