Workforce.com

Retooling Pay

November 11, 2005
Delphi’s decision to file for bankruptcy and last month’s events at General Motors signal drastic changes for how employers in old-line businesses will have to think about workforce management. Global competition has made it impossible for these companies to rely on high wages, employer-sponsored health care and pension benefits to attract and retain workers.

    The new Delphi contract will cause all hourly workers’ wages to decline, auto industry analyst Maryann Keller says. Traditionally, when an automotive company opens a plant in a region, it increases the wages of that area for all employers. But if Delphi becomes a low-cost supplier, other employers, both within and outside the industry, will follow.

    Jim Gillette, director of supplier analysis at CSM Worldwide, predicts that for the auto supplier market, average wages could drop about 15 percent from a range of $25 to $30 an hour, with benefits, to $21 to $26 an hour.

    And as wages spiral downward, more employers will need to turn to performance-based compensation and other incentives to retain skilled workers, keep them motivated and attract the next generation of younger workers to the industry, says David Gregory, a labor law professor at St. John’s University in New York.

    If companies don’t find effective incentives, they risk losing prospects to the likes of Wal-Mart, says Sean McAlinden, vice president of research at the Center for Automotive Research in Ann Arbor, Michigan. After negotiations are through, the hourly wages in the auto manufacturing sector will be about the same as at the discount retailer, he says, "but at least at Wal-Mart they know the work is easier."

    Executives can look at the performance-based compensation models implemented at Metaldyne, an auto supply manufacturer in Plymouth, Michigan, and Nucor, a Charlotte, North Carolina, steel manufacturer, to see what has been effective in spurring productivity and retaining skilled workers. Nucor has zero percent turnover and has been profitable for the past 130 quarters, says Jim Coblin, vice president of human resources. "That’s a huge feat in an industry as cyclical as our is," he says.

    Even companies in bankruptcy, such as United Airlines, have developed programs that reward workers who meet certain metrics. Through its Success Sharing program, launched in 2004, United employees can receive bonuses based on specified goals.

    "Employers are moving from high-fixed-cost models where they bear all the risk to performance-based compensation models that are variable costs tied into company performance," says Ravin Jesuthasan, managing principal at Towers Perrin, which worked with United on its performance-based incentives.

Bonus rounds
   
Delphi chairman and CEO Robert S. Miller says the company has to drastically cut workers’ benefits and pay to stay in business. "We are paying triple or more for hourly labor compared to what prevails in the marketplace, and no business can survive that," he says.

    Creating performance-based incentives, however, provides an option for employers to continue to reward hardworking employees while reaping the rewards of increased productivity, says Kim Kovac, vice president of human resources at Metaldyne.

    "Resources are tighter than ever, but companies can still do a good job if they have the right people," she says.

    To remain competitive in recruiting and retaining workers, Metaldyne created a performance-based bonus plan two years ago for the 4,300 hourly employees in its 30 U.S. plants, Kovac says. Under the program, the company sets certain target metrics in a variety of areas, such as efficiency of production or scrap reduction for the quarter or the month, depending on the plant.

    If the plant’s employees reach their target, they all receive bonuses, which range from 35 cents to $1.50 an hour in addition to the workers’ wages. Metaldyne has seen an increase in productivity as a result of the compensation plan, but could not provide hard results immediately.

    Nucor has used a performance-based compensation model for 30 years, and through that design its 8,960 hourly workers in 35 U.S. plants are eligible for weekly bonuses based on the productivity of their work group. The bonuses can average from 80 percent to 150 percent of an employee’s base pay. The average base pay for workers is $9 to $10 an hour.

    Department managers can earn bonuses of up to 80 percent of their base pay on an annual basis. Their bonuses are based on the performance of their division or plant. "Managers don’t have control over company performance, but they do have control over their own divisions," Coblin says.

    Even Nucor’s 401(k) plan has performance-based incentives. The company will match 5 percent to 25 percent of what employees contribute based on the company’s returns, Coblin says. The average match is usually 12 percent to 13 percent.

    "In our employee surveys, workers always say that this is the one thing they love most about working for Nucor," Coblin says. "They know what their bonus structure is down to the penny, and there are no politics."


Giving top management retention bonuses is a common practice among companies in bankruptcy, but Delphi CEO Robert S. Miller clearly did not realize the impact on the company's workforce, GSM Worldwide's
Jim Gillette says. "Workers are ... going to question that anyone is worth seven to eight times more than what they make."

    That doesn’t mean that Nucor executives don’t share their competitors’ concerns about offshore competition.

    "If China starts putting out tons of steel, we will have a problem," Coblin says. But Nucor is hoping that its performance-based compensation model will help it stay ahead in terms of productivity. Coblin estimates that 0.75 man hours currently go into a ton of steel produced at Nucor, compared with an industry average almost double that. "We brought in $11 billion in revenue in 2004," he says. "That’s over $1 million per employee in revenue."

    Executives at United Airlines have similar hopes for the carrier’s performance-based compensation program. In 2004, as part of its efforts to get out of bankruptcy, the airline changed its compensation strategy so that salaries and bonuses would be tied to the performance of its employees, who numbered 63,000 at the time. One pitfall for companies when designing performance-based incentives is that they view it as a cost rather than an investment, Jesuthasan says. "United Airlines didn’t do that. Their mindset was that we are investing in this to help turn around the business, and that means investing in the way people make decisions," he says.

    The company set metrics in each division, including productivity for mechanics and efficiency for baggage handlers. The goal was to get employees to understand how each transaction they made affected the bottom line, explained Patricia Gardner, former managing director of organization and talent strategies at United Airlines, speaking at the World at Work Conference in May. As a result of the program, the company has seen an increase in productivity in every category.

Noncash incentives
    Employers like Delphi may say they do not have the resources to offer performance-based bonuses, but nonmonetary incentives can often be just as effective, observers say. For younger workers just entering the field, this translates to training and career opportunities, says Gregory, the labor law professor. Also, both young and old workers value being involved in strategic discussions, he says.

    Nucor realizes this and encourages its department and plant managers to hold annual dinners with employees to talk about the business and ideas. "I tell my managers and supervisors that their job is not to give edicts, but to serve our employees," he says. "It’s not the supervisor that gets the steel produced and creates the revenues, it’s the worker."

    Just giving feedback, even when a company is not in the position to offer cash rewards, can go a long way in retaining high performers, Jesuthasan says. For example, United Airlines also created a ratings plan for its 8,000 salaried and management employees by which, at their annual reviews, they would get a rating from 1 to 5 based on their performance.

    If United hit its financial goals for the year, the employees would receive a bonus based on their ratings. In 2004, however, United did not reach its financial goals, so employees were just told what their ratings were.

   "But just getting positive feedback gave those high performers the message that they were valued," Jesuthasan says. "Sometimes it can be as simple as a chief executive officer taking employees out to lunch."

Labor-relations fallout
   
As the Delphi and GM situations demonstrate, getting unions to accept drastic wage and benefit cuts is never easy. Offering up performance-based compensation incentives may not make negotiations easier, says Rick Beal, division practice leader for compensation at Watson Wyatt Worldwide.

    "This challenge of having a culture of entitlement is one that many companies have—not just ones with unions," he says. "To address this, employers have to work hard to communicate to workers the link between performance and compensation so that everyone understands that they are all in this together. You can’t just make the changes and tell people to live with it."

    Metaldyne was able to cut its health care costs by working closely with its unions and keeping them apprised of the situation, Kovac says. The company has developed a council with its unions in which management and labor work together to make decisions on health care carriers.

    By working closely with the unions, Metaldyne was able to move from an employer-sponsored health care plan to a cost-sharing structure that required employees, including union members, to pay for 20 percent of their costs. Kovac concedes there’s more cost cutting to do, but at least the relationship with the union makes it possible.

    "Unions are prepared to share sacrifice, but they expect it to be broadly shared," says Ron Blackwell, chief economist at the AFL-CIO.

    Delphi weakened its ability to garner union cooperation when it sweetened its severance package for 21 top executives the day before it filed for bankruptcy. The company also proposed a bonus program that would give 486 U.S. executives cash bonuses of 30 percent to 250 percent of their salary upon the company’s exit from bankruptcy or the sale of the company.

    Giving top management retention bonuses is a common practice among companies in bankruptcy, but Miller clearly did not realize the impact on Delphi’s workforce, Gillette says. Miller defended the move by pointing out that retaining the company’s top management was crucial to getting Delphi out of bankruptcy. "Philosophers can philosophize about fairness; I have to deal with reality," he said at a press conference October 12.

    Days later, after severe criticism from the unions, Miller announced that he would be taking a salary of $1 per year and that the company’s officers volunteered to waive 10 percent to 20 percent of their base pay. But the damage was already done, Gillette says. "Workers are still going to question that anyone is worth seven to eight times more than what they make."

    Companies can learn from Delphi’s mistakes and create compensation incentives for workers throughout their ranks if they get out of bankruptcy, observers say. Unions may be more willing to accept perks given to senior executives as long as they are shared down the ranks.

    At Nucor, Coblin says his workers have never even asked to form a union because they realize they make more through the company’s compensation plan than they would as union members. The average union worker in the steel industry makes $15 to $18 an hour, but if the company paid those wages, it wouldn’t be able to offer bonuses of 100 percent to 200 percent of their base pay, Coblin says.

    "Unions equate performance-based incentives to lower wages, but a well-designed plan will mean more money for the best people," says Jack Dolmat-Connell, a compensation consultant. "I think it’s going to be time for some hard talks."

Workforce Management, November 7, 2005, p. 1, 22-30 -- Subscribe Now!