Workers: Risks And Rewards

By John Greenwald

Would you risk earning less in exchange for the chance to earn more? U.S. companies are putting that question to a growing number of workers these days in hopes of engineering a revolution in the way everyone, from janitor to junior executive, gets paid. The question lies at the heart of far-reaching new programs called pay-for-performance plans, which typically start with reduced base wages and salaries but reward employees with handsome bonuses for hitting production targets or meeting other goals. "This is the hottest area in compensation today," says Steven Gross, a vice president of Hay Management Consultants. "Just about every major company is examining its pay strategy."

While employee-bonus plans have been around since the 1930s, the new programs surged in popularity during the past decade. Faced with a massive loss of business to aggressive global competitors such as Japan and Germany, U.S. companies rushed to control labor costs and raise productivity. The new plans help on both fronts, because firms that adopt them typically pay ! employees bonuses only when they meet production targets or when corporate earnings rise. Moreover, companies often combine the programs with other approaches -- such as encouraging shop-floor teams to plan and carry out projects -- that help give employees a sense of pride and participation in their work.

"Companies are saying, 'I'm tired of paying simply for time,' " notes John Hamm, vice president for compensation and benefits at Aetna Life and Casualty. "Now they are saying, 'I want to pay for production.' " So many are saying it that 35% of the FORTUNE 500 are experimenting with some form of pay- for-performance program, according to the consulting firm Sibson & Co. -- up from 7% 10 years ago.

The roughly 4 million U.S. workers covered by such plans are living by the ancient rule of markets everywhere: risk and reward go together. Unlike corporate chieftains, who often prosper no matter how their companies fare, workers in these programs may suffer painful cuts in income when times are lean. Uncertain pay can create problems when it comes to such mundane matters as applying for mortgages, which usually demand predictable annual income -- to say nothing of the impact of variable wages on one's ability to pay back loans. But the payoff can also be great, allowing productive employees to make far more than their counterparts at other firms. In general, depending on job performance and the plan's details, covered workers may earn as little as 90% of the average salary for comparable jobs -- or as much as 120%.

The 160 workers at a new Corning ceramics plant in Blacksburg, Va., earn bonuses for, among other things, pulling blemished materials from assembly lines before they can go into kilns. While starting workers at the plant make $8.60 an hour, or about 40 cents less than those at Corning facilities with traditional pay plans, the Blacksburg workers made at least an additional 72 cents an hour in bonuses last year. Three-quarters of that gain reflected the fact that workers met their production targets, and the rest was pegged to improvement in the company's financial results.

With so much riding on their performance, employees at Blacksburg tend to be strict with themselves and one another. Notes Gail Simpkins, an assembly-line worker who earned $2,000 in bonuses last year: "People often say, 'Watch what you're doing! If you're throwing away something you don't have to, you're costing me money as much as you're costing yourself money.' "

Yet no matter how hard employees work, variable-pay programs expose them to the vagaries of the marketplace and chance. Workers at a Monsanto plant in Idaho that mines and refines phosphorus earned more than $1,800 each in bonuses in 1989 but only $255 last year when the facility had to shut two of its three furnaces for extended maintenance and the economy stumbled into recession. Monsanto's chemical plant in Luling, La., pegs bonuses to how well its 380 workers meet goals ranging from reducing on-the-job injuries to preventing air pollution. The employees earned $1,060 each in bonuses in 1989 but just $760 last year.

Companies must guard against setting goals so high that they cannot be met. Valvoline, a Kentucky-based maker of oil additives, created a pay-for- performance plan for 1,000 employees last year but then had to tell workers it could not afford to pay a bonus when the company missed its goal of $38 million in operating income. "People didn't like it, but they understood it," said Randy Powell, Valvoline's human-resources manager. Partly to avoid repeating the embarrassment, Valvoline lowered its earnings target to $30 million this year. If nothing else, the episode caught the workers' attention. Powell said that before the new program, "if you asked employees, 'What's our 1989 profits and what's our 1990 goal?' they couldn't tell you. Today 900 people could tell you what our goals are."

Worker discontent has led some firms to jettison their programs. In a stunning reversal, Du Pont dropped a pay plan in February that experts had hailed as a landmark when the chemicals giant launched it just two years ago. Under the program, which covered 20,000 workers in Du Pont's fibers group, employees would receive 6% lower basic pay than their counterparts elsewhere in the company after a phase-in period. But workers could recoup the difference in bonuses if the fibers group met its profit goals, and they stood to receive an additional 6% for surpassing those goals. Nonetheless, nervous employees balked at putting so much of their wages at risk -- especially when they saw the group's profits suffering in the recession. When Du Pont tried to modify the plan to give employees a choice of how much income to risk, federal regulations made the move impractical.

Variable-pay plans often fare better in service industries where workers are accustomed to commissions or other forms of nonfixed compensation. Seattle- based Nordstrom, an upscale department-store chain, pays its sales force - straight commissions in lieu of even minimal salary guarantees. "We have people making over $100,000 a year selling suits, and a lot getting between $30,000 and $60,000 selling shirts and shoes," says Joe Demarte, vice president for personnel. (Recent employee lawsuits against the company involve unionized clerks, not commission-earning salespeople.) The strategy has boosted Nordstrom's sales volume and helped the company embark on an ambitious expansion plan at a time when rival retailers are shuttering stores.

Young workers with little to lose may gladly embrace incentive plans. Long John Silver's, a Kentucky-based chain of seafood shops, launched a pay-for- performance program last October at its 1,000 company-owned stores. The plan, which encouraged employees to increase store business by suggesting that customers order such items as a king-size drink or a slice of pie, worked so well that some employees boosted their wages more than 75 cents an hour during the first quarter, from about $4.25. Says Wendy Lane, 23, a restaurant worker in St. Clairsville, Ohio, who added $70 to her paycheck in March: "All I had to do was a little bit more to make our guests happy. What it all comes down to is that the bonus was a real motivator."

Some industries see pay for performance as one of their best bets for keeping jobs in the U.S. Despite a decade of restructuring, many companies remain desperate to slash payrolls further and get more bang for their labor bucks. "People are beginning to understand that the world is moving ahead at a fast clip and that global competition is so fierce that the future of American manufacturing industries is at stake," says Lawrence Bankowski, the Ohio-based president of the American Flint Glass Workers Union, which has lost nearly half its 36,000 members during the past 15 years. Concurs Mike Rohret, a human-resources manager at a Fisher Controls plant in Iowa that is testing a variable-pay plan: "If we didn't manufacture here, we would have manufactured in Singapore."

A wave of layoffs last week provided fresh evidence of just how vulnerable jobs can be. CBS said its profits fell 73% in the first quarter, to $23.3 million, and announced plans to dismiss 400 workers. In Boston GTE said slack defense spending meant layoffs for 500 of its workers at a unit that makes military communications equipment. Grumman said the slowdown will force it to cut 1,900 jobs. In Baltimore, insurer USF&G said it will reduce its work force by 1,900 positions.

! Yet some experts doubt that most U.S. workers will ever fully accept pay- for-performance plans in their present form. "There has to be an acceptance of a downside risk, and that seems to be the stumbling block," says Charles Peck, a senior research associate at the New York City-based Conference Board. "This is true of everybody -- executives too. People want money or more money. They don't want less."

A pay-for-performance plan brings workers and companies a step closer to being partners -- and the only way partnerships work is through trust. Contends Marc Wallace, a management professor at the University of Kentucky: "Where employees believe their managements, they are willing to put a tremendous amount at risk to make the business go." Gaining the trust of workers isn't quick or easy; it generally requires a concrete demonstration of confidence in them by giving them more authority and freedom. Many companies might hesitate to take that chance. But if they want the benefits of a successful pay-for-performance plan, it's the only way. For employers, as for workers, risk and reward go together.

With reporting by Tom Curry/Chicago and Kathryn Jackson Fallon/New York