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Mployee incentive pla.ns are so common in North America that they risk becoming pmverless. It's possible to structU're effective plans, hO'llJever, and avoid undesirable results. Good implernentation of the plan design will get the company what it wants.
Mployee incentive pla.ns are so common in North America that they risk becoming pmverless. It's possible to structU're effective plans, hO'llJever, and avoid undesirable results. Good implernentation of the plan design will get the company what it wants.
Mployee incentive pla.ns are so common in North America that they risk becoming pmverless. It's possible to structU're effective plans, hO'llJever, and avoid undesirable results. Good implernentation of the plan design will get the company what it wants.
teamwork : 15 . Compensation and Benefits Management, 16 (4) (AR30509) The Essential Role ofRewarding Teams and Teamwork o o o o o 0 0 o o. o o o o o o o o o o JERRY McADAMS mployee incentive pla.ns are so common in North America that they risk becoming pmverless. lt i.s possible to structU're effective plans, hO'llJever, and avoid undesirable results. Among plan design options are incentive plans that recognize everyone in the organization and tlwse that zero in on special project teams. As always, good implernentation of the plan design will get the company what it wants. SUSAN VITALE IS FRUSTRATED. She's coming to grips wth the realization that she hasn 't paid enough attention to her human capital, her employees. As a vice-presi.dent of operations, she manages physical c p i t ~ the labs and production, and economic capital through the budgeting and expenditures process. Be- cause she's been adept on both fronts, operations is exceeding budgeted perfonnance plan. Yet she knows something is amiss. Jerry McAdams is a thought-leader for Strategic Rewards for Watson Wyatt Worldwide and co-founder of lhe Consortium for Alternave Reward Stl'ategies Research (CARS). He is a member of the facuhy ofWorldatWork. (formerly American Compensation Association) and is a regular speaker at human resources conferences. This article is based en the book Rewarding Teoms, Lsstms Jrom lht Tre11ches, by Glenn Parker, je!T)' McAdams, and David Zielinski. Copyright 2000.jossey-Bass, lnc., Publishers, San Francisco. Susan has left the 1nanagement-and leadership - of more than 1, 000 people largely to company poli- ces and admini,stration processes, prnarily the do- tnain of Hwnan Resources. But reperwssions Jrorn the CONPRO team project- the team 's feeling that 1nan- agement could have played a more visible and hands- on role in championing and rewarding teamwork- have her closely examining her 1nanagement style. Susan is scheduled for her weekly one-on-one lunch with a trusted peer, General Manager jeny Parker. They have warlud together for m.ore than 1 O years, and the relationship is comfortable. The two regularly bounce ideas off each other and explore ways of meeting their respective business goals. After ordering lunch in the executive dining room, Susan asks, "Do you remember the CONPRO team?" "Sure, "]erry responds. "! think it 's one of our real success stories. At least, corporate thinks it is. l agree that they should be nominated for the Chainnan 's Award." "! thought it was pretty successful in the end, but it sure took a while to get there, "she says. "Anyway, we had a feedback session, and 1 was surprised about hO'llJ negative some of the comments were about how the ar- ganiz.ation 1nanages teams. " 15 16 COMPENSATION & BENEFITS MANAGEMENT
A U TUMN 2000 jerry was surprised. "How can that be? The em- ployee apinion su-ruey we just did shows we're doing pretty good and peaple think this is a good enviromnent to work in. We gave Rupert ... ahhh, what 's-his- name? . .. Collins that employee of tite year awltrd. Benefits are competitive and so is compensation. 1 talk about teamwork all the time. " He paused to sip his chiUed white wine. '1 know, " says Susan, "but if some of rntr best peaple tell us that we talk teamwork, but don 't live it, that extra effort is rewarded only with the opportunity to pul out even more effort fur no extra pay, that we wflTk in silos, and that all the meaningful rewards are reseroed jflT managernent, we've got a problem. We t.alk a good garne about the irnportance of peaple, but !'m starting to think we m.ay be creating a pleasing work environrnent, but not a place where perj(JT7nance is adequately recognized ur rewarded. Especially team per- formance." "O K, if you think it s a probl.em, then it probably is, "j eny says. "vVhere do we start?" "That's arwther problem. 1 need a ro(td map. l guess 1 start by looking at where we 've been and where we are nuw. 1 went to a va-riable compensation. meeting in New York l.ast year and got so1ne material on reward systems Jor wurk tearns. I'll try to find it. " DISCOVERING THE DISCOVERY PROCESS: A SYSTEMS AUDIT G etting all employees engaged in pursuil of organizational goals-as individuals, as part of small work teams, or as broader organizational units-requires action and consis- tent follow-through by the management team. Unfonunately, management interventions that can spur such engagement-such as reward plans, communication devices, or training pro- grams-are often created and implemented not as a coordinated system, but independent of one another. Even when they are pan of a coordi- nated plan, they're often designed at cross-pur- poses. It's not at all unusual for companies to trai n people how to work as high-performing teams, and then publicly celebrate or reward only the work of outstanding individuals. Two practices percei.ved by employees as sending con- trary messages. Reward and recognition systems, communi- cation and performance feedback devices, and training tools must be aligned along the same path, with the left hand in full understanding of what tl1e right is up to, and with the same end goal. The alignment of purpose stans with vision and mission and is put into operation through work systems, communications, management coaching, personal/ professional development, performance measurement-and, of course, re- ward systems. Improving where you're headed first re- quires understanding where you currently stand. We'd argue, for instance, that the balance of or- ganizations with more than a few hundred em- ployees would be hard pressed to answer most of the following questions: Reward Systems ls there an inventory or audit of all reinforce- ment plans (social, celebrations, cash, non- cash, etc.) presently operating at any level of the organization? What corporate objectives are supponed by each reward or recognition plan, and how do we know if they've been successful? Are the reward systems consistem with the organiZt'ltional culture and management messages? How well do people understand how each plan works-or how aware are thcy that the plans exist? Who is eligible for each plan, and how many actually receive awards? How much is spent on each plan and what is the average (or median if there is a wide range) award earnings per person? What is the value-contribution from the plans (performance improvement, reinforcing the mission and vision statements, tcamwork, customer success, maintaining or improving the organization's competitive position in the labor market, etc.)? Communicatlons and Performance Feedback How often are company or organizational unit measures and performance objectives communicated-and explained-to all em- ployees? How often are employees told about the or- ganization 's successes, failures, and competi- Lion in the marketplace? T H E E S S E N T 1 A L R O LE O F R E W A R O 1 N G T E A M S A N O T E A M W O R K 17 How often are employees asked- and more importantly, listened to-about their ideas for improving company or business unit per- formance? As you move toward a team-based culture, strategies, and practices under these categories will need to be maintained, redesigned, or tossed altogether to match the new direction. But con- ducting such a systems alignment audit is critica! before installing a team-based rev.rard or recogni- tion system; doing the latter in isolation will greatly limit its impact. The objective is to create an integrated portfolio of practices that "lever- ages" or makes maximum use of human capital to improve business performance. Susan's experience with "leveraging" human capital has not heen hugely successful (J'()er the long run. Man- agement has been sending out directives, and estahlish- ing many measures of StlCcess ( usually financial) since she's heen there. Management By Objectives (MBO) was all the rage fo-r a while, but quickly showed itseif as mo-re of a planning/paperwoik exercise than a way to engage, excite, and align all employees toward a com- mon purpose. MBO is now a part of most everyone's job, but Susan isn't convinced it makes a great deal of difference in pef1Jle's o-r the organization's peifrmnance. The real problmn is creating accountability at m.anagerial and supervisqry fevels Jo-r suppo-rting and rewarding teamwork in the ranks. Perfrmnance ?nan- agement is a mixed bag. 1he o-rganization has in- creased its Jocus on devel()/Jing competencies and has encouraged managers to ?n(J'()e peopl.e around, hoping the new oppo-rtunities will increase thei:r sense of satis- factiO'n and develop 11UJ1'e diverse skills in the wo-rkfo-rce. The m.erit pay plan, however, still dist'Tilmtes only a paltry 3 to 5 percent ayear to the balance of employees, barely keeping pace with injlation. A handful of "out- standing" peifqnners get 8 to 1 O pe1cent. Employees believe salary increases are a "-right" they 're entitled to. There are fezv, if any, incentive plans tied to o-rganiza- tional unit or project team peifrmnance, and still fewer recognitiO'n tools used to celebrate teamwO'Tk in the o-r- ganization. As the o-rganizatiO'n was preparing its application for the Malcohn Baldrige National Quality Award, continuous improve1nent project teams sprouted up everywhere. But most of the process impr(J'()enwnts those teams suggested have been successjuUy integrated into the departments' stand.atd way of doing business, and tite "team" activity has dwind:d away. RecognitiO'n focuses on an "employee of the month" and then "of the year. " Their immediate super- visqrs o-r managers nominate employees, and final se- lection is by a top 1nanage1nent committee. There is little peer-based recognition. Lately, it seems as if Susan has to beg to get nominatillns every month. The quality of the nominations is dropping -rapidly. Any project tean!S, stLCh as CONPRO, are consid- ered "rewarded" simply if they present results to top management. Tite cookout was appreciated, but the T- shirts were misunderstood as representing the true value of their contributinns. Probably a mistake to pass those out when she did. A few years ago, Susan created a gain-sha:ring pl.an fo-r production. It was based on a cmnpl.ex far- mula measuring redttctiO'n of labO'r costs per ttnit of prodtLCtion against a standard. Engineering got tied up redefining standards and in the difficult practice of m.easuring peifonnance against goals, and the plan simply lost mmnentum. Payouts shrank, and the plan was terminated not long after introdttction. But Susan figured it was time to take up the re- ward and recognition issue a.gain. Well-designed team- based rewards have a unifying effect and offer an op- pmtunity to create aligntnent and accountability, along with spurring perfrmnance impr(J'()ement and collaho-ra- tive behaviors. She knows rewards alone won 't solve the proble?n, but they will get pe()/Jle's attention and give teams a sense that the fmits of their labo-r aren't going only into the o-rganization 's coffers. Then she fO'Und the presentatiO'n from the vari- able compensatm woikshop. It descrihed a Reinfo-rce- ment Model Jor choosing and using various reward and recognition strategies. THE ROADMAP: AN ORGANIZING MODEL FOR REWARDS T he Reinforcement Model is an easy way to look at your reward plan options. It begins with the organization's objectives and de- sired culture. Business objectives tend to be straightfor- ward. Profit, revenue growth, cycle time, EVA, financia! retum calculations, customer satisfac- tion, quality, new product development, and op- erating expense reduction are typical. Reward plans must be aligned with these objectives to ensure management support. "Nice todo" objec- tives are not as effective as "key to our success" ones. Sorne objectives translate nicely into meas- 18 COMPENSATION & B ENEFITS MANAGEMF.NT
A UTU MN 2000 u res against which performance can be judged. Sorne require drilling down to find those activi- ties, projects, and relevant contributory measures that, when addressed, will affect performance. Susan ticked off tite organization 's primary business objectives: Growth Cycle time Retaining the workforce Retum on net assets Customer satisfaction/loyalty/success While the Ust could contain up to 20 additmal objec- tives, all of them important at di.fferent levels of the organization, she understood that. people couldn 't focus on more titan 3 to 5 objectives. If she had to put her hu1nan capital to work on just a few objectives, these would be the critical ones. The best physical exercise plans are those that you will do. The same is true with reward plans. The best ones are those that the organiza- on will embrace as important to meet its needs. That means all levels of management accepng the plans as business strategies to engage its em- ployees in addressing its objectives. And that is a matter of culture. Organizaonal culture (and how to influence it) has been the subject of many a book and academic research. The or- ganization's vision, mission, history, operating norms, strategy, environment, and structure form culture. For the purpose of discussing re- ward plans, culture can be described as how the organizaon ulizes its employees to get work done. It is more than work design. lt is the way people are considered when there is a desire to improve performance. One general description of the whole or- ganizaon 's culture is possible, although organi- zaons are rnade up of a number of sub- organizational units, each with a slightly di.ffer- ent culture. Accounng has a different culture than Marketing. Manufacturing has a different culture than Custorner Service. Hopefully, they are aligned with the overreaching organizaonal culture, with the differences simply reflecting the nature of the work they do. One of the keys to success in irnproving or- ganizational performance is to ensure that re- ward plans reinforce the desired culture, or at least attempt to reduce the gap between the ex- isng and desired culture. Exhibit l. Continuum of Organization Culture and lmprovement Approaches Organizational Culture: How Work Gets Done Task and Job- Individually Focused Hierarchical, Traditional .........._ Based (example: - and Mea.sured - (example: directive, top - .......... . . 1 . ) (example. sales) down) (example. open- ClV1 servJce book, fluid
Task and Job Redesign Organizational Perfonnance lmprovement Approaches
lmprove Individual Performance Management Direction and Strategy teams) t Employee Engagement in lmproving Processes THE ESSENTIAL ROLE OF REWARDING TEAMS ANO TEAMWORK 19 Exhibit 1 is a way to describe organizationaJ culture. It ranges from a focus on individual tasks and jobs to a collaborative and cross-func- tional tearn-based organization. The culture de- termines what has to be done to improve performance. What part of the continnuum should you target? Simply put, the desired culture should be the one that best suits the needs of your busi- ness. lf your desired culture differs from your existing one, it's important to structure any new reward or recognition system to reinforce the ideal culture, the one you're moving toward. For exarnple, if your most influential reward plan is to recognize and celebrate outstanding perform- ers and you want a culture of collaborative teamwork, you 've got a misalignment. An organ- izational unit incentive plan that rewards results through teamwork would be more appropriate and should be added to your existing plans. Re- ward systems need to be aligned with the desired culture. Susan believes her present culture is hierarchical and somewhat paternalistic. The nice offices, day care cen- ter, employee gym, and excellent cafeteria a-re imp()rtant Jw attmcting and retaining employees, but they're strictly envir()nmental benefits, almost table stakes fw staying in the recruitment/retent()n game these days. The prevailing management style of cmnmand and C()ntrol stems Jrom a time when cost C()ntrol was paramount. But now revenue gmwth and rapid prod- uct innovati()n are the new totems. Managem.cnt re- spects and values employees, but old traditi()nS die hard, and the company stiU largel:y manages and vi.ews pe()jJle- headcount- as a "cost of doing business, " not as a cmnpetitive advantage. She believes ?TL()Ving to a team-based, coll.abwative cultuTe would be the best fit fw the wganizati()n 's new strategic th-rust. She needs employees to be foctlSed on Exhibit 2. Cost of Plans and Participant Focus what's best Jor tite business and somehow, also make that the best Jw them. Equally imporlant is engaging management in supp()rt of this new culture. TOTAL REWARD OPPORTUNITY: THE REINFORCEMENT MODEL R eward and recognition plans run the garnut in organizations. Sorne plans are designed to create a focus on specific ob- jectives or celebrate outstanding individuals or teams-these are commonly called recognitiorl plans. Sorne plans are speci:fically designed to improve organizational performance through the work of defined work groups or teams- these are ()rganizati()nal unit incentives and project team incentives. The key is knowing when to use plans as "standalones," and when to use them in suppon of each other to increase their power and effect on business objectives. Objectives overlap plans, and plans often overlap each other. The role of the reinforcement model is to provide a frame- work for choosing the best combination of re- ward or recognition plans. Exhibit 2 begins with a look at how the cost of plans (payouts) is viewed by management and the participant focus. This continuum relates how the cost of the reward plans correlate with the plan's intended participant focus. GeneraJly plans that focus on the individual are considered a cost of doing business. Base salary and benefit.s make up most of the cost of people in organiza- tions. These are table stakes. They provide the organization with little opponunity for leverag- ing business results. Moving to the right, plans that focus on project teams and organizationaJ unit performance payout with the performance ________________________ Cost of Dolng Business .... .... - Cost (payouts) lnvestment in Results Participan/: Focus Individual Project
Team 20 COMPENSAT I ON & BENEFITS MANAGEMENT
AUTUMN 2000 of those teams or units. If the results are not there, the payouts aren't either. The cost of these plans are often offset or funded by the im- provement itself oran investment in meeting or exceeding objectives that add value to the or- ganization. TYPES OF REWARD PLANS E xhibit 3 combines the cost, participant fo- cus, and type of plans as an overview of the Reinforcement Model. Base compensation and benefit, competency, and individual incen- tive plans have critical rol es in an organization, but it is the last three (recognition, project team incentive, and organizational unit incentive plans) that reinforce and reward teamwork. These three of the six types of reward plans will be discussed. Recognition Plans Recognition plans are investments in human capital and often reflect the culture of an or- ganization. These plans can apply to individuals, project teams, or permanent work groups (or- ganizational units, by our definition). Recogni- tion can take the form of a simpl e "thank you" to a cash spot bonus toa trip to Bali. (See Exhibit 4.) Exhibit 3. The Reinforcement Model / Cost of Doing Business Cost (payouts) Individual
Participant Focus ._. - ._. ..
.. Base Capability Individual Compensation (Competency) Incentives & Benefits The critica! distinction between recognition and incentive plans is certainty. Recognition is after the fact, that is, awarded after behavior is exhibited or results accomplished; it is not "do this and get that" according to a pre-announced schedule, but "we saw you do this-thanks." Rec- ognition plans do not guarantee awards. There are as many variations of recognition plans as there are crcative minds. What we know is that they are very powerful, and generally un- derutili zed, tools for encouraging repeat positive performance and building team morale. Getting the most out of recognition plans requires ongo- ing attention and regular refreshing to stay meaningful to employees. Recognition plans can be categorized as: Celebrating arganizational objectives. Picnics, pizza parties, special lunches, regular meet- ings to share accomplishments and chal- lenges, and information trading sessions are all examples of recognizing both the objec- tives of the organization and the importance of people in meeting those objectives. They are inexpensive, fun, signilicant, and make a positive cultural statement. They must be frequem, open, honest, and involving. They are about focus and celebration, rather than manipulation and hype. / ... Investment in Results Project O!:,ganizationa .. Team Unit / - - - .. ... y Recognition Project Organizational Team Unit Incentives Incentives T H E E S S E N T I A L R O L E O F R E W A R D 1 N G T E A M S A N D T E A M W O R K 21 Exbibit 4. Recognition / / Individual .. > ... Pro jec:t Team ... Pro.iect l'l!.anizational .. ..... Individual .... Organlzational Unit ..... Team Unit ... / __ _L _...J_ _L _j_ _L ___ L Base Compensadoo ca.-bllitles In di vi dual aod Benena Dt"'lop lndlvlwal Nrracr atuf skUI$ and l mprove individual Basepay competmde performtJJfce Adjus1men1s lo base Technical & Career Sales incentive or pll)l Tmcks convnission pbns Benefiu Competency -Based Piecc>rnle Annual Bonuses Performance MBO-based Man.,enl inc<nl ives Reinfarcing outstanding performers, as individu- als, teams, ar arganzatiunal units. This is a fonnalized process of spot awa.rds. They can be given at management's djscretion, L.hrough a nomination process with a com- mittee deciding who will be rewa.rded, or from fellow employees or customers. They single out contributors or teams of contribu- tors to say "thanks" and "well done." They can be done in private (as opposed to secret) or in public. The awards can be cash, mer- chandise, special assignments, L.he opponu- nity to leam and develop, promotions, or a honest expression of "than.k you." They can be time-based (monthly awa.rds) or based on events (an accomplishment or contribution). Reinj&rcing desired behaviars ar activities. These are generally social recogrution of the com- pletion of a training courses, special proj ects, or even changed behavior. Seroice. Recognizing years of service toan or- ganization is L.he most common of plans, so common that it is rarely mentioned when Recognition Celebrare outstanding performance Organizational success, miss ion, and visK>n celebrations Spot bonuses, management discretK>n, nomination, or peer-to-peer listing the active plans. lt has become an en- titl ement but does carry L.he message, "we know you are staying with us and we are tak- ing the time to celebrate it." The traditional pin or plaque is being replaced with a selec- tion of items allowing the employee to choose something more meaningful and use- fui. The number and visibility of recognition plans says a lot about an organization's culture. The more dynamic and meaningful the plans, the more appreciated the employees feel. Susan decides to m.ake a fundamental change in her two existing recognitiO'n plans, Emplnyee of the Month and Chainnan :r Award. (Whether the chainnan will agree is another issue.) She changes the EoM award to a spot bonus plan that allO'ws any supervisar ar 1nan- ager to award individua.ls or teams up to $500 in cash ar merchandise Jrom a with no approval. For spot awards between $500 and $5,000, one-step up 1nanagement approval is required, and awards above 22 COMPENSATION & BENEFITS MANAGEMENT
AUTUMN 2000 $5,000 require tite CEO's approval. These rewards can be given (tnytime, but only for work that contributes lo a team's primaty objeclives or demonstrates desired team behaviors. HOlllever, the awards aren't only at management discretion- non-management employees can nominate peers or other teams Jor awards through their own managers. She appoints a crossfunctional, cross-level team of eight to promote and monitor the plan. At the end of each six-trwnth period, two rnembers rotate off and two otlurr employees come on. When people rotate off, Susan recognizes them for their contributions with lelters of thanks or olher symholic, non-cash awards. Project Team Incentives Project teams are usually, but not always, formed by management to tackle specific projects or challenges a defined time frame-revicMng processes for efficiency or cost-savings recom- mcndations, launching a new software product, or implementing enterprise resource planning systems are just a few examples. In other cases, teams selfform around specific issues, or as part of continuous improvement initiatives such as E.xhibit 5. Project Incentives / team-based suggestion systems. (See Exhibit 5.) Project teams can have cross-functional membership or simply be a subset of an ex.isting organizational unit. The person who sponsors the team-its champion-typically crcates an in- centive plan Mth specific objective measures and an award schedule tied to achieving those meas- ures. To qualify as an incentive, the plan must included pre-announced goals, Mth a "do this, get that" guarantce for teams. The incentive usually va1ies Mth the value added by the pro- ject. Project team incentive plans usually have sorne combinat.ion of these basic measures: Project milestones. Hit a milestone, on budget and on time, and all team members eam a defined amount. Allhough sound in theory, there are inherent problems in tying finan- cia! incentives to hitt.ing milestones. Mile- stones often change for good reason (technological advances, market shifts, other developments, etc.), and you don't want the team a.nd management to get into a negoa.- tion on "slipping" dates to trigger the incen- tive. Unless milestones are seL in stone Individual / -- Project Project ....
..... Individual Organizational Team Unit Unit V .J. _L .J. _L _j_ L __ L __ L Base Capabilities Individual Recognlllon Project Incentives Compensallon Develop Individua 1 lncenlives Celebra te Measure and reward and Benerats sk:ills a nd lmprove individual ou/Sianding Altract and retain competencies perfonnonce perfonnance project results Base pay Technical & Sales incentive Organizaonal Management-
Adjustments to Career Tracks or oommission success, fonned team base pay Competency- plans mission/vision performance Benclits Bnsed Piece-rate celebrations Annual Bonuses Peonnance MBQ-based Spot txmuses, Self-formed Management incenves management employee teams discretion, (suggestion, no mi nation or cont.inuous pecrto-pcer irnprovement) T H E E S S E N T 1 A L R O L E O F R E W A R D 1 G T E A M S A N D T E A M W O R K 23 and reaching them is simply a funcon ofthe team doing its normal, everyday job, it's gen- erally best to use recognition-an after-the- fact celebration of reaching mileswnes- rather than tying financia! incentives to their achievemem. Milestones need not always be time-based. When the team hits Lhe mile- stone, they earn. The sooner they hit it, the sooner they get the award. Projecl completion. AJI team mero bers eam a defined amount when they complete the pro- ject, on budget and on time (orto the team champion's quality standards). Value added. This award is a function of the value added by a project and depends largely on the ability of the organization to create and/ or track objective meas u res. Examples include reduced tumaround time on cus- tomer requests, improved cycle times for product development, cost savings due to new process efficiencies, or incremental profit or market share created by the product or service developed/ impl emented by the project team. One warning about project incentive plans: They can be very effective in helping teams stay focused, accomplish goals, and feel like there's sorne reward for Lheir hard work, but they tend to be exclusionary. Not everyone can be on a project team. Sorne employees (team members) will have an opponunity to eam an incentive that others (non-team members) do not. There is a lack of internal equity. One way to address the issue is to reward core team members with incentives for reaching team goals and also rec- ognize peripheral players who supported the team, either by offering advice, resources or a pair of hands, or by covering for project team members back at their regular jobs. Sorne pro- jects are of such strategic importance that you can live with these imernal equity problems and non-team members' grousing about exclusionary incentives. The bottom line, though, is that this too! should be used cautiously. One type of project incentive plan can help sidestep perceived equity problems, however- incentives for self-formed tearns. Under this plan employees are encouraged to form Lheir own teams-usually between five and eight people- take on a speci.fic objective and emerge with a way to make things better. Team-based sugges- on systems are one manifestation of this plan, with cost reduction as a common target. In well-designed plans, teams have the re- sponsibility not only of coming up with an idea or solution, but of writing up a business and im- plementation plan, getting managers affected by the change to sign off on it, developing the cost- justification (savings or degree of performance improvement), submitting it to managemem for approvaJ, and then taking an active role in idea implementation. Again, a pre-announced reward schedule-do this, get that, usually based on cost reduction-is used for al! such incentive plans. Special consideraon is given to projects for which cost reduction is not an appropriate goal. Susan realized a good project team incentive would have made al! the difference to the CONPRO team. It wouldn 't have eliminated the usual difficullies most teams face in melding different styles and approaches to accomplish project goal.s, but it would have made team members feel more appreciated and would have forced ]udy and other team rnembers to agree on more quanti- fiable project outcomes as the basis of tite financia/ in- centive. She decides to layout guidelines for ful'ure project incentive plans. The guidelines includ.e a payout range (20 percenl of base pay maximmn per team member for hitting pre-announced goals, 5 percent minimum), time limit (no projects longer than 12 months), project goals (mustfocus on company business objectives), and participation ( equal payotlt for all assigned core team members, with the exceptt:on of lhe team leader who earns one and a halj times the individual team member amount). The team can be composed of either fullrtime or part-time members, but nota mix. (A team cannot be made up of three people wlw only spend 1 O percent of their time on the team, and seven who spend 100 per- cenl.) Champions are given guidelines for devel.oping incentive plans, and Susan must approve any plan. Project team incentives are to be used jttdiciously and every effort should be made to link the team 's work lo one of the company's strategic objectives. She also de- cides the plans will cmly apply to managementformed, crossfunctional project teams. Organizational Unit Incentives Organizational unit incentive plans cover a de- fined population, usually an organizaonal unit - an entire company, a division, a department, a 24 COMPENSATlON & BENEFlTS MANAGEME NT
AUTUMN 2000 workgroup. The unit appears on an organiza- tional chart. Panicipation may be limited to cer- tain levels of employees in that organizaonal unit (everyone, all non-exempt people, all ex- empt, or everyone but those on the management incentive plan). The performance-award sched- ule is pre-announced. Panicipants know how much they can eam as a function of perform- ance against the measures. lt focuses on the pri- mary business objectives and can use perfor- mance measures most appropriate for the panicipating organizational unit. Sometimes there are combinations of levels of measures. As an example, 25 percent of payout is based on how well the whole company does on retum on assets, 25 percent on how well the division im- proves cycle time, and 50 percent split between two measures at the department level. All meas- ures, however, should be aligned with the pri- mary business objectives. (See Exhibit 6.) An organizational unit incentive can be the most powerful reward plan type to suppon a cul- ture of teamwork. Organizational unit incentive plans can make a business strategy come alive. It is a powerful way to leverage human capital to improve performance. It engages all or most of the employee base. Exhibit 6. Organizational Unit Incentives / It is pays out only when the improvement occurs. It is results-based, not activity-based. It provides an opponunity to communicate, reinforce, educate, and engage employees for the accomplishment of specific and criti- cal objectives. It can be measured for effecveness. It is dynamic in that it changes as business needs change. Organizational unit incenve plans are usu- ally announced for a year with the option to be revised, kept the same, or terminated, depending on the outcome of an effectiveness assessment. One of overlooked aspects of an organiza- tional uni t incentive plan is the opponunity to create accountability for all levels of manage- ment. Most managers are measured on their in- dividual contributions rather than the accom- plishment of their areas of responsibility and the performance of their people. The discipline of actually cutting a check based on performance against measurable objectives provides the op- portunity and the discipline to follow-through, recalibrate, and actually find out what you got for your money (something lacking in MBO and traditional management measurement plans.) 7 Individual
... .. Project ... Pro,ject ... Individual Organizational Team Unit V l !nit _J_ _L.. .l L .....1_ _L. ....J. J_ --'- __L .....! J_ Base compensa.on C.pahlllllu lncl>lcloal !Wcopllon Projed lncend-.,s Organizational andBe111ftll locl>i..,al lnctnthes Mtasure and rtward Unit Incentives Attract ond rtoin oldllo and /mprove individuo/ ouurandU.s pro}tt:t re.rults lo Base pll)' c:ompotendu ptrformanc ptrformance M anacment-fonned Align people with . Adjustmcnts ro T echnical &. Sales incc:ntlve Orpnizllional oeam peormanct organ izationol bMCpll)' Co=:rTracla or commlssion success, Self-fonned Objectives Bendil.$ Compelency - plano missionlvision employoeu:ams . Annual Based Peormanoe Pieco-I'Ble oeltbrations (suggestion. Jmprove 11pon dwse Manaement MBO-based Spoo bonuses. continuous objectives incent ives manog:mcnl lmprovemcnt) Formu b-based disaetion. iocenrives with IJOIDftation or
preannowx:ed performance- award schedule THE ESSENTIAL ROL E OF REWARDIN G TEAMS AND TEAMWORK 25 Sorne organizational unit incentive plans are really awareness and communications plans in drag. lt is rare that the plan designers realize they have designed a plan that is a methodology for the distribution of payouts based on a for- mula, rather than a plan that improves perform- ance. These are long line-of-sight plans. (Line of sight is how well the employees believe lhat they or theirworkgroup. department, etc. can actually contribute to affecting lhe measures.) Economic value added (EVA), eamings before taxes, return on capital assets, and customer satisfaction in- dexes are examples of measures that are oflen not understood by the employees, making those measures have a long line of sight. Companywide measures, covering diverse divisions and de- partments and sometimes international opera- tions, also contribule lO a long line of sight. The ex.istence of the plan has little effecl on the per- formance because the measures are too remote to the average employee. These long line-of-sight organizational unit incentive plans can be effective, if managemem understands what effective means. These plans are for communication of critical objectives, the op- portunity lO educate employees about the meas- ures, and to reinforce the vision and mission. The question then becomes "is the value of a plan worth the expense?" In more cases than one might think, it is. This is particularly lrue when the company has purposely decided LO pay peo- ple slightly below the competitive labor market and make up the difference, and more, through the organizational unit incentive plan. The measures used in a plan for this strategy need to be calibrated to ensure a payout of at least that of the gap between market and the organiza- tion's base pay, but it is the upside opponunity that makes it attractive to the employee. The fact that the payout is variable with overall perform- ance protects the company from payout unless the performance is there. Organizatmal unit incentive plans give Susan the Jocus she is looking for. She makes a strong statem.enl that this is a jramework Jor actm, with aligmnent to frrimary business objectives, to engage all employees in a com'T!Um purpose: one that is good Jor the organizatm a:nd good jor them. She forms a crossfunctional, muUi- level design team who goes through a discovery process to ensure that they u:nderstand how the employees feel about the organization and what managemen.t will ( really) support. They design the plan and present it to S usan after about Jour months of work, spending about a day every two weeks in formal meetings. All payouts are in addition to their existing reward plans (base pay, adjustments to base pay, and benejits), do rwt apply lo those on the management incentive plan, and will not be added to base pay. Measure1nent of perjonn- ance wiU be communicated each monlh, with payouts annually. (They debated about quarterly and decided to start conservatively with the option to change it next year.) The basic structttre of the plan Jor all non-exernpt and hourly employees is shown in Exhibit 7. Exhibit 8 shows an example of how payout for the plan would work (circles indicate actttal year-end performance). Organizational revenue growth earns 2% Departmental cycle time earns 6% Department measure ( custmnized lo its ttnique needs) earns 1 % Total of 2% + 6% + 1 % = 9% of base pay Exempt e7nfJloyees up to those managers on the man- age7nenl incentive plan simply could have higher pay- outs. The biggest surprise was lww much diffiwlty the design team had getting agree1nent on the m.easures for each depart1nent. What were assumed to be "tight" measures (ajter all, they had been running the business wit h those measures jor years) tumed out to be rwt quite good enough when a.n incentive was tied to tlmn. They began to call the process the "Drano effect. " It forced people to confront the legitimacy of the rneasures and how they could be collected and fed back to the partici- pants in a ti1nely and creditable manner. Susan and the team agreed the process was worth it even iJ the 'Vrarw effect" was the only outcorne of the process. She and the team presented the plan to the rest of top management, ajter so1ne individual preparation of each oj the decisi.on makers. The actual presenter was a non-exempt prodttction e1nployee who seroed on the team. Her passion Jor the plan and insight to how the organization worked from the "bottmn" up added a great deal of credibility to the process. The plan was approved if quarterly reviews are held Jor top manage- ment and a complete assessment begins two months befare the end of the first year of operation. 26 COMPENSATION & B ENEFITS MA N A GE MENT
AUTUMN 2000 Exhibit 7. CONPRO's Organizational Unit Incentive Plan Design (Non-Exempt Employees) % of base pay plus overtime level Measure Weighting Previous Level 1 Level2 Leve] 3 - Goal Level 4 Level 5 Year's (90% (70% (50% (30% (10% Performance probability probability of probability of probability of probability of reaching) reaching) reaching) reaching) of reaching) Organizational revenue growth 25% 0% ofpay 1% of_Qa_y_ 2.5% of_Qay 3% ofpay Departmental cycle time 50% O% ofpay 2% ofpay 3% ofpay 4% ofpay 5% ofpay 6% ofpay Depanmental measure, 25% O% ofpay 1% ofpay 1.5% ofpay 2% ofpay 2.5% ofpay 3% ofpay customized to its unique nced 100% 0% ofpay 4% ofpay 6% ofpay 8% ofpay 10% of__e_ay 12% ofpay Exhibit 8. Payout Example of CONPRO's Organizational Unit Incentive Plan Design (Non-Exempt Employees) % of base overtime level Measure Weighting Previous Year's Performance O rganization al reven u e growth 25% 0% ofpay Deparunental cycle time 50% 0% ofpay Deparonental measure, 25% 0% ofpay CUSlOmized lO its unique need THE MIX: LEVERAGING HUMAN CAPITAL Levell (90% probability of reaching) 1% ofpay
1% of pay S usan understands that one size (or type) of reward plan does not fit all her business needs. She also understands the "art of the possible." She cannot do everything at once. Her culture and management team needs time to adapt toa more activist strategy in getting people aligned with the primary business objectives and improving u pon them. In her case, base compen- sation and benefits are not the problem, nor are individual incentives. (Individual incentives Level2 Level 3 - Goal Level4 Level 5 (70% (50% (30% (10% probability of probability of probability of probability reaching) reachi_ng) reaching) of reaching) 1.5% ofpay h% ofpay 1 2.5% of pay 3% of pay
3% of_Qay 4% of__Eay 6% ofpay 1.5% ofpay 2% ofpay 2.5% ofpay 3% ofpay could have been a problem if there has been a lot of plans in the organization, something in- consistent with a desired culture of teamwork.) Performance management as a competency de- velopment process, as opposed to a merit in- crease tool, is a longer-term need. Recognition (spot bonuses), guidelines for an expanded use of project team incentives, and an organizaonal unit incentive plan are shoner term and a quicker route to performance im- provement and her desired culture of teamwork. AH have clear, but different, objectives and should be designed to complemcnt each other. THE ESSENTIAL ROLE OF REWARDING TEAMS ANO TEAMWORK 27 It is a mix of plans that can become the framework for acon for the core employees and the management ranks. It is a carefully considered mix that reflects the degree to which the organization believes that people can make a difference. An average plan, well implemented, will always do better than a brilliant plan, poorly im- plemented. It is all about how you implement what you have designed. Implementation is three-fold: Gaining management ownership dawn through supervisary L-evels. Approval does not mean commitment. Management comrnltment is the critical distinction between plans that are effective and those thatjust limp along with suppon limited to lip service. lt requires education on how the plans work and how they are tools to engage, educate, and moti- vate people to meet the organization's needs. Rolling out the plan and operating it as a business st-rategy. Effecve plans constant..ly communi- cate performance-to-date, educate on the measures, and formally engage employees in contributing to success. IL is also imponant to get feedback from the employees on a regu- lar basis. You have time to fix something if you can find out what is not working earlier rather than later. Assessment of effectiveness. Management reviews of performance should be held quanerly. Two months before the end of an annual plan, a total review should be done, gathering information from employees, management, and the performance data. Plans do not live forever. They require refurbishment regularly.