Pageiii

RewardsThatDriveHighPerformance
SuccessStoriesfromLeadingOrganizations

ThomasB.Wilson

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Thisbookisavailableataspecialdiscountwhenorderedinbulkquantities.Forinformation,contactSpecialSalesDepartment,AMACOM,animprintofAMA
Publications,adivisionofAmericanManagementAssociation,1601Broadway,NewYork,NY10019.

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LibraryofCongressCataloginginPublicationData
Wilson,ThomasB.
Rewardsthatdrivehighperformance:successstoriesfromleading
organizations/ThomasB.Wilson.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN0814404286
1.IndustrialmanagementCasestudies.2.Businessenterprises
Casestudies.3.SuccessinbusinessCasestudies.I.Title.
HD31.W55761999
658dc219847845
CIP

1999ThomasB.Wilson.

Allrightsreserved.

PrintedintheUnitedStatesofAmerica.

Thispublicationmaynotbereproduced,storedinaretrievalsystem,ortransmittedinwholeorinpart,inanyformorbyanymeans,electronic,mechanical,
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 Pagev

Formywife,Fran,andchildren,RobertandJohn:
Yougivemeadventurestofillalifetime.

Inmemoryofmybrothers,JimandLarry:
YoutaughtmeallIknow.

 Pagevii

Contents

ListofContributors xi

Acknowledgments xix

1.TheQuietRevolution 1

2.BuildinganEntrepreneurialSpirit 9

Casestudies:

Amazon.com 10

TheMathWorks,Inc. 15

Ticona,LLC 21

SouthwestAirlines 29

WilsonGroup,Inc. 36

3.CreatingaStakeintheEnterprise 49

Casestudies:

DuPontCorporation 50

TheCocaColaCompany 54

SaturnCorporation 60

BooneCountyNationalBank 66

IdeaScopeAssociates,Inc. 74

CiscoSystems,Inc. 79

4.KeepingaFocusontheCustomer 86

Casestudies:

RoyalBankFinancialGroup 87

ColonyCommunications,Inc. 96

 Pageviii

CopleyPharmaceutical,Inc. 103

StarbucksCoffeeCompany 111

5.WorkingasaTeam 117

Casestudies:

DuPontCorporation 118

CumminsEngine 123

BlanchardTraining&Development,Inc. 129

K/PCorporation 134

BaptistHealthSystem,Inc. 143

6.SupportingaBusinessTurnaround 154

Casestudies:

Sears,RoebuckandCompany 155

AvidTechnology,Inc. 161

Burke,Inc. 167

OSRAMSYLVANIA,Inc. 177

SunLifeofCanada 184

7.RetainingCriticalTalent 190

Casestudies:

FleetFinancialGroup,Inc. 191

CIGNAHealthCare 196

HealthServicesMedicalCorporation 203

Keane,Inc. 214

8.ReinforcingtheQualityProcess 222

Casestudies:

AlliedSignal 223

Techneglas,Inc. 230

CorningIncorporated 239

CommunityHealthPlan 246

HarvardUniversityHealthServices 253

9.MatchingRewardstoaChangingStrategy 261

Casestudies:

HarvardPilgrimHealthCare 262

 Pageix

W.W.Grainger,Inc. 270

GenzymeCorporation 276

KeyPrivateBank 280

LeviStrauss&Co. 287

10.NottheLastChapter 293

Bibliography 303

Index 305

 Pagexi

ListofContributors
[inalphabeticalorderbycasestudy]

AlliedSignal
ScottPitasky
formerHumanResourcesManager
101ColumbiaRoad
Morristown,NJ07962

Amazon.com
JoyCovey
ChiefFinancialOfficer
1516SecondAvenue
Seattle,WA98101
ScottPitasky
Director,HumanResources
1516SecondAvenue
Seattle,WA98101

AvidTechnology,Inc.JudithOppenheim
SeniorVicePresidentofHumanResourcesandCorporateServices
AvidTechnology,Inc.
OneParkWest
Tewksbury,MA01876

BaptistHealthSystem,Inc.
DouglasDean,CCP
CorporateDirector,Compensation&Benefits
BaptistHealthSystem,Inc.
P.O.Box830605
Birmingham,AL35283
SuzanneThorn,CCP,PHR
CompensationManager
BaptistHealthSystem,Inc.
P.O.Box830605
Birmingham,AL35283

 Pagexii

BlanchardTraining&Development,Inc.
BobNelson
President
NelsonMotivation,Inc.
11848BernardoPlazaCt.,Suite210B
SanDiego,CA92128

BooneCountyNationalBank
BoFraser
PresidentandChiefExecutiveOfficer
BooneCountyNationalBank
P.O.Box678
Columbia,MO65205

Burke,Inc.
RodCober
SeniorVicePresident
BurkeCustomerSatisfactionAssociates
805CentralAvenue
Cincinnati,OH45202
JoeOttaviani
SeniorVicePresident
BurkeMarketingResearch
805CentralAvenue
Cincinnati,OH45202

CIGNAHealthCare
MichaelJaques
VicePresidentofCompensation&Benefits
CIGNAHealthCare
900CottageGroveRoad,A145
Hartford,CT061521145

CiscoSystems,Inc.
JohnRadford
Director,OrganizationalEffectiveness
CiscoSystems,Inc.
255WestTasman,BuildingJ
SanJose,CA95314

TheCocaColaCompany
DavidCheatham
Manager,StrategicCompensation
TheCocaColaCompany
P.O.Drawer1734
Atlanta,GA30301

 Pagexiii

ColonyCommunications,Inc.
DanielV.Donahue
HRConsultant
124DanielDrive
NorthKingstown,RI02852
BruceClark
formerCEO
154EdmundDrive
NorthKingstown,RI02852

CommunityHealthPlan
Dr.PaulJarris,M.D.
MedicalDirector,VermontRegion
CommunityHealthPlan
7ParkAvenue
Williston,VT05495
Dr.DavidJillson,Ph.D.
DirectorofHealthServices
CommunityHealthPlan
7ParkAvenue
Williston,VT05495

CopleyPharmaceutical,Inc.
BarbaraMorse
VicePresident,Administration
CopleyPharmaceutical,Inc.
25JohnRoad
Canton,MA02021

CorningIncorporated
HaroldAltmansberger,CCP
GoalSharingConsultant
HNAConsulting
2736CountyLineDrive
BigFlats,NY14814

CumminsEngine
TheoSmith
Director,HumanResources
CumminsEngine
901SouthUSRoute23
Fostoria,OH44830
DirkTaylor
PlantManager
CumminsEngine
901SouthUSRoute23
Fostoria,OH44830

DuPontCorporation
RobertMcNutt
DuPontHumanResources
DuPontCorporation
Nemours104608
Wilmington,DE19898

 Pagexiv

FleetFinancialGroup,Inc.
MichaelIrons
SeniorVicePresident,
Director,CorporateCompensation
FleetFinancialGroup,Inc.
111WestminsterSt.,RIMOM14H
Providence,RI029032393
JaneM.Buonocore
AssistantVicePresident,CorporateCompensationManager
FleetFinancialGroup,Inc.
111WestminsterSt.,RIMOM14H
Providence,RI029032393

GenzymeCorporation
JoDeeGentile
Compensation,Benefits&HRISManager
GenzymeCorporation
1KendallSquare/Building1400
Cambridge,MA021391562

HarvardPilgrimHealthCare
LarryJ.Gibson
SeniorVicePresident,HumanResources,InformationTechnology,andQualityManagement
HarvardPilgrimHealthCare
10BrooklinePlaceWest
Brookline,MA021467229

HarvardUniversityHealthServices
MaryHennings
DirectorforAdministration
HarvardUniversityHealthServices
75MtAuburnStreet
Cambridge,MA02138
Dr.MaureenLynch,MD,ChiefAssociateofPediatrics
Dr.ChristopherColey,MD,ChiefofMedicine
CarieMichael,AssistantDirectorforClinicOperations
GioiaBarry,AssistantDirectorfor
HumanResources

HealthServicesMedicalCorporation
EllenG.Wilson
VicePresidentHumanResourcesandCommunications
HealthServicesMedicalCorporation
8278WillettParkway
Baldwinsville,NY132071399
JenniferFultonVacco
Director,HumanResources
HealthServicesMedicalCorporation
8278WillettParkway
Baldwinsville,NY132071399

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IdeaScopeAssociates,Inc.
KimberlyKelley
VicePresident
IdeaScopeAssociates,Inc.
UnionWharf,Suite214
Boston,MA02109

Keane,Inc.
ReneeSouthard
VicePresident,HumanResources
Keane,Inc.
10CitySquare
Boston,MA021293714

KeyPrivateBank
W.LawrenceGilmer
SeniorVicePresidentandDirectorofCompensation&Benefits
KeyCorp
127PublicSquare
Cleveland,OH441141306
MichaelGarelik
NationalChairmanFinancialIndustryGroup
WilliamM.Mercer
1717ArchSt
Philadelphia,PA19103

K/PCorporation
ChuckParsons
522WestMercerPlace,Suite403
Seattle,WA98119
PatriciaEllsworth
365ReflectionsCircle,Suite23
SanRamon,CA94583

LeviStrauss&Co.
SteveEpstein
VicePresident,GlobalRemuneration
LeviStrauss&Co.
1155BatteryStreetIH2/3
SanFrancisco,CA94111

TheMathWorks,Inc.
JeanneO'Keefe
ChiefFinancialOfficer
TheMathWorks,Inc.
24PrimeParkWay
Natick,MA017601500
NaomiCouino
DirectorofHumanResources
TheMathWorks,Inc.
24PrimeParkWay
Natick,MA017601500

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OSRAMSYLVANIA,Inc.
JamesR.Stokely
DirectorofCompensationandOrganizationDevelopment
OSRAMSYLVANIA,Inc.
100EndicottStreet
Danvers,MA01923

RoyalBankFinancialGroup
PeterH.Tucker
SeniorVicePresident
RoyalBankFinancialGroup
RoyalBankPlaza,
11thFloorNorthTower
Toronto,Ontario,Canada,M5J2J5

SaturnCorporation
DennisG.Finn
DirectorofHumanResources
SaturnCorporation
100SaturnParkway,P.P.Box1500
SpringHill,TN37174

Sears,RoebuckandCompany
SteveKirn
VicePresident,OrganizationLearningandDevelopment
Sears,RoebuckandCompany
3333BeverlyRoad
HoffmanEstates,IL60179

SouthwestAirlines
ElizabethSartain,SPHR,CCP
VicePresidentofPeople
SouthwestAirlines
P.O.Box36611
Dallas,TX752351611

StarbucksCoffeeCompany
LeslieThornton
Director,TotalPay
StarbucksCoffeeCompany
2401UtahAvenueSouth/MSSHR3
Seattle,WA981241067

 Pagexvii

SunLifeofCanada
RayWaldron
CompensationOfficer
SunLifeofCanada
1SunLifeExecutivePark
WellesleyHills,MA02181

Techneglas,Inc.
RobertReynolds
GeneralManager
Techneglas,Inc.
RR#4,Box60
Pittston,PA18640
RonaldL.Drennan
AdministrativeManager
Techneglas,Inc.
RR#4,Box60
Pittston,PA18640

Ticona,LLC
AnnLane
ExecutiveDirector,SalesAmerica
Ticona,LLC
P.O.Box819005
1601WestLBJFreeway
Dallas,TX753819005
MargaretBatcheler
HumanResourcesManager
Ticona,LLC
1195CentreRoad
AuburnHills,MI48326

WilsonGroup,Inc.
ThomasB.Wilson
President
WilsonGroup,Inc.
100MainStreet
Suite240
Concord,MA01742
Email:info@wilsongroup.com

W.W.Grainger,Inc.
GaryGoberville
VicePresident,HumanResources
W.W.Grainger,Inc.
455KnightsbridgeParkway
Lincolnshire,IL60069
JackieBarry
Director,Compensation
W.W.Grainger,Inc.
455KnightsbridgeParkway
Lincolnshire,IL60069

 Pagexix

Acknowledgments
Thisbookwastrulyateameffort.Thecasestudiesweredevelopedinclosecollaborationwithrepresentativesfromthecompaniesincluded.Alistofthese
contributorsisincludedonpagesxithroughxvii.

Inaddition,thereareanumberofindividualswhosecontinualeffortshavemadethismaterialpossible.TheyareindividualswhoaremembersoftheWilsonGroup,
Inc.,andtheyaddedgreatlytothepreparationofthesecasestudies.InparticularIwouldliketoacknowledgeLaurenSagner,JackieShaw,andLynneKondrackifor
theirtremendouseffortsinpreparingthisbook.Inaddition,IwishtothankJackDolmatConnell,JulieKniznik,andCaroleGreer,whoaddedmuchguidance,
assistance,andsupporttomeinpreparingthisbook.Finally,IthankDaveKowalofKowalCommunications,Northboro,Massachusetts,forhisassistancein
workingwithmymaterialsforthisbook.

TogethertheyhaveproducedabookthatIbelievewillbeofgreatvaluetothereadersoftoday,andthoseinthefuturewhoareinterestedinwhathighperformance
organizationswerelikeinthisera.

T.B.W.

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1
TheQuietRevolution
Wearewitnessingarevolutionintheworkplace.ItistakingplaceintheUnitedStatesandlikelyoccurringthroughouttheworld.Itisaquietrevolution,onethatis
barelybeingdiscussedinthemedia.Itissoprofoundthatitisreshapingthosewhoarepartofitandthosewhoareaffectedbyit.Anditsimpactisgradual,sofew
peopleevennoticeit.

Theglobalization,reengineering,restructuring,anddownsizingthattookplaceinthe1990sleftorganizationsinmoredemandingcircumstances.Competitionintensified
fromawidevarietyofsources.Inresponse,organizationsengagedinmassivecostreductions,reconfiguredtheirstructures,mademajorinvestmentsintechnology,
andsoldoperationswhileacquiringothers.Theyformedalliances,partnerships,andjointventures,evenwiththeircompetitors.Theysoughttofindtheircompetitive
advantageorcorevaluesasanenterprise.Peoplewereoftendemoralized,alienated,andfrustrated.Loyaltyandcommitmentdroppedtotheirlowestpoint,andthe
peoplewhoremainedemployedheldlittlecommitmenttotheorganization.Manyorganizationsdidnotsurvive,butsomeprosperedmanypeoplelosttheirjobs,but
somefounduniqueopportunities.Everyorganizationhassomehowbeenchangedbytheseforces.

Fromthischaosaneworganizationmodelisemerging.Organizationsarefundamentallychanginghowtheymanagetheiractivitiesandrelatetotheirpeople.
Organizationsarebecomingmoreresponsivetotheircustomers,reducingcosts,andimprovingquality.Asaresult,theyarebecomingmorecompetitive.Theyare

 Page2

generatinghigherreturnsforshareholdersandmoreopportunitiesforemployees.Themostfundamentalrealizationisthatpeoplearemakingthedifferencein
organizationalperformance.Thisiswhatthequietrevolutionisallabout.

Theneworganizationthatisevolvingplacesagreatervalueonemployeesthanorganizationshaveinthepast.Itachievesmorebycreatingaprocessforemployeesto
shareintheresultsthattheyhelpachieve.

Thisbookprovidesaseriesofstoriesthatofferawindowintotoday'sorganizations.Whilethefocusisontherewardsystemsthattheseorganizationsdevisedand
implemented,thetruepicturegoesmuchdeeper.Eachstoryreflectsanorganizationthatwasfacinganeedtochangethewayitconducteditsbusinessanddeveloped
aprocesstosupportandreinforcechange.So,therewardsystemsaremanifestationsofanewsetofvaluesandpracticeswithinorganizations.Intheirownway,
rewardsystemshavemodifiedthefundamentalspiritoftheseorganizations,therelationshipbetweentheemployerandtheorganization'smembers,aswellastheir
competitivenessandvitality.

Theseorganizationshavedemonstratedthattheactionsofpeople,thethingstheydoorfailtodo,oftendefinethedifferenceintheorganization'sperformance.They
havealsodemonstratedhowrewardsystemsplayasignificantroleinchangingorguidingorganizations.

Manypeoplemakeassumptionsaboutwhatmotivatespeopletheyalsohaveassumptionsaboutwhatdrivessuccessfulorganizationalchange.Themessagefrom
theseleadingorganizationsisthatthereisnosimpleformulaforhighperformancebutinvolvement,commitment,andastakeintheoutcomesareessentialingredients.

Eachoftheorganizationsprofiledinthisbookhadtoadapttochangingmarketconditions.Somehadawellarticulatedstrategy.Othersweremoregeneralintheir
approach.Somecompaniesusedasetofspecificperformancemeasures.Otherstranslatedtheirstrategyandthevaluesoftheorganizationintoprograms.Somehad
leaderswhoactivelysupportedorpromotedchange.Othersdidnot.Commontoeachorganization,however,wasaholisticapproachtorewardsthatwashighly
integratedwithhowthebusinessandpeopleweremanaged.

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DefiningRewardsinaStrategicManner

Rewardsystemsarenotmerelycompensationorrecognitionprograms.Theyareprocessesthattranslatestrategicgoalsandvaluesintoactionsanddefinehowpeople
willbereinforcedfortheseactions.Theycancreatealignment.Rewardsmayfocusonactionsorresults.Theyincludesalaryprograms,incentiveorbonusprograms,a
performancemanagementprocess,andmanyformsofpersonalrecognition.Theyexistasmanagementsystemsandpracticeswithinorganizations.Theydefineforthe
individual,''What'sinitforme?''

Rewardsystemscreateaconnectionbetweentheemployerandtheemployee.Theydefinetheemploymentcontractandthenatureoftheemployeremployee
relationship.Iftheyareeffective,theydonotjustdistributecashtoemployeesbutreflectthecontributionsmadebytheemployeesandbuildarenewedsenseof
commitment.Theycreateamechanismforsharingthebenefitsofsuccessandformalinkbetweenwhatisexpectedfrompeopleandtheresultsthatareachieved.

Rewardsystemsdonotexistinavacuum.Theyarepartofthestrategyandculturalfabricoftheorganization.Theyworkwhentheyarewelldesignedandwell
managed.Theyenableanorganizationtoattractandretainthetalentneededtosucceed,andtheycanmakethedifferenceinthedegreeofcommitmentand
discretionaryeffortemployeescontributetotheirorganization.

WhyOrganizationsShouldBeConcernedwithRewards

Somepeoplebelievemoneywillnotdrivedesiredperformance.Theyciteresearchandexampleswherefinancialrewardspressuredemployeesintoactionsthathurt
theorganization,itspeople,anditscustomers.Theyusetheseasevidencetoreflecttheirownvaluesandopinions.Theproblemisthatwithoutsomeformof
meaningfulexchange,desiredperformancedoesnotendure.Therewarddoesnotnecessarilyneedtobeincashorevenexternallyprovidedsomeofthemost
meaningfultimesoccurwhensomeonegainsinternalsatisfactionfromanexternalaction.Unfortu

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nately,theworkenvironmentdoesnotinherentlycontainthisalignmentbetweenpersonalneedsandjobaccountabilities.

Itistruethatwhenarewardsystemisusedtocontrolormanipulate,itcanworkagainstanorganizationandtheperson.Someprogramsaremoreinfluentialthanany
managerwouldbeindailypractice.However,theanswerisnottoeliminaterewardsbuttoapplytherewardsystemthat'srightfortheorganization.Rewardsystems
thatareexploitative,focusonpunishment,orfailtorequireaccountabilityneverbuildsuccessful,enduringorganizations.

Thisbookdemonstratesthatthereisabetteralternativeoneinwhichrewardsgiveemployeesastakeinthesuccessoftheenterprise.Ifanemployee'sperformance
supportstheorganization'smission,values,andstrategy,andtheseactionsimprovefinancialormarketperformance,thenitisonly"right"thattheindividualbe
"enriched"fairlyforthecontribution.Therewardsenrichedworkplaceischaracterizedbyachievement,excitement,andfulfillment.Butthisdoesnotjusthappen.A
strategyandsetoftargetedprogramsneedtobecreatedandintegratedintotheeverydaylifeoftheorganization.Thebestrewardsystemsarethosethatdonot
appearasformalsystemsbutratheras"thewaywedothingsaroundhere."Buttherewascareful,strategicsupportbehindthesepractices.

StoriesMakeaLastingImpact

Researchonthedevelopmentofhumanintelligenceconcludesthatgreaterlearningtakesplacewhenconceptsarepresentedascasestudiesratherthanaslistsand
narrativedescriptions.Everycivilizationusespoems,songs,andstoriestopassontraditionsandvalues.Storiescreatementalimages.Imagesburndeeperandlast
longerthanliststhatarememorized.Theyformaconnectionbetweenanemotionalmemoryandreality.

Inonestudy,whenhistorywastaughtusingacollectionofstories,highschoolstudentswereabletorecalluptothreetimesmoreinformationthantheydidafter
readingtraditionaltext.Storiessparktheimaginationandmayevokeanemotionalresponse.Theycreateapersonalrelationshiptoasequenceofevents.Theylive
longerinthemindofthereader.

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Sothisbookpresentssuccessstories,orcasestudies,fromsomeofNorthAmerica'sleadingorganizations.Inmypreviousbook,InnovativeRewardSystemsfor
theChangingWorkplace(NewYork:McGrawHill,1995),Iexplainhowtodevelopawidevarietyofrewardsystems.Thisbook,then,presentsademonstration
ofhoworganizationshaveapproached,developed,andimplementedrewardsystemstoimproveperformanceandshapetheirculture.

Situationswithverydifferentapplicationsareillustrated.Someofthecasestudiesaresophisticatedothersaresimple.Somearedirectlycompensationrelatedothers
provideawiderangeofcashandnoncash,formalandinformalprocessesinwhichpeoplearerewarded.Buteachcompanyhasinvestedconsiderabletimeandeffort
toaddresshowpeoplecanshareintheachievementsoftheirownandtheirorganization'sperformance.

Byreviewingmanyofthesecasestudies,theprinciplesofsuccessfulrewardsystemsandhighperformanceorganizationscanbelearnedandhopefullyremembered.

RealLifeSituations

Thecasestudiesinthisbookweredevelopedwithrepresentativesoftheseorganizations.Theyaretrue,reallifedescriptionsofwhatgoesoninsidethesecompanies.
AListofContributorsisincludedinthisbook.

Thosewhochosetoparticipatedidsoforseveralreasons.First,theywanttosharetheirsuccesswithotherswhomayhavesimilarissues.Theywanttoshowwhat
canbedone.Second,theywanttocontributetothemarketplaceofideasbydemonstratingthatrewardsystemscanplayacrucialroleinanorganization'sbusiness
strategy.Finally,theyrealizethatpeoplewithintheirorganization,aswellasthosewhodobusinesswiththemorwishtodobusinesswiththem,mayreadthisbook
andconnectwiththephilosophy,values,anduniquestyleoftheorganization.

Manyorganizationsdeclinedtoparticipatebecausetheywereconcernedthattheircompetitorswouldlearntheirsecretstosuccess,whichinitselfdemonstratesthe
rolerewardsystemscanplayinanorganization'scompetitiveness.Somedetailsinthecasespresentedwereeliminatedforsimilarreasons,withoutcompromisingthe
reader'sunderstandingoftheconceptsinvolved.

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ACollectionofBestPractices

Manybookshavebeenwrittenaboutcompaniesthatareleadersintheirindustries.Itseemsthatitisusuallynotlongafterbeingprofiledinsuchabookthatthe
companyisovertakenbythecompetition,sold,orsomehowoverwhelmedbychangingmarketconditions.

Theorganizationsrepresentedherearenotallleadersintheirindustries,althoughsomecertainlyareatthispointintime.Theorganizationsprofiledarefromacrossthe
landscapeofNorthAmerica.Somehaverewardsystemsthathaveexistedformanyyears.Othershavejustimplementedthem.Insomecases,rewardshavehadan
incredibleimpactonperformance.Inothers,theimpacthasbeenmodestyetimportant.Somecasesdescribethecompany'sphilosophyofcompensationandhowit
hasevolved.Othersdescribeaspecificprogramthatwasusedsuccessfully.

Organizationsandcasestudieswereexcludediftheydidnotengagepeopleinpositiveways,weretoodiscretionaryandarbitrary,orwerebasedonafterthefact
judgmentsofperformance.Genericprofitsharingprogramswerealsoexcluded,unlesstheyreflectedanactivemanagementprocess.

Thesearesuccessstories.Theywereselectedbecausetheyhadthedesiredimpactonthecultureandperformanceoftheorganization.Theyeachprovideaspecial
messageaboutwhatmadethemsuccessfulandabouttheorganizationtheyrepresent.

MakingtheMostofthisBook

Whilethisbookcanbereadfromfronttoback,itwasnotwrittentobereadinatraditionalmanner.Itmaybeusefultotakeanonlinearapproach,jumpingfromone
sectiontoanother.Recognizingthatrewardsystemsarecreatednotbecausecompaniesneedtodevelopprograms,butbecausetheyneedtoaddressissues,thebook
isorganizedaroundthemes.Thechapterswiththethemethatbestmatchesyourcurrentsituationmayprovemostusefulasastartingpoint.Thenconsiderthe
following:

1.Setrealisticexpectations.Thisbookisnotintendedtorepresentthebestpracticesofthebestcompanies,althoughitoften

 Page7

does.Itisabookaboutreality.Itmaynotincludethedesignfortheperfectrewardsystem,butitshouldgiveyouideasandapproachesthatwillchangethewayyou
thinkabout,develop,andmanagerewards.

2.Lookbeyondyourcurrentsituation.Itmayprovefruitfultoreadaboutcompaniesoutsideofyourindustryandtoreadcasesthataddressthemesotherthanthose
thatrelatecloselytoyoursituation.Muchcanbelearnedfromwhatothersdowhentheyfacesituationsdifferentfromyours.

3.Realizethatthereisnoperfectsystem.Thinkaboutwhatpeopledid,whytheydidit,andwhattheylearned.You'llfindthateachcompanymadetradeoffsand
foundthebestapproachgivenconflictingcircumstances.Therearenoblueprintsherefordesigningperfectrewardsystemsforyourcompany.Everysituationis
different.Whileyouneedtofindyourownanswers,thisbookshouldprovideyouwithimportantcluesforfindingthem.Thecasesaremeanttosparkideasthey
shouldstimulateinspiration,notcreateimitation.

Allofthecompaniesrepresentedhavetakenboldactiontochangethecourseofmanagement,creatingprogramsthathavehadaprofoundimpactontheir
organizations.Butkeepinmindthatthesecompaniesrepresentonlyasamplingofwhatistakingplaceinbusiness.Capturethespiritrepresentedinthesestoriesand
acceptthechallengeofcreatingyourownapproachtorewards.Doingsowillgiveyourcompanyacompetitiveadvantage,butonlyifyourapproachisbetterthanthat
ofyourcompetitors.

BeforeYouBegin

Millionsofpeoplehavebeenaffectedbytheprogramspresentedinthisbook.Millionsmore,includingcustomersandsuppliersofthesecompanies,havebenefited
fromtheactionspeoplehavetakenbecauseoftheseprograms.Manyotherorganizationshaveyettobetouchedbythequietrevolutionthatistakingplaceinthe
globalmarketplace.

Thisbookgivesthesecompaniesanopportunitytosharetheirexperiences.Ifyouhavea"storytotell"orwouldliketo

 Page8

discussanyofthesesituationsinmoredetail,pleasecontactme(info@wilsongroup.com).I,aswellasthosewhocontributedtothisbook,arelistedatthebeginning.
Youmaycontactanyofusdirectly,butthepressuresandprioritiesofahighperformanceorganizationmaylimittheiravailability.

Thisbookwaswrittenwithapurpose.Itbringstogetherideasandapproachesthatawidearrayoforganizationshaveusedtobecompetitiveandsuccessfulto
createtheirownquietrevolution.Myhopeisthatthestoriespresentedherecaninfluencewhatyoudo,whyyoudoit,andhowyoudoit,sothatyoucanmakea
differenceinyourworkplaceinamannerthatbenefitsyourcustomers,fellowemployees,otherstakeholders,andofcourseyourself.Ihopethisbookhelpsyou
becomepartofthiscommunityofglobalchange.

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2
BuildinganEntrepreneurialSpirit
Howdoesanorganizationinstillorretaintheentrepreneurialspiritthatithadwhenitwassmall?Oneofthecharacteristicsofanentrepreneurialcultureisthestrong
relationshipbetweenthecustomerandemployees,employeesandthemanagers,andshareholderswitheveryone.Peopleareinacommonboatdealingwiththe
turbulenceofadynamicmarketplace.Theyfeelthepressureofsurvivaleveryday.Theyareinnovativebecauseinnovationisrequiredtobecompetitive.Peopletake
initiativetoaddressissuesbecausethecompanycannotaffordtowait.Thereisaspiritofactionandcollaboration.

Iftheorganizationissuccessful,itgrows.Asitbecomeslarger,formalorganizationalstructuresandsystemsemergetomanagethecomplexity.However,these
changescanlimitthespiritoftheorganization.Peoplecannolongereasilyconversewithexecutives,anddecisionsneedapproval.Peoplestartperformingtasksthat
arespecializedandhavelimiteddirectbenefittothecustomer.Theyseetheirbossastheircustomerratherthanthepersontheyserve.Thespiritthatmadethemstrong
asayoungorganizationresponsiveness,flexibility,andcommitmenttocommongoalsbecomesfadedinthememoryoftheorganization'smembers.

YouwillseeinthischapterhowAmazon.comhasexperiencedmeteoricgrowthandyethasretainedasmallorganizationculture.Therewardsystemshavebeenkey
toretainingthefeelofthisorganization.MathWorkshascreatedastakeholdersprogramtocreateashareinthecompany'ssuccessandpersonalaccountabilityfor
contribution.Ticonadevelopedasalesincentiveprogramto

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encouragecustomerfocusandalignacommonsalesforcewithmultiplelinesofbusiness.ThispracticehasbeenkeytoTicona'sgrowthasacompany.Southwest
Airlinesplacesemphasisonitsselectionprocessandculture.Itusesabroadspectrumofrewardsinsubtleandpowerfulwaystoreinforceitsculture.Finally,the
WilsonGroupisanemergingcompanythatisbuildingrewardsystemstoretainitsvaluesandspiritinthefuture.

Althoughthesecompaniesareatdifferentstagesoftheirdevelopment,theyallhaveacommonconcernaboutretainingtheirentrepreneurialculture.Theyareusing
rewardprogramstobuildthisspiritinuniqueways.Forsome,thishasmeantchangeothersseektogettheirsystemsrightfromthebeginning.Theyallvaluetheir
culture,andthisenablesthemtodefinetheiruniquenessinthemarketplace.Inthisway,theyareleaders.

ShapingaHighPerformanceCultureThroughHRandRewardSystemDesignatAmazon.com

CompanyBackground

AnexplosivelygrowingcompanyheadquarteredinSeattle,Washington,Amazon.comistheworld'slargestInternetbookstoreandoneofthemostvisitedsitesonthe
WorldWideWeb.Foundedin1994,italsosellsCDs,havingrecentlylauncheditsonlineMusicStore,aswellasvideosandaudiotapes.Customerscansearchby
author,title,subject,orkeyword.Soldatdiscountsofupto40%,booksandCDsareordereddirectlyfromdistributorsorpublishersafterthecustomermakesthe
selection.However,thecompanyisincreasinglycarryinginventorybasedonforecasteddemand.BooksandCDsaregenerallydeliveredwithintwotothreedays
fromoneofthecompany'stwomassivewarehouses.

Sales,whichwere$511,000in1995,climbedtoalmost$16millionin1996and$147.8millionin1997.Revenuesinthefirstquarterof1998were$87.4million,an
increaseof446%overthefirstquarterof1997.Thecompanyhasyet,however,toturnaprofit,focusinginsteadonexpansionandthecapturingofmarketshare.The
customerbasehasalsoexperienceddramaticincreases,from

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340,000inMarch1997tomorethan2.2millioninMarch1998.Amazon.comwentpublicinMay1997ataninitialofferingprice(IPO)of$18pershare.Itsshares
weretradinginthemidtoupper$90s(afterarecenttwoforonestocksplit)inJune1998.

TheFounder

JeffBezosisthefounderandchiefexecutiveofficerofAmazon.com.Atage33,heisoneofthetruesuccessstoriesoftoday'sinformationageandIPOcraze,witha
networthofmorethan$1billion.Bezos,whograduatedfromPrincetonUniversitywithaB.S.inelectricalengineeringandcomputerscience,alwayswantedtobean
entrepreneur.HerealizedtheInternetwashispathin1994,whilehewasworkingatD.E.ShawonWallStreetandlearnedthatusageoftheWorldWideWebwas
growingat230%ayear.Herealizedthatthiswasfasterthananythinghehadeverseen,sohedecidedtotrytofindabusinessplanthatwouldmakesenseforthe
Web.Seeingthatyoucanbuildauniquebookstoreonline,asthereisnowaytohave2.5milliontitlesinaphysicalworldbookstore,Amazon.comwasborn.

TheCulture

BezoshasworkedhardfromdayoneofthecompanytobuildastrongandpowerfulcultureatAmazon.com.Itisafrugalculture,giventheintenselycompetitive
natureofthebusinessandtheresultantlowmargins.Tothisday,alldeskswithinthecompanyaremadeofrecycledwoodendoors,phonebooksserveascomputer
monitorstands,andplasticmilkcratesserveasfilingcabinets.Thisallowsthecompanytoinvestmoreinitsgrowthandcontinuetobeabletoscaletheindustry
rapidly,asopposedtoinvestinginitsphysicalassets.

Itisaculturecharacterizedbyintenseandhardwork.Rapidgrowth,stiffcompetitionfromBarnes&NobleandBorders,internationalexpansion,andentresinto
newmarketscreateasuperchargedenvironmentwhereemployeeswanttowinandarewillingtogotogreatlengthstoensurethathappens.

Thecultureisalsocharacterizedbyabalancedshortand

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longertermorientation,inwhichBezossetsthetrend.WallStreet,typicallyfocusedonshorttermprofitability,isenamoredwiththiscompanythatislookingto
revolutionizeInternetcommerceasamuchlongertermperspective.However,Bezosalsoknowsthatlongrunsuccessisonlypossiblebyexecutingflawlesslyinthe
shortterm.Thus,hedemandsbothintheorganizationdeliveringshorttermresultsthatwillhelpguaranteelongrangesuccess.

ItisaculturethatispassionateaboutwhatitdoestransformingthewayinwhichpeoplebuyproductsovertheInternet.Bezosdoesnotwantacultureat
Amazon.comthatwillappealtoeveryonerather,hewantsittobeaculturethatwillappealtothosewhotrulywanttomakeadifferenceandwhoarewillingtodo
whatittakestomakethatkindofdifference.

TheEmployees

Alongwithspectacularrevenuegrowthhascomearapidexpansionoftheemployeepopulation,risingfromapproximately150attheendof1996tomorethan600at
theendof1997andalmost900inmid1998.Whathasremainedconstant,however,isthequalityofpeoplethatthecompanyhires.

Amazon.comhasoneofthebrightestworkforces.WhilethecompanydoesnotscreenpeopleoutduetotheirScholasticAptitudeTest(SAT)scores,itdoesaskfor
themininterviewsandendsuphiringpeoplewhoweretopgraduatesatPrinceton,Dartmouth,Harvard,Stanford,Berkeley,andothertopinstitutions.Itisalsohiring
topupandcomingtalentfromsuchcompaniesasMicrosoftandWalMartallorganizationsthatknowsomethingabouthighgrowth.

Theaverageageoftheworkforceis28,notunlikemanyotherhighlysuccessfulSiliconValley,hightechstartups.Itisapassionate,energetic,highlymotivated
collectionofindividualswhoareouttochangeInternetcommerce.Whiletheaverageageoftheworkforceisrelativelyyoung,Bezosknewthattoscaleacompanyas
rapidlyasAmazon.com,heneededaseniormanagementteamthathadexperiencebuildingarapidlygrowingorganization.Executivesandseniormanagerscomefrom
organizationssuchasWalMart,Microsoft,AvidTechnology,AppleComputer,CiscoSystems,andSunMicrosystems.

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TheRewardSystem

TherewardsystematAmazon.comisdefinitelyalignedwithitsbusinessstrategy,employeebase,culture,andpositioninitsgrowthcycle.Amazon.compaysbase
salariesthatareslightlylessthancompetitiveonaveragecompetitiveatthelowestlevelsoftheorganizationandthenincreasinglybehindthemarketasemployees
moveuptheorganization.Thecompanyalsohasnoshorttermincentivesystem,sototalcashcompensationisalsoslightlylowerthanthecompetitivemarketplace.
Thiscashcompensationstrategyfitswellwiththecompetitivebusinessenvironmentinwhichitoperates(relativelylowmarginsandhighlevelsofcompetitiondriving
theneedtocapturemarketshareinordertobestcompete).Thestrategyalsofitswellwiththegrowthcyclepositionofacompany(highgrowthneedingcashto
financeitsexpansion)andwithitscultureofwantingtobelongrunfocused.

WhenBezosfoundedthecompanyin1994,hebelievedthattobesuccessfulinthelongerterm,allemployeeshadtoretain''ownership''intheorganization.Asa
result,everyemployeeinthecompany,fromexecutivesdowntothehundredsofemployeesworkinginthewarehouseoperations,receivesnewhirestockoptionsat
highlycompetitivelevels.Inslightlymorethanayearaftergoingpublic,withthestockhavingclimbedtonearly$200ashare(adjustingforthestocksplit),many
employeeshaveaccumulatedsubstantialoptiongains.Evensome$18,000peryearwarehouseoperationsworkershavepapergainsofmorethan$50,000.This
optionstrategyhasallowedAmazon.comtoattractandretainthekindofworkforcethatitwantsandneedstogrow,toconservecashforexpansion,andtoallowall
employeestohaveakeystakeinthelongtermsuccessofthecompany.

Therearenoperquisiteswithinthecompany,reflectingitsegalitarianculture.Executives'officesarefurnishedthesamewayallotherswithinthecompanyare(e.g.,
desksmadeofrecycleddoors).Beforeacquiringadditionalspacerecently,manyofficesweredoubledortripledup,andBezostoldtheexecutiveofficersthatthey
wouldnotbeexemptfromthischangeaswell.Thebenefitplansaretypicalofmoststartupandhighgrowthorganizationscoveringthemajorareasofneedbutnot
fullycomprehensive.Thereisalsosignificantcostsharinginthemedicalarena,againtoconservecashforexpansion.

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TheRewardSystem/EmployeeLinkage

Therewardsystemisunmistakablylinkedtothecompanystrategy,businessenvironment,culture,andpositionwithinitsgrowthcycle.Howdoesitlinktoemployee
needsandexpectations?Thecompanyisouttohireacertainprofileofindividualaggressive,bright,forwardthinking,someoneouttomakearealdifferenceand
investedinthelongtermsuccessofAmazon.com.Itisabletogetandkeepthiskindofindividualthroughthedesignofitsrewardsystem.Relativelylowbasesalaries,
noshorttermincentives,andgenerouslevelsofstockoptionsattractpeoplewhoarehungry,willingtotradeshorttermeconomicsforthepotentialoffargreaterlong
termgains,andunafraidtoworkincrediblyhardtomakesuccessareality.

Conversely,thecompensationsystemalsoactsasahighlyeffectivescreeningtoolforpeoplewhodon'thavetheprofilethatthecompanyislookingfor.Those
unwillingorunabletotakearisk,totradeoffshorttermforlongtermpotential,andtoliveinanegalitarian,noperquisitesorganizationaregoingtoselectoutdueto
thestructureoftherewardsystem.

WhattheFutureHolds

Amazon.comhasalreadybegunlookingatwhatthefutureholdsforitsrewardsystems.Whatisclear,andwhatwillnotchange,isthetypeofpeoplethatthecompany
wantstoattractandretain.Whatwillneedtochange,however,isthespecificrewardsystemmix,andundoubtedlytheamountandtypesofcomponentsinthereward
system.Giventheexplosiveemployeegrowth,stockoptiondilutionmustbeconsidered.Giventhenecessityofattractingadiverseworkforce,benefitstrategieswill
havetobelookedat.Giventhecompetitivepressuresinherentinthelabormarket,greaterpressuretobecompetitiveoncashcomponentswillarise.Whatisgratifying
tosee,however,isthatthecompanyisproactivelyconsideringtheseareasandnotwaitinguntilanissueorcrisisarises.Willthingsneedtochange?Certainly.
However,onecanbeassuredthattherewardsystematAmazon.comwillcon

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tinuetobelinkedtocriticalstrategies,theculture,andthedesiretoattractandretainexceptionaltalent.

RetainingtheSpiritofanEmergingCompanyatTheMathWorks,Inc.

Thesoftwareindustryisdynamicandcontinuallyundergoingchange.Ifanorganizationissuccessfulinthisindustry,itgrowsandmaturesandmayloseitsedge.The
factorsthatleadtosuccessatonestageofgrowthoftenformtheseedsoftheorganization'sdemiseinlaterstages.Thechallengeofgrowthinthisdynamic
marketplaceisbeingaddressedbyTheMathWorks,Inc.,inuniqueandimportantways.

CompanyBackground

TheMathWorkswasfoundedin1984toaddressaneedamongengineersandscientistsforamorepowerfulcomputingenvironmentthanwasavailablewith
FORTRAN,thethenpopularprogramminglanguage.FoundersJackLittle,thecurrentpresidentofTheMathWorks,andCleveMoler,thecurrentchiefscientist,
wereexpertsinmathematics,engineering,andcomputersciencetheywerealsodriventostartanewbusiness.TheycreatedMATLAB,ahighperformancetechnical
softwareenvironmentwithacomprehensivesetoffunctionsforcomputationsandgraphics.Theproductshavebeenusedbycompaniesforthedesignofcarsandair
trafficsystems,formedicalresearch,andaseducationtoolsforscientists.TheMathWorkshasbecometheworld'sleadingprovideroftoolsforengineeringand
scientificprofessionals.

Thecompanyhasgrowntomorethan450peopleandhasbeenprofitableeveryyearsinceitsinception.Itisprivatelyheldanddoesnotdependonventurecapital
funding.Growthhasbeenfinancedthroughstrongcashflowmanagement.Thishasgiventhecompanyauniqueabilitytofocusoncustomers,employees,andthe
productsthatwillretainitsmarketleadership.Itdoesnotneedtoproduceareturnoninvestment(ROI)forexternalconstituenciesitdoesneedtoremainprofitablein
ordertosupport

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growthplansandinvestments.Consequently,thefirmhasbeenabletoestablishaculturethatisdriventoservetheneedsofacomplexmarketplaceand,inturn,make
animpactonitscustomers'abilitytousetechnologyinwaysthathaveneverbeenappliedbefore.

OneoftheimportanthallmarksofTheMathWorkshasbeenitscommitmenttokeepingpeopleinvolvedanddedicatedtothesuccessofthecompany.Thisphilosophy
isembeddedinmanyaspectsoftheorganization,fromrecruitmentandselection,toworkassignmentsandstructures,tocommunicationaboutthecompanyandits
actionsinthemarketplace.Employeesarekepthighlyinformedandinvolvedineveryaspectofthecompany'soperations.Thishasledtoaresponsivenessand
continualprocessofchangeanddevelopmentseldomexperiencedbyestablishedcompanies.

OneofJackLittle'scommonrefrainsis,"Ifwe'rehappyandmotivatedanddoingourjobs,thecustomer'sgoingtobehappy."Thiscommitmenttoaninformal,
customeroriented,funplacetoworkhasshapedthefirm'sculture.Thestructureisdynamic,andthecompanyfavorscrossfunctionalteams.Alllevelsofmanagement
areactivelyengagedinpromotingnewideasandmethodsbothtoimproveproductsandservicesdeliveredtocustomersandtoreducecosts.Theseactionsare
reinforcedbythecompany'scompensationsystemsaswell.

BuildingSharedRewards

OneofthemostpowerfulrewardsystemsinthecompanyistheStakeholderProgram.Thisisanincentiveprogramwhereallemployeesshareinthecompany's
financialperformance.Ithaschangedandevolvedovertimeandcontinuestodevelopastheorganizationchanges.

TheprecursoroftheStakeholderProgramwasstartedasayearendbonus,profitsharingtypeprogram.Thepayouts,whilebasedonperformance,weremadeona
discretionarybasisbytheseniormanagementteam.Asthefirmgrew,thecorrelationbetweentheperformanceofanindividualandtheamountofthebonuspayout
wasnotwellunderstood.Theprogrambegantobe

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seenasaholidaybonusorentitlementprogramthatwasnicetohavebutdidnotreflectindividualorcompanyperformance.

Theexecutiveteam,leadbyJeanneO'Keefe,thechieffinancialofficer,researchedalternativestochangetheprogram.Theexecutivesrealizedthatitwasimportantfor
peopletoshareintheperformanceofthecompanyandtoseehowtheirowncontributionsmadeanimpact.Theyconsideredperformancebasedstockoptions,stock
appreciationrights,andemployeestockownershipprograms.Eachoneoftheseinitiativesseemedtoincreasedysfunctionalpressuresontheorganizationor
management'sdecisions.

TheexecutiveteamdecidednottousestockrelatedprogramsbecauseitwantedTheMathWorkstoremainaprivatelyheldcompany.Whileonecouldestablishan
"internalmarket"fortheprivatestockintheseprograms,thegreatestgaintoindividualswouldcomewhenthecompanydidaninitialpublicofferingandwentpublic.
Thestockrelatedprogramswouldplacepressureonmanagementtotakethecompanypublicandtogeneratecapitalintheexternalmarketstosupportthe
compensationpayouts.Theexecutiveswerealsoconcernedthatitwouldtakeconsiderabletimetogeneratesufficientpayoutunderanequitybasedplan,andthey
wantedtheincentiveplantohaveamoreimmediateimpactonbehaviors.

DevelopingaNewApproach

Tothatend,theydevelopedanewapproachcalledtheStakeholderProgram.Theprogramisstructuredtopayouteachquarterwithnoholdbackforannual
performance.Therearethreefactorsthatdeterminepayout:

1.Theprofitabilityofthecompany(netoperatingincomebeforetaxes)

2.Theindividual'scurrentsalary

3.Theperformanceratingoftheindividual

Thepayoutisdeterminedbythefollowingsteps:

1.Ofthecompany'sprofits,10%issetasideandpaidouteachquarterfortheStakeholderProgrampool.Whilethequartersvary

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inprofitability,thepoolvariesaswell.Thiscommunicatestoallstaffmembersthattherearecyclestothebusinessandtheirpayoutswillvaryaccordingly.
Furthermore,ifthereisalargeinvestmentorexpenditureduringaparticularquarter,therewillbeeffectsonthepayouts,buttheseactionsshouldleadtoincreased
payoutsinsubsequentquarters,therebypromotingalongertimehorizon.

2.Ashareofthepoolisdeterminedforeachindividualbasedonthepercentageofone'ssalarytothetotalpayrollofallparticipants(i.e.,eligibleemployees).Asthe
numberofpeopleinthefirmgrows,thepercentageshareofanyonewillbereduced.Thus,individualsthatareaddedtostaffneedtomakeacontributiontothe
companyingrowingitsprofitability.Anindividualmustbewiththecompanyforoneandahalfyearstoreceiveafullvestedinterestintheprogram.

3.Thesharethatindividualsreceiveis"modified"bytheirperformancerating.Thefollowingaretheratingsusedbythecompany:

Outstanding

Excellent

Verygood

Meetsrequirements

Needsimprovement

Eachratingisassignedaweightingfactorfrom0.5to2.5.

4.Thepayoutisthendeterminedbycombiningthemodifiedamountsofallstakeholdersandcalculatingeachindividual'spercentageshare.Thispercentageisapplied
tothepooldollarsandtheamountofthepayoutisdetermined.

5.Eachmanagergivesoutthepayoutcheckspersonally.Somegroupsmeetasateamtodiscussoverallresultsandthendiscusstheachievementsofeachindividual
duringoneononesessionsothermanagersmeetoneononewitheachstaffmember.Asacompany,thereisalwaysexcitementthedaythestakeholderpayoutsare
made.

IntegratingPayandPerformanceReviews

Theperformancereviewprocessisdonebymanagersandcontinuestodevelopandchangeastheorganizationbecomesmorecom

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plex.Theevaluationsarebasedonasetofperformanceindicatorsthatreflectthefunctionalareaand/orprojectteaminwhichtheindividualswork.Theperformance
indicatorstendtobebasedonspecificobjectivesortechnicalcontributions.Insomecases,unitshavedevelopedteambasedperformanceplans,andallmemberson
theteamhaveinputtoanindividual'sperformancerating.Furthermore,managersreviewtheevaluationsoftheirpeopleannuallywithapeergroupofmanagers.Thisis
doneinadiscussionsessionwiththeobjectivetoincreasethequalityandreliabilityoftheassessment.Frequently,peermanagerspushbackonamanagerwhoeither
isoverlyharshorgenerousintheperformanceratings.Managersneedtocorrelatetheirunit'sperformancewithratingsoftheindividualswithintheunit.Thisprocess
enablesthedistributionofratingstobeachievedwithoutrevertingtoforcedrankingcontrols.

Recently,TheMathWorkshasbegunapilotprojecttoinstituteamultiraterassessmentprocesstoexpandtheinformationonwhichthestakeholderperformanceis
judged.Thiswasdonebecauseofasuccessfulexperiencewithusingthisfeedbackprocesstoassesstheperformanceoftheexecutiveteam.Thefeedbackmadea
powerfulinfluenceonhowexecutivesprovideleadership,andthefactorswereadoptedforabroaderapplicationinTheMathWorks.Theresultswillbeintegrated
intotheperformanceratingsofindividualsandshouldbereflectedintheirstakeholderpayouts.

ThisprogramhasbecomeanintegralpartofthewaypeoplearemanagedandrewardedatTheMathWorks.Althoughthestructureisrelativelysimple,thesupporting
actionsrequireconcentratedeffort.Thecompanyhasgainedanimportanttoolthathascontributedgreatlytogrowthandprofitability.Asstatedearlier,thefirmhas
achievedasteady,abovemarketaveragegrowthformostyearssinceitsinception.Ithascontinuedtoachieveimpressivenetincomeresults,whichhasenabledThe
MathWorkstofinancegrowthandprovideattractivepayoutstothestakeholders.

TheImpactoftheStakeholderProgram

Fromanorganizationalperspective,thisprogramhasachievedthefollowingimportantoutcomes:

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1.Peoplethinkandactlikestakeholdersinthecompany.Peoplereceivemonthlyupdatesonthefinancialprogressofthecompany.Becausethisinformation
affectstheirpayouts,employeeshavebecomekeenlyinterestedintheresults.Thistimelyinformationhasledmanytoexaminedecisionsandtoexertpeerpressureto
controlcostsorincreaserevenues.Oftenpeopleareheardaskingwhetheragivenactionisthe"stakeholderfriendlythingtodo."

2.Theprogramsharestheprofitsofthecompanywiththosewhohelpedcreatethem.Fromthebeginning,theexecutiveswantedtocreateanenvironment
wherepeoplesharedinthefortunesoftheorganization.Theyacttosupportthisprinciple.However,theydidnotwanttocreatepressurestotakethecompanypublic
orcreateownershiprivalries.Thus,theprogramenablespeopletobepartoftheorganization,addtoitscompetitiveness,andshareintheresults.

3.Performanceisrewardedinmeaningfulways.TheMathWorksexecutivesrealizedthatameritpayprogramalonesimplydoesnotalwayshavesufficientimpact
onpeopletomakeadifference.TheStakeholderProgramprovidesadirectlinkbetweentheperformanceofindividuals,thefinancialperformanceofthecompany,
andone'spayouts.Ithasestablishedastronglinkbetweenperformanceandrewards.

4.Theprogramrequiressignificantmanagementattention,whichisoneofthemostimportantactivitiesinwhichmanagersareengaged.Setting
performancetargets,trackingperformance,makingproductandprocessimprovements,andcommunicatingprogresshavebecomeimportanttobuildingacompetitive
organization.Byrequiringmonthlyreportsontheprogressofthebusiness,andreviewingindividualperformanceonafrequentbasis,thecultureoftheorganizationhas
becomehighlyperformanceoriented.Thefactorsencouragepeopletofocusoncustomers,marketleadership,newproductdevelopment,andcostmanagement.
Everyoneisengaged.Amajormanagementchallengeistohelppeopleseehowtheiractionscontributetoordetractfromthecompany'sabilitytobecompetitivein
themarketandeffectivewithcustomers.Theyhavecreatedanalignmentthatmanyorganizationswouldenvy.

TheStakeholderProgramisnotperfectandwillmostlikelyundergochangesastheorganizationbecomeslargerandmorecom

 Page21

plex.Itneedstoretaintheabilitytoencouragecrossfunctionalcollaborationwhileprovidingpeoplewiththelineofsightbetweentheiractionsanddesiredresults.As
theorganizationgrows,thenumberofparticipantswillgrow.Thepressureonprofitswillincreasetosustainthedesiredpayoutlevels.Fornow,however,thestyleand
natureofTheMathWorksmanagementisreflectedbythesuccessofthisprogramandthecompany.Anemergingbusinessneedstokeepitsspiritaliveandkeep
peopleengagedintheprocessofgrowth.ThisisacontinualstruggleatTheMathworks,andtheyhavemanyofthetoolstomakeitworthwhile.

TheChallengeofIntegration:AligningSalesStrategywithMultipleBusinessesatTicona,LLC

Oneofthemostcriticalissuesofanyorganizationistoalignthesalesprocesswiththestrategicobjectivesofitsbusiness.Thisbecomesevenmorecomplexwhenthe
companyoperatesseveralproductlinesbutthecustomerwantsasinglepointofcontact.SuchwasthechallengefacingTicona.

CompanyBackground

TiconaLLCisawhollyownedsubsidiaryoftheHoechstGroup,aGermanbasedmultinationalindustrialcompany.Ticonamarkets,manufactures,anddistributes
engineeringresinstoawidevarietyofindustries,includingautomotive,hightechnology,healthcare,electrical/electronics,consumer,andappliancesonaworldwide
basis.Themarketplaceforitsproductsishighlycompetitiveandmanyproductlinesfaceincreasedpricingpressure.Itsellsdirectlytoindustrialcustomersandalso
usesanactivedistributionchannelformarketingandservicingcustomerswithneedsforsmallerquantities.Ticonamaintainsmarketleadershipthroughitsabilityto
collaboratewithcustomersonthedevelopmentofapplications(usingmaterialstoenhancethecustomer'scompetitiveadvantage)andtoprovidesolutionstothe
customer'sdesignproblemsandaccountservicing.

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Afterthecompanycompletedamajorstrategicassessment,itdiscoveredseveralcriticalissuesnecessarytoretainitsmarketleadership:

Customerswantthesalesprofessionalstohaveabetterunderstandingoftheirbusinessandtoworkmorecloselywiththecompanytoenhancetheircompetitiveness.

CustomerswantasingleinterfacewithTiconatosimplifytheaccountrelationshipresponsibilitiesandincreaseresponsivenesstocustomerneeds.

Customerswantmorefocusedapplicationsdevelopmentprojectsthatwillbuildcompetitiveadvantageforthefuture.

Tothisend,Ticonareorganizeditssalesforceintoasetofindustryfocusedteams.Ticonaidentifiedtwocriticalrolesinthesegroupsandorganizedaccountabilitiesto
betterservethecustomer.Accountmanagershaveaccountabilityforthesalesandoverallrelationshipwiththecustomers,andtheyusetheirindustryknowledgeto
identifytrendsandopportunitiesthatenhanceTicona'scompetitivepositioninthemarket.Applicationsdevelopmentengineershaveresponsibilitytodeveloplonger
termapplicationswithclients.ThisinvolvesworkingcloselywithmembersofthecustomerengineeringfunctiontoexaminenewwaysthatTicona'smaterialscan
improvetheirproductsorreducetheircosts.

Ticonahasfiveproductbasedbusinessunitswithfullprofitandlossaccountabilityfortheirsectorofthecompany.TheseunitsincludebusinesslinessuchasNylon,
Celconpolyacetal,Celanex,andImpetpolyester.Thesebusinessunitsdevelopstrategicplanstogrowtheirmarketshareandgeneratedesiredoperatingincometothe
corporation.Thebusinesslinessharethesamecommonsalesforce.TheAmericassalesorganizationservescustomersinNorth,Central,andSouthAmericaandthe
businesslinesworkonaglobalbusinessbasis.

ThisorganizationalstructureutilizesthesalesforceastheprimarylinkagebetweenthecustomerandTicona,andthebusinesslineshaveaccountabilityforproduct
development,pricing,manufacturing,anddelivery.ThisdynamictensionpositionsTiconatobehighlyresponsivetotheneedsofthemarketwhileachievingeconomies
ofscaleandintegrationwhereneeded.Thesalesorganizationseekstoidentifyopportunitieswheretheproductsportfo

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liocanhelpsolvethecustomers'applicationneedsanddelivergrowthandprofitabilitytoeachofthebusinesses.

CreatingBusinessAlignment

Tomakethisstrategyandorganizationworkeffectively,itisessentialthatthesalesorganizationandthevariouslinesofbusinessworktogethertoachievemarket
leadership.Ifthesalesorganizationdidnotcollaboratewiththebusinesslines,orthebusinesslinesdidnottiecloselywiththecustomerneeds,thenTiconawouldlose
itscompetitiveadvantage.Ticonahassoughttoachieveanoptimalbalancebetweenproductlinefocusandanintegratedfacetothecustomer.Thiswillinturn
stimulategrowthandkeepTiconainaleadershiproleforinnovationsandserviceswithitscustomers.

Whilethisstrategyandorganizingconceptisrelativelyclear,thecriticaltaskisimplementation.Ifpeopledonottakethedesiredactions,thenthestrategicplanwillbe
atrisk.Forthisreason,thesalesorganizationdecidedto''reinvent''itssalescompensationprogram,withthesimpleconceptthatitneededtoencourageandreward
strategicbehaviors.

DevelopingaNewSalesCompensationProgram

Toaccomplishthistask,Ticonaidentifiedasalescompensationdesignteamtoworkwithanoutsideconsultanttoassessanddevelopanewmodelofcompensation
fortheaccountmanagersandapplicationsdevelopmentengineers.Theprogramhadthreeprincipalobjectives:

1.EncourageandrewardsalesandprofitablegrowthinTicona'sbusinesses.

2.Attractandretainhighlyskilledandsuccessfulsalesandapplicationsdevelopmentengineertalent.

3.Aligntheobjectivesofrespectivebusinesslineswithsalesobjectivesthroughintegratedmeasuresofperformance.

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Thedesignteamworkedforseveralmonthsontheplan.Manyalternativeapproacheswereexamined,andthegroupdevelopedanapproachthatbalancedsaleswith
businesslines,individualwithteamperformance,andaccountmanagerswithapplicationsdevelopmentengineers.Althoughonthesurfacetheprogramappears
complex,itisactuallyquitesimpleinconcept.

Thesalescompensationplaniscomposedoftwoorthreeelements,dependingonone'srole.Thecombinedlevelofcompensation(salaryplustargetpayoutfor
incentives)shouldbehighlycompetitiveinthemarketandreflectdesiredmarketpaylevelsfordesiredperformancephilosophy.

Thefirstcomponentisthebasesalary.Allmembersofthesalesorganizationretaintheirbasesalary,althoughfutureincreasesdependontheimplementationofthe
plan.Furthermore,thecompanyisinvestigatinglinkingthebasepaylevelstothedefinitionofcriticalcompetenciesnecessaryforsuccessfulaccountmanager'sor
applicationsdevelopmentengineer'sperformance.

Thesecondcomponentistheteamincentive.A"teamscorecard"isdevelopedforeachindustryteamwithinthesalesorganization.Themeasuresaretiedtobothsales
andbusinesslineobjectives.Figure21isasampleoftheteamincentivescorecard.Thefocusoftheteamincentiveistoencouragebothrevenueandprofitgrowthin
thebusinesses.Thescorefromtheperformanceoftheindustryteamwouldapplyequallytotheaccountmanagersandtheapplicationsdevelopmentengineers.The
measuresinclude:

Thecombinedoperatingincomefromthebusinesslinesthatthesalesteamserves

Therevenuegrowthgeneratedbytheindustryteam

Therevenuegeneratedfromcommercializingnewprograms

ThistiesthemtogethertoensuretheysupporteachbusinesslineandworkcloselywithcustomerstoidentifysalesopportunitiesandnewapplicationsforTicona's
products.Fortheaccountmanagers,thisrepresentsapproximatelyhalfoftheirvariablecompensation.

Thethirdcomponentappliestotheaccountmanagersonlyandisbasedonindividualsalesresults.Sinceeachaccountman

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Figure21.
Teamincentivescorecardforaccountmanagersandapplicationsdevelopmentengineers.

agermayservesomeorallofthebusinesslinesandthemixofbusinessneededbyeachindividualmayvary,Ticonaneededaprocesstotailortheprogramtodifferent
roles.Tothatend,an"individualscorecard"wasdeveloped(seeFigure22).Thisscorecardallowseachbusinesslinetoselectonemeasurefortheirbusinessthat
servestheirsalesdevelopmentandgrowthobjectives.Mostbusinesslinesutilizenetrevenues,buttheymayalsoutilizecontributionmargin,numberofnewaccounts,
oroperatingincomefromnewprograms,forexample.Salesmanagementandthebusinesslineleaderswouldworktogetheronselectingthemeasuresanddeveloping
therangeofperformanceneededbyeach

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Figure22.
Individualincentivescorecardfortheaccountmanagersandsalesteamleaders.

accountmanager.Becausethisprocessisdoneinanopenfashion,inclosecollaborationbetweensalesmanagersandothers,eachindividualscorecardreflectsan
optimalbalancebetweentheperformancerequirementsofthebusinesslinesandtheoverallpeopleresourceallocationprioritiesofthesalesorganization.This
componentofthesalescompensationplanisbasedonindividualperformanceandavailableonlytotheaccountmanagers.

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TheScorecard

Thescorecardisanintegratingtoolusedinboththeteamandindividualincentivecomponentstheprocessofperformanceplanningiskeytoachievingtheright
balanceofalignmentbetweenprioritiesandneeds.Thescorecardservesasthecatalystforimportantdecisionmakingandresourceallocation.Eachscorecardis
structuredinasimilarmanner.Therearebetweenthreeandsixmeasuresforeachcard,aweightingofeachmeasure,andfivelevelsofperformance.Theperformance
levelsrangefromminimumthreshold,tobudgetplan,andtoexceptional.Thescore(80to120)iscomputedbyidentifyingthelevelachievedduringtheperformance
period,multiplyingthisamountbythemeasureweighttodetermineperformancescore,andthenaddingthescoreforeachmeasuretodeterminethetotalscore.Thisis
arelativelysimplemathematicalprocess.Thetotalscoreisthencomparedtothe"payoutopportunitytable"andpayoutisdetermined.Thepayoutpercentageis
appliedtotheindividual'stotalearningsfortheperformanceperiod.

Thepayoutsaredeterminedeverysixmonths.Thefirstsixmonths'payoutisbasedontheperformanceforthefirsthalfoftheyearandthesecondsixmonths'payout
isbasedonthetotalyear,lessanypayoutinthefirsthalf.Thisallowstheplantooperateonanannualbasisyetprovideforhalfyearperformancepayouts.

ImplementingthePlan

Thesalescompensationplanhasbeenapproved,communicated,andimplementedthroughouttheorganization.Afterthefirstperformanceperiod,thecompany
exceededitsgrowthobjectivesforbothrevenuesandprofits.Thenumberofdevelopmentprogramsthatcanbecommercializedhasincreasedandchangesneededin
thesalesprocessaretakinghold.Thetrendofresultsisclearlyinapositivedirection,butthetimelineoftheplan'simpactonbehaviorsofallpartiesconcerned,both
insideandoutsidethesalesorganization,isjustbeginning.Itwasexpectedthattheplanwouldcauseanimmediatechangeinbehaviorsandresults.Realityhas

 Page28

shownthatittakestimetoredirectperformanceandchangeentrenchedbehaviors.Thecommitmenttotheprogramremainshigh,andalthoughthepayoutswereon
target,peopleexpectedthemtobesignificantlyhigherthantarget.Furthermore,theydiscoveredthatittakesmoretimetodevelopeffectivemeasures,createthe
systemsneededtosupporttheprocess,andestablishfairperformancetargets.However,thetimespentappearstohavehadmultiplebenefits,inbuildingstrong
industryteams,improvingtrustandcommunicationwiththebusinesslines,andestablishingstrongsalesleadership.Thesearethefoundationelementsofasuccessful
organization.

Numerousorganizationalchangeswerehappeningatthesametimethecompensationplanwasbeingimplemented.Wouldithavebeenbettertowaituntilthechanges
werecompletedbeforeimplementingthenewcompensationprogram?Manychallengedthewisdomofmovingaheadwithchangesincompensationbeforeallthe
otherorganizationalalignmentissueshadbeenresolved.ButExecutiveDirectorofSalesAnnLanepushedback,indicatingthattherewasneveragoodtimeandthat
thechangeswouldtakelongerifpeoplecouldputofftheharddecisionsthatimpactcompensation.Shewasprovencorrect.

TheImpactandtheFuture

Perhapsoneofthegreatestbenefitsoftheplanhasbeeninhowtheperformanceplanningprocesswascreated.Thescorecardshavecauseddiscussionsand
decisionsthatwereonly"talkedaround"inthepast.Thebusinesslinesneededtofinalizetheirstrategicplansandidentifythepriorityperformancemeasuresandthen
integratethesewiththesalesorganization'splans.Thesalesorganizationexamineditsallocationofresourcesanddetermined"whobestfitswithwhom"onan
industryandaccountbasis.Itdefineditsmission,vision,andvaluesasanorganization,anddevelopedasalesstrategytosupportthebusinesslinesaswellasthe
overallcorporation.Therewerechangesinthepeopleservingassalesleaders,developmentofnewsalessupportinformationtechnology,andaredefinitionofthe
relationshipswiththedistributorchannels.Thesalesleadershipteamidentifiedpriorityaccountsandfocusedpeopleonstrengtheningthecollaboration

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betweensalesandcustomers,andsaleswithbusinesslinesandaccountmanagersandapplicationsdevelopmentengineers.

Likemanyorganizations,Ticonaisundergoingafundamentaltransformationtomakeitselfmorecompetitiveinachangingmarket,createclosertiestoitscustomers,
andbemoreefficientinhowitusesresources.Thesalescompensationplanhasservedtostimulateimportantactions,buttherealdriverforchangehascomefromthe
salesleaders.Theyhaverealizedtheimportanceofprovidingfocustoandcollaborationwithintheorganization.Theyknowtheimportanceofsettingfair,well
understood,andchallengingperformancegoals.Theyareworkingcloselywiththeirstaffmemberstothinkbeyondanarrowdefinitionoftheperformancemeasures
andseehowtoday'sactionswillbuildamorecompetitive(andrewarding)organizationoftomorrow.Theyarewellintotheirjourneyofchange,andeveryoneknows
thatthesuccessofthiseffortwillyieldgreatersuccessforthecompanyandtheywillsharedirectlyinthebenefit.

FindingtheFormulaforSuccessatSouthwestAirlines

FewcompanieshaveachievedtheperformanceandconsistentawardsthatSouthwestAirlineshas.Ithasbeenabletodevelopanorganizationthatishighlydesirable
tobothemployeesandshareholders.Whilemanycompaniesattempttostudyandemulatethisorganization,fewhavebeenabletoachieveit.

Let'sreviewafewoftheresultsthis25yearoldairlinehasachieved.

1.SouthwestwasnamedbyFortunemagazinein1998asthenumberoneBestPlacetoWork,anditisconsistentlyselectedforotherattributessuchasbestairline,
mostadmiredairline,andsafestairlinebyotherpublications.

2.Ithasbeenthemostprofitableairlineintheindustryinthe1990sandhasbeenprofitableeveryyearsince1973.

3.Southwesthasbeenthefastestgrowingcompanyinrevenuesofallmajorairlinecarriers.

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4.SouthwestearnedtheDepartmentofTransportation(DOT)"TripleCrown,"whichisthehighestDOTrankingofallmajorairlinesforontimeperformanceand
fewestmishandledbaggage,fivetimesinarow.Bestcustomersatisfactionwasearnedforsevenstraightyears.

5.Southwesthasoneofthelowestoperatingcostsofallmajorairlines,achievingaroundsevencentsperavailableseatmile.Thishasenabledtheairlinetoofferlow
costfaresthatroutinelybeatthecompetition.

Whilethelistcangoon,theimportantpointisthatSouthwestAirlineshasachievedremarkableperformancebyalmostanystandard.Thisiswithinanindustry
environmentthatisundergoingmajorchange.Theairlineindustryisbothconsolidating,asthemajorcarriersformalliancesandmergers,andexperiencingmanynew
entrantsinlocalmarkets.Whilethecurrentcostoffuelislowforrecenthistoricalstandards,thecompetitionisbecomingmoreintense.Thishaskeptpricesrelatively
lowandofferedpassengersmorechoices.Thepressureonmarginsisquiteintense.Thecostofequipmentisgrowingandlaborcostscontinuetobeanimportant
componentofthetotaloperatingcosts.Deregulationofthemarkets,withintenseregulationsofoperations,equipment,andprocedures,requiresmultipleresponsesto
regulatorypressures.Manyexpertsindicatethatthisisthemostdifficultindustryinwhichtocompete.

SowhathasbeenthesecrettoSouthwest'ssuccess?Theanswerisnotduetoanyparticulartechnology,equipment,marketniche,orprogram.Thesuccessof
SouthwestAirlinesisduetoitsculture.Butaculturedoesnotjusthappenitiscreated.Thiscasestudywillexaminehowrewardsystemshaveplayedasupporting
roletobuildingandsustainingthiscultureofhighperformance.

OverviewofSouthwestAirlines

SouthwestAirlineswasstartedin1971bythecurrentchairman,chiefexecutiveofficer,andpresident,HerbKelleher,andboardmemberRollinKing.Theconcept
wastobuildanairlinethatprovideslowercostpointtopointservicesdeliveredwithmoreefficiencyandservicethananyofthemajorairlines.Thecompanyhas
grownfromaregionalairlinetoamajornationalforce.Thecom

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panyhasbeenabletosurviverecessions,oilembargoes,andderegulation.Itachievedaprofitableoperationafterthreeyearsfromstartup.Thecompanyhashadno
furloughsorlayoffsinitshistoryandseekstocontinuethistrackrecord.Morethan85%ofits26,000employeesareunionized.Therelationshipwiththeunionsis
clearlyoneofmutualcommitment,trust,andsupport.

Thecultureofthecompanycanbecharacterizedinmanyways.First,thereisagreatdealoffreedomandresponsibility.Peopleareencouragedtocontributeideas
andtakeactionsthatwillservethecustomerandimprovetheorganization.Peopleknowtheregulationsoftheindustryandmaintainanintensecommitmenttomeeting
thesecorerequirements.Bymaintainingahighcommitmenttotheindustryregulations,peopleareabletofocusonservingthecustomers.

Second,thereisahighlevelofinvolvementthroughoutthecompanyinmakingdecisionsandrecommendationsforchange.Peopleseetheirideasseriouslyconsidered
andmanyimplemented.Thecompanypridesitselfinconstantlyrenewingandseekingbetterwaystodothings.Forexample,therearemorethan120peopleonthe
CorporateCultureCommittee,andevenmoreinculturecommitteesestablishedineachdepartmentandlocation.Peopleatalllevelsareinvolvedmaking
improvementstopromoteandenhancethecultureoperationsandservicesareaddressedintheirfunctionalareas.Thesecommitteeshaveformedthebackboneof
theculturebuildingprocessfortheorganization.

Third,mostofthecultureissustainedbyhiringpeoplewhomatchtheprofileofthedesiredemployeeofthecompany.Thereisperhapsnomoreimportantdecision
thanwhoishiredfortheorganization.Evenwiththetremendousgrowthinthecompanyanddecreasedavailabilityofqualifiedworkers,Southwesthasnotloweredits
standardstofilljobs.HerbKelleherbelievestheculturestartswiththehiringprocess.Therecruitmentandselectionprocessinvolvesagreatnumberofpeopleand
reflectsthecommitmentbysustainingthedesiredcultureandretainingtheindividual.Muchoftheinterviewprocessisbasedonexamininghowpeoplehavehandled
varioussituationsintheirexperienceandhowtheywouldaddresscurrentsituations.Fromtheseindepthinterviews,thetruecharacterofthepersonemerges,andthe
selectionteamcandeterminethedegreeoffitwiththeorganization.Theywantpeopletobesuccessfulandtobethemselves

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duringtheinterviewprocess.Thisappliestohowtheyselectpilots,operationsstaff,andadministrativesupportstaff.Everyhiringdecisionisacommitmenttothe
personandastatementaboutthecompany'sculture.

Fourth,trainingisstronglysupportedandemphasizedatalllevelsintheorganization.Buttraininggoesbeyondskilldevelopment.Thepurposeisnottotrainpeopleto
justdotheirjobs,butto"coloroutsidethelines"andtousetheirinitiativetofillthegapsinfunctions,departments,andoperationstobetterservethecustomer.So,
eveninthetrainingprocess,thecultureofinvolvement,action,andcustomerserviceisreinforced.

Finally,Southwestseekstoremainflexibleinhowitutilizesemployeesandtorespondtocareeraspirationsoftheirpeople.Newhiresusuallyjointhecompanyatan
entrylevelintheorganization,includingthepilots,whojoinasfirstofficers.Theyarethenexpectedtoprogresswithintheorganizationastheyacquirebetterskillsand
becomeproponentsoftheculture.Peopleareselectedforinternalpromotionsandtransfersbasedonacombinationoftechnicalskillsandpersonalstyle.Managers
whoarenotstrongreinforcersofthefirm'scultureseldomadvanceandusuallyleavethecompany.Managersareleaderswithintheorganizationandneedtooperate
consistentlywiththevaluesandprinciplesofSouthwestAirlines.

Consequently,thehiring,training,placement,anddevelopmentofpeoplehavebecomethekeyleversbywhichtheorganizationsustainsitscultureofhigh
performance.LibbySartain,vicepresidentofpeople,hassaid,"TheSouthwestAirlinescultureisdesignedtopromotehighspirit,avoidcomplacency,andpreventa
hierarchyorbureaucracyfromslowingdowncreativityandinnovation.Breakingtherulesisoftenrewarded,andemployeesareexpectedtodotherightthingwhen
toughsituationsarisetheydo.It'stheairline'sphilosophythatemployeeswithasenseofownershipinthecompanyusuallywillmaketherightdecisionsforthe
company."

IntegratingRewardsintotheFabricoftheOrganization

SouthwestAirlineshascharacterizeditsrewardsystemsasbasic.However,theyareviewedasaprocessforsupportingandreinforc

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ingtheairline'sphilosophy.Ina1992lettertoshareholders,CEOKelleherstated,''Materialrewardsareimportanttoapointbuttheyalsoprovehollowunless
accompaniedbythesatisfactionofpride,excitement,fun,andcollectivefulfillment.Ourpeopleprovidetheseessentialintangiblestoeachotherandtoourcustomers.''
Hence,Southwestviewssalaries,variablecompensation,andrecognitionprogramsaspartoftheprocessofmanagementandhighlyintegratedwiththethingsleaders
andpeopledoonadaytodaybasis.

SinceunionsrepresentmostofSouthwest'semployees,thewagesandsalariesarecoveredbyunioncontracts.Formostpeoplethismeansthatpayisrelatedto
seniority.ThisisimportantbecauseSouthwestvaluesretentionandlongtermcommitmenttotheorganization.Furthermore,paylevelsareeitherconsistentwithor
slightlybelowthewagesforvariousmarkets.Infact,startingratesarelowrelativetothemarket,buttheyprogressmorerapidlythanotherstodesiredmarketlevels.
Thiskeepsthesalarycostsinlinewiththelowcostproviderphilosophyofthecompany.

TheCEOiscompensatedatbelowthemedianofthemarketforexecutivesincompaniesofsimilarsize.Otherseniormanagersarepaidslightlyhigherrelativetothe
market,buttheyretainasmallerportionofthecompany'sstock.Thephilosophyistounderpaytheexecutivesforcashcompensationbutletthemshareincreating
greatervaluefortheshareholdersbybuildingastronger,morecompetitiveairline.Thestockoptionsarenotdiscounted,andexecutiveshavethesameopportunities
forstockpurchasesasotheremployees.Theemphasisisonlongtermgrowthanddevelopmentofthecorporation.Furthermore,thereisastrongcommitmentto
makethecompensationlevelsandpayopportunitiesinternallyfair.

Therearelimitedvariablepayprograms.Perhapsthemostinclusiveisacorporatewideprofitsharingprogram.Thisprogramwasstartedin1973andencourages
everyonetokeepcostsaslowaspossible.Everyonesharesequallybasedontheirearningsandthecompany'sprofits.Thosewhoworklongerhoursorflyextratrips
receivealargerpieceoftheprofitsharingpayouts.Historically,theprogramhaspaidamixofcashpaymentsanddeferralstoretirementaccounts.Employees
requestedseveralchangesintheprogramand,in1990,thetotalcontributionwasmadeonadeferralbasis.Thisenablesemployeestobuildalargernesteggfortheir
retirement.

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Theretirementplansofferavarietyofinvestmentoptions,includingSouthweststock.Theemployeescurrentlyholdbetween9%and10%ofthecompany.Whenthe
stockperformswell,everyonegains.Manylongserviceemployeeshaveretiredquitewealthyfromthisinvestment.Butonceagain,individualsneedtotake
responsibilityfortheirownretirementthecorporationmakestheprocesseasier(afurtherreflectionofSouthwest'sculture).

Companystockisanimportantdeviceforsharingtherisksandrewardsofthecompany'sperformance.Inadditiontoprofitsharinginvestmentoptions,employees
canpurchasestockwithpayrolldeductionsatadiscountthroughtheemployeestockpurchaseplan.Furthermore,therecentpilotunioncontractenablespilotstogain
evengreaterinvestmentsinthecompanythroughstockoptionsanddeferralofwageincreases.Theprofitsharingandstockoptionsprogramshaveencouraged
everyonetoshareinthetaskofholdingcostsdownandworkingtogethertobenefittheairlineandthecustomer.Finally,itisimportanttonotethatthestockpriceis
displayedineachfacility,andpeoplewatchiteveryday.

Southwestmakeslimiteduseofteamorunitbasedincentiveprograms.Instead,itreliesonanextensiveseriesofspecialrecognitionprogramstoencourageand
reinforcedesiredbehaviors.Theseprogramshavelimitedtheneedtoprovidespecialincentivecompensationprograms,andtheyhavesupportedtheculturalvaluesof
Southwest.

Thereareawidevarietyofbothcorporateandlocalunitbasedrecognitionprograms.Theychangeeveryyearandremainexciting,involving,andfun.Forexample,
"HeroesoftheHeart"isawaytorecognizeteamsofindividualswhosebehindthescenesworkmakeamajorimpactoncustomerservice.Theymaybegroupsfrom
maintenance,service,orsupportroles.Theyareselectedthroughanextensivenominationandreviewprocess.Theyarehonoredbyhavingthegroup'snamepainted
onanairplaneforoneyear.Theawardceremonyisoneofthemajoreventsofthecompany,andmanypeopleshareintheexcitementofthepresentation.

Theseniorexecutivesacknowledgeeverycommendationmadetoboththepersonwhoreceiveditandthepersonwhogaveit.Thisenhancestheimportanceofthe
awardsgiventoindividualsandreinforcesthosewhoprovidethem.Furthermore,therearenu

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merousprogramstorecognizeandrewardindividuals,teams,andentiredepartmentsfortheircontributions.Theseprogramsareencouragedandsupportedwith
advice,financialresources,time,andexperiencesfromotherlocations.Spacedoesnotallowforafulldescriptionoftheseprograms,butnotesomeofthetitles:
TogetherWeMakeItGreat
TickettotheFuture
WalkaMile
HelpingHands
StuckonService
GoSeeDo
WinningSpirit

Furthermore,someoftheawardsareascreativeastheprograms.Theseinclude:
JoeCoolAward
President'sAward
TopWrenchAward
Superstars
AShiningStar
VoiceAward

Manyoftheseprogramsweredevelopedandmanagedbylocalcommitteesofemployees.The"peopledepartment"providesadviceandassistanceasneededand
mayreferdeveloperstootherlocationsforideasandsolutionstoproblems.Thekeyconceptistorewardeverythingthatpeopleliketheycelebrateeverything
birthdays,anniversaries,promotions,andespeciallyspecialefforts.Forexample,whenSouthwestAirlinestookoverseveralMidwayAirlinesoperationsinChicago,
thetransitionteamdiscoveredthatanotherairlinehadtakenoversomeofSouthwest'sgates.TheSouthwestAirlinesemployeestookthefacilitiesandpropertiesback
andcreatedthelogisticsfortheairlinetooperateattheairport.Whentheyreturnedtotheirhomebase,theywerewelcomedwithbannersthatread:WelcomeHome,
ChicagoBanditos!Peopleinthecrowdedlobbycheeredwhentheteamentered,andeveryonetookgreatprideintheirachievements.

Recognitionispartofeverydaylife.Celebrationsoccurdaily

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andweeklysomewhereonSouthwestproperty.Theyhavetakenthespiritofrecognitiontonewlevelsofexcitementandinvolvement.Itisanimportantresponsibility
ofmanagerstosupporttheseactivities,andmany,manypeopleareinvolved.Furthermore,theawardsarepresentedinameaningfulandfunmanner.Someofthe
awardsincludesmallcashawards,giftcertificates,savingsbonds,books,ticketstoevents,champagne,watches,extratimeoff,extrabreaks,Tshirts,flowers,and
whateveriscreativeandmeaningfultoemployees.Theawardsarealwayschanging.Theimportantmessageistonotrelyonasingleprogramorasingleawardthey
mustbecontinuallyrefreshedwithspiritandinnovation.

HaveYouDiscoveredtheSecretYet?

SouthwestAirlinesindeedhasasecret.Itcansharethisinformationbecausetheanswerdoesnotlieintheprograms.Instead,theculturefostersaprocessandthe
processfostersaculture.Itisanenvironmentwherepeoplecanexperiment,makemistakes,learn,andtryagain.Initiativeisexpected,encouraged,andrewarded.

Theyhavetransformedcompensationintorewards,payprogramsintoappreciation.Theygainahighpositiveimpactfromthevariousrewardprogramsbecauseofthe
waytheyaredelivered.Therearemanyavenuesbywhichpeoplearetoldtheyarevaluedbythecompany.Inturn,peoplevaluethecustomersandthecompany.
Consequently,commitmentishighandemployeeturnoverremainsoneofthelowestintheindustry.Thishasresultedinanorganizationthatishighlycompetitive,
resourceful,andachievesremarkableresults.

HerbKelleherhasstated,"Thedifferenceisinthededicationandspiritofourpeople.And,thatisveryhardforourcompetitorstoemulate."

ShapingCoreValueswithRewardsatWilsonGroup,Inc.

Whenacompanyisformed,ithasnocultureitisacleanslate.Itlackstraditions,practices,orareputation.Thereareonlythe

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founder'svision,commitment,capabilities,andvalues.Thecompany'ssuccessdependsonhowsuccessfullythefoundercancreatethedesiredcapabilitiesandculture
thatcreateacompetitiveadvantageandcustomercommitmentinthemarketplace.

Theadvantageofbeinganewcompanyisthatitisfareasiertoshapeanewtypeoforganizationthanitistotransformanexistingcultureintosomethingnew.The
founderoftheWilsonGroup,Inc.(WGI)recognizedthisopportunitywhenheformedthecompanyasaconsultingfirmspecializingindevelopingperformancebased
rewardsandotherpeoplemanagementsystems.Healsowantedtocreateanorganizationthatlivedbywhatitadviseditsclientstodo,andtobuildadesirableplace
toworkforeveryoneincludinghim.

Toaccomplishthis,rewardsystemswerestructuredtoalignwiththeorganization'sstrategyandvalues.AsdemonstratedinthebookBuilttoLast(NewYork:
HarperBusiness,1994),visionandvaluesdrivethesuccessofhighperformancecompanies.Thecommoncharacteristicofhighperformancecompaniesistheirability
tointegratetheircoreideologyanddriveforsuccessintothefabricoftheorganization.Theybuildatotalenvironmentaroundtheirvaluesandachievealignmentin
everythingtheydo.Whenthereisintegrationbetweenthecorporatecultureandthefactorsnecessaryforitssuccess,theorganizationisalwaysatacompetitive
advantage.TheWilsonGroupfoundthatitcouldutilizethelessonsofhighperformanceforitsclientsaswellasitself.

ASimpleMission

ThemissionoftheWilsonGroupissimpleandfocused:tohelpclientsalignalltheirperformancebasedrewardsystemswiththeirstrategiesandcorevalues.These
systemsthenencourageandreinforcethebehaviorsthecompaniesneedtoachieveacompetitiveadvantageinacomplexmarketplace.

TheWilsonGroup'sservicesincluderewardstrategydevelopmentandassessment,baseandvariablecompensationprograms,strategicmeasurementsystems,and
recognitionandperformancemanagementprograms.Theseservicesmaybeappliedtoanentireorganizationortoselectgroups,suchaskeyexecutives,thesales
force,operations,managers,orspecializedtalent(e.g.,information

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technology,engineers,physicians,andcustomerservicestaff).TheWilsonGroupconsultantsworkinawidevarietyofindustries,andmostengagementsarehighly
customizedtomeetspecialclientneeds.

Theorganizationhasgrowndramaticallysinceitsinceptionandhasexperiencedboththepainsandthejoysofgrowth.Initially,theprincipleconcernswerethose
typicalofanynewbusinessdevelopingthedesiredclientbase,creatinghighimpactmethodologiesandtools,andmanagingcashflow.Astheorganization'sclient
baseanddemandforservicesgrew,attractingandretainingstaffthatsharedtheorganization'svaluesbecameapriority.

Thefirmhasbeentestedbytoughcompetitionandsituationsthatchallengeditscorevalues.Butthesesituationshaveprovidedopportunitiestobringthecharacterof
thecompanyintoclearfocus.WhiletheWilsonGroupisstillanearlystagecompany,whatitdoestodaywilldeterminethecultureandimagetheorganizationwillhave
inthefuture.Therefore,theleadersarecarefultocreatetheorganizationtheywantsothatfuturechangecanbeminimized.

TheMarketplaceContext

TheWilsonGroup'smarketiscomplexbutattractive.Opportunitiesaregrowingbecausefeworganizationsaresatisfiedwiththeircompensationsystems.As
organizationsincreasinglyrecognizethattheirrewardsystemsdonotfitwiththeirbusinessstrategiesandsuccessfactors,theywantchange.Whentheyrealizethe
impactrewardsystemshaveontheircultureandtheirabilitytocompete,theysearchforadvisorsthatcanprovidenewwaysofthinkingabouttheirpeople
managementsystems.

Thecompensationconsultingindustryhasseveraltiersofcompetition.Onetieriscomposedofseverallargecompaniesthathaveabroadnetworkofofficesand
extensivecapabilitiesandtalents.Thesecondtierincludessmaller,specializedfirmsbuiltaroundspecificservicesorageographicorindustrymarketniche.Thethird
tierismadeupofindividualpractitioners,includingacademicprofessors,withaspecialinterestandexpertiseincompensation.

Manycompanieshavebecomedisillusionedwithlargecon

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sultingfirms,havingexperiencedalackofresponsiveness,creativity,andcommitmenttotheirneeds.Thishascreatedopportunitiesforsmallerfirmsthataremore
focusedandmoreresponsive.Whilethesmallerfirmsmaylackthedepthofresourcesoflargerfirms,theyoftenprovidebettervaluefortheclient.

Anotherfactorbenefitingsecondtierfirmsisthechangingrequirementsforconsulting.Clientswantsolutionsthatarecustomtailoredtotheirneeds.Theydon'twant
boilerplate.Clientswanttoworkwiththeseasonedprofessionalswhogaintheirtrustandconfidenceduringtheselectionprocess,notthejuniorassociatesthatthe
largerfirmsoftensendinafterthecontractissigned.Clientswanttoworkwithconsultantswhohaveindepthexperienceandspecializedknowhow,andwhomthey
willenjoyworkingwith.Egocenteredconsultingisnolongeracceptable.Theyalsowantthesecurityandconfidenceofknowingthatthesolutionspresentedwill
addresstheirneedsandworkeffectively.Ifasmallfirmcandemonstratethesedesiredcapabilities,itcanofteneffectivelycompeteforthesameassignmentsasthe
largerfirms.

Becausetherearefewbarrierstoentry,theWilsonGrouprecognizedthatitcouldcompetesuccessfullybyfocusingonanattractivenicheandestablishingareputation
forexceptionalvalueandresponsiveness.Togrow,theWilsonGroupneededtobuildanorganizationthatdistinguisheditselfinthemarketplaceandwinclientsin
headoncompetitionwithregionalandnationalfirms.

Toaccomplishthis,theWilsonGroupneededtoestablishacompetitiveadvantagethatcouldnotbeeasilyreplicatedbyotherfirms,smallorlarge.Whilecompeting
onpricecanhelpafirmgainmarketshare,itisnotaviablelongtermstrategyintheconsultingindustry.Abetterapproachistocreategreatervaluefortheclientthan
thecompetition.Thisrequiresinnovative,highqualityservices,aprovensetoftoolsandmethodologies,andresourcestoinvestingrowth.Italsorequirestheabilityto
attractandretainbetterpeoplethanthecompetition.

RewardSystemsforanEmergingCompany

EarlyinthelifeoftheWilsonGroup,thefounderrealizedthatacertainkindofpersonwasessentialtothecompany'ssuccess.Thestaffmembersneededtohavethe
requisitetechnicalexpertise,and

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theyneededaninterpersonalstylethatisconsistentwiththefirm'scorevalues.Theyalsoneededpeoplewhowanttoworkforasmallconsultingfirm,ratherthan
startingtheirownbusinessorworkingforanestablishedcompany.

Tobeeffectiveinattractingthiskindofindividual,theWilsonGroupneededtocreateanenvironmentwheretalentedpeoplefeeltrulyvaluedfortheircontributions.A
varietyofrewardsystems,formalandinformal,hadtobecreatedtoshapethedesiredculture.Compensationisimportant,butsoareflexibility,opportunity,challenge,
andtheknowledgethatyouarevaluedforyourcontributions.SincetheWilsonGroupisinthebusinessofdevelopingrewardsystemsthatalignwithstrategy,it
neededtofollowthesameframeworkitprescribestoothers.Itdevelopedarewardstrategy.

Realizingthatdesiredperformanceneedstoberewardedquickly,thecore(orbase)compensationprogramshouldreinforcetheindividual'seffortstogenerate
revenues.Theamountpaidshouldreflecttheindividual'scompetenciesandperformance.Inadditiontorewardingindividualperformance,thereneedstobeteam
basedincentivestoreinforceworkingtogethertobuildastrongorganization.Thisprogramshouldencouragethefirm'sgrowthandimplementationofitsannual
businessplans.Thereshouldbebothcashandstockoptionsopportunitiestocreateameaningfulstakeinthefutureofthebusiness.Thevalueoftherewardsshould
reflectthefirm'sgrowthandcompetitivenessovertime.

Finally,bothformalandinformalrecognitionshouldassistinreinforcingspecialactionsofindividualsorteamsthatsupportthecompany'scorevalues.Thecash
compensationplansreinforcethefirm'sstrategyandbusinessdrivers,andtherecognitionpracticesreinforcethefirm'svaluesanddesiredculture.Eachelementthereby
operatesaspartofatotalsystem,whichtranslatesthefirm'skeysuccessfactorsintoaction.

DescriptionofRewardPrograms

Inprofessionalservicefirms,compensationistheorganization'slargestexpenseandcashflowisalwaysamajorconcern.AttheWilsonGroup,consultantsarepaidan
establishedcommission

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percentageoftherevenuestheybilltoclientseachmonth.Theirbillingrateisestablishedbythedegreeofcompetencytheyhaveinpracticeareas,project
management,andconsulting.Thecommissionratereflectsthecompetenciesanddegreeofriskinthecompensationpackage.Therevenueconsultantsgenerateisa
reflectionontheirperformanceinprovidinghighlyvaluedservicestoclients.Thus,themonthlypayreflectsbothcompetenciesandperformance.

Bypayingtheconsultantsasprojectsarebilled,theyreceiveanearlyimmediaterewardfortheirperformance.Thecompanythenservesabankingfunctionandis
responsibleforcollectingamountsbilled.Inmonthswhenconsultantsperformwell,theyreceivealargecheck.Whenclientactivityislimited,andthecompanyhas
limitedrevenues,thecheckissmaller.Thechallengeofthecompanyistoretainsufficientprojectssothateachconsultant'smonthlyincomedoesnotfluctuatetoo
widelyandtheyachieveatargetcompensationlevel.

Thisuniquevariablebasepaysystemisalteredfornewconsultants,whotypicallyneedatransitionalperiod.Newconsultantsusuallyreceiveaguaranteeddrawand
canearnadditionalincomewhentheyexceedspecificrevenuelevels.Thisencouragesincreasingappliedtime,butdoesnotpenalizenewconsultantsastheylearnand
developtheirportfolioofclientprojects.Thethresholdlevelanddurationofthisguaranteedpaysystemdependsonthebackgroundoftheconsultantandproject
opportunities.Consultantswhoareontotalcommissionreceivealargerpercentagecommissionthanthosewhoareonaguaranteedordrawpay.

Inadditiontotheirmonthlyincome,allstaffmembersparticipateinthecompanywideincentiveplan.Theplanisdesignedtoencourageindividualstowork
collaborativelyandrewardcontributionstogrowanddeveloptheorganization.Thisprogramusesfourtofiveperformancemeasurestailoredtotheindividual'srole
andpersonalinterests.Twomeasuresarecommontoallmembers.Thefirstmeasureisgrowthincompanyrevenues.Ifbusinessopportunitiescanbesharedwith
others,andrevenuesgrowasaresult,everyonereceivesbenefits.Thesecondmeasureisbasedonthetotalscorefromthecompany'scustomersatisfactionsurvey.A
questionnairesurveyisdistributedtoclientsafterthecompletionofeachprojectitprovidesfeedbackonavarietyofperformance

 Page42

indicatorsthatreflectthefirm'svaluesandstrategyandkeysuccessfactors.Theresponsesaretabulatedandanalyzedandtheresultsaddedintothegroup's
performanceresults.

Forsomeconsultants,athirdmeasureispersonalsalesvolume,whichcreditsthemforgeneratingsalesofclientprojects.Thecompanypaysasalescommissiononly
toafewkeybusinessdevelopmentconsultants,butothersarecompensatedbasedonasalescreditsystem.Iftwoormoreconsultantsworktogethertodevelopa
newclient,theycansplitthesalescreditbasedontheroleeachperformed.Thesalescreditcanrangeupto200%oftheproject'stotalrevenuesnoonecanreceive
greaterthan100%credit.Eachconsultanthassalesgoalsthataregreaterthanwhattheindividualcanbillpersonally.Thisencouragescollaborationonallsalesefforts.

Someconsultantsuserevenuecreditfromprojectstheymanagedasameasure.Thisperformancereflectsrevenuegeneratedfromclientprojectsorfromspecifictasks
withinamajorproject,wheretheconsultantplaysaleadershiprole.Aswithsalescredits,thegoalsaregreaterthanwhatonecanproducealone.Thisencourages
individualstoassumeresponsibilityforclientsandprojectsandinvolveothersinone'sprojects.

Individualsmayalsohavepersonalmeasuresrelatedtoimportantassignmentsthatwillbenefitthecompanywithoutdirectlyproducingrevenues.Theseeffortsinclude:

Conductingconferencepresentations

Writingforpublication

Implementingnewtechnologyorsystemswithinthecompany

Implementingpracticeareasorindustrybasedbusinessplans

Learningordevelopingsomethingforthecompany

Finally,whenindividualsdesignateaspecificmajorgoal,suchasearningaspecialcertificationorhavinganarticleacceptedbyamajorpublication,theycanearn
specialachievementpointsaswellasrecognition.Thesespecialgoalsaredevelopedcollaborativelywitheachconsultantandreflectbusinessobjectivesforthespecific
year.Insomecases,individualssharethesamemeasures,suchasimplementingbusinessplansorinstallingnewsystemsin

 Page43

thecompany.Thecombinedsetofmeasuresbalancesindividualandteamperformance,revenuegenerationwithbuildinginfrastructure,andstrategicwithtactical
goals.

Toorganizeallthesefactors,theprogramusesascorecardfordisplayingmeasuresandsettingspecificgoals(seeFigure23).Allconsultantshavetheirown
scorecard,andtheresultingtotalscoreisappliedasapercenttotheindividual'stargetincentivepayout.Forexample,a100%scoremeanstheindividualreceives
100%ofhistargetincentive.payoutsrangefromaminimumof60%toamaximumof150%oftarget.Payoutsaremadetwiceayearthefirstsixmonths'payoutis
basedonthatperiod'sperformance,andthesecondsixmonths'payoutisbasedontotalannualperformance.

Individualsreceivefeedbackonallrevenuebasedmeasuresmonthly.Theydiscussothermeasuresduringstaffmeetingsasappropriate.Thescorecardprovidesactive
performancemeasures,andindividualscaneasilydeterminehowwelltheyareperforming.

Althoughthecompanyisprivatelyheld,allstaffmembersareeligibletoreceivestockoptionsinadditiontotheircashcompensation.Stockgivesstaffmembersa
tangiblestakeinthesuccessofthecompanythatgrowsinvalueasthecompanygrowsinvalue.Thecompany'svalueisdeterminedannuallybytheboardofdirectors
usingaformulabasedontotalannualrevenuesandprofitability.Thenumberofsharesandwhentheyarepresented(everyonetothreeyears)arebasedonthestaff
member'scontributiontothegrowthofthecompany.Stockoptionsarelikelytobegrantediftheindividualgeneratessignificantrevenuesinexcessofpersonalbillings,
developsnewtoolsandmethodologiesinkeypracticeareas,orenhancesthecapabilitiesofthecompany'sinfrastructure.Theboardofdirectorsdeterminesstock
optionawardsafterdiscussionswithkeyindividualswithinthefirm.

Stockoptionsrepresentanimportant,symbolicstakeinthecompany,buttheyarebeginningtotakeongreatermeaningasthecompanygrowsinvalue.Forsome,
stockoptionsmayprovideasubstantialfutureincomeopportunityifthecompanyissoldorrecapitalized.Thefirmmaycreateanemployeestockownershipplan
(ESOP)orprovideotheropportunitiesforcashinginstockinthefuturewherepayoutswouldcomefromretainedearnings.

Thelimitationwitheachoftheserewardsystemsistiming.

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Figure23.
Theconsultant'sperformancescorecard.

 Page45

Whilemonthlycommissionincomereflectspersonaleffort,otherperformancerewardsaresignificantlydelayed.Toaddressthis,theWilsonGroupalsoprovides
informal,spontaneousrewardstopeoplewhenappropriate.Oneconsultant,forexample,wasgivenapersonalfaxmachineforhernewhomeofficeaftersellinga
majornewprojecttoadifficultclient.Anotherconsultant,whoisawineconnoisseur,wasgivenanespeciallygoodbottleofwineaftersigningthecompany'slargest
contracttodate.Projectdemandskeptathirdconsultantfromspendingtimewithavisitingparentonseveraloccasions,soshewasgivenroundtripairfaretovisither
parent.ThisgiftreflectsoneoftheWilsonGroup'scorevalues,thatpeopleleadabalancedlife.

Recognitionrewardsareprovidedforimportantcontributionstotheorganization.Whiletheyareoftenmadeafterthefact,theyarebasedonclear,consistentactions
byindividualswhohelpachievecompanygoals,suchasreinforcingclientrelationships,bringinginnewbusiness,andfulfillingclientcommitments.Rewardsmustbe
basedonseveralimportantprinciples.Theymustbe:

Tiedtoactionsthatsupportcompanyvalues

Madeimmediatelyafter,orassoonaspossibleafter,theactionwastaken

Highlypersonalizedandmeaningfultotheindividualswhowererewarded

Informalrewardsarebecomingincreasinglyimportanttothecompany.Incombinationwithcashbasedcompensation,theyhelpcreateaportfolioofrewardsthat
shapethecompany'sdesiredculturetodayandinthefuture.

AligningRewardswithValues

Overaseriesofstrategicplanningmeetings,membersoftheWilsonGroupdevelopedmission,vision,andvaluestatementsthatserveasacornerstonefordecisions
andactions.Asarelativelynewcompany,itiscriticaltoarticulatetheseconceptsandintegratethemintoallactivities.Thealignmentbetweentheseprin

 Page46

ciplesandtherewards,informalandformal,isofparamountimportance.

TheWilsonGroup'sfivecorevaluesare:

1.Deliverexceptionalvaluetoclients.

2.Collaboratewithclientsandeachother.

3.Beinnovativeandcreativeinprovidingsolutions.

4.Behonestanddemonstrateintegrityinallactions.

5.Havefunandleadabalancedlife.

Thesevaluesarereinforcedbyacombinationofseveralrewardpracticeswithinthecompany.Thecashincentivecompensationplansfocusonrevenuegrowth,which
isachievedbyprovidingexceptionalvaluetoclients.Sellingnewprojectstoexistingclients,aswellasachievinghighcustomersatisfactionsurveyresults,areadditional
demonstrationsofthiscorevalue.

Collaborationisreinforcedinmanyways.Conductingregularstaffmeetings,involvingothersinprojects,collaboratingonsalesefforts,andsharingcompany
informationonprojectstaffingandfinancialperformancecontributetoacollaborativeculture.Manyclientprojectsareconductedwithdesignteamsandspecialtask
forceswithintheclientorganization,reinforcingcollaborationnotjustinternallybutexternally.

Innovationandcreativityarealsoencouragedinmanysubtlebutimportantways.Duringstaffmeetings,consultantsshareinnovationsornewapproachesthathave
benefitedtheirclients.Theyalsoperiodicallyprepareguidebooksondifferentpracticeareas,andothersusethesematerialsinotherprojects.Distributingandutilizing
innovativeideasismoreimportantthan''owning''them.Supportstaffmemberslookforwaystoimproveoperationalefficiency,increasepositivecustomer
relationships,andexperimentwithnewsystemsorprocesses.Inadditiontotraditionalsupportfunctions,theyresearchprocessesthatcanhelpconsultantsworkto
theirmaximumpotential.Ideasarefrequentlydiscussedinopenforumsandshorttermtaskforcesareestablishedtohandlespecificissues.Innovationsthatincrease
thegrowthoftheorganizationcanalsoberewardedwithstockoptions.Thecompanyalsoinvestsheavilyininternalandexternaltraining,andallstaffmembersattend
majorconferences.

Integrityandhonestyarerecognizedasimportantprinciples

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ofconduct.IntegritybeginsatthetopoftheorganizationandisimportantineverythingpeopleattheWilsonGroupdo.Somecompanymembershaveassumedthe
roleofthecompany'sconscienceandtheyhighlightsituationswhenothersactasrolemodelsorfailtoactinamannerconsistentwiththecorevalues.Thisformof
dialoguecreateshealthyexchangesandisencouraged.Whilemistakesoccur,theyaretreatedasopportunitiestolearn,clarifyvalues,andreinforcecommitments.

Havingfunisoneofthemostimportantvaluesoftheorganization.Thisisreflectedinpromotionalmaterialsusedformarketingandrecruitment,anditisdemonstrated
ineverydayactions.Laughterisencouragedthroughspontaneousandgenuinefunactivities.Asenseofhumorisanimportantcriterionforhiringandisimportantin
howmembersactwitheachotherandwithclients.

Toachieveabalancebetweenhomeandwork,thecompanyishighlyflexibleaboutworkhours,timecommitments,anddress.Thefocusisontheclientcommitments,
notonsomearbitrarytimeordressrequirementofthecompany.Technology,suchasemail,voicemail,andofficenetworking,enablesconsultantstoworkfrom
homeorotherlocationswithoutsacrificingclientservice.Staffmembersarenotjudgedbasedonthe"facetime"theyputinattheoffice.Someworkparttimeorhave
flexiblehourstoaddresspersonalorfamilyneeds.Whilepoliciesareinplace,individualsituationsdictatetheproperresponse.Staffmembersarenotexpectedto
workexcessivehours,buttheyarerequiredtomeetclientcommitments.

Thecompanyrespectstheindividual'spersonaltime.Staffmeetingstakeplaceduringnormalbusinesshours,andeveningphonecalls,whilesometimesnecessary,are
infrequent.Weekendhoursareexpectedonlywhennecessarytomeettightclientdeadlines.Creatingaworkplacethatisfun,balanced,andpersonallyfulfillingisa
deliberatepartofthefirm'severydayculture.

TheResultsandtheFuture

InarecentstudycomparingtheWilsonGroupwithotherconsultingfirms,itwasfoundthattheWilsongrouphasgrownfasterthanitscompetitors,payshigher
compensation,hasahigherprofitmargin,andhascompetedmoresuccessfullyfornewbusiness.

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Thefirmhascreatedadistinctiveworkplaceandanationalstatureinashortperiod.

Thefutureofanewcompanyisalwaysuncertain.Marketplaceandinternalchallengestesteverycompany.TheWilsonGroupwillfacesituationswhereshortterm
pressuresoutweighlongterminvestments.Theeconomywillnotalwaysgrowattherateitisgrowingtoday.Asnewpeoplejointhefirm,theywillchangetheculture.
Theevolutionoftheorganizationasitgrowswillrequiremorestructureandcontrol,moresystemsandprocedures.Growthmaychallengethehighlypersonalfeelof
theorganization.However,ifcompaniessuchasSouthwestAirlines,Starbucks,Amazon.com,andKeane(whosecasestudiesarediscussedinthisorotherchapters
throughoutthisbook)cansustainacultureofhighperformance,socanthiscompany.ThechallengefortheWilsonGroup'sleaderswillbetocontinuetoreinforcethe
company'scorevaluesasthecompanygrows.

TheWilsonGrouphasemergedasanattractivefirmintheconsultingindustryandastrongcompetitor.Ithasarticulateditsvaluesandremainscommittedtofulfilling
them.Ithasestablishedprogramsandpracticesthatarebuildingthedesiredculture.Workingandbehavingaccordingtothecorevalueshasbecomeapriorityforall
staffmembers.TheWilsonGroupwillneedtocontinueattractingpeoplewhoseworkstyleisconsistentwiththecompany'sprinciplesofsuccess.Themarketfor
creatinghighperformanceorganizationsisimmenseandgrowingdaily.TheWilsonGroup'scontinuedsuccessdependsonitsabilitytobeaninnovativethoughtleader,
todeliverexceptionalvaluetoclients,andtobeahighlyattractiveplacetoworkandworkwith.Thismeanspeople,tools,andculturearekeytoitsfuture.Peoplein
thiscompanyaremakingadifferencetotheirclients,theircompany,andthemselves.

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3
CreatingaStakeintheEnterprise
Oneofthecommonthemesofthecompaniespresentedinthischapterishowtheyseektocreateabridgebetweentherequirementsforsuccessandeachindividual.
Thefactorsofcorporatesuccessareverydifferent.Theapproacheachcompanyusesisdifferent.Yettheyhaveacommondesiretosharetherisksofperformance
withtheindividualswhowillcreatesuccess.

Eachcompanyunderstandshowimportantaretheactionsofindividuals.Youwillseeacombinationofstockrelatedprogramsaswellastheuseofmultiplereward
systems.Thisstakeintheenterprisegoesbeyondasymbolicrepresentationanddefinesaprocessforlinkingpeopletotheorganization.

YouwillseehowDuPonthasdevelopedanallemployeestockoptionprogram.CocaColausesacriticalsetofmetricstodriveperformancethathasproduceda
significantincreaseinthevalueofthecompany.Saturnhasdevelopedanincentivepayprogramthatsupportsacultureofquality,collaboration,andservice.Saturn
hascreatedadifferentkindofcarcompany.BooneCountyNationalBankhasimplementedasimilarallemployeeincentiveprogramandcreatedadifferentkindof
bank.IdeaScopeAssociateshasdevelopedaninnovativearrayoffinancialandrecognitionbasedrewards.Finally,CiscoSystemshasestablishedmultiplestrategies
toconnectpeopletothebusinessoftheorganization,andallhavebenefitedfromthisalignment.

Eachstoryisdifferent,buteachorganizationhasfoundawaytocreatefortheirmembersacommonstakeintheorganization.This

 Page50

processhasenabledeachorganizationinitsownwaytocreateaconnectionandachievesuccess.

CreatingaShareintheSuccessoftheCorporationatDuPontCorporation

Haveyoueverwonderedhowtocreateastakeinthesuccessofalargeenterprise?Howdoesalargecompanyprovideamechanismforall136,000employeesto
shareintheupsanddownsoftheorganization?DuPonthasdevelopedsuchaprogramandintegrateditintothecultureofaperformanceorientedculture.

Inthelate1980s,DuPontlookedforawaytoshareboththebenefitsofasuccessfulcompanyandtheresponsibilitiesforachievinggrowthobjectiveswiththe
employees.Adesignteamofrepresentativesfromacrossthecompanydevelopedtheprogram.Theyexploredseveraloptions,includingwhatcompaniessuchas
PepsiColaweredoing.Theyconcludedthatthebestsystemwastoprovidestockoptionstoallemployees.TheprogramwasentitledtheDuPontSharesProgram.

ChairmanoftheBoardE.S.Woolard,Jr.,said,"Ifwearetobeagreatglobalcompany,wecannotseparatetheideasofvaluingpeopleandachievingfinancial
successtheyaretwosidesofthesamecoin."Hissupportoftheprogramanddemonstrationofcommitmenttoallemployeesworldwidemadethisprogrampossible.

TheDuPontSharesProgram

Theprogramwasinauguratedin1991.Thatyeareveryfulltimeemployeeacrosstheworldreceivedanawardof100stockoptionsinDuPont.Thevalueofthe
optionswouldbebasedonthegrowth,profitability,andperformanceofthecompanyinthemarketplace.Eachemployeehasaroleinachievingtheseresults.Along
withtheoptiongrant,employeesreceivedconsiderableeducationaboutwhatastockoptionisandhowanindividualemployee'sperformancecanimpactthevalue.
Companymanagementdiscussedthereasonfortheplanandhowitwaspartofanoverallseriesof

 Page51

rewardsystemstargetedtocreatingameaningfulstakeinthecompanyforeachemployee.Employeesincountrieswheretherearelegalrequirementsagainstowning
U.S.securitieshadanaccountestablishedintheirnamethatwouldmirrorthestockperformanceandprovisionsoftheprogram,onlythepayoutwouldbemadein
cash(localcurrenciescoveredfromU.S.dollars).

Theprogramhasseveralimportantprovisions.First,anemployeeneedstoretaintheoptionsforoneyearbeforeheorshecanexercisethem.Second,theemployee
thenhasupto10yearstotransfertheoptionsintoactualstockinthecompany.Atthattimetheoptionwouldexpire.Third,anindividualcanexercisethestockoption
bypayingcashforthestockattheexercisepriceorutilizesomeofhisorheroptionstopurchasethestockinacashlesstransaction.AlltransactionsaremadeinU.S.
currencyandareavailabletoallemployeesworldwide.

Afourthprovisionisthatadistributionofstockoptionsisnotprovidedannually.Unlikeotherprograms,thedesignteamdidnotwanttocreateanentitlementofannual
grants.TheOfficeoftheChairmanmustdeterminewhetherthereshouldbeadistributionbasedontheperformanceofthecorporation.Thismakesitadiscretionary
programandcreatesadegreeofuncertaintyabouttheprogram.

Finally,allemployeesparticipateintheprogram,includingDuPont'sexecutives.Eventhoughtheyreceiveadditionaloptionsbasedonperformance,theirparticipation
inthisprogramisincludedindeterminingthetargetnumberofoptionstheyreceive.Thisreflectsanimportantvalueofequityintheparticipationofthisprogram.

TransferringValuetotheEmployees

Thevalueoftheoptionsisbasedonthegrowthofthestockprice.Thepriceoftheoptionisbasedonthecurrentmarketrateoftheyearinwhichtheoptionsare
granted.IfDuPontcontinuestoperformwellinthemarketandthestockmarketfavorsthisgrowth,thenthevalueofthestockincreases.Duringtheperiodfrom1981
to1990,thevalueofDuPontstockincreasedanaverageof10%peryear.Infact,itincreasedanaverageof21%ayearfrom1985to1989.Inotherwords,ifan
individualhadinvested$1,000inDu

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Pontin1981,themoneywouldhavebeenworth$2,625by1990.Withtheinitialgrantpricein1991at$37,thestockhasincreasedinvalueby1997tomorethan
$120(ona1997presplitbasis),whichisalmostathreetimesgrowthinshareholdervalue.Thisopportunityforgrowthinshareholdervalueisexactlywhatthedesign
teamintendedforeachemployee.

ThevalueoftheDuPontSharesProgramhasbeeninhowithaschangedthemindsetofemployeesandhowtheyperceivetheirrelationshipwiththecorporation.The
programwasintendedtocreateasenseofshareddestiny,ofacommonfatebetweentheemployeeandthecorporation.Asthefortunesofthecompanyriseandfall,
sotoodoestheimpactonemployees.Theimpactgoesbeyondtheiremploymentstatusortheirdirectcompensation,butdependsonthevalueoftheir"stake"inthe
company.

Somearguethatthisprogramisineffectiveininfluencingindividualbehaviors.Thedesignersdidnotintendfortheprogramtoimpactindividualperformance.DuPont
maintainsandcontinuestodevelopawiderangeofspecificincentiveandrecognitionprogramsthatinfluencetheactionsofpeople.TheexecutiveswantedthisDuPont
Sharesprogramtobeanadditionalelementinabroadportfolioofrewardsavailabletoemployees.Itisdifficulttoascertainthelink,ifany,betweenanindividualwho
viewsthestockpriceinthemorningpaperoverbreakfastandtheactionsshetakesthatdaytomakeDuPontamoresuccessfulcompany.DuPonthascreated,in
somemeasure,aprocessthatlinksemployeeswiththeconcernsofmanagementandallshareholders.

Therearethosethatcriticizetheprogramfornotplacingmoreriskintheprogram.ThecriticspointoutthatDuPonthasprovidedemployeeswithanopportunity
withoutwithholdingsomeothertangiblereward.Thedesignteamconsideredawiderangeofissuesindevelopingthisprogram.Acentralobjectivewastocreatea
positiveimpactonemployeesandencouragethemtoconsiderDuPontastheirowncompany.TheriskisthatwithoutgrowingthevalueofDuPont'ssharestherewill
benogain.Hence,theprogramismorefocusedonopportunitythanrisk.

OvercomingtheConcerns

Thewideuseofstockoptionprogramshasalsobeencriticizedbysomefordilutingtheimpactonshareprice(i.e.,ifmoreshares

 Page53

areonthemarketandthevalueofthecompanydoesnotgrowaccordingly,thevalueofeachsharewillbereduced)andcreatingunrealisticexpectationsofgains.The
marketvalueofacompanyisnotalwaysdependentonthefirm'sperformancehence,thereisariskofstockdevaluationbecauseofbroadexternalmarketforces
overwhichpeoplehavelittlecontrol.Ifpeoplehaveanexpectationthatthestockpricealwaysrisesandthefirmexpectspeopletoshareinthisgrowth,bothmaybe
severelydisappointed.

Thedilutionimpactoftheprogramhasbeenminimal.Atthelaunchoftheprogram,only100shareswereprovidedtoeachofthe130,000plusemployeesthis
representedlessthan5%oftheoutstandingstock.Furthermore,ifthecompanygrows,theimpactisminimal.Ifthecompanydoesnotgrow,nostockoptionsare
awarded.Sothereisaselfregulatingfeaturetotheprogram.

Intermsofthefluctuationsofthemarketplace,DuPonthasclearlycommunicatedthisrisktoitsemployees.Thecompanyfrequentlycommunicatessharepricetoall
employees,aswellasexplainseventsinthecompanyandthemarketthatmayinfluencetheprice.Thecompanyalsoprovidesa10yeartimeframeinwhich
individualsmayexercisetheiroptions,andthentheymayretainthesharesorsellthem.Furthermore,ifthecompanydoesnotperformwell,thereisnoguaranteeofa
stockoptiondistribution.Aninterestingchallengetothecompanyariseswhenthestockpricefallsbelowtheexercisepriceoftheoption.Peoplewillrealizethatthis
programisforthelongterm.Sincethisprogramisonlyoneelementinanarrayofrewardprograms,thestockpricemayhaveonlylimitedimpact.

Stockoptionsweredistributedtoemployeesin1991,theinitialyear.Theywereagainawardedin1995and1997.Thereisanticipationonwhethertheywillbe
providedin1998andbeyond.Theoverallobjectiveistoachievegrowthinstockvalueofthecompanysothateachemployeewillrealizesignificantgains.

TheFutureofDuPontShares

Theprogramcontinuestobemodifiedasmarketandbusinessconditionschange.Forexample,therewasaspecialprovisionforstockoptionsawardedin1997.The
stockmustachieve$75pershareforfivedaysbeforeindividualswillbeabletoexercisetheoptions.Thevalueatthegrantoftheoptionswas$52.50pershare.

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Thisneedstobeachievedby2002ortheywillbeforfeited.Consequentlythereissignificantpressuretogrowthevalueofthecompany.Tothispoint,DuPontiswell
onitswaytoachievingthisgoal.

Theprincipalchallengestodevelopingthisprogramwereinthreeareas.First,thecompanyappliedthisprogramtoallemployeesworldwide.Thedesignteamneeded
toresearchandcomplywiththeinvestmentlawsofeachcountryinwhichDuPontoperates.Furthermore,theyestablishedaglobalpartnershipwithMerrillLynchto
administertheprogram.

Second,manyemployeesdidnotunderstandwhatastockoptionwasorwhatitmeanttoownone.Therewasasignificantinvestmentintrainingandeducationabout
stock,stockoptions,andthedriversofDuPont'sperformance.Thishadmanyimportantbenefitstobuildingthecultureand"commonfate"philosophytheexecutives
soughtfromthisprogram.

Finally,DuPontwantstheprogramtobedynamicandalivewithemployees.Therefore,thereisongoingcommunicationaboutthecompanyandthestock's
performance.Oftendiscussionpointsaremadeinrelationtotheshareprice,andthisprovidescommongroundforallmembersofthecorporation.Thereisrisk
associatedwiththisprogram,notintermsoflossbutintermsofnotrealizingadesiredgain.

ThereisalsoagreatdealofexcitementabouttheDuPontSharesProgram.Ithasalignedtheinterestofexecutiveswithallemployeesithascreatedaconnection
betweenemployeesandshareholders.BothhaveacommongoalofbuildingDuPontintooneoftheworld'sleadingcompaniesandsharingthegainsthatarerealized
bythisachievement.Thisgainisnotguaranteed,butitcanbeachievedifpeopletaketheactionsthatleadtothecorporation'ssuccess.Atleastfornow,ithascreated
acommonbond.

LinkingIncentiveCompensationandEVAtoDriveShareownerValueatTheCocaColaCompany

TheCocaColaCompanyleadstheworldwidebeverageindustryintermsofvolume,profitability,growth,andinnovation.Itspri

 Page55

maryobjectiveasacompanyistogrowshareownervalueovertime,andithasbeenextremelysuccessfulinrecentyearsinachievingthatobjective.Thetotalmarket
valueofitsstockgrewfrom$15billionattheendof1986to$165billionattheendof1997.

However,fromthecompany'sperspective,muchremainstobedone.Aroundtheworld,thecompanystillsupplieslessthan2ofthe64ouncesofliquidintakethe
averagepersonneedseachday.Andthecompany'sfocusremainsresolutelyongoingaftertheother62!

Todoso,itoperatesinaccordancewiththreeguidingobjectives.First,itworkstofuelgrowthwithintheindustry,increasingoveralldemandforbeverageproducts.
Second,itfocusesoninnovationineveryareaofthebusiness,includingmarketing,packaging,andpeoplemanagement.Third,itmanagesforthelongterm,making
investmentstodaythatwillpayoffinthefuture.

SettingtheStrategicMeasures

Toensurethateverydecisionitmakesissoundfromafinancialandshareownervalueperspective,thecompanyismanagedfromaneconomicvalueadded(EVA)
andeconomicprofitviewpoint.EVAandeconomicprofitarecloselylinkedandserveasdecisionmakingtoolsthatallowallassociatestoensuretheyarecreating
shareownervaluewitheverydecisiontheymakeandeveryactiontheytake.EVAisdefinedasthechangeineconomicprofitfromoneyeartothenext.Economic
profitisdefinedasnetoperatingprofitaftertaxes(NOPAT)minusachargeforoperatingcapital.

Inthemid1980s,thecompany'sfinancialsystemsbegantracking,measuring,andreportingaggregateeconomicprofit.Throughrefinementsandenhancements,bythe
early1990seconomicprofitdatabecameavailableonaregularbasisattheoperatingdivisionlevel(approximately25worldwide,geographicunitsthatreportinto
corporate).

Withtheavailabilityofthefinancialdatanowensured,andwiththeincreasinglyfocusedeffortoncreatingshareownervalueatalllevelsoftheorganization,the
compensationgroupofthecompanyledanefforttorealignvariablepayprogramstofocusoneconomicprofit.Theprocesswasastraightforwardoneconsistingof
essentiallyfoursteps:

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1.Reviewoverallbusinessstrategyandkeybusinessdrivers.

2.Assessalignmentofcurrentincentiveandstockoptionprogramswiththosedrivers.

3.Redesignincentiveandstockoptionprogramstomorecloselymatchbusinessneeds.

4.Implementandcommunicatethechanges.

Theoutcomeofthatprocessincludedseveralkeyconclusions:

1.Financialmeasuresarethemostcriticalmeasuresofthecompany'ssuccess.

2.Volumeandprofitresultsareequallyimportant.

3.Eachdivisionshouldstandaloneinitsperformanceandnotberewardedorpenalizedbasedontotalcompanyperformance.

4.Eachdivisionshouldhaveflexibilitytodeterminetheexactdistributionofincentiveandstockoptionawards.

5.Oneuniversalprogramdesignshouldapplyconsistentlytoheadquartersandalloperatingdivisionsandtoalllevelsofassociates.

Theresultingprogramdesignisbestdescribedasafundingpoolwithflexibledistributiontoindividualsbasedonvalueaddedcontributionstotheresults.The
programsareconsistentonaworldwidebasisandallassociatesfrommidlevelprofessionalandaboveareeligibletoparticipate.Aspecificdescriptionoftheannual
incentiveandstockoptionprogramsfollows.

TheAnnualIncentiveProgram

Eachdivision,workingwithseniormanagement,determinesanobjectiveforunitcasesalesofcompanyproducts(volume)andeconomicprofit(profit).Thesetwo
objectivesbecomethetargetforthedivisionforannualincentivepurposes.Forcorporateassociates,thetargetforincentivepurposesistheobjectiveforthetotal
company.

Attheendoftheyear,theperformanceofeachdivisionisassessedversusitsobjectivesfortheyearrelativetoafundingmatrix.Thematrixweightsvolumeandprofit
equally.Ifdivisionsmeettheirobjectivesexactly,thenincentivesarefundedat100%

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oftarget.Iftheyexceedobjectives,theyarefundedatgreaterthan100%,andiftheyfallshort,theyarefundedatlessthan100%.Thetargetedpoolitselfissimplythe
totalamountrequiredtoawardeachparticipantintheplantheirexacttarget,whichisexpressedasapercentofbasesalary(e.g.,10%,15%)basedonjobgrade
level.

Oncethepoolforthedivisionisfunded,thendivisionmanagementdecideshowtheexactpoolwillbedistributed.Eachdivisionhastheresponsibilitytosetspecific
teamandindividualobjectivesthatlinkintothetotaldivisionobjectives.Basedonindividualandteamperformanceagainstthoseobjectives,eachparticipantthen
receivesaspecificannualincentiveaward,whichfallswithinabroadrangefromnoawardtothemaximumaward.Itistheresponsibilityofeachdivisiontomakesure
thattotalincentiveawardsdonotexceedtheamountallocatedandthatthetotalawardsbalanceagainstthepool.

TheStockOptionsProgram

Theprocessforstockoptionawardsissimilartothatofannualincentives:Optionpoolsarefundedbasedonperformanceagainstunitcasesalesandeconomicprofit
objectives,andindividualoptiongrantsaredeterminedbasedonspecificcontributiontothoseobjectives.Stockoptionawardsareconsideredannuallyandfallwithin
aminimumtomaximumofaspecifiedrange,whichvariesbygradelevelandisdrivenbytargetedtotalcompensationlevelsversusthemarketplace.Division
managementconsiderseacheligibleassociateeachyearforanappropriategrantandthenrecommendsthatamountforapprovalbythecompensationcommitteeof
theboard.

Forbothannualincentivesandstockoptions,awardsforcorporateassociatescomefromandmustbalanceagainstthecorporatepool,whichisbasedontotal
companyperformance.

ImpactofthePrograms

Theeffectonthebusinessoftheclearlinkageofincentiveandstockoptionawardstoeconomicprofithasbeenverypositive.Someofthebenefitsincludethe
following:

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Moreattentionisgivenintheplanningprocesstotheamountandcostofcapitalrequiredtodelivervolumeandprofitresults.

Managersandassociatesnowfocusmoredailyattentionthanevernotonlyongeneratingvolumeandprofit,butdoingsoinawaythatcoverscapitalcostsand
enhancesshareownervalue.

Thecommunicationeffortssurroundingtheimportanceofvaluebasedmanagementarereinforcedfinanciallytwiceayearthroughincentiveandstockoptionawards.

Theeconomicprofitlevelsofthecompanyandtheresultingincreaseinshareownervaluecontinuetogrowathealthyrates.Figure31showsthataseconomicprofit
grewanaverageof20.2%peryearfor10yearsendingwith1997,stockpricegrewanaverageof30.2%peryearforthesameperiod.

Eventhoughtheplanisworkingwellandthecompany'sfinancialresultsarestrong,therearestillaspectsofthisapproachthatCocaColacontinuestoworkto
improve.

Figure31.
Relationshipbetweeneconomicprofitandstockpricegrowth.

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Oneoftheseisthebudgetprocess.Sincesomanyfinancialrewardsaredirectlytiedtoperformanceversusbudget(atboththedivisionandcorporatelevel),the
companyworksconstantlytoensurethatbusinessplansaresetwiththesamedegreeofdifficultyacrossalldivisions.Inotherwords,seniormanagementhasregular
dialoguewiththeoperatingunitstomakesuretheyareplanningoncapturingallavailablegrowthinvolumeandprofitinboththeshorttermandthelongterm.Such
judgmentsarerarelysimpleones,buttheyarenecessarytoensurebothbusinessgrowthandequitableopportunitiesforfinancialrewardsforthosedivisionsthat
performwell.

Asecondconstantchallengerelatestocommunicationtotheindividualparticipant.Sinceboththepoolfundingandindividualorteamperformancecanvary,itis
difficulttoexplaintoanindividualpreciselywhathisexactrewardwouldbeunderdifferentperformancescenarios.Forinstance,aparticipantcouldperform
exceptionallywell,butifthedivisiondoespoorly,thenhispayoutcouldbereducedsignificantlybecausetheoverallpoolislower.Explainingthisteambased,zero
sumapproachinasimpleandeasilyunderstoodmannerisaconstantchallenge.

Afinalchallengerelatestomakingsurethateveryparticipanthassomelineofsightbetweenhisorheractionsandthefinancialrewardsreceivedfromtheseplans.
Partofthisendeavorinvolvesgeneraleducationaboutvaluebasedmanagement(amajorpriorityofthecompany)andhowdecisionsshouldbemade.Partofit
involvesclearobjectivesthatrelatetoanddriveportionsofthevolumeoreconomicprofitequation.Thefinalpieceinvolvesdemonstratinghowtheindividual'sreward
linksbacktotheoverallvalueaddedtothebusiness.

Afundamentalcommunicationtoallassociatesatthecompanyis:''EverythingyoudotodaywilleithercreateordestroyvaluefortheCocaColaCompany.''Withthat
leveloffocusonvaluecreation,thecloselinkageofincentiveandstockoptionprogramstoEVAcurrentlyinexistenceisexactlyrightforthecompany.Theprograms
areworkingwell,arefullyalignedwithbusinessneeds,andnomajorchangesareplanned.

However,sinceanothersharedvalueiscontinuousdiscontentwiththeimmediatepresent,thecompanywillcontinuetobevigilantinmonitoringallaspectsofits
rewardsprogramstoensuretheyimprove,evolve,andchangeasnecessarytosupportthecompanyonitsinfinitejourneytocreateshareownervalue.

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BeingaDifferentKindofCompanyatSaturnCorporation

Howdoesadifferentkindofcarcompanyremainadifferentkindofcarcompany?ThisisthechallengefacingSaturn,awhollyownedsubsidiaryofGeneralMotors.
Saturnhadtheluxuryofcreatingacompanywithstrongfinancialinvestmentsbytheparentorganization.Sinceitsinceptionin1985,ithascreatedmanynewmodels
formanagementandlaborrelations.Ithasbeenabletocreateaculturethattrulylivesbyvaluesofcustomerfocus,collaboration,andmarketresponsiveness.Butasit
facesincreasingcompetitionandachangingmarketplace,therearepressurestoreturnto"traditional"waysofoperating.TheimportantconclusionisthatSaturn
cannotgobacktooldpracticesbecausethechangeshavebeenfundamentallyintegratedintotheveryfabricoftheorganization.

Oneofthemajorcontributorstotheprocessofchangeandtheorganization'sculturehasbeenitsrewardsystems.However,asDennisFinn,Saturn'shumanresources
advisorpointsout,therewardsystemssupportthenewprocessofmanagementbutdonotdetermineit.Oneneedstofullyunderstandtheculturaldimensionsthat
characterizeSaturnbeforeonecanappreciatethevalueofthisstatement.

TheFormationofSaturn

ThegenesisofSaturn'sformationwasbasedonasimplerealitytheAmericanautomobileindustryhadlostsignificantmarketshareoverthe1970sand1980sto
foreigncarcompanies,principallyJapan.GeneralMotors,whichwasperhapsthemostresistanttochange,decidedtocreateaskunksworksorganizationtodevelop
anewcarmodelandanewmanufacturingprocess.RogerSmith,chairmanofGeneralMotors,sponsoredthiseffortatthehighestlevelofthecorporation.Hewas
joinedinthesponsorshipbyDonEphlin,thethenvicepresidentoftheInternationalUnitedAutoWorkers(UAW)andtherepresentativetotheGeneralMotors
Corporation.Agroupof99individualsfromacrossthecorporationandtheunionwerebroughttogethertoresearchhighperformancework

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sites,analyzecustomerneedsandpreferences,anddevelopanewcarmodel.TheywerecharteredunderanentityknownastheSaturnStudyCenterwithasimple
butpowerfulmissiontorecommendthebestapproachestomanufactureasmallcarfortheUnitedStatesbasedontheintegrationofpeopleandtechnology.

Thismassivestudyeffortresultedinthepreparationofapaper,whichsomehavereferredtoastheequivalentofaconstitutionorDeclarationofIndependence,
entitled"MemorandumofAgreement."This1,600worddocumentlaidouttheprinciplesandpracticesnecessarytodevelopanewcarfortheAmericanmarketplace.
Thekeypointsincluded:

Peoplewanttoandshouldbeinvolvedindecisionsthataffectthem.

Peoplecareabouttheirjobsandthosetheyworkwith.

Peopletakeprideintheirworkandtheircontributionstothecompany.

Peopleshouldshareinthesuccesstheyhelpcreate.

Thesesimplestatementsofphilosophybecamethebasisfortheorganizationinpracticetodayandtherewardsystemsthatsupporttheprocessoftheorganization.
Furthermore,theMemorandumdefinedgoalsforquality,cost,andcustomersatisfaction.Itwasabusinessdocumentaswellasastatementoforganizationalsuccess
factors.

TheUAWrepresentativeswerehighlyinvolvedintheSaturnStudyCenter,draftingtheMemorandumanddefiningthestaffingprocessforthenewcompany.When
theUAWratifiedtheMemorandum,itachievedacommitmentthattheorganizationwouldbehighlycommittedtothelabororganization.Thismeantthatmorethan
6,000peoplewouldbedrawnfromotherpartsofGeneralMotorsandmovedtoSpringHill,Tennessee.Theyhadnofacility,cardesigns,ordealernetworks.Each
ofthesewouldneedtobebuilt,butthesetaskswouldconformtotheprinciplesandspiritoftheMemorandum.

ADifferentKindofRewardSystem

Fromthestart,Saturnwantedtobuildontheconceptsofcollaborationandsharinginthesuccessoftheenterprise.Thisalsomeant

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thatpeoplewouldhavecleargoals,accountabilities,andcontributionstomakethecompanyhighlycompetitiveinthemarketplace.Newpeoplewouldbehiredbased
onconsistenthiringcriteriaandtheywouldworkwithintheguidelinesoftheMemorandum.OnekeyobjectiveoutlinedintheMemorandumwasthatpaywould
ultimatelybeatriskandthat20%ofthetargettotalcompensationwouldbevariable.Thismeantthatbasepaywouldbesetatbelowmarketlevelsandthedifference
wouldbemadeupthroughvariablecompensation.Aftertheinitialstartupphaseofthecompany,itwasdeterminedthattheatriskportionofpaywouldbephasedin,
butthatthecompanywouldhaveanactivevariablecompensationprogram.

Thevariablepayprogramwasimplementedin1992.Inthisinitialyear,theincentivetargetwassetat5%ofpay.Individualscouldearnthisamountiftheysuccessfully
completedspecificcriticaltrainingactivitiestoenabletheteamstohandlenontraditionalresponsibilitiessuchasbudgeting,workplaceorganization,materials
management,scheduling,safety,andhousekeeping.Thiswasimportantasaprecedentsettingmeasureforseveralreasons.First,thecompanywasinastartupmode
andnewworkpracticesneededtobeestablished.Thefocusofworkwouldbethroughteams,andemployeesneededtounderstandtheproductionprocess,have
strongcommunicationskills,andbehighlyeffectiveinworkingwithothersasateam.Second,Saturnestablishedagoaltobealearningorganization.Byemphasizing
trainingastheinitialfocus,thisreinforcedthepointoflearningwithinthecultureoftheneworganization.Finally,therewaslittlebaselinefromcomparable
manufacturingplantsonwhichtoestablishreliablegoals.Byusingafairlyconservativeapproachinitially,theprogramwasabletogetupandrunningandestablish
standardsofperformancethatwouldbesetoncetheprocesswasunderstood.

By1998thepayatriskportionhasgrownto12%.Thevariablecompensationprogramwasstructuredintwoparts.Thefirstcomponent,thepayatriskportion,
focusesonthreekeygoals:

1.Qualityperformance(4%ofpay).ThegoalistobuildSaturncarsthatmeetorexceedcompetitivequalitylevels.Thiswasmeasuredbyanauditteamusing
InternationalUniformVehicleAudit(IUVA)standards.Saturnneededtoat

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tain9.0discrepanciespervehicle(DPV)orlowertoachievemaximumpayoutof4%.

2.Achievementoftraininggoals(4%ofpay).Thegoalsincludedperforminganapprovedindividualtrainingplan(50%)andreceivingaminimumof92hoursof
trainingcreditduringtheyear(50%).

3.Teameffectivenessgoals(4%ofpay).Thefocusisonstrengtheningtheeffectivenessofteamsandtheircontributionstotheperformanceofthecompany.Teams
aredefinedbyfunctionalgroupsandneedtocompleteaminimumofonecommunicationmeetingperquarterandtoidentifyandsolveatleastthreehighprioritysafety
problems.Theguidelinesandreviewprocessforthesegoalshavebeenthoroughlydefined.

Thesecondcomponentistherewardpay.Thiscomponentisbasedonexceedingbudgetedearningsbeforeinterestandtaxes(EBIT),matrixproductionschedule,and
qualitygoals.TheEBITthresholdisadjustedbasedonproductionschedulestoaccountforchangesinmarketconditions.Thefinancialpayoutisbasedonasharingof
actualcostreductionsversuscurrentyearbudgetedcostindividualsshare50%ofanycostreductionsabovethebudget.Thereisnocaponthissharing.However,the
payoutmaybemodifiedbythequalityperformance(basedontheIUVAratings)andontimedeliveryscheduleperformance.

Theprogrammakespayoutsquarterly.Dataischartedanddisplayeddailyandweeklysothatindividualsarecontinuallyawareoftheperformancestandingandthe
opportunityfortheiradditionalpay.Basedontheoverallresults,allmembersoftheorganizationreceiveacommonpayoutasapercentoftheirtotalearnings.

RemarkableResults

Themarketplacehasclearlyappreciatedthequalityofthisautomobile.ForseveralyearsSaturnwastheonlysmallcarwithintheGMlinethatwasprofitable.It
achievedaprofitablestatusthreeyearsaftertheplantstartupthisisunprecedentedintheautomobileindustry.Thecompanyhasestablishedaleadingreputation

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foritscarsaswellasthesalesandserviceprocessthatsupportstheproducts.This"experiment"haschangedGMaswellandhasservedasamodelofwhatthe
Americanautoworkercanaccomplish.

Membersoftheorganizationhavebenefitedaswell.Thevariablecompensationprogramwasestablishedin1992.Payoutshavebeenachievedeachyear,asfollows:

Year AtRisk Payout

1992 5% $1,800
1993 7% 5,000
1994 10% 3,200
1995 10% 10,000
1996 10% 10,000
1997 12% 2,100

Basesalarieshaveincreasedwiththemarketandhaveretained88%oftheaverageGMcompensation.Therewasa$10,000capontheprogramthiswasincreased
to$12,500in1997.

Toillustratetheimpactoftheperformancecapabilitiesoftheorganization,oneneedstoreviewproductivityresultsin1996.Atonepointduringtheyear,Saturnwas
40,000carsbehindproductionschedule.Thiswasduetostrikesatpartsuppliersthatbroughtworknearlytoahalt.Byyearend,theSaturnteamhadproduced
314,000cars,whichwas4,000abovetarget.Thisrequiredcarefulcoordinationamongallelementsoftheorganizationandwasatestimonytotheleadershipand
involvementbymanyintheorganization.

AChallengetothe"MemorandumofAgreement"

InMarch1998,theUAWmembersatSaturnvotedagainonwhethertoretainthis"verydifferent"agreementbetweenlaborandmanagement.Atissuewasthe
declineinthepayoutsfor1997inrelationtopreviousyears.Sincesalesforsmallcarshavedeclined,somehourlyworkerspressedfortheUAWtovoidthe
agreementandreplaceitwithaconventionalwagecontract.ThisvotewaswatchedcarefullyforitstestofcommitmentbytheUAWtothepartnershipandwhether
thisphilosophyofcompensation

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wouldendurehardtimes.TheprogramisperhapsthemostinnovativelaborcontractintheU.S.autoindustry.Furthermore,themarketsegmentforsmallcarshas
cooledgreatlyasAmericanconsumershavebecomeattractedtolargerluxuryandsportutilityvehicles.Thus,wouldapayprogramthattargetsbasewages12%
belowmarketandprovidesopportunityforincentivesremainaviablepayphilosophyinlightofdecliningmarketgrowth?

Theagreementimpliedthatwhenbusinesswasstrong,membersoftheSaturnorganizationwouldshareinthebenefit.Whentimeswereweak,wouldtheyalsosuffer
onthedownside?Theunionvotewouldtestnotonlythisphilosophyofcompensationbutinsomemeasurethecorevaluesoftheorganization.

ThevoteonMarch11,1998,wasstronglyinfavorofthe"MemorandumofAgreement."Themarginwasnearly21,with4,052votinginfavoroftheagreementand
2,120votingtochangeit.Bothunionandmanagementleadersfeltthatthisdemonstratedthatthe"partnershipisaliveandwellinTennessee."

Althoughthisrepresentedadeclineinthemarginofvictory,giventheprospectsoftheimmediatefuture,itremainsastrongstatementofsupport.In1992,theunion
votedforthecompensationcontractbyamarginof87%.AtthattimetheSaturncarwasstronginthemarketandtheprospectsofpayoutswerehigh.Today,the
markethaschangedandmarketsuccesswillbemoredifficult.Itisnowonderthattheaverageemployeeisconcernedaboutthepay,butthecommitmenttothe
principlesofthepartnershipremainsintact.

TheFutureWillBeDifferent

Saturnhasclearlydemonstratedthatapartnershipinworkingtogetherandsharingintheresultscanbehighlyeffective.Therewardsystemisanimportantelementof
theculture,butitisnotthedrivingforce.Instead,thefocusisonacommitmenttothecustomer,thequalityofthecars,andeffectivelyutilizingresources.Actionstaken
onadailybasisdemonstratehowtheorganizationisdifferent.Forexample,thehiringprocessinvolvespeoplefromalllevels,trainingisextensiveandappliedtothe
worksetting,andmarketinginvolvespeopleinorganization.Thisisanorganizationthatleadsbyitsvalues.

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Whilethemarketforsmallcarsmaynotholdthesameopportunityinthefuture,GMiscommittedtokeepingthesuccessrecordofthecompany.Thereareefforts
underwaytomodifytheexistingproductline,introducenewproductsintothiscompany,andexpandSaturn'smarketreachonaglobalbasis(e.g.,manufacturing
righthandedcarstofittheJapanesemarket).OtherstrategiesarebeingdevelopedtoretainSaturn'slongtermleadershipinthemarketplace.

ThesuccessthatSaturnhasachievedhasgivenitconfidencethatitisindeedahighperformanceorganization.Amongthemajorpositiveattributesarethetrustand
partnershipestablishedatalllevelsoftheorganization.Thisisperhapsthemostimportantoutcomeofthemanagementandrewardprocess.Withthischaracteristicas
aculturalfoundation,Saturndoesnotneedtoworrywhethertheorganizationcanproduceoncommitments.Itwillseeknewopportunitiesandaddresschallengesina
mannerthatwillretainitsuniqueness.Inthefuture,Saturnmaynotbeadifferentkindofacompany,onlybecauseotherorganizationswillfollowitslead.

SharingtheBenefitsofPerformanceatBooneCountyNationalBank

"Thekeyissueforus,"statedBoFraser,chiefexecutiveofficer,"wastoencouragethebehaviorsweneededtobesuccessfulinthiscompetitivemarket.Weareinthe
peoplebusiness.Ifwearetobesuccessfulweneedtobeperceivedbyouremployeesasfairandwillingtosharetherisksandrewards."Likemanyothercommunity
orientedfinancialservicecompanies,BooneCountyNationalBank(BCNB)didnothavetheresourcesornetworkofasuperregionalornationwidebank.Yetit
facedincreasingcompetitionfromlocal,regional,andnationalfinancialinstitutions.ThecompetitivenessofthemarketplacewasincreasingandBCNBwantedto
maintainandstrengthenitsleadershipposition.

However,oneoftheproblemswithcreatingasenseofurgencywasthatitsemployeesandparentcompanyregardedthebankashighlysuccessful.Itachieveda55th
percentilerankingonperformanceofpeerbanksandhadbeenquiteprofitableformany

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years.Fewbeyondtheseniorexecutivesrealizedthatthebankneededtoimproveitseffectivenessinthemarketplaceorfaceamoredifficultstruggleinthefuture.
Theyneededpeopletotakeactionsthatwouldretainthebank'sleadershipinthemarketplace.Toplacearbitrarygoalssuchasa10%costreductionwasunwise
becausesomeareasshouldreducecostsby15%whileothersshouldnotreducecostsatall.Therewerefewleversbywhichtomotivatepeopletotakepurposeful
andmeaningfulactions.

Finally,ifthebankwasabletoimproveitsperformanceandachieveastrongermarketposition,howcouldthebankmakepeoplefeelgoodaboutit?BoFraserused
theconceptof"fairness"todescribethedilemma.Iftheexecutivesandshareholdersbenefitedfromtheimprovedperformance,whyshouldn'tthepeoplewhomadeit
happenshareinthegainsaswell?Itsimplybecameaconcernaboutfairness.

BackgroundoftheBank

BooneCountyNationalBankisastrong,communityorientedbanklocatedinColumbia,Missouri.Ithasalonghistoryofserviceandinvestmentinthecommunity.It
hasassetsof$617millionandemploys344people.Itisownedbyaregionalbankholdingcompanybutoperatesinahighlyautonomousmanner.Theorganization
hasretainedarelativelylowlevelofturnoverbyofferingattractivesalaries,progressivemanagementsystems,andahighlysupportiveandpersonalizedworkplace.For
example,theserviceawardceremonyinvolvesallemployeesofthebankandishighlightedbypersonalpresentationsbytheCEOtoeachawardrecipient.Thebank
hasbeenopenincommunicatingitsperformanceandmaintainsastrongcultureofcommunication,collaboration,andservice.

TheDevelopmentofGainSharingandTEAM

Thechallengewastocreateaprocessthatwouldencourageandrewardperformanceimprovements.ThisledtheCEOandtheseniormanagementteamtodecideto
developanincentivecompensationplan.Theoverallpurposewastocreateavehiclethatcould

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createameaningfulstakeintheneededimprovementsanddevelopastrongsalesorientedculturewithinthebank.

Thedesignprocessusedateamofrepresentativesfromthroughoutthebanktodeveloptheprogram,withguidancefromanexternalconsultant.Themembership
includedindividualsfromseniormanagement,commerciallending,retailbanking,operations,finance,systems,andhumanresources.Theyworkedtogetheroverfour
monthstodevelopthemeasures,payoutmechanisms,incentiveopportunities,eligibilitycriteria,andthecosts/benefitsoftheprogram.Theyrecommendedtheprogram
tothechiefexecutiveandseniormanagementteamandreceivedstrongendorsement.Theprogramwascommunicatedthroughaseriesofmeetingsandabrochure
thatcapturedthepurposeandspiritoftheprogram.TheprogramwastitledGainSharingbecauseitprovidedawaytosharethegainsachievedbytheperformance
improvements.Thedesignteamhascontinuedasthesteeringcommitteetheoveralleffort,whichincludedtheGainSharingprogramandotherperformance
improvementefforts,becameknownasTEAMTogetherEveryoneAchievesMore.

OverviewofGainSharing

Oneofthefirsttasksofthedesignteamwastoexaminewhythebankneededtheprogramandtodevelopapurposestatementthatreflectedthecorethemeofthe
program.Theteamdevelopedthefollowingstatement:
ThepurposeoftheBooneCountyNationalBankIncentiveProgramwillbetorecognize,reinforce,andrewardemployeesforservingtheneedsoftheBank'scustomerswhich
resultinincreasedprofitabilityandgrowth.

Theyalsodevelopedasetofguidelinesfortheprogram.Theguidelinesincludedthefollowing:

Measuresmustalignwiththekeysuccessfactorsofthebank.

Theprogramshouldbeeasytounderstandandadminister.

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Measuresmustbeobjective,meaningful,andachievable.

Theprogramshouldcommunicatethebusinessgoals,theprogressbeingmade,andtheresultsachievedinthemostreinforcingmannerpossible.

Feedbackshouldbecommunicatedinastimelyamanneraspossible.

Thedesignteamconsideredmanyalternativeapproachesduringthedevelopmentoftheprogram.Theyconcludedthatthebestwaytoreflectthecomplexnatureof
thebusinesswastouseabalancedscorecardapproachtothemeasures.Thiswouldentailamultiplesetofmeasures.Thesemeasureswere:

Returnonbeginningequity(thekeyfinancialmeasureofthebank)

Depositgrowth(reflectsgrowthandmarketposition)

Efficiencyratio(anoperational,wellestablishedsetofindicators)

Customersatisfaction(basedonasurveyofcustomers)

Numberofservicesperhousehold(reflects''shareofwallet''ormarketpositionofthebankaswellascustomerretentionandsatisfaction)

Tocommunicate,display,anddeterminepayouts,thedesignteamdecidedtouseaperformancescorecard.AnillustrationisshowninFigure32.Eachofthese
measuresrepresentedamajorfunctionalareaofthebank.Althoughasignificantamountofeducationwasneededtohelppeopleunderstandthemeasures,theytook
greatinterestintheinformation.Thescorecardthereforebecameausefultooltocommunicatetheprogramtoemployeesandclarifytheperformancegoals.

TheGainSharingprogramisanannualplan.Thepayoutsaremadeannuallyaswell.Oneofthequestionsthataroseduringthedesignteamsessionswashowtoensure
employeesfeltthepayoutswerefairandequitable.Aftermuchdiscussion,theteammadethepayoutsasacommonpercentagetoalleligibleemployees.Although
peoplewouldreceivedifferentamountsofincentive

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Figure32.
Theperformancescorecard.

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payout,theywouldallreceivethesamepercentofthesalary.Allemployeesofthebankwereeligibletoparticipateintheplanunlesstheyhadunacceptable
performance.

KeepingtheAttentionFocused

Oneoftheconcernsabouthavingannualpayoutswasretainingtheattentionofemployeesthroughouttheyearwhenthepayoutsmayseemverydistant.Then,once
theprogramhadbeenthoroughlycommunicatedandemployeesknewhowtheprogramworked,thesteeringcommitteeidentifiedthatemployeeshadadifficulttime
understandingwhattheycoulddotoimpacttheresults.Whiletheyunderstoodthemeasures,manyemployeesdidnotknowwhatactionstheyshouldtake.

Toaddressthesetwoissues,thesteeringcommitteedevelopedseveraleffectivesolutions.First,thesteeringcommitteeconductsamonthlymeetingforallemployees
toreviewtheperformanceofthebankandtheprogressontheGainSharingprogram.Differentmembersofthecommitteepresentthedatathisdemonstratesthatthe
programisaconcernforthewholeorganization,notjustforseniormanagers.Usuallyaboutonethirdoftheemployeesattendthesemeetings.

Thesemeetingsreviewtheprogressofthebankineachofthemeasurementareas.Theydiscussthefactorsthatcontributetothemeasuresandusethesesessionsto
furthereducatepeopleontheperformancedrivers.Peoplefrequentlyaskquestions.ThesesessionshavebecomeanimportantelementofmanagingtheGainSharing
program.

Inadditiontothemonthlymeetings,thesteeringcommitteecontributestothemonthlynewsletterwithinthebank.Thisnewsletterreviewstheresultsaswellas
describesactivitiesthatweretakenindifferentareasofthebanktoimproveperformance.

Asecondimportantperformanceimprovementprocessimplementedwithinthebankisbrainstorming.Thesearequarterlysessionsconductedbyeachdepartment
managertodevelopideastoimprovetheperformanceoftheunit.TheCEOreviewstheminutesandactionitemsrecommendedbyeachdepartmentandtheactions
areoftendiscussedintheseniorstaffmeetings.Thesteer

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Figure33.
Idearecordsheetforbrainstorming.

ingcommitteedevelopedtheideaofthebrainstormingsessions,andtheimpacthasbeensignificant.Figure33isanidearecordsheet.

Animportantlearningfromthebrainstormingsessionsisthatnoideaistoosmallorinsignificant.Infact,thebankhasfoundthatmanysmallideasaddedtogetheroften
leadtolargesavingsorimprovementsinperformance.Theprocessfirstfocusesthegrouponasinglemeasure,andthentheparticipantsgeneratealistofactionsthat
wouldimproveperformanceinthisarea.Theparticipantsthenreviewtheideasanddeterminetheonesthatwouldhavethemosteffectiveimpact.Someoftheideas
implementedinclude:

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PuttingallformsonaPCandsharingwithotherfacilities

InitiatingamonthlycontestbasedonaproductorTEAMgoal

Writingaprogramforbalancingtraveler'scheckstosavetwopeopletwodays'worthofwork

Workingwithcustomersondepositpreparationtosavetime

Askingprocessorstoworkfour10hourdaysforefficiencyandlessovertime

MakingchangesontheWebsitetoincludeloanandjobapplications

TheImpactofGainSharingontheBank

GainSharinghashadasignificantimpactonthebankandallemployees.However,theprocesshasnotbeeneasy.Intheearlystagesoftheprogram,peoplewere
excitedbytheopportunityofsharingintheperformanceimprovementsofthebank,butmanydidnotknowwhattododifferently.Eventhemonthlyfeedbacksession
providedlittleclarityabouttheapplicableactions.Thebankdidimproveperformance,andwhileeveryonemaynothavechanged,therewassufficientattentiontothe
criticalmeasuresofdepositgrowth,customersatisfaction,andexpensecontrolthatpeoplebeganchangingsomeoftheiractions.Thebrainstormingsessionsshowed
manypeoplethethingstheydothataffectthebank'sperformance.Peoplenowquestionmanyactionsanddecisions,asking,"WouldthisbegoodforGainSharing?"

Measuresarecontinuallyrevisedtoimprovetheiraccuracyandvalidity.Forexample,thebankconductsregularcustomersatisfactionsurveysandusedthistoolto
providerichinformationtothosedepartmentswithdirectcustomercontact.Thenumberofservicesperhouseholdhasencouragedpeopletoreferbusinessleadsto
otherareasofthebank.Theseniormanagersupdatethegoalseachyear,buttheprogramhasessentiallyremainedunchangedoverthelastthreeyears.

Perhapsoneofthemostmemorableelementsoftheprogramisthepayoutcelebration.Aftertheclosingofthefiscalyear,theperformanceresultsarefinalizedandthe
bankwideawardceremonyisscheduled.ThiseventusuallyoccursaroundValentine'sDay.Theyoftenhavefunwiththeimagesofthisholiday.Thesteer

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ingcommitteeorganizesthesessions,identifiesthetheme,andoutlinestherolesfortheseniormanagers.Theseeventshavebecomeamajor"happening"inthebank,
onethatmostpeoplelookforwardtoformonthsandtalkaboutmonthsafterward.

Forexample,inoneofthefirstsessionsthemeetingbeganwithareviewoftheperformancedatabytheSeniorVicePresidentofOperationsVickiDunscombe.Then
theCEOdiscussedmanyoftheexcitingchallengesoftheyearandhowpeoplewereabletobesuccessful.Hediscussedtheimportanceoftheseresultsintermsofthe
bank'scustomers,thehistoryofthebank,andhispersonalobjectives.Thenhecalledfortheexchangeofchecksthathadalreadybeendistributedpeopledidnot
receivetheirownchecksbutsomeoneelse's.Theywereinstructedtofindthepersonbelongingtothecheck,tellthemaboutsomethingtheyhaddoneforthebank,or
justgivethemasimplethankyou."Forwithoutthecombinedperformanceofeveryone,"astheCEOstated,"thesecheckswouldnotbe."Theprocesswasmetwith
greathumor,excitement,andlaughter.Afterthecakeandrefreshments,employeesleftthemeetingfeelingthattheyhadmadeanimportantcontributiontothebank
andsharedinsomeimportantwaywiththissuccess.Eventslikethesehavestrengthenedthecultureofthebankinremarkableways.

Todaythebankisperformingatrecordlevels.Ithasimproveditspeergrouppositiontooverthe70thpercentile.Thebankisabletoattractandretainmostofthe
talentitneedstobesuccessful.Whilechallengesremainandthecompetitioncontinuestoimprove,BooneCountyNationalBankisready.Thekeywillbetosustain
thelevelofenergyandcommitmentintothefuture.

Thebankhascreatedaspiritthatisunusualandreflectsthesincere,activeengagementofitsseniorexecutives.TheGainSharingprogramhascontributedtothis
success,buttherealcontributorshavebeenthesteeringcommitteeandeachemployee.Forwithouttheirefforts,theperformanceexcellencewouldnothavebeen
achieved.

BuildingRewardsforThoseWhoFacilitateChangeatIdeaScopeAssociates,Inc.

Insomeorganizations"innovation,"likeothermanagementfads,haslostitsmeaningandabilitytoinspireaction.Yetmostcompa

 Page75

niesarechallengedtodevelopnewproducts,enternewmarkets,oraddressthreatstotheirmarketpositioninnewandcreativeways.Thisoftenrequiresan
organizationalculturethatisfocusedonbeingcompetitive,takingrisks,andsupportingnewideas.

CompanyBackground

Strategicinnovation,aprocessdevelopedbytheconsultingfirmIdeaScopeAssociates,Inc.,ofBostonandSanFrancisco,enablescompaniestoseenewmarkets,
inventnewproductcategories,anddevelopthedisciplinetoimplementboldideas.Thequestionis,doesthe"doctor"practiceitsownmedicine?IdeaScopehasused
avarietyofrewardsystemstocreateitsowncultureinwhichallstaffmembersshareincreatingfortheirclientswhattheyhaveachievedforthemselvesanexciting,
innovative,andhighlysuccessfulcompany.

IdeaScopehasdevelopedavarietyofrewardsystemsthatarebuiltaroundacommonsetofprinciples.Thefivecoreprinciplesare:

1.Reachingbottomlineprofitabilitygoals

2.Reachingrevenuegrowthgoals

3.Deliveringexcellentconsultingthatleadstoadditionalconsultingworkandadvancestheirmethodologies

4.Growingtheintellectualpropertyofthefirmthroughbothprofessionaldevelopmentandrecruitment

5.Makingacontributiontothefieldofstrategyandinnovation

ATotalApproachtoRewards

Withinthiscontext,IdeaScopehasdevelopedandappliedatotalrewardsconcepttotheorganization.Itiscomposedofthreeelements:

1.Basepay.Each"IdeaScoper"hasasalarythatissufficientlycompetitivewiththemarkettoattractandretaindesiredtalent.Thepaylevelsreflectthegeneralrole
withinthefirm,butshouldnotfostercomplacency.Basepayprovidesstable,economicsecu

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ritytoindividuals.Employeesathigherlevels,however,shouldnotbecomfortableearningonlytheirbasepay.

2.Variablepay.Everyoneinthefirmiseligibleforincentivecompensation.Thepayoutsreflectbothindividualandfirmwideperformance.Thevariablepayprogram
wasfoundedonasimpleprinciple:Everyoneshouldbenefitfromthefinancialsuccessofthefirminproportiontotheircontributions.Althoughitisdescribedinmore
detailbelow,theessentialdesignprovidesapoolbasedoncompanywideprofitability,witharequirementthatrevenuegrowthgoalsneedtobeachieved,andthenthe
payoutisbasedoneachindividual'scontributions.Variablepaycomponentsincreaseathigherlevelsinthefirm(i.e.,lowerlevels,lessvariabilityhigherlevels,more
variability).

3.Specialcontributions.Therearetwoadditionalnoncompensationrewardsprograms.Thefirstisaspecialspotdollarawardforwritingarticles,gettinganarticle
published,deliveringaconferencespeech,orbringinginanewemployee.ThesecondisaprogramcalledIdeaScopeDollars,wherebyindividualscannominateother
employeesforgoingbeyondthenormalcallofdutyand/orcontributingdirectlytooneofthefivecoreprinciples.IndividualsareselectedmonthlyandgivenIdeaScope
Dollars.Thesedollarsareexchangeableforitemsthatimproveone'squalityoflife.Theseitemsincludeweekendtripswithone'sfamily,dinnernightsout,gift
certificatesforshoppingsprees,massages,scubagear,cameraequipment,VCRs,andotheritemsthatareofspecialvaluetotheindividual.

Thesignificanceoftheseprogramsishowtheyworkincombination.Eachonehasanimpactonindividuals,butworkingasatotalsystemtheyreinforceasetof
culturalvaluesthatmakeIdeaScopeauniqueenvironment.

HowtheProgramsWorkinCombination

Thevariablecompensationprogramhasasignificantimpactonindividuals.Onamonthlybasis,acertainpercentage(rangingfrom25%to+30%)ofthefirm'stotal
salariesiscontributedtoapoolbasedonaslidingscaleoftheprofitmarginofthecompany

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(rangingfrom40%to+40%).Then,ifthecompanyachievesitsrevenuegrowthgoalsforthequarter,apayoutismade.Ifapayoutisnotmadeforagivenquarter,
thenthepoolgetscarriedforward.Ifanegativebalanceexists,itiscarriedforwarduntilapositivebalanceeliminatesit.Iftherevenuegoalsareexceeded,thepool
maybeincreased.Individualshaveacertainpercentageoftheirbasepayasatargetincentiveinthepoolwhethertheyreceivethisamountdependsontheirindividual
contribution.

Individualperformanceisjudgedbytwomeasures:thedeliveryofservicesandprovidingconsultingexcellence.Fordelivery,x%inpersonalconsultingrevenues(i.e.,
daysbilledatone'spersonalrate)isaddedtogetherforeachconsultanttodeterminea"consultingdaydelivery"score.Thepercentthatindividualscontributetothis
pooldeterminestheirshareofthebonuspool.Adjustmentsaremadeforthosewhoseworkrequiresextensive,nonbillabletraveltimeandforthoseinsupportrolesto
theconsultingproject.

Fortheexcellenceinconsultingmeasure,IdeaScopeusesateamincentiveprogram.Thisisdeterminedbyseveralfactors:thequalityoftheproject(basedonthe
averageclientsurveyfeedbackscore),theprofitabilityoftheproject,andthecomplexityoftheteamassignment(ascomparedtostandardconsultingengagements).
First,aconsultingprojectisgivenaclientfeedbackscore.Thisscoreisthenmodifiedbytheprofitabilityoftheproject(0.60to1.15)andbythecomplexityofthe
assignment(0.85to1.25).Theresultingteamscoreisthengiventoeachmemberoftheteam.Anindividualwilllikelyserveonmanycasesduringtheyearandwill
thenearnpointsforeachengagement.Theaveragetotalwilldetermineone'soverallperformanceratingforallocatinganannualbonus.

Thecaseteamdirector(orprojectmanager)willearnascoreinasimilarfashionexceptthefactorsincludeclientfeedback,caseprofitability,andthecaseteam
evaluationofthedirector(toincludesuchperformancecriteriaasavailability,abilitytofosterappliedcreativity,informationsharing,goalachievement,mentoring,and
encouragementofteamwork).

TheexecutivesofIdeaScopeshareinthisperformanceorientedsetofrewardsystemsaswell.Everyindividualatthedirectorlevelandabovehaspersonalgoalsthat
linkdirectlybacktothefivecriticalsuccessfactorsoftheorganization.Theyhavea

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directimpactonthedecisions,resourceallocations,andcoachingofstaffmembers,whichcanbeattributedtothesefactors.Inthisway,therewardsystemisdirectly
alignedwiththeelementsneededforIdeaScope'scontinuedgrowthanddevelopment.

Thecompanyiscurrentlydevelopinganemployeestockownershipprogramforallstaffandanincentivestockoptionforkeyleaders.Thiswillcontinuetosupportthe
principlesofcommitmenttotheorganizationandcreateanenvironmentthatexcelsforitsclientsanditsownfuture.

InprofessionalservicefirmssuchasIdeaScope,thecustomerhasasignificantimpactoneveryone.Ifclientsarenothighlysatisfied,thefirm'sreputationwillnotgrow.
Ifthereputationdoesnotexceedthatofcompetitors,thefirmwillnotbeabletoobtainnewbusiness.Thesatisfactionoftheclientsisoftendependentontheimpactof
theinterventionontheorganizationandtheabilityoftheclienttostrengthentheorganization'smarketposition.Iftheclientorganizationcanimproveitscompetitiveness
becauseoftheconsultingfirm'sassistance,bothorganizationsbenefit.Consequently,therecanbeanintertwinedrelationshipbetweentheclientandtheconsultingfirm,
wheretheirfuturesareinexorablylinked.

UsingtheGuidingFramework

TherewardprogramsthatIdeaScopehasdevelopedandimplementedseektofoster,inasdirectamanneraspossible,thefivecorephilosophies.Theprogramshave
becomeasolidframeworkforguidingtheactionsofallstaffmembersandprovidingthemwithrecognitionandrewardsinrelationtotheirdirectactions.

InnovationiskeytoIdeaScope'sfuture.Thecompanycontinuestodevelopopportunitiesandservicesthatenableitsclientstocommandacompetitiveadvantage.The
programsoutlinedabovearebuilttoprovidestaffmemberswithrewardsthatreflectgrowthofthebusiness,acultureofinnovativethinkinganddevelopment,andthe
satisfactionofclients.Bysodoing,everyoneachievesdesiredresults.

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CreatingaShareintheSuccessatCiscoSystems,Inc.

Growth,thecommoncharacteristicofsuccessfulhightechnologycompanies,isnotachievedbymerelyhavinga''hot''product.Thecommerciallandscapeisstrewn
withcompaniesthathadanattractiveidea,developedthemarket,andfellpreytocompetitorsortheirownresistancetochange.Sustainedgrowthisacontinuous
effortofstrategicactions.Onecompany,CiscoSystems,Inc.,hasbeenabletoachieveremarkablegrowthandmaintainitsleadershipintheemergingmarketof
Internetnetworking.

Ciscowasfoundedin1984whenLeonardBosackdevelopedatechnologytolinkhiscomputerlabsystemwithhiswife'ssystematthegraduatebusinessschool.
Theybelievedtherecouldbeamarketfornetworkingsystems.Withmoneyfromtheirmortgageandafewfriends,theydevelopedanetworkingrouterproductin
theirgarage.

Intheearlyyearstheydependedonwordofmouthformarketingandpersonalrelationshipsforgeneratingcustomers.Insubsequentyears,theyusedventurecapital
supportandacquiredprofessionalmanagementtalent.Theirsalesexplodedfrom$1.5millionin1987,to$28millionin1989,to$69millionin1990and$6.4billionin
1997.Ciscoisnowtheleadingcompanyinthecomputernetworkingmarket,thethirdlargestcompanyontheNASDAQandamongthetop40companiesinthe
world.ItsgrowthiscontinuingtoriseasthemarketforInternetandnetworkingproductsexpands.

Successlikethiscreatesenormouschallenges.Maintainingaclearfocus,sustainingastrongstreamofnewproducts,andmanagingthefinancialcashflowneededfor
operationsandinvestmentsarebutafewofthechallengesCiscohasfaced.AttractingandretainingpeopleisalsoacriticalissueCisco'semployeepopulationhas
grownfrom254in1990tomorethan13,000in1998.Productofferingshavebroadenedfromnetworkingrouterstoanextensivelineofintegratedsolutions
orientedequipmentandservices.ThesechallengesarecompoundedbythefactthatCiscohasachievedmuchofitsgrowthbybeingoneofthemostaggressiveand
successfulacquirersofsmallcompanies.Prospectingand

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integratingthesecompanieshavebecomeelementsofeveryone'sjob.Cisco'sabilitytosustainthisgrowthispartofitsoverallbusinessstrategy.

ThisisthecasestudyabouthowCiscohasbeenabletokeeptheorganizationintactandfocusoncorestrategicdriversofsuccess.Otherfirmsinthisindustryhave
attemptedsimilarfeats,butfewhaveaccomplishedwhatCiscohasdone.Thiscompanyhascreatedacommonspiritandcommitmenttoanorganizationwithaclear
purpose,andprovidedaprocesswherebypeopleshareintheirsuccess.Ithasbecomeagreatcompany.

ABusinessFoundedonGrowth

CiscoSystemsistheworldwideleaderinnetworkingfortheInternetandfororganizations.Itprovidessolutionsthatconnectcomputingdevicesandpeople,allowing
informationtobetransferredwithoutregardtotime,place,oroperatingenvironment.Itsmissionissimple:tochangethewaypeoplework,play,live,andlearn.With
theprevalenceofcomputerconnectednetworksemerginginalmosteveryorganizationprivateorpublic,government,oreducationalandthetransformationof
communicationtechnologyintothehome,thismissionisnotsofarfetched.Infact,allthesenetworksofcomputersrequiretechnologytomanagethesignalsand
transferofdatatheproductsofCiscoSystems.

Atthispoint80%ofInternettransactionsflowthroughCisco'sproducts.Ciscofocusesonofferingsolutionservicestocompaniesseekingnetworkingcapabilities.It
pridesitselfonbeingtheleadingexampleoftheglobalnetworkbusiness.Byusingnetworkedapplications,theInternet,anditsownapplications,Ciscohassaved
hundredsofmillionsofdollarsonoperatingcostswhileimprovingcustomerinterfaceandsatisfaction.

SuccessfulAcquisitionsasaKeytoGrowth

Thereisperhapsnoothercompanythathassosuccessfullycapitalizedontheconsolidationofthenetworkingindustry.Inthelate1980sand1990s,thenetwork
industrygrewrapidlythroughstart

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upandnewventures.Then,likeotherhypergrowthindustries,consolidationsstartedoccurringasalliancesandmergersenhancedanorganization'sabilitytocompete.
Cisco'saggressiveacquisitionprogrambeganin1993withtheexchangeofabout$95millioninstockforCrescendoCommunications,anotherCaliforniabased
networkingservicescompany.In1994itboughtKalpana,theleadingmakerofEthernetswitches.CiscostrengtheneditspositionintheATM(asynchronoustransfer
mode)switchingmarketwhenitboughtLightStreamandStrataCom.ThecompanyalsoformedallianceswithHewlettPackard,Dell,andUSWesttoofferan
integratedsetofproductstothegrowingnetworkingmarket.Overthenextfewyears,CiscoacquiredArdentCommunications,GlobalInternetSoftwareGroup,and
PreceptSoftwaretostrengthenitssuiteofsoftwareproductstosupportthecomponentsandsystemssolutions.

Ciscohasusedtheseacquisitionstopositionitselfforthefuturedirectionsofthismarket.Ratherthanrelyingprimarilyoninternalresearchanddevelopment,Ciscohas
usedtheacquisitionstointegratepromisingnewtechnologiesintoitsmarketofferings.Thishasenabledittopenetratenewmarketsegmentsandprovideahighly
attractivesetofservicestothemarket.

Althoughmostorganizationalresearchstudiesindicatethatmergersseldomproducedesiredresults,Ciscohasbeenabletocapitalizeontheintegrationofthenew
companies.Itskeytosuccessistominimizethecontrolsorprocessesitimposesonthesenewcompaniesandtoinvestintheirdevelopmentandexpansion.TheCisco
culturehasbeenhighlyadaptiveandattractivetotheseneworganizationsandtheirpeople.

BecauseacquisitionshavebeensoremarkablysuccessfultoCisco,theorganizationhascreatedaculturewherepeoplearecontinually"onthelookout"forattractive
partners.Frequentlypeopleinavarietyofroles,frommarketing,manufacturing,advanceddevelopment,andhumanresources,willinvestigatenewcompaniesas
potentialpartnersandrecommendsomeofthemtoCiscoexecutives.Insomecasesthese"prospects"formallianceswithCisco,whichleadstoatrialarrangement.If
thisearlystagerelationshipissuccessfulforbothparties,thentheypursueformalizingtheownershipchange.Thisoftenhasapositiveeffectonthenewacquisition
candidateandmakesCiscoanattractiveacquisitionpart

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nerformanyfirmsinthisindustry.ParticipationinthesignificantgrowthofCiscostockvaluehasprovidedanadditionalrewardformembersoftheacquired
organizationaswell.

UtilizingRewardstoSupportCiscoValues

Ciscoapproachesthechallengeofmanaginggrowthandintegrationofnewcompaniesinadeliberatemanner.Ithasestablishedaculturethatservesasanorganizing
frameworkforadaptive,flexiblemanagementsystemsandprocesses.Thenitusescashincentivestorewardcompanyperformanceandindividualcontributions.Ituses
stockoptionstogivepeopleadirect,meaningfulstakeinthelongtermsuccessofthecompany.Thecultureofthefirmpromotesthreekeythemesinallitsactivities:

1.Focusonthecustomer.Listen,respond,andsolvetheproblemsormeettheneedsofthecustomers.

2.Teamwork.Supportandcollaboratewithothersinthecompanyandwithstrategicpartnerstoprovidethebestproductsandservicespossible.

3.Achievestretchgoals.Sethighstandardsforperformance,neverbesatisfiedwithsecondbest,andgetresultsthatmakearealdifference.

Thesethreeattributeshaveservedasanimportantorganizingframeofreferenceforthecompany'sbusinessintegration,performancemanagement,andreward
systems.Theyhavebecomecomponentsintheassessmentfornewacquisitions.Executives,managers,andemployeestakethesethreeculturalvaluesveryseriously
andmakethingshappenthatsupportthem.

Ciscousestwoprincipalrewardsystemsasdriversofperformance.Eachprogramworkstoprovideameaningfulstakeinthesuccessoftheorganization.Oneisa
cashincentiveprogramandtheotheristhestockoptionsprogram.

EveryCiscoemployeeparticipatesinacashincentiveprogram.Thereareafewdifferentprogramsdependingonone'sroleinthecompany.Essentially,eachprogram
isanannualincentive,buttherearemidyearorquarterlypayouts.Theperformancemea

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suresaretiedtotwokeyvariablescompanyrevenueandprofitabilityandindividualperformancecontributions.Attheendoftheperformanceperiod,managers
assesstheperformanceofindividualsandmakepayoutdecisions.Seniormanagersreviewthesedecisionstoensuretheassessmentsarefairandthetopperformers
areeffectivelyrewarded.Theawardismadeinrelationtoatargetpayoutlevelofindividualsbasedontheirrolewithinthecompany.Thepayoutopportunitiesare
heavilyleveragedandhavebeenthesourceforsignificantpayouts.

Oneissuethatoftenemergeswiththeincentiveplanisthedesiretohaveitfocusedmoreattheoperatingunitlevelratherthanthetotalcompany.JohnChambers,
chiefexecutiveofficer,stronglyfeelsthatatotalcompanyfocusiscriticaltoreinforcingCisco'scommonculture.Hebelievesandtheresultshavedemonstrated
strongsupportforthispositionthatthepeopleneedtoseethatCiscoistheirprimaryunitforcontributionratherthanbusinessunitsorfunctionalareas.Thisenables
executivestomovetalentaroundtheorganizationwithoutrestraintsontheincentivepayopportunity.Italsoenablespeopletosharedirectlyinthesuccessofthe
company.

ThesecondrewardsystemCiscousesisthestockoptionsprogram.Eachyearthecompanyprovides4.75%ofoutstandingsharesinstockoptionstoemployees.
Individualsreceivetheseoptionsbasedonseveralkeyperformancefactors.First,anindividualiseligibletoreceivestockoptionsthatcorrespondtotheoveralllevel
withinthecorporation.Managersaregivenapoolofstockoptionscommensuratewiththetotalnumberofpeopleandeligiblenumberofoptions.Thenthenumberof
optionsanindividualmayreceiverangesaroundatargetlevelforthepositionandmaygoupto200%oftarget.Managersareabletoallocatethesharesas
appropriatefortheirarea,aslongasthetotalnumberdoesnotexceedallocatednumberofoptions.Approximately10%ofthepeoplearedesignatednottoreceive
anyoptionsforagivenyear.Thisencouragesmanagerstomakeimportantassessmentsofeachoftheirpeople.Thetaskistakenveryseriously.

Thenumberofoptionsanindividualreceivesisbasedonseveralfactors.First,thetargetnumberofoptionsreflectstherelativevalueandroleofthejobinthe
organization.Therangefrom0%to200%isthesameforalllevels.Next,thenumberofoptionsis

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basedonthecontributionsoftheindividualtothesuccessoftheorganizationandonthegrowthpotentialoftheindividual.Specificannualperformanceishandled
throughthecashincentiveprogramsostockoptionsreflectthecontributionandgrowthpotential.

Third,managersconsolidatetherecommendedsharesandreviewthemwiththeirvicepresident.Thevicepresidentreviewstherecommendations,makesadjustments
asneeded,andfinalizestheawardallocations.Seniorvicepresidentsreviewtheallocationsandcanmakeadditionalallocationstotopperformers.Thehuman
resourcemanagersworkwitheachleveloftheorganizationinthisdecisionprocessandensurethatthedecisionsarebasedonfair,objective,andperformance
orientedcriteria.Ciscohasautomatedthisprocesssothatall13,000peoplecanbereviewedandawardedstockoptionswithinninedays.

TheserewardsystemsgiveeachorganizationwithinCiscosignificantflexibilitytoencourageandrewardhighperformance.AsJohnRadford,directoroforganizational
effectiveness,indicates,"Thisworkstosendtherightmessagestopeopleandprovidethemwithameaningfulstakeinthesuccessofthecompany.Peoplefeelandact
likeowners,becausetheyare."

TheImpactofRewards

Cisco'sgrowthandsuccessinthemarketplaceisunparalleled.TherewardsystemshavebeenkeytoCisco'sabilitytoacquireandintegratenewbusinesses,retain
criticaltalent,andreinforceactionsthatareconsistentwiththecorporation'sstrategyandvalues.Thisalignmenthasbeencriticaltoitssuccess.

Theimpactofthestockoptionprogramhasbeenquitesignificantfromseveralpointsofview.WhilemostofCisco'sstockiscurrentlyownedbyinstitutions(66%),
thenumberofsharesgoingtoemployeesofthecompanyhasbeensignificant.Thishashelpedtocreatethe"onecompany"JohnChambersseekstopromote.
Furthermore,thegrowthinthevalueofthesharestotheindividualhasbeenincredible.ThetableonthenextpageshowsseveralkeygrowthindicatorsofCiscofrom
1993to1997.

Whenacompanyusesstockoptions,itisimportantforpeopletoretaintheoptionsorthestocksothereisadirectrelationto

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FiscalYear Revenues NetIncome Numberof SharePrice(at

(inmillions) (inmillions) Employees FYclose)
1993 $649 $172 1,451 $8.65
1994 1,243 315 2,443 7.00
1995 1,979 421 4,086 18.59
1996 4,096 913 8,782 34.52
1997 6,440 1.049 11,000 53.07

companysuccess.Whereasinotherhighgrowthcompaniesindividualsselltheirstockonceavestingperiodlapses,peopleatCiscoareretainingtheirstock.The
previoustableclearlyindicateswhyreturnoninvestment.Institutionalinvestorsappreciatethehighdegreeofstockretentionbecauseitcreatesaconnectionbetween
employees,managers,andshareholders.Italsodemonstratestheconfidencepeoplehaveinthecompanyanditsleadership.

Finally,theeffectiveuseofcashandequitybasedrewardsystemsthroughoutthecompanyhasenabledCiscotoretainitsmostcriticalemployees.Thesesystems
supporttheotheropportunitiesandchallengesavailabletoemployees.Whereothercompaniesoftenneedtoimplementspecialrecognitionor"goldenhandcuff"
programs,Ciscohasnot.Thestrengthoftheculture,thechallengingopportunities,andtheimpactoftherewardsystemshavebeencreditedwithCisco'sabilityto
retainkeytalent.Ciscoputsitsmoneyandstockintowhatitvalues,andtheresultsspeakforthemselves.

Asinotherindustries,therewillcomeatimewhenthegrowthisnotsustained.Theimpactofstockbasedrewardsmaylessen,andtheaggressiveuseofcash
incentivesmaybemoredifficult.Executivesandhumanresourcesmanagersunderstandthiseventualcondition.However,untilthatcomes,Ciscowillcontinuetofocus
onwhatitdoesbestchangingthewaywework,play,live,andlearn.Theflexibilityoftheorganizationanditsabilitytorespondtochangingconditionswilllikelybea
corecompetencetocontinuethisgrowthandsuccesswellintothefuture.Onepointisclear:Ciscohasthecommitmentofthepeopleinitsorganizationbecausethey
shareinthesuccesstheyhelpcreate.

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4
KeepingaFocusontheCustomer
Customersdefinetheimportanceofworkandthenatureofthetasksinorganizations.Whileothercompanieshavelostsightoftheircustomersandthemarketsthey
serve,thecompaniesinthischapterkeepthecustomers'needsclearlyinfocus.Whethertheircustomersareinternalorexternal,thecustomerorientationhasrenewed
andtransformedtheseorganizations.

Eachoftheseorganizationsintegratesthephilosophyofmeetingcustomerneedswiththeirrewardsystems.Thisencouragescollaborationwithintheorganizationand
keepsthefocusonservingothers.Asaresult,theseorganizationsbecomehighlycompetitiveandattractiveplacestoconductbusiness.

InthischapteryouwillseehowtheRoyalBankFinancialGroup(partoftheRoyalBankofCanada)hasmodifiedabroadbasedprofitsharingprogramintoa
processforintegratingpeoplewiththecorporation'sstrategy.Thestrategyemphasizescustomersandperformance.ColonyCommunicationtransformeditsculture
fromafragmented"utilityminded"companytoahighlycompetitivesetofteams.Itbuiltavarietyofcustomerimpactmeasuresintoitsteamincentiveprogramand
achievedremarkablechange.CopleyPharmaceuticalbuiltacustomerfocusmentalityintoitsbasepayprogram.Toprogresstohighergrades,individualsneedto
demonstratestrongercollaborationandimpactonthecustomer.Starbuckshascreatedanunusualculturethatcloselylinkstheorganizationtothecus

 Page87

tomersitserves.Thesecasestudiesoughttoprovideusefultoolsandstrategiesonhowtoretainacustomerfocussothatpeoplecollaborateandstrivetoperform
better.Inthisway,thecustomerbenefitsandsodothemembersoftheorganization.

QPIandPerformance:BetterWaystoMeasureSuccessatRoyalBankFinancialGroup

Preparingforthetwentyfirstcentury,thefinancialservicesindustryfindsitselfinaperiodofsweepingchange.Banksandotherfinancialservicesprovidersmustadapt
tochangingdemographics,growingcustomerneedsandexpectations,rapidlyevolvingtechnology,theglobalizationandreregulationoffinancialmarkets,and
increasedcompetitionalongsideindustryconsolidation.AsCanada'sleadingprovideroffinancialservices,RoyalBankFinancialGroup(RBFG)hasearned
customers'businessbyanticipatingandmeetingtheirneeds,providingthemwithwhattheywantatacompetitiveprice,aswellasbeingcommittedtodeliveringto
shareholderssuperior,consistentreturnsontheirinvestment.Movingforward,RBFGhasclearlydefinedgoalsandstrategicprioritiestoensurethecontinuedgrowth,
futuresuccess,andenhancementofshareholdervalue(source:RBFG1996AnnualReport.)

AnOverviewofRoyalBankFinancialGroup

RBFGisCanada'sleadingproviderinmostfinancialservicemarkets,withgrowingandprofitableglobaloperationsin36countries.RBFGiscomposedofthreemajor
businesssegments:PersonalandBusinessBanking,WealthManagement,andCorporateandInvestmentBanking.Itprovidesproductsandservicestonearly10
millionconsumerandbusinesscustomersandhasaleadingmarketshareinresidentialmortgages,consumerandbusinessloans,andpersonaldeposits.RBFGisthe
largestmoneymanager,thirdlargestinmutualfunds,andRoyalBankofCanada(RBC)DominionSecuritiesisthelargestandmostprofitablefullserviceinvestment
dealerinCanada.ActionDirect,RBFG'sdis

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countbrokeragearm,isthesecondlargestinCanada,andRBCInsuranceisasignificantproviderofcreditorlifeanddisability,individuallife,andtravelinsurance.
RBFGoperates1,400branches,morethan4,200automatedbankingmachines,morethan570selfserviceaccountupdaters,andsome84,000pointofsale
merchantterminals.Over1.3millioncustomersuseRoyalDirecttelephonebanking,andthecompanyrecentlylaunchedPChomecomputerandInternetbanking.

RBFG'svisionistobeCanada'spremierfinancialservicesprovider,withcloseto58,000committedemployeesworkingasateamtoexceedcustomerand
shareholderexpectations.Thefocusisoncontinuallyimprovingperformanceineachbusinesstoachieveconsistentandsuperiorreturnsforshareholders.Toachieve
this,RBFG'sstrategicprioritiesaretogrowanddiversifyrevenues,improveefficiency,andmaintainaqualityriskprofile.

BackgroundoftheBank

In1989,RoyalBankintroducedtheQualityPerformanceIncentive(QPI)Program,abroadbasedincentiveprogramdesignedtorewardemployeesfortheir
contributionstoRoyalBanksuccess.QPIledthefinancialservicesindustryandwasoneofthefirstprogramsofitstypeinNorthAmerica.Themainobjectivesof
QPIwastofocustheeffortsofallemployeesonthebank'sstrategicbusinessplansandtotangiblyrewardallemployeesfortheirindividualandteamcontributions
towardhelpingtomeetthoseplans.Eachyear,ifthebankmetaplannedleveloffinancialperformance,apooloffundswascreatedtorewardemployees.Thesizeof
theincentivepoolwasdeterminedbythedegreebywhichthebankachieveditsbusinessobjectives.

Thevalueofindividualawardswasbasedonseveralfactors:

Theperformanceofthebankasawhole

Theperformanceofthebusinessorgeographicarea

Theemployees'paylevel,whichdeterminedaQPIopportunityrange(i.e.,theminimumandmaximumamountsthatcouldbeearnedundertheprogram)

Theemployees'contributionsinachievingtheirkeypriorities

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Theprogramhasevolvedovertheyearswithamajorredesignin1996tomeetthechallengesofthechangingworkandbusinessenvironmentsandmaintainleadership
inperformancebasedcompensation.

NatureoftheQPIRedesign

Inthespringof1996,employeefocusgroupswereconductedwithcloseto400employeesacrossRoyalBankFinancialGrouptoshareideas,concerns,and
suggestionsaboutQPI.Inthesegroups,mostemployeessaidtheylikedQPI.Theyfeltitwasaneffectivewayofpayingforperformance.Butemployeesalsoasked:

WereresultsrelativetotheannualbusinessplanthebestwaytodeterminetheamountofQPIavailableforpayment?

CouldtherebemoreconsistencyinthewayindividualQPIawardsweredetermined?

CouldtherebeaclearerlinkbetweenpersonalperformanceandQPI?

CouldQPIearningsbecomepensionable?

TheredesignofQPItookthesequestionsintoaccount.RBFGrevieweditsownbusinessneedstocreateasetofprinciplesforthenewprogram.Theseprinciples
were:

QPIshouldrewardwhatisgoodforshareholders,customers,andemployees.

QPIshouldbeclearlylinkedtoresultsandreflectindividualcontributiontothoseresults.

QPIshouldbebasedontheemployee'sabilitytoinfluenceresults.

Withtheseprinciplesinmind,QPIwasredesignedtoachieveoneclearobjective:tofocusalleffortsonmeetingbusinessprioritiesandbeatingthecompetition.

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NewMeasuresofSuccess

TheoriginalQPIusedonlyonemeasurereturnonequity(ROE)todeterminethepoolofQPIfundsavailableforpayout.ThenewQPIaddsasecondfinancial
measurerevenuegrowthinlinewithRBFG'sstrategicpriorities.However,anothersetofmeasureswasaddedRBFGperformanceagainstthecompetition.
BecausethefinancialservicesindustryinCanadaoperatesinahighlycompetitiveenvironment,itisnolongerpracticaltomeasuresuccessbyinternalstandardsonly.It
becameapparentduringtheredesignprocessthatperformanceagainstthecompetitionintermsoffinancials,customersatisfaction,andemployeecommitmentwould
giveabalancedscorecardaddinguptoincreasedvalueforshareholders,customers,andemployees.

WhyMeasureEmployeeCommitment,CustomerSatisfaction,andFinancialPerformance?

1.Studiesrevealhighlevelsofemployeecommitmenttranslatedirectlyintoimprovedcustomerserviceandsatisfaction.

2.Customerswhoareverysatisfieddomorebusinessandalsohelpattractothercustomers.

3.Bydoingmorebusinesswithexistingcustomersandattractingnewcustomers,financialperformancecanimprove.

4.Betterfinancialperformanceenablescompaniestoreinvestinnewtechnologies,newservices,newjobs,morelearningopportunities,andabetterwork
environment.

5.Studiesalsoshowthatemployeeswhohavethetoolstoprovidecustomerswiththebestpossibleservicesandwhofeelgoodaboutwheretheyworkhavehigh
levelsofemployeecommitment.

Everystepinthecyclereinforcesthenext.Ifmanagedwell,thecombinedpowerofhighemployeecommitmenttranslatesdirectlyintoimprovedcustomersatisfaction
leadingtobetterfinancialresultsandimprovedshareholdervalue.

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HowtheQPIProgramWorks

TheredesignedQPIprogramhastwomajorcomponents:

TotalQPIforallofRBFGisdeterminedbyperformancerelativetoannualbusinessplansandagainstthecompetition.

ThesizeofindividualQPIawardsisdeterminedbypersonalperformancerelativetothekeygoalsofthebusinessunit.

PerformanceAgainsttheAnnualBusinessPlan

ThisisthefoundationoftheQPImodel.Atthebeginningofeachfiscalyear,RBFGsetsgoalsforbothreturnonequityandrevenuegrowth.Everyquarter,aQPI
scorecardisdistributedtoeachemployeeasapaystatementinsertupdatingthemonhowRBFGisdoingagainstthesemeasures.ROEandrevenuegrowth
performancesareaddedtogethertodeterminehowwellRBFGperformedrelativetoplan.Here'showthescorecardiscalculated.

PerformanceAgainsttheCompetition

IfRoyalBankFinancialGroupistosucceed,itmustkeepacloseeyeonthecompetition.WhenconsumersdealwithRBFG,theyhaveexpectationsofqualitybased
ontheexperiencethey'vehadelsewhere.Theydon'tjustmakecomparisonswiththeotherbankdownthestreet.Theymakecomparisonswiththehighstandardsthey
findelsewhereinthemarketplace.CustomersmeasureRBFGagainstthecompetition,soRBFGmustmakethesamecomparison.Thosemeasurementsareinthree
areas:financials,customersatisfaction,andemployeecommitment.

Financials: RBFG'srelativeperformanceintermsofreturnon
equityandrevenuegrowth

(tablecontinuedonnextpage)

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(tablecontinuedfrompreviouspage)

comparedtothefiveothermajorCanadianbanks

Customer RBFG'srelativelevelofcustomersatisfaction
satisfaction: measuredbyindependentsurveyswithothermajor
Canadianfinancialinstitutions,includingcredit
unions
Employee RBFG'srelativelevelofemployeecommitmentas
commitment: measuredbyanindependentsurveywithother
highperformingcompaniesacrossNorthAmerica

Withtheintroductionofthenewcompetitivemeasures,QPIcanbeincreasedbyasmuchas25%throughanycombinationofsuperiororimprovedperformanceon
thethreecompetitivemeasures.SuperiorperformanceisdefinedasplacinginthetopthirdofthecompaniesRBFGmeasuresitselfagainst.Improvedperformanceis
definedasamovefrombelowaveragetoaverageorfromaveragetosuperioragainstthesecompanies.

DefiningEmployeeCommitment

Employeecommitmentismorethanemployeesatisfaction.Employeecommitmentmeasureshowcapableemployeesfeeltheyareabletodotheirjob,howwell
managedtheyfeeltheyare,andhowsatisfiedtheyareintheirwork.Ifanemployeehasthetoolsandtrainingtoservecustomerswell,customersatisfactionwill
increaseandcustomervalueisbuilt.Itallfitstogether:Employeecommitmentleadstocustomersatisfaction,whichleadstofinancialresults...abalancedscorecard.

TheFullPicture

Takentogether,performancerelativetobusinessplantargetsandperformanceagainstthecompetitionwilldetermineRBFGperformanceforcalculatingQPI.The
followingisanillustrationofhowQPIwouldincreaseifRBFGmeetsitsbusinessplansandleadsthecompetitioninallthreecompetitivemeasures:RBFG
performancewouldbe125%.

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IndividualQPIAwards

IndividualQPIawardsdependonRBFGperformance,theemployee'scompensationband,andpersonalperformance.Itiscalculatedusingtheformuladetailedin
Figure41.

Figure41.
IndividualQPIcalculation.

TheamountoftheQPIawardisdirectlylinkedtopersonalperformanceinmeetingindividualgoalsestablishedatthebeginningofthefiscalyear.Employeeswillknow
exactlyhowmuchQPIcanbeearnedforsatisfactoryperformanceintheircompensationband,ifRBFGmeetsplan.RBFG'sfinancialperformanceisupdatedand
communicatedtoemployeesquarterly.Likewise,employeesandtheirmanagersaretoreviewpersonalperformancequarterly.Byinsertingtheappropriatenumbersin
thisformula,employeescancalculatetheirQPIawardatanytimeduringtheyear.Thiswasamajorimprovementoverthepreviousprogramsinceemployeesnow
haveadirectlineofsightbetweentheirpersonalperformanceandtheamounttheycanearnunderQPI.

Forexample,apersonemployedasacustomerservicerepresentativeachievesaPersonalPerformanceof130%.Here'swhattheQPIformulawouldlooklike:

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MakingQPIPensionable

Withvariablepaybecomingagrowingelementoftotalcompensation,RBFGrecognizedtheneedtoincludeQPIasapartofthecalculationforthenoncontributory
portionofemployees'pension.Previously,onlybasesalarywasrecognizedforpensionpurposes.NowQPIisaddedtobasesalarytodeterminenoncontributory
pensionableearnings.Allpensionplanmembersautomaticallyreceivenoncontributorypensionwithnocontributionsrequired,soallmembersparticipatinginQPI
benefit.RBFGwasthefirstCanadianbanktoprovidesuchinnovativecompensationpoliciesforemployees.

Communicate,Communicate,Communicate

Don'tsayitonce,sayitagain!Theimportanceofcommunicationcannotbeoverlooked,especiallyinthisageofinformation.RBFGmadesureallemployeesknew
andunderstoodQPIbycommunicatinginformationaboutitinvariousways.AtthelaunchoftherevisedQPI,allmanagerswereprovidedwithbriefingkits
announcingQPI.Variousmaterialswereincludedwiththekits:fullprogramexplanations,staffmeetingagendas,overheads,deliverynotes,questionsandanswers.
Likewise,acommunicationpackageforeachemployeewasdistributedthatconsistedofaQPIprogramoverview,examplesofthenewprograminaction,questions
andanswers,andaquickreferencecardshowingtheQPIformula.Eachquarter,employeeswereprovidedwithaQPIscorecardthatreportedRBFGperformance
againstplanandagainstthecompetition.Justpriortotheyearendannouncementoffinancialresults,aspecialvideowasdistributedtoallunitsthatagainprovideda
completeoverviewofQPI.AspecialsiteonRBFG'sintranetwasopeneddedicatedtoQPI,anditincludesaspecialfeatureofaQPIcalculator.Also,thereisa
telephonelinesetupsoemployeescancallandhearabouttheprogram.Thecommunicationpaidoff:Moreemployeeswerecompletelyawareofandcomfortable
withtheprogram.

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RBFGPerformanceDeliversExtraordinaryQPI

Hardwork,supportedbyfavorableeconomicconditions,producedsignificantfinancialperformancein1997,resultinginarecordbreakingpayoutundertheQPI
program.RBFGplacedinthetopthirdofthecompaniesinreturnonequityandemployeecommitment.Revenuegrowthwasthehighestever,andcustomer
satisfactionscoresremainedconstantcomparedtobenchmarksestablishedinpreviousyears.In1997,RBFGperformanceforcalculatingQPIwas152%.These
powerfulresultsshowcommitmenttocreatingvalueforshareholdersandcustomersandprovidesignificantrewardstoRBFGemployeeswhoarekeytosuccess.

LessonsLearned

WithanincreasedawarenessoftheQPIprogram,employeeswerekeenonlearningexactlywhatRBFG'sfinancialperformancewaseachquarter,aswellas
measuringtheirpersonalperformance.AssoonasquarterlyresultswereknownandtheRBFGperformancefactorcommunicated,employeesbusilycalculatedQPI.
But,moreimportant,employeeswerebeginningtotakeashareholderperspectiveandfocusingonopportunitiestogrowqualitybusiness,attractingnewcustomers
andaddingnewprofitablebusiness.Improvingthelineofsightforemployeeswasoneofthemajorreasonsfortheprogramredesign,andtheactivitythroughout1997
showedQPIachieveditsgoal.

QPIisevolving,andfurtherexperiencewillimprovetheprogram.Individualgoalsettingisoneareathatisundergoingreview.AlthoughQPIremovedmostofthe
subjectivity,employeesstillfeelsomeremainswhenperformanceisassessedinqualitativeterms.Bettertoolsarebeingdevelopedtoassistmanagersinsettinggoals
andmeasuringperformanceagainstthem.

MovingForward

New,excitingchallengesandopportunitiesareinstoreforRBFG.ThebusinessenvironmentinCanadaremainsverycompetitive.ThevisionistobeCanada'spremier
financialservicesprovider,

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withcommittedpeopleworkingasateamtocreatecustomerandshareholdervalue.Thefocusisonimprovingperformancetoachieveconsistentandsuperiorreturns
forshareholders.Theprioritiesaretogrowanddiversifyrevenues,improveefficiency,maintainahighqualityriskprofile,effectivelymanagethebalancesheetand
capital,andprovideopportunitiesforcapable,committedemployees.TheQualityPerformanceIncentiveprogramisoneofthetoolsusedtomaintainabalanced
scorecardforshareholders,customers,andemployeesthatisimperativetoRBFGsuccess.

TeamIncentivestoIncreaseCustomerLoyaltyatColonyCommunications,Inc.

Thechangesinthetelecommunicationsandinformationindustryarereshapingthemarketplaceforcabletelevisionoperatingcompanies.Whiletheseorganizations
wereonceprotectedfromcompetitionbymaintainingfranchisesinlocalcommunities,developmentsininformationtechnologyfundamentallychangedhowthese
companiesviewtheirbusinessesandretaintheirleadership.Akeyfactortotheirsuccesswillbetheloyaltytheymaintainwiththeircustomers.

CompanyBackground

ColonyCommunications,Inc.,wasalargecabletelevisioncompanythatwasownedbyamajorpublishingcompany.Itoperated27localcablesystemsthroughout
theUnitedStatesandhadapproximately1,500employees.Ascompetitionincreasedfromsatellitebroadcastingcompaniesandothernewentrantstothemarket,
Colony'sgrowthprospectswerebeingchallenged.Furthermore,InternetbasedcommunicationprovidedbothasignificantthreatandopportunitytoColonyand
othersinthisindustry.Althoughthethreatstosurvivalwerenotimminent,thecompanyneededtochangeitsculturetobemorecompetitiveandretaincustomers.The
centerpieceofthischangestrategywastoincreasecustomerloyaltysothatwhenacustomerwasofferedotherchoicesfortelevisionservices,theywouldremainwith
ColonyCommunication.

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Thepresidentofthecompany,BruceClark,andmembersofhisseniormanagementteamdecidedthattheircurrentcompensationsystemswereinadequatetosupport
thechangeneededbythecompany.Theyneededarewardsystemthatencouragedindividualstoimprovetheservicesthatweremeaningfultothecustomer,take
actionsthatwouldgrowrevenues,andreducecosts.Theyhadimplementedavarietyofrestructuringandreengineeringefforts,buttoachieveenduringimprovements
theyneededmoreemployeeinvolvement.Theybelievedthattheirsuccessdependedonchangingthecultureoftheorganizationtomakeitmoreresponsiveto
customerneedsandcompetitiveinthemarketplace.Theseniorexecutivegroupdecidedtouseanincentivecompensationtodrivetheneededchange.

DevelopingtheIncentiveProgram

Theincentivecompensationprogramwasdesignedbyagroupofexecutivesandmiddlemanagers.Theymetforaseriesofdaylongsessionsoverfourmonths.An
externalconsultantguidedthemeetings.Whencompleted,theprogramwasentitledSPIRIT,whichstoodforSuperiorPerformanceIncreasesRewardsandImproves
Teamwork.

Tosettheframeworkfortheincentiveplan,thedesignteamaskedseveralcriticalquestions:

WhowereColony'scustomersandwhatdidtheywant?

Whatfactorswerecriticalfortheorganization'ssuccess?

Whatwerethebestmeasuresofsuccess?

Whatactionswereneededbystaffmembersforthesystemtoexcelintheseareas?

Thedesignteamdevelopedallaspectsoftheprogram.Theirfirsttaskwastodeterminethepurposeandapproachoftheprogram.Theydecidedthattheprimaryunit
offocuswouldbethelocaloperatingcompany(orsystem).Theseunitswererelativelyselfcontainedandthelineofsightbetweenactionsandresultswasrelatively
clear.Second,theyagreedthattheprimaryprinciplebehindthiseffortwasthatifthesystemimproveditsperformanceincriticalareas,thecompanywouldsharethe
resultingbenefitswith

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theemployees.Asthecompanybecamemorecompetitiveandprofitable,individualswouldbenefitfinanciallyandpersonally.Consequently,theydecidedtodevelopa
goaloriented,teamincentiveplan.

Theteamnextidentifiedaseriesofperformancemeasures.Thesemeasuresdirectlyreflectedthecustomerfocusedsuccessfactorsandthecompany'sstrategicplan.
Themeasureswere:

Netrevenues(retentionandgrowthinrevenuesfrombasicservices)

Controllableexpensescomparedtobudget(excludespurchasedprogramming,taxes,andrelatedspecialcosts)

Systemreliability(theamountoftimethesystemwasfullyoperational)

Customerservice(thedegreetowhichthesystemexceededFederalCommunicationCommissionrequirements)

Customersatisfaction(thedegreetowhichcustomerswerepleasedwithColonyCommunications'services)

Mostofthemeasuresalreadyexisted.Forexample,thesystemreliabilityreporthadbeendevelopedseveralyearsbefore,anditwasprovidedtoeachsystemona
monthlybasis.However,fewpeopleusedittotakeactionandemployeesweregenerallyunawareofitsexistence.Thecustomersatisfactionmeasurementprocess
neededtobedeveloped,whichhadbeenapriorityforthemarketingdepartment.Thedevelopmentoftheincentiveplanservedasacatalysttousemeasuresor
implementsystemsthathadbeenconsideredimportantforseveralyears.

HowSPIRITWorks

Tolinkthemeasuresintoanincentivesystem,theteamdecidedtouseaperformancematrix.Eachmeasurewouldreceiveaweight,andarangeofperformancegoals
from''threshold''to"target"to"exceptional"wouldbedevelopedforeachmeasure.Atotalof10progressivelevelsofperformancewereidentified.Thematrix,or
scorecard,integratedthemeasuresintoasingleincentiveprogramthatcouldbeappliedtoeachcableoperatingsystem.

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Theperformancewouldthenbebasedonhowthesystemdidagainstitsownscorecard(seeFigure42).

Thepayoutwasdeterminedbasedonthescoreachievedbythesystemusingthescorecard.Allmembersofthesystemreceivedthesamepercentageoftheirsalaryas
apayout,butactualpaymentswoulddifferbecauseofthedifferentsalarylevels.Thepayoutopportunityrangedfrom2%ofpayto10%oftotalearningsforthe
performanceperiod.Payoutsweremadequarterly.Eachquarterwasaseparateperformanceperiodtherewerenoreservesorholdbacks.Thisfacilitatedthefocus
onimmediateresultsandencouragedindividualstotakeaction.Whilethisdidpresentariskthatpayoutsearlyintheyearwouldnotbesupportedbyoverallannual
results,theconsideredopinionwasthattheimmediacyofthepayoutwasmoreimportantthantheriskofoverpayment.Theprogramincludedeveryoneineachsystem
exceptforthegeneralmanagerandadsalesrepresentativesoncommissions.Thegeneralmanagerparticipatedinthecorporateexecutiveincentiveprogramandthe
measuresforthisprogramwereadjustedtocreatealignmentbetweenthecorporateandthesystem'smeasures.Corporatestaffmemberswhodidnotparticipatein
theexecutivepayplanwereprovidedincentivesbasedonthecumulativeresultsoftheincentiveplansforallsystemsforwhichtheyhadresponsibility.

Aspecialconsiderationinthestrategicplanandthedesignoftheplanwastoencouragecommunityinvolvementbyeachsystem.Whilepeopleweretoldtobecome
involvedintheirlocalcommunities,thiswasoftenseenasamarketingormanagementresponsibility.Yetmarketresearchclearlydemonstratedthatifthesystemhada
positiveimageinthecommunity,itwouldhavegreatercustomerloyalty.

Thedesignteamdevelopedaninnovativefeaturetotheincentiveprogram.Thesystemcouldreceive"extrabonus"ifitwashighlyactiveinsomeimportantcommunity
basedprograms.Ifapproved,teammemberswouldreceiveanadditional0.5%ontheirSPIRITpayout,assumingthatachievedatleast80pointsperformance.These
programsneededbothtoincreasethevisibilityandpositivereputationofthecompanywithinthecommunityandinvolvemanymembersofthesystem.Forexample,
involvementinRotaryorlunchclubmeetingsdidnotcountcommunitydrivesforfoodshelters,involvementwithHabitatforHumanity,oractive

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Figure42.
TheSPIRITperformancescorecard.

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supportfortheSpecialOlympicswouldreceivecredit.ThespecialcontributionbonuswasdeterminedbytheseniormanagementofColonybasedonthe
recommendationsofthesystem'sgeneralmanager.

TheImpact

Theprogramhashadanenormousimpactonthecompany,itsculture,anditscompetitiveness.Oftheapproximately27systems,24receivedatleastonepayoutover
sixperformancecycles.Theaveragepayoutwas3.5%ofpay,andtheimprovedfinancialresultshaveexceededthecostofthepayoutsbymorethan6.2to1.In
otherwords,ifthetotalpayoutswere$1million,theorganizationrealized$6.2millioninabovebusinessplanoperatingincome.

Furthermore,SPIRIThelpedthecompanytoachieve:

Asignificantreductionincustomerturnovers,especiallycomparedtoindustrystandards

Fewercustomercomplaintsthanhistoricallyreceived

Lowercostsofoperatingthesystem(e.g.,manybudgetedpositionswerenotfilled,travelcostswerereduced,andsupplycostswerelowered)

Loweremployeeturnoverandashortertimetofillvacancies

Whentheprogramcompleteditssixthcycle,thepresidentandvicepresidentforhumanresourceswantedtounderstandwhycertainsystemsachievedsignificantgains
(andhighpayouts)whileotherswereweakperformers.Aninterestingfindingwasdiscoveredabouttheprogram.

Thereweredistinctdifferencesinthewayhighperformingandlowperformingsystemsmanagedtheteamincentiveprogram.First,inthehighperformingsystems,
eachmanagertooktheoverallsystem'smeasuresandtranslatedthemintosmallteamorindividualmeasuresofperformance.Managerseducatedpeopleonthe
actionstheyneededtotaketoimproveperformanceandrealizeapayout.

Second,thesystemdisplayedtheoverallresultsonaregularbasis.Therewerelargegraphicandcolorfuldisplaysthroughouttheworkareasonthekeyperformance
measures.Thescorecard

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wasdisplayedinhighemployeetrafficareas,andtheinformationwaskeptcurrent.Manyworkteamsdisplayedtheirowndataaswell,eventhoughtheirpayoutwas
basedontheoverallsystem'sperformance.

Third,asdatacameinfrommarketing(customersatisfaction),finance(revenuesandexpenses),andengineering(reliability),employeesandmanagerscombedthrough
thedatatogethertounderstanditsmeaning.Theyusedthedatatocreateopportunitiesforgreateremployeeinvolvementandtodevelopcorrectiveactionplans.
Individualsandteamsthenbecamefocusedonimplementingchangeswithlittleresistance.Therewasalsoabetterunderstandingofthedataandanyinaccuratedata
wascorrected.

Fourth,asindividualsorgroupsbeganimprovingtheprocessandachievingbetterresults,theyreceivedimmediaterecognitionbybothmanagersandpeers.People
werefrequentlyrecognizedinmeetingsindepartmentsandsystemwidesessions.Finally,whenthechecksarrived,thepeopleinthesystemcelebratedtheir
achievementsasatotalgroup.Theywererecognizedaswinners,theyfeltlikewinners,andtheywere.Theymadechangesinworkstructures,increasedtrainingand
communication,andfoundwaystoimproveperformancewellbeyondthetargetlevelofexpectation.Noneoftheseactionsoccurredinthelowperformingsystems.

Inthiscompany,therewerewinnersallaround.Thecustomersreceivedbetterandmoreresponsiveservices,wellabovethestandardssetintheindustry.The
organizationgainedfinanciallythroughreducedcosts,increasedrevenues,andimprovedcustomerloyalty.Itbecameastrongercompetitor.Theemployeeswere
winnersbecausetheyearnedmoremoneyandreceivedgreaterrecognitionfortheircontributions.Contributionsandperformancewerehighlyvaluedbyboth
managersandpeers.

ThereisanepiloguetotheColonystory:Thecompanyhasbeensoldtoalargercabletelevisioncompany,andseveraloftheSPIRITteamincentiveprogramsremain
ineffect.AlthoughColonynolongerexistsasanindependentcompany,manyofthepeoplewhoweredesignersorparticipantshavelearnedhowaprogramofthis
naturecanimpactbehaviors,andtheyhaveappliedthisexperiencetotheirnewendeavors.TheSPIRITisalive.

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EstablishingtheValueofaJobatCopleyPharmaceutical,Inc.

Whenanorganizationtransitionsintoaprofessionallymanagedorganization,doesitneedtobecomeabureaucracy?ThiswasoneofthecentralissuesatCopley
Pharmaceutical,Inc.,whenitwasconsideringhowtodesignacompensationsystem.Furthermore,itwasconcernedwithhowtoretainitsentrepreneurialspiritinthe
presenceofgrowthandcontinuedregulatoryvigor.Finally,itwantedtointegratetheconceptofcustomerrelationshipsineveryaspectoftheorganization,evenwhile
managerialcontrolswerekeytoitssuccess.

Theseweretheparadoxesfacingseniormanagers.Sinceacompensationprogramclearlysendsmessagestoeveryemployeeaboutwhatisvalued,theywantedto
establishasetofspecificationsthatreflectedthevaluesofthecompany.Bysodoing,thecompanycouldgrowanddevelopprofessionalism,retainitsdesiredculture,
andachievedesiredmarketleadership.

CompanyBackground

CopleyPharmaceuticalwasstartedin1972byJaneHirsh,apharmacistinamajorBostonhealthcareorganization.Thecompanydevelops,manufactures,markets,
anddistributesawiderangeofgenericpharmaceuticalproducts.Theseproductsarebothprescriptionandoverthecounterdrugsandcomeinavarietyofforms,
suchastablets,solutions,creams,ointments,andpowders.Thecompanyiscurrentlyowned51%bytheHoechstCorporation.Copleyendedits1997fiscalyearwith
netsalesof$121millionandapproximately400employeeslocatedprimarilyinMassachusetts.

Genericpharmaceuticalsaleshaveincreaseddramaticallyoverthelastseveralyears.Thisisdueinparttotheincreasingroleofpharmaceuticalsinthetreatmentand
managementofdisease,aswellastheuseoftherapeuticequivalentsforbrandnamedrugs.Genericdrugcoststendtobesignificantlylower,whichisconsistentwith
thecurrentpressurestocontainhealthcarecosts.Thismarketcontinuestochangeandbecomereshapedbymany

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forcesthehealthcareproviderindustry,thechemicalandpharmaceuticalindustry,thebiotechindustry,andgovernmentregulations.Remainingcompetitiveinthis
industryrequiresconstantvigilance.

Copleywasoneofmanynewentrantstotheemergingmarketofgenericdrugs.Sincethattimetherehavebeensignificantconcernsbymanyconsumersandregulators
abouttheefficacyofgenericdrugs.Whiletheywereclearlylowerincost,didtheyprovidethesamehighqualityimpactonthepatientasbrandnamedrugs?
Experiencehasshownthattheseproductsareofgreatvalueandachievebothclinicalandcostobjectives.

Copleyhasalwaysbeenanorganizationthatishighlyresponsivetothemarketsituations.Furthermore,ithasmaintainedthehighestpossiblestandardsofquality
despitethemarket'scostcompetitivenature.ThoughtherehavebeenchallengingtimesforCopley,itcontinuestobeamajorplayerinthegenericpharmaceutical
market.

Thesemarketconditions,aswellasthetraditionsofthecompany,weredeeplyconsideredbyseniormanagementindefiningwhatwaskeytocontinuedsuccess.
Thesekeysuccessfactorsincluded:

Providinghighqualitypharmaceuticalsatattractivemarketprices

Maintaininghighcustomerservicelevels

Introducingacontinuousarrayofnewproductsthatsustainmarketconfidenceandmarketshare

Maintaininganoperationthatsupportsacompetitivecostbaseandensuresenduservalue

DevelopingaNewFrameworktoCompensation

ThesekeysuccessfactorswerethenreflectedinthecompensationsystemthatCopleydeveloped.Historically,thecompanyprovidedpaylevelsthatwere"market
priced"thatis,itpaidwhateverwasnecessarytoattractandretainthedesiredtalent.Whilethisworkedwellintheearlystagesofthecompany,numerousinternal
payissueswerecausingattentiontobefocusedinternallyratherthanexternally.Therewassimplynowayinwhichmanagerscould

 Page105

reasonablycontrolcompensationcostsandprovideemployeeswithconsistentcareeropportunities.Thevariablepatternsofcompensationwerenolongerappropriate
tothecompany'sneeds.

Asthevicepresidentofadministrationandanarticulatecommunicatorofthecompany'svalues,BarbaraMorseoutlinedthekeyrequirementsforthenew
compensationsystem.Itneededto:

1.Reflectthevaluesoftheorganizationforquality,customerfocus,andcostmanagement.

2.Beseenaseffectivebymanagersandemployeesandinstillconfidenceinthemthatdecisionsweremadeinanobjectivemanner.

3.Besimpletomanageandmaintain.

4.Enablethecompanytoattractandretainthedesiredtalent.

Furthermore,itwasimportanttotheorganizationthatpeoplebeinvolvedinthedevelopmentprocess.Anoutsideconsultingfirmguidedtheeffort,buttheprocess
utilizedadesignteamofseniormanagersandkeyprofessionals.Finally,whilevariablecompensationwasimportanttopeople,itwasfeltthatthecurrentbase
compensationprogramwasinmostneedofdevelopment.Thiswouldprovidethefoundationonwhichotherrewardprograms,includingincentivesandspecial
recognitionprograms,wouldbebased.Ifthecompanydidnothaveconfidenceinthebasicsalarystructure,itwouldbedifficulttoestablishcredibilityintheother
programs.

KeyElementsoftheNewCompensationSystem

AtthetimewhenCopleyneededtodevelopanewcompensationprogram,ithadalargenumberofjobtitles,alimitednumberofformalpositiondescriptions,few
meaningfulcompensationsurveys,andanunevenprocessformanagingsalaries.Tothatend,theprojectfocusedonbuildingthefivecoreelementsthatwouldenhance
thecompany'sabilitytomanagepay.Theprojectdevelopedtheseelementsofthenewcompensationsystem.

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CustomerFocusedJobDescriptions

Mostorganizationshavesomeformofjobdescriptions.Manyofthesereflectacommandandcontrolphilosophybydefiningthejobintermsofreporting
relationships,budgetaryandstaffingcontrols,andspecializedresponsibilities.Thereisusuallylittleemphasisonthecustomerorcollaboration.

AtCopley,managersdevelopedanewapproachtojobdescriptionsbasedonthefollowingideas:

Ratherthanaskingworkerswhomtheyreportto,thequestionnaireformataskedthemtodefinewhomtheyserve(i.e.,theircustomers)andwhattheywant.Rather
thandefiningtasksorresponsibilities,theformataskedindividualstodefinewhatvaluetheyadd,andwithwhomtheyneedtocollaboratetomakeithappen(i.e.,
individualscouldsharevalueaddedaccountabilities).

Ratherthandefiningwhatresourcestheworkercontrols,theformataskedonetoidentifytheresourcesusedtofulfilltheneedsofthecustomers(i.e.,lessisbetter).

Byaskingadifferentsetofquestions,thefocusofthejobdescriptionchanged.Furthermore,becausejobdescriptionsoftenimplywhatisvaluedbytheorganization,
seniormanagementfeltthatthesequestionswereastrongreflectionofwhatbehaviorsoractionsshouldbeencouraged.

ValuesBasedCompensableFactors

Thecompanyrealizedthattherewasadifferencebetweencompetenciesandcompensablefactors.Competenciesoftenreflectsuccessfactorsforperformanceor
entryrequirementsintothecompany.Theymayormaynotbeapplicablethroughouttheorganization,bothverticallyandhorizontally.Compensablefactorsdefinedthe
basisonwhichthecorporationallocatesitscompensationdollars.Thesefactorscoupledwiththemarketplacedefinedthedimensionsforpayintheorganization.

Tothatend,thecompensationdesignteamdevelopedamodelthatdefinedinCopleylanguagetherequirementsforeach

 Page107

gradelevelintheorganization.Thismodelusedthefollowingcompensablefactors:

1.Knowledgeandskillsapplied

2.Performanceeffort

3.Scopeofresponsibility

4.Criticalthinking

5.Collaboration

6.Workingconditions

Thesesixfactorswerethendefinedandappliedto10gradelevels.AnexampleisprovidedinFigure43.Asjobswereappliedtoeachlevel,theyaidedindefining
howthekeyfactorsappliedtothelevel.Boththecriteriaandjoblevelassignmentsweretestedfor

Figure43.
CopleyPharmaceutical'sdefinitionsbygradelevel.

 Page108

validitythroughtheapplicationofbenchmarkpositions.Thecompensationdesignteamledthiseffortwithassistancefromtheconsultants.Theprimaryoutcomewasa
setofwelldefinedgradelevelsthatcouldbeusedtoassignpositionsinanobjective,rigorous,andopenmanner.

MarketBasedSalaryRanges

Likeeveryorganization,Copleyneedstocompeteinvariouslabormarketsfortalent.Theprojectincludedananalysisofthecurrentpayrelationshipsandthe
developmentofanewgradestructurebasedonsoundmarketdatafromanumberofexternalcompensationsurveys.Thedesignteamexaminedcompensationsurveys
fortheirrelevancetoCopleyanddiscussedthecurrentcompetitivenessofsalaries.Inaddition,theyarticulatedwithseniormanagersthedesiredmarketpositionand
degreeofinternalequitynecessarytoprovideasenseoffairnessandopportunitywithintheorganization.

Theoutcomeofthisprocesswasasetof10salaryrangesthatcorrespondedtothegradelevelsdevelopedearlier.Theserangeswerebroadintraditionalterms(50%
minimumto80%maximum)anddefinedthepayopportunityformanagersandemployees.Whiletheorganizationcouldestablishspecialrangesfor''hotmarketjobs,''
theserangesweresufficientlybroadandmarketbasedtoprovideahighdegreeofflexibilityforattractingandretainingdesiredtalent.

ASimpleSalaryManagementProcess

Consistentwiththethemesoftheorganization,managersneededguidelinesbywhichtheycouldmanagecompensation.Managerswereaccountableformanagingthe
compensationoftheirpeopleconsistentwiththeseguidelines.Thehumanresourcesfunctionservedinaconsultative,problemsolvingrole.

Tosupportthedevelopmentoftheseguidelines,Copleyneededtoestablishitscompensationphilosophy.Althoughmanyofthekeyprinciplesweredefinedearlyin
thedevelopmentprocess,thistaskfocusedthedesignteamonarticulatingthecompensationphilosophy(seeFigure44).Eachelementofthecompensationprogram
wasthenreexaminedtoensurethatitwas

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BecauseemployeesarecriticaltoCopley'scompetitiveness,ourcompensationprogramshouldprovideanopportunitytoshareinoursuccessasacorporation.

Thecompensationprogramshouldencourageemployeescontinuallytoseekwaystoimprovetheirservicetotheircustomers,increasetheircontributions,and
enhancetheircapabilities.

Theprogramneedstobefairlyandeffectivelymanagedtothebenefitofemployeesandthecompany.

Tominimizeourfixedcosts,weneedtotradeoffhighmarketratesofpaywithanaggressivecombinationofatmarketsalarieswithabovemarkettotalpay
opportunity.

Figure44.CopleyPharmaceutical'scompensationphilosophy.

consistentwiththisphilosophy.Seniormanagersappreciatedthisqualityassurance.

Theguidelinesrelatedtohiring,transfers,promotions,andsalaryactionpolicies.Accountabilitiesofmanagingtheprogramwerewelldefined.Althoughthesehave
beenadjustedsomewhatovertime,theessentialprinciplewasthatmanagersaretomanagetheirpeopleandtheirpay,whilehumanresourcesprovidesthetools,
administration,andguidancetoensurethistaskisdoneeffectively.

CommunicationthatisHonestandOpen

Managersareexpectedtounderstandtheprinciplesandguidelinesofthenewcompensationprogram.Employeesneedtounderstandhowtheprocessworksandto
supporttheirmanagersinensuringthatindividualsarecompensatedfairly.Tothatend,manyoftheelementsofthenewcompensationprogramwerecommunicated
openlytoallmanagers,supervisors,andemployees.Whileatfirsttherewasgreatconcernaboutissuesofequity,fairness,andopportunity,overtimetheseissueshave
diminishedaspeoplehavegainedconfidenceinthesystemandthesystemhasadjustedtouniquecircumstances.Managersknowthegradelevelmodelandthesalary
ranges.Theyareexpectedtousethese

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toolswhencreatingnewpositionsorwhencounselingemployeesonhowtoprogresswiththeircareersinthecompany.Itissimple,theyaretrusted,andtheprocess
works.

TheImpactEnduresastheOrganizationChanges

Copleyisanorganizationunderconstantchange.Ithasgrownrapidlyandcontinuestofacethepressuresofanunforgivingmarketplace.Theoneissueexecutivesand
managersdonotneedtodealwithisthebasecompensationprogram.Bythefactthatitisseenaslendingsupporttostrategicefforts,theprogramhasaddedvalueto
thecompany.Furthermore,manymanagerscaneasilyuseeachelementofthesystemandseehowitempowersthemtocontinuallyshapeandimprovetheirbusiness
units.Thejobdescriptionprocesshasclearlyreinforcedthecustomerfocusphilosophyofthecompanyandmademanagersmindfulofrelativepositionvalues.

Individualsandmanagersthatarenewtotheorganizationquicklylearnhowtheprocessworksandfindnew,creativewaystoapplythecriteriaandvaluesinmanaging
performance.Inthisway,ithasbecomeanimportanttoolofmanagementandonethathascontributedtoCopley'sabilitytocompeteinthemarketplacefortalent
andformarketshare.

TheFutureofCompensationatCopley

Thecompanyhasusedthesalarymanagementsystemwell.Ithasestablishedconfidenceandcredibility.Therearecontinualpressurestomakeexceptionsfor
individualsthatareinhighdemandinthemarketplace.Managersfindthemodelhasaidedintheprocess,andthey'veappliedthemodelinaflexiblemanner.Inthe
marketplaceforgenericdrugs,effectivemanagementofcompensationrequirescontinualvigilance.

Thecompanycontinuestochangeanddevelopnewprogramsforincentives,specialrecognition,andattractiveemployeebenefits.Communicationhasbeenakey
elementtothesuccessofthisprogram,ashastreatingeveryoneinaresponsibleandresponsivemanner.AsCopley'sexecutivesfocusonwhatittakestoremain

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competitiveinthemarketplace,theycontinuetosupportacompensationpracticethatrewardstheirpeopleforwhat'simportant.

BuildingaUniqueTotalRewardsandHRSystemforaUniqueCompanyatStarbucksCoffeeCompany

SinceStarbucksisn'tyourtypicalcompany,thisisn'tatypicalcasestudy.Ratherthanfocusingonasinglerewardprogramoreventheentirerewardsystem,thiscase
focusesonhowtheentiretotalrewardandhumanresources(HR)systemsatStarbucksarelinkedtothebusinessobjectivesandreinforcethecompany'sstrong
cultureandvalues.Workinginmutualsupportofthebusiness,theculture,andvalues,thisintegratedHRsystemhashelpedshapeapowerfulsuccessstorythatdidn't
relyonconventionalthinkingandtrendswithrespecttothetreatmentofitsworkforce.

ABriefHistoryofStarbucks

StarbucksCoffeeCompany,asweknowittoday,beganin1987,whenHowardSchultz,thecurrentchairmanandCEO,acquiredtheassetsfromtheoriginal
founders,whomhehadworkedwithfrom1982to1985.In1987,Starbuckshad11stores.Theoriginalbusinessplan,andpromisetotheinvestors,wastohave125
storeswithinfiveyears.

From1987to1992,thecompanyremainedprivate,growingattheastonishingrateof80%peryeartomorethan150stores.InJune1992,thecompanywentpublic,
anditwasoneofthemostsuccessfulinitialpublicofferingsoftheyear.Today,Starbucksistheleadingretailer,roaster,andbrandofspecialtycoffeeinNorth
America.Itoperatesmorethan1,800retaillocationsinNorthAmerica,theUnitedKingdom,andthePacificRimandhasestablishedjointventurepartnershipswith
Breyer's(toproducecoffeeicecream)andPepsiCo(toproduceFrappuccino,abottledcoffeedrink).Salesforfiscalyear1997were$967million,anincreaseof
nearly39%overthepreviousyear,andthecompanyemployedmorethan25,000partners(thecompany'stermforemployees).The

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companygoalistohavemorethan2,000locationsinNorthAmericabytheyear2000.Thecompanymissionisto"establishStarbucksasthepremierpurveyorofthe
finestcoffeeintheworldwhilemaintainingouruncompromisingprinciplesaswegrow."

Starbucks'CultureandValues:TheDriverofHRandRewardSystems

Starbucksisavaluesdrivencompany,withafirmlyestablishedsetofprinciplesthatarewidelysharedwithintheorganization.Itisalsoacompanythatputsits
employeesfirstandinvestsatremendousamountinthem.Noneofthisisbyaccident.ItallstemsfromthevaluesandbeliefsofitsCEO.SaysSchultz,"Iwantedto
establishthekindofcompanythatgavepeopleaformofequity(ownership)andcomprehensivehealthinsurance,andmostimportantly,givethemselfesteeminthe
workplace.PeoplefeelthatStarbucksisaplacethatgivesthemselfrespectandvaluesthecontributionstheymake,regardlessoftheireducationorwheretheyarein
thecompany."

Thecompanybelievesthatifitputspartnersfirst,theresultwillbeexceptionalcustomerservice,andbyextension,ifithashighlysatisfiedcustomers,thefinancial
returnswillfollow.

ReinforcingCultureandValuesThroughHRandTotalRewards

InordertoreinforceandhelpdrivetheStarbucksculture,leadingedgecompensationandbenefitsprogramshavebeenputinplace.Fullandparttimepartners(who
meeteligibilitycriteria)areofferedhealth,dental,andvisioninsurance,aswellasaccesstoanemployeeassistanceprogram(EAP),reimbursementaccounts,short
andlongtermdisability,andWorkingSolutions,Inc.(aresourceandreferralservice)tohelpmanageworkandfamilyissues.Thisisveryatypicaloftheretailindustry,
whichforthemostpartdoesnotpaythecostsassociatedwithprovidingbenefitstoparttimeemployees.Eventhoughthecostsofprovidingthesebenefitstopart
timeemployeesraisestheoverallcostofbenefits

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atStarbucks,theaveragecostofprovidingbenefitstoanemployee,visvisthecompetition,isstilllower.Whilethisinvestmentissignificant,itpaystremendous
dividends.Thepeoplewhoreceivethesebenefitsgreatlyappreciateandvaluethemand,asaresult,providecustomerswithbetterservice.

Second,allpartnershaveanopportunitytobecomeownersofthecompany.ThecompanyinstitutedtheBeanStock(i.e.,broadbased)stockoptionprogramin
1991andtheStockInvestmentPlan(SIP)topurchasestockatadiscountin1995.Parttimeemployeeswhomaintainaminimumnumberofhoursareagaineligible
forbothprograms.TheBeanStockprogramprovidesstockoptionsonanannualbasis,inanamountupto14%ofbasesalary,foranypartneremployedfromApril
1totheendofthefiscalyear,workingatleast500hoursduringthisperiod,andemployedwiththecompanywhentheoptionsaredistributedinJanuary.As
Starbucksstockpricehascontinuedtoclimb,thevalueoftheoptionsprovidedtoemployeeshasbeensignificantmoreimportant,whencombinedwiththeeducation
thecompanyoffersrelativetocreatingvalueandprofits,ithaslinkedemployeestoshareholdervalue.

Reinforcingcultureandvaluesismorethanjustatotalrewardsissue,however.Thetotalrewardssystem,whileapowerfullevertohelpdrivethebusiness,isbutone
elementthatcannotbeviewedinisolationfromotherkeyhumanresourcesleversthathavebeenputinplace.Theseotherleversincludeextensiveemployee
education,anopenandhighlycommunicativeenvironment,andauniqueprogramcalledMissionReview,whichispartofabroaderprogramcalledPartnerSnapshot.
PartnerSnapshotisacomprehensiveeffortaimedatgettingfeedbackfromthecompany'spartners.ItparallelstheCustomerSnapshotprogramaimedatgetting
customerfeedback.PartnerSnapshotincludescompanywidesurveys,MissionReview,andarelativelynewtelephonebasedsurveysystemonkeycompanyand
partnerrelatedissues.

MissionReviewisaformalprogramthatwassetupin1990toensurethatthecompanyislivinguptoitsmissionstatement.Everylocationhascommentcards
addressedtotheMissionReviewteamthatemployeesusewhentheyseedecisionsandoutcomesthatdonotsupportthemissionstatement.Relevantmanagershave
twoweekstorespondtotheemployeeandtheis

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sue.Additionally,acrossorganizationalteammeetstoreviewemployeeconcerns,seeksolutions,andprovideareportattheopenforums.Notonlydoesthiskeep
themissionstatementaliveandwellitreinforcestheopennessoftheculture.

Allpartnershiredtoworkinaretailpositionreceiveaminimumof24hoursoftrainingduringtheirfirstmonthwiththecompany.Thistrainingincludesanorientationto
thecompany,customerserviceskills,andthetechnicalskillsnecessarytoworkinthestores.Anextensivemanagementtrainingprogramalsoexists,focusingon
leadershipskills,customerservice,diversity,andcareerdevelopment.

OpencommunicationisalsopartofthenormatStarbucks.Openforums,heldseveraltimesayear,updatepartnersonhappeningswithinthecompany,explainthe
financials,andallowpartnerstoaskquestionsofseniormanagementandprovideinputtothemaswell.Additionally,aregularemployeenewsletterispublishedthat
alsodiscussesdevelopmentswithinthecompany,alongwithacolumnonbenefitsandownershipprograms.

TheEvolutionofHRandTotalRewardsatStarbucks

OneotherthingthathasbeenlearnedandfocusedonatStarbucksisthatasthecompanyhasmovedthroughvariousstagesofitslifecycle,theHRandtotalreward
systemshavehadtoevolveaswell.Forexample,inthelate1980s,Starbuckswasaregionalcompanywithasingleproductfocus.ItsHRorganizationwasprimarily
madeupofadministratorssmart,peopleorientedpartnerswithbrightideas,butwhoatthesametimewerecharacterizedasbeinghighlyreactiveandcaughtupin
manualprocessing,withasignificantamountoftheworkdirectedbyconsultants.Compensationandbenefitsduringthisperiod(ithadyettoevolveintoatotal
rewardsfunction)werecharacterizedbyparttimecoverageofthebasicsandtheimplementationofthe401(k)plan.

Intheearly1990s,Starbucksbecameatrulynationalcompanywithmultipleproductlines.Humanresourcesbecameaprojectmanager,movingfromadministration
toHRmanagement,deliveringproductsandtoolsthatsupportedthebusiness.Certainservicesbegantobeoutsourcedthatwerenotcorecompetenciesof

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theorganization.FurtherautomationofHRfunctionscontinued.Compensationandbenefitswascharacterizedbyamovetototalrewardsthatincludedadditional
healthbenefits,maturationofhealthcaredeliverytomanagedcare,coverageforsamesexpartners,andanemployeeassistanceprogram.

AsStarbucksmovesintothelate1990s,itwillbecomeincreasinglyinternationalinscopeandbusinessfocus.Simultaneously,HRhaspositioneditselftobeabusiness
leader:atechnologybasedorganizationthatisintegratedwiththebusinessunits,providingbusinessconsultingandstrategicmanagement.Numerousvendor
partnershipshavebeenestablishedthathaveincreasedthestrengthandqualityoftotalpayofferingsandwillallowinintegratednationalandinternationalHRfocusthat
remainsconnectedtothestrategyofthebusiness.

TheResultstoDate

HavetheresultsofthisintegratedHRandtotalrewardsystemthatstronglyreinforcesthecultureandvaluesoftheorganizationbeenworththeinvestment?Itcertainly
appearsthatithas.ThecompanywasnamedoneoftheFortune100"BestCompaniestoWorkFor."Thefinancialgrowthofthecompanyhasbeenexceptional,with
revenuesofnearly$1billioninfiscalyear1997.Thestockpricehasincreasedmorethan30timesitsoriginalprice,includingtwostocksplits.Employeeturnover,
especiallywithinthestores,isdramaticallybelowtheretailindustrynorms,runningatanannualrateofonehalftoonethirdthatoftheindustrynorm.Resultsofthe
employeesatisfactionsurveyindicatethatpartnerstremendouslyenjoyworkingforStarbucksandfeelterrificabouttheleadershipofthecompany.Theexternalfirm
thatconductstheemployeesurveysaidthattheresultsatStarbuckswereliterally"offthecharts"whencomparedwithmostotherfirms.

CantheyquantitativelycorrelatetheseresultsoftheHRandtotalrewardsystemefforts?Notlikely.However,thereisastrongfeelingbyseniorexecutives,managers,
HR,andemployeesthattheseprogramshavecertainlycontributedagreatdealtothegrowthanddevelopmentofthecompanyanditsemployees.

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WhattheFutureHolds

Asthecompanycontinuestoexpanditsstoresbothnationallyandinternationallyandtheemployeepopulationcontinuestorapidlygrow,severalchallengesareposed
ontheHRandrewardsystemsfront.Howcanthecompanycontinuetoreinforceandliveitsstrongcultureandvaluesystemasitgetsmorediverse,spreadout,and
bigger?AsStarbucksgrowslarger,howcanitmaintainasmallcompanyfeel?HowdoprogramssuchasBeanStock,whichhavebeenextremelysuccessful,maintain
theirvibrancyandstayalignedwiththechangesinthebusinessandtheneedsofemployees?

Providingsolutionstothesequestionsinwaysthatcontinuetoreinforcethecompany'scultureandvaluesanddemonstratecommitmenttoputtingemployeesfirst,is
whereHRandtotalrewardsatStarbuckswillbefocusingtodayandintothenearfuture.Ifthefutureisanythinglikethepast,staytunedforsomeexcitingandunique
developments.

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5
WorkingasaTeam
Organizationswerecreatedbecauseworkcanbeaccomplishedmoreeffectivelyinagroupthanbyindependentindividuals.Theconceptoforganizingworkbyteams
isnotnew,butrecentlyithasrevolutionizedtheworkplace.Thischangeismorereflectiveofanew.managementphilosophythantheintroductionofanewwork
structure.Withthisphilosophy,peopleoperateonthe"wholejob,"notincrementalpieces.Peopleareencouragedtocollaboratewithotherstoimprovetheprocess
andservecustomersbetterthanthecompetition.Theresultshavebeenremarkable.

Thecasestudycompaniespresentedinthischaptershareacommonvalueaboutteamsandhavecometolearnhowtheycanmakeamajordifferenceinan
organization'scompetitiveness.Oneoftheinterestingaspectsoftheirexperienceisthattheyhaveusedrewardstosupporttheirphilosophyofmanagement.Great
performanceachievementsaremadebecausepeoplestartworkingclosertogether.

Shouldtheyhavecollaboratedinthepast?Yes.Didthey?Usuallynot.Therewardsystemsmadethedifference.Theyencouragedpeopletocollaborateandprovided
ashareofthebenefitifimprovementscouldbeachieved.YouwillseehowDuPontdevelopedoneofthemostpublicizedvariablecompensationplanswiththe
AchievementSharingProgram.Then,whentheprogramwasdiscontinued,youwillunderstandwhy.CummingsEnginehasuseditsrewardsystemstoenhance
problemsolvingandprocessimprovements.BlanchardTraining&Developmenthasusednoncashrecognitioninsimpleandpowerfulwaystoenhancecollaboration
andcustomerfocus.K/PCorporationhasusedcompensationforbusinessinitiativesforgreaterrealizationonitsvisionandmission.Finally,

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BaptistHealthSystem,Inc.,hasusedteambasedpaytostrengthenperformanceandresponsivenessinahighlycomplexmarketplace.

Theseorganizationshavefocusedonteamwork,notteams.Oneisaprocess,theotherisastructure.Theyhavefoundthevalueofcollaboration.Thisvaluehasthen
beentranslatedintosuperiorperformance.Theythencelebratetheseachievementsasateam.

LessonsFromaPlanthatDidNotEndureatDuPontCorporation

Profitsharingisasimple,powerfulconcept.Itsaysthatiftheorganizationisabletorealizeprofitsaboveapredeterminedlevel,itwillshareaportionofthismoney
backwiththosethatcreatedittheemployees.Whatcouldbesimpler?Whatcouldbemorecompelling?Theseprogramslinkeveryoneintheorganizationtothe
samefocus,makingthebusinessmoreprofitable.

However,noteveryattempttoapplysuchaprogramendures.SuchwastheexperienceoftheFibersDepartmentatDuPont.Thiscasedescriptionwillreviewthe
developmentprocess,plandesign,andprinciplelearningsofanincentiveplanthatwasdiscontinued.Thisexperiencehighlightedtheconflictingchoicesthatareinherent
inthedevelopmentofsuchprograms.Finally,thecaseprovidesapowerfuldesignprocessthatmadeamorelastingimpactthantheplanitwascharteredtocreate.

BackgroundoftheFibersDepartment

In1988theFibersDepartmentofDuPontdecidedtointroduceavariablepayprogram.TheFibersDepartmentwasoneofthelargestbusinesssegmentsofDuPont,
withsalesatthattimeof$5.8billionandmorethan20,000employees,includingfiveunions.IthadbeenahighlysuccessfuldepartmentofDuPont,butwasnowfacing
increasingpressuresfromglobalcompetitors.Thecompanyhadarticulateditscorevaluesofquality,leadership,andcontinuousimprovementandsoughtwaysto
integratethesevaluesineverythingitdid.Italsobelievedstronglyinteamwork,prudentrisktaking,andaselfmanagingworkforce.Itneededaculturethat

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wouldcontinuetochangeanddeveloptomeetachangingmarketplace.

TheFibersDepartmentbeganinvestigatingvariablepaysystemsin1986.Thecorporationgaveeachbusinessunittheoptionofintroducingalternativepaysystemsas
awaytoincreaseflexibilityandimprovethebusinesses.TheFibersDepartmenthadrecentlyreduceditstotalU.S.employeesby7,000andcreatedastrongspiritof
changewithintheorganization.Itreducedlayersofmanagement,changedworkstructures,andinvestedinnewtechnology.However,theexistingpaysystematthat
timewasfundamentallyinconsistentwiththenewdesiredcorporatecultureanditsvalues.TheFibersDepartmentwantedtoconsiderthemoveawayfromtraditional
entitlementpaytovariablepay.

DesigningtheIncentiveProgram

Tobegintheprocess,theFibersseniorexecutivesselectedastudyteamtoinvestigatewhatotherorganizationsweredoing,discussalternativeswithleadingacademic
andconsultingpractitioners,anddeterminethebeststrategyforthedepartment.Theteamwascomposedofrepresentativesfromallmajorareasofthebusiness,
includingmanufacturing,marketing,researchanddevelopment,businessunits,humanresources,andcorporatecompensation.Twelveindividualswereontheteam.
RobertP.McNutt,formerlyalinemanagerinFibers'businessandmarketinggroup,wasselectedtoleadthisteameffort.

Duringtheprocessofdatacollection,theteamidentifiedabasicphilosophyandasetofbeliefsandprinciplesaboutpaysystemsthatguidedtheminthedevelopment
effort.Theyusedfocusgroupsofemployeestotestideasmorethan1,000peopleoftheFibersDepartmentprovidedinputandfeedbacktotheteam.Thiswasone
ofthemostinvolvingactivitiesthedepartmenthadeverbeenengagedin.

Theprogramtheydevelopedbecameknownas''AchievementSharing.''Itwasasingleprogramthatwouldapplytoall20,000employeesintheU.S.Fibers
Department.ThedesignteambelievedthatemployeesshouldnothavetheirpayorwagesreducedinordertoparticipateinAchievementSharing,butthataportionof
futureincreasesinpaywouldneedtobe"placedatrisk."The

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payoutswouldbepaidtoeveryonebasedonthesuccessoftheentirebusiness.

ImplementingAchievementSharing

TheimplementationofAchievementSharingwastobephasedinoverapproximatelyathreeyearperiod.Individualswouldreceive2%lessofanannualbasepay
increasethantheircounterpartsinotherdepartmentsofDuPont.Thiswouldbecappedat6%.Inturn,ifthedepartmentachieveditsannualearningsobjective,
employeeswouldreceive6%oftheirpayasabonus.Theminimumthreshold,setat80%oftheearningobjective,wouldearna3%bonus,and150%oftheearnings
objectivewouldearnan18%bonus.Thisrangeofpayoutopportunitieswasdeemedtobehighlymeaningfultotheparticipants.Payoutsweremadeannually.

TheimplementationofAchievementSharinginvolvedagreatdealofcommunicationandeducation.Forexample,eachofthe20sitelocationsviewedavideoonthe
newprogramandabrochureontheprogramwasgiventoallparticipants.Therewerefollowupmeetingsatallplantsandofficestohelpemployeesunderstand,
question,andconsiderwhattheycoulddodifferentlynowthattheywereonavariablepayprogram.Therewereteamstrainedateachsitelocationtoanswer
questionsandtopromotetheAchievementSharingprogram.Ayearaftertheprogramwasintroduced,theseteamsprovidedrefreshereducationtoemployeesonkey
aspectsoftheprogram.Theyalsoassistedpeopleinunderstandingthedepartment'sfinancialstatementsandtheearningsobjectiveinparticular.

Theinitialresponsetotheprogramwasquitepositive.FourofthefiveunionsagreedtoparticipateinAchievementSharing.Therewasastrongstatementof
commitmentbyseniormanagementtocommunicatefrequentlyonthestatusofthedepartment'sperformance.Eachplantcouldchooseitsownmethodsof
communicatingspecificresults.BobMcNuttfrequentlystatedthatthisprogramshouldtoucheveryemployeeandreinforcetheideathattheycanmakeadifference.

Theprogramgeneratedpayoutsinthefirsttwoyears.Theaveragepayoutwasbetween2%and3%eachyear.Thepayoutswererelateddirectlytothedepartment's
operatingincome.However,theprogramwasdisbandedatthebeginningofthethirdyear.

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Whileonemayconsiderthisamajorproblem,therewereimportantreasonsforthisdecision.

WhyandHowAchievementSharingWasTerminated

Itisclearthattheprogrammadeamajor,positiveimpactonthecultureoftheFibersDepartment,DuPont,andU.S.industryingeneral.Thisprogramwasoneofthe
mostpublicizedprogramsinthenationalpressduringthelate1980sandhasbeenthesourceformanydiscussions.Ananalysisofthisprogramisessentialtolearnthe
criticalfactorsofsuccessandhowsuchprogramscansupportmajororganizationalinitiatives.

Therewereseveralimportantreasonsforterminatingtheplan.First,whentheimpactoftheprogramwasassessedinyeartwo,morepeopleindicatedthatthey
wantedmorechoiceinthepayoutopportunitylevels.Peoplewantedtomakeindividualchoicesregardingtheamountofmoneytheywouldputatriskandopportunity
toreward.ItwasimportanttoDuPont'sseniorexecutivestosupportthisrequest.Whentheyreviewedthelegalfeasibilityofthisoption,theydiscoveredthatthe
SecuritiesandExchangeCommission(SEC)wouldtreattheAchievementSharingprogramasaninvestmentopportunity.TheSECwouldthenrequireDuPontto
makepublicdisclosuresofdetailedbusinessinformation.Whileexecutiveswouldeasilymakeinformationavailabletoemployees,theriskofgettingdetailed
informationintothehandsofcompetitorsrenderedtherequirementunacceptable.Consequently,theFibersexecutivesfacedacriticaldilemmadisclosesensitive
informationandhonoremployeechoice,oroffernoemployeechoiceandlimittheamountofcommunicationoffinancialinformation.

Asecondfactorthatcontributedtothedecisionrelatedtothedesignoftheprogram.Asstatedearlier,theprimaryunitoftheprogramwastheFibersDepartment.
Employeesinthedepartmentselectedthispayoutmethodbecauseitwasimportanttocreateacommon,sharedfate.Itwouldencourageteamworkwithinandacross
thedepartment,asstatedinoneoftheircorevalues.Theoperatingearningsobjectivewasselectedbecauseitwastheonlybasiccommonmetricofperformancefor
allunitsofthedepartment.

Theproblemwiththisapproach,however,isthatindividuals

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didnothaveaclearandcompellinglineofsightbetweentheiractionsandtheirresultsthatdeterminedthepayout.Whenstructuredinthismanner,theprogramwould
havelittleimpactonbehaviorbutwouldcreateacommonfateforallconcerned.Thedesignteamconsideredthesevariousoptionsanddecidedthatitwasmore
importantfortheprogramtobefairandtounifypeoplewithintheFibersDepartment.Ifdifferentunitsweretohavedifferentperformancetargets,howcouldonebe
assuredthattheeffortsandopportunitytoachievepayoutswerecomparable?Ifoneareaweretoreceiveapayoutbecauseithadfavorablemarketconditionsand
anotherwerenotsuccessfulbecauseofbusinessconditions,wouldtheprogrambefairandcredible?Acommonplanwasdeemedappropriate,eventhoughithadthis
inherentlineofsightproblem.

ThethirdreasonfortheFibersDepartmentdecisiontoterminatetheprogramwastheconcernthattheoverallmarketwasheadingintoarecessionandtheplanwould
notmakeapayout.Thisbusinessconditionwasnotexpectedduringthetimeoftheprogram'sdesign.Theconcernwasthatiftheprogramdidnotmakeanypayouts
forseveralyearsduetodecliningmarkets,thenitwouldnothaveanycredibilitywiththeworkforce.Earlysuccessesareveryimportanttoanyprogram'scommitment.
Whileitisoftendifficulttoselecttherighttimeforaprogramofthisnature,itwasfeltthatforcesthatwereclearlyoutsidethecontrolofindividualswouldadversely
impactthem.Furthermore,becausetheprogramwasbasedontheoverallFibersbusiness,therewaslittlethatindividualsorsmallunitscoulddotooffsetthedecline
oftheoverallbusinessthatwouldimpactthepayouts.Therecontinuestobeuncertaintyaboutwhether"ridingouttherecession"wouldhavebeenbetterthan
discontinuingtheprogram.

Priortothedecisiontoterminatetheprogram,seniormanagersexploredtheoptionofrestructuringtheprogramtolinkmoredirectlywiththeperformance
requirementsofthe25businesslines.Theywereconcernedwiththelineofsightissueandwithmodifyingtheprogramtoreflectamajorportiononunitperformance
andasmallbutsignificantportionondepartmentwideperformance.Thiswasthenlikelytoincreasetheimpactoftheprogramonbehaviorsandperformance.If
adopted,managerswantedtocreatea"handicap"provisionfordifferentgroupsinordertoensurethatperformancetargetswouldbecomparableacrossthevarious
linesofbusiness.

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TheImpactHasContinued

Althoughthisprogramdidnotendure,itmadealastingimpactontheDuPontorganizationandonothercompaniesseekingtoimplementvariablepayprograms.The
developmentprocessclearlydemonstratedhowalarge,stableorganizationcouldcreateinvolvementandbuildsupportforacontroversialsubjectpayatrisk.It
displayedcriticalvaluesofemployeeinvolvementinthedevelopmentoftheprogramandeffectivecommunicationoncetheprogramwasapproved.Finally,itidentified
allthecriticalissuesoneneedstoconsiderindevelopingavariablepayprogramforalarge,stableorganization.However,therewerefundamentalconflictsintheneed
forchoiceandinthedevelopmentofabetterlineofsightonperformanceandonunderstandingbusinessconditions.

ManyorganizationshavelearnedfromDuPont'sexperience.Theyhavemodifiedvariablepayprogramstohaveamoredirectimpactonbehaviors.Theyhaveused
designteamsandcreatedstatementsofcorebeliefsandprinciplesaspartoftheirdesignefforts.Theyhavedecidedtokeeptheprograminplaceeveninrecessionary
times.TheFibersDepartmentexperimentwithvariablepayhasmadeanimportantcontributiontochanginghowAmericanindustrythinksaboutvariable
compensation.

DuPontisnowconsideringalternativemodelsforvariablepaythroughoutitslinesofbusinesses.IthaslearnedfromtheAchievementSharingprocessandis
implementingmanyotheralternativemethodsforpayandrewardswithintheDuPontorganization.Inthisway,experimentsservetocreatelearningandclarifykey
principles.TheinvestmentmadeinAchievementSharingcontinuestogenerateafavorablereturn.

SustainingContinuousImprovementsinaHighPerformanceWorkSettingatCumminsEngine

Howdoesanorganizationimproveitscompetitivenessandperformance?Howdoesanorganizationthatisknownforitsqualitycontinuetocreateandimprove?How
doesanorganizationthatworksinteamsstrengthenitscollaborationacrossunitsandwith

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thecustomer?ThesearechallengesfacingCumminsEngine.Inparticular,thesewerethetasksthatAtlasCrankshaft,Inc.,adivisionwithinthecorporation,attempted
toaddresswithitsvariablecompensationprogram.

CumminsEngineistheworld'sbiggestmakeroflargedieselenginesandpowergenerators.Theyareusedtopowertrucks,buses,andequipmentforminingand
construction.Thecompanyhasannualsalesofmorethan$5billionandmorethan26,000employeesworldwide.AtlasCrankshaftisacomponentsmanufacturing
divisionwithaspecialtyincrankshaftsandrelatedequipment.MostofAtlas'soutputsareprovidedtootherCumminsplantstobeassembledandsoldtomajorvehicle
andequipmentmanufacturers.

OrganizationalContext

Historically,manyemployeesatCumminshaveparticipatedinacompanywideprofitsharingprogram.Thisprogramhassoughttoestablishastakeinthesuccessof
thebusinessforeachemployee.However,managementfeltthattheprogramdidnotofferastronglineofsightrelationshipbetweenindividualactionsandresults.
Therefore,theyencouragedthedivisionstocreatetheirownapproachtorewardsystemsthatwouldprovideabetterfocusonperformance.

AtlasCrankshaftdecidedtodevelopavariablecompensationprogramin1993forimplementationin1994becauseitneededtocreateaconnectionbetweenits
employeesandtherequirementstoimprovetheperformanceofthedivision.Atlasunderstoodthatitneededtocontinuallyimproveitsperformanceandcapabilities.

AtlasCrankshaft,Inc.,islocatedinFostoria,Ohio,andhasjustunder300employees.ManyoftheemployeesarerepresentedbytheUnitedAutoWorkers(UAW).
Since1993,thecompanyhasmaintainedateambasedworksystemwhereallemployeesareinteamsandmanageastrongprocessflowfromroughmanufacturingof
productsthroughtofinishedgoodsandshipping.Theplantoperatesinacomfortableenvironmentinaddition,thereiscontinuousemphasisonsafetyandcreatingan
attractiveworkplace.Althoughthereissignificantmaterialfabrications,movementoflargepiecesaroundtheplant,andagreatdealofworkinprocess,the

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plant'senvironmentplacesahighdegreeofimportanceonsafetyandprofessionalism.Peopletakeagreatdealofprideintheirproducts,theirworkplace,andeach
other.

TheVariableCompensationProgram

Thevariablecompensationprogramwasdeveloped,asstatedearlier,toencourageandrewardmembersoftheplantforimprovingtheperformanceofAtlas.Itwas
developedbytheplantoperatingteamthatnowincludesthelocalUAWpresident,butovertimeithasevolvedtoincludemoreandmorepeopletoimprovethe
program.Theyhaverealizedthatlikeanygoodsystem,thecompensationprogramneedstocontinuallychangeandbeupgraded.However,theprogramhasnot
changedfundamentallysinceitsinception.

TheprogramincludesallmembersoftheAtlasorganization,includingunionandnonunionemployees.Becausethemeasuresaresetbasedonplantwideperformance,
theycontinuetostrugglewithbringingthelineofsightclosertowhattheindividualhascontrolover.Thenumberofmeasuresrangesfromfourtosixtheimportance
weightingandperformancelevelschangeeachyear.Thisisimportantsothatpeoplecanseethecontinuityoftheprogramovertimeandlearnhoweachpersonaffects
theresults.

Thecoremeasuresoftheprogramincludethefollowing:

Safetyincidencerate

Ontimedelivery

Productivity(i.e.,numberofpiecesperpersonperday)

Managedexpenses(i.e.,managedexpensesasapercentofthebudget)

Thepurposeofthesafetyincidentrateistoreinforceacleanandhealthyworkplaceenvironment.Thisisimportanttoensureemployeesworkinasafeworkplacethat
enhancestheirabilitytoproducehighqualityproductsatthelowestpossiblecost.Whenanemployeeisinjured,therearecostsrelatedtobothhealthcareandlost
productivity,nottomentiontheimpactinhumanterms.Thisismeasuredbycalculatingthenumberofrecordedsafetyincidentsasapercentageofthetotalhours
workedbyallemployees.

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Theyestablisharangeofperformanceforthismeasureandcontroltheprocessthroughfrequentsafetyinspectionsandtraining.

Ontimedeliveryismeasuredbymeetingthedeliverydateoftheircustomers,usuallyotherplantswithinCummins.Atlasusesthereceiptoftheorderasopposedto
theshipmentdatebecausethemostimportantconsiderationforcustomersiswhentheyreceivetheproduct,notwhenitwasshipped.ThismeansthatAtlasneedsto
considerthedeliveryvendoritusesforproductsandtheextenttowhichtheyarereliable.Althoughdeliveryislessinone'scontrolthantheshipmentdates,thereceipt
iscriticaltootherplantsthatoperatewithajustintimematerialsmanagementfunction.

Productivityoftheplantismeasuredbydeterminingthenumberofplanthoursneededtoproduceaproduct.Theratioisthenumberofpiecesperpersonperday.
Thisfactorperhapshasthegreatestimpactontheperformanceoftheplant.Allemployeeseitherworkdirectlyatproducingtheproductsorsupportingthosewhodo.
Thiscausespeopletoreflectonwhetherornotanindividualneedstobereplacedoraddedtothestaff.Thisalsogivescredittotheplantiftheemployeesareableto
growthevolumewithoutaddingconcomitantlytostaff.

Thefinalmeasureexamineshowwellexpensesaremanagedaccordingtothecompanybudget.Theseexpensesdonotincludewages,asthisiscapturedinthe
productivitymeasure.Theexpensesincludecontrollableitemssuchasmaintenancesupplies,operatingsupplies,scrap,utilities,freight,medicalcosts,andgeneral
expenses.Oncethebudgetisset,theplantneedstoproduceexpendituresthatarelessthanthebudgetinordertoachieveapayout.Specifically,theyneedtobe2%
underbudgettoachievetheirtargetperformance.Ifexpenseswere10%belowbudget,theywouldreceiveahighlevelofpayouts.

HowPayoutsAreDetermined

Thepayoutsaredeterminedbycombiningtheperformanceinallmeasuredareas.Foreachmeasurethereisapayoutschedulethatrangesfromminimumtotargetto
highperformance.Basedonperformancelevelachieved,acertainnumberofpointsareearned.

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Therangeofpointsreflectstheperformanceofthemeasure.Eachmeasureiscappeddifferentlybasedonitsperformancefactors.Thepointsaretotaledandaveraged
bythenumberofmeasures.Thepayoutrangethenisappliedtodeterminethepercentoftotalearningsonereceives.Thecalculatedpayoutfactorforeachquarteris
multipliedbytheparticipationleveloftheemployee,whichrangesfrom4%to6%.Thedemonstratedperformancepayouthasbeenfrom0%to11%,butthepotential
isthereforthattobegreaterbasedonimprovedperformanceinthevariouscategories.Everyone'spayoutisbasedonthesamefactorpayoutsarenotadjustedfor
individualperformance.Thepayoutispaidquarterlyandpayoutsaretypicallymadewithin10daysoftheendofthequarter.Thetargetpercentisbetween4%and
6%,dependingonyourposition.Thepayoutfactorscanrangefrom0.25togreaterthan3.00which,inturn,couldleadtoapayoutgreaterthan18%.

Inadditiontotheseperformancemeasures,theprogramhastwo"hurdles"thatneedtobemetbeforethepayoutsaremadeavailable.Thisisimportanttoensurethat
theplanisselffundedthatis,thegainsinperformancewouldmorethanpayforthefinancialawards.Thefirsthurdleisthatsufficientsavingsneedtobegenerated
fromtheperformancetofundtheplan.Althoughmanagedexpensesandproductivityarethetwomeasuresclearlytiedtofinancialperformance,thedeliveryandsafety
incidentratescanclearlybetranslatedintofinancialimpactgains.

Thesecondhurdleisthatthecustomeracceptanceratemustequalorexceed99.5%foreachquarter.Customershavetheabilitytoreviewthequalityoftheproducts
andiftheyarenotacceptable,theycanreturnthemtothecompany.Ifthesereturnsexceed0.5%oftheproductsshipped,therewillbenopayoutforthequarter.
Fortunately,andreflectiveoftheAtlasqualitymanagementprocess,inonlyonequarterinthehistoryoftheprogramhasthisthresholdnotbeenmet.

Attheendofeachquarter,theAtlasplantoperatingteamreviewstheperformanceresultsandrecommendsthepayoutfactor.ThebusinessunitthatAtlasispartofis
responsibleforfinalapproval.ThisAtlasleadershipteamisheavilyinvestedinachievingthedesiredperformanceandmakingtheassociatedpayouts.Astheymake
payouts,theyrealizethatthecompanyisimprovingitsproductivity,quality,anduseofresources.

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TheCostsandtheReturnonInvestments

Sincetheimplementationoftheprogramin1994,Atlashasmadeapayoutinallbutonequarter(thiswasduetothequalityofcustomeracceptance).Theaverage
payoutshaverangedasfollows:

Year Payout% Payout$

1994 1.34% $686,556
1995 1.53 800,776
1996 0.78 418,880
1997 1.40 850,244

Totalpayoutsoverfouryears $2,756,456

ButthepayoutsneedtobemeasuredagainstthegainsthathavebeenachievedbyAtlasCrankshaft.Thesavingsgeneratedfromthisprogramhaveexceeded$5
million.Thatisovera2:1savingsratio.Furthermore,theprogramhasencouragedcontinualimprovementsinperformancebecausetheperformancelevelsare
increasedoradjustedeachyearbasedoncorporaterequirements.

Overtimemanyskepticsabouttheprogramhavebecomesupporters.Managersactivelyseekwaystoencouragechangethatimprovestheperformanceoftheplant.
Theyseeadirectrelationshipbetweentheplant'sperformanceandtheindividualvariablecompensationpayout.

ContinuingtheImprovements

Eachyearmanagersseektomakeimprovementsintheprogram.In1997theyactivelysoughttheinvolvementofthelaborunionleadershiptoimprovetheprogram.
Thishashadaverypositiveimpact.Oneofthemostcriticalissuesiseducatingpeopleinhowtheiractionsimpacttheperformancefactors.EventhoughAtlasisa
relativelycohesiveorganization,peopleneedtoseealineofsightbetweenactionsandresults.Theunionleadershiphasbeeninstrumentalinbuildingthiseducational
processandencouragingpeopletofindwaystoimprovetheperformanceofthecompany.Thispartnershiphasledtostrongimprovementsinsafetyanddelivery
performance.

Theprogramwillcontinuetodevelopinthefuture.Itisnot

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likelythattheprogram'sfundamentalstructurewillchange,butthemeasuresandtheprocessthatsupportsthereinforcementofeverydayactivitieswillchange.
Managersunderstandhowtheprogramhasaffectedbehaviorandhaveseenthepotentialofwhatitcantrulydo.Personalinvolvement,collaborationacrossteams,
implementationofprocessimprovements,andreinforcementofindividualperformancewillbekeydriversforthefuture.

Atlashaslearnedthattheprogramcannotexistinavacuumofleadershipmanagersandteamleadersneedtobeinvolved.Unionleadershipsupportiscriticalaswell.
Byworkingtogether,Atlasexpectstocontinuetoimproveperformancebylinkingindividualperformancetotheplant's.Theyhavethespirittocontinuetomake
changesandlearnnewapproachesthatwillenhancetheabilitytomeetcustomerneeds.Inmanyways,peoplefeelthattheyhavejustbegun.

LearningtoSoarwiththeEagleAwardatBlanchardTraining&Development,Inc.

Whenitcomestorewards,manymanagersbelievethattheonlythingthattheiremployeeswantismoremoney.However,whilemoneycanbeanimportantwayof
lettingemployeesknowtheirworthtotheorganization,ittendsnottobeasustainingmotivationalfactortomostindividuals.Thatistosay,cashrewardssuchas
salary,bonuses,andthelikearenice,butseldomaretheywhatmotivatepeopletogivetheirbesteffortsonthejob.

Cashrewardshaveonemoreproblem.Inmostorganizationsperformancereviewsandcorrespondingsalaryincreasesoccuronlyonceayear,whereasthethings
thatcausesomeonetobemotivatedtodayaretypicallyactivitiesthathavehappenedrecentlywithintheimmediateworkgroup.Thingssuchasbeingthankedfordoing
agoodjob,involvedindecisionmaking,orsupportedbyone'smanager.Tomotivateemployees,managersneedtorecognizeandrewardachievementsandprogress
towardgoalsbyemployeesonadailybasis.

Whenyouaskemployeeswhatismostmotivatingtothem,rarelyismoneylistedfirst.Infact,innumerousstudiesmoneyisrankedaboutfifthinimportance.Whatis
mostimportantto

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employeesaresuchintangiblesasbeingappreciatedfortheworkthey'vedone,beingkeptinformedaboutthingsthataffectthem,havinginterestingwork,andhavinga
sympatheticmanagerwhotakestimetolistentothem.Theseintangiblescostlittleornothingtoimplement,buttheydotakethetimeandthoughtfulnessofamanager
whocares.TheseprincipleshavebeenputinplaceatBlanchardTraining&Development,Inc.(BTD).

CompanyBackground

BTDisamanagementtrainingandconsultingfirmlocatedinEscondido,California.Itemployesaparticularlyeffectiveformofrecognitiontokeepemployees
motivated.AtBTD,speciallydesigned''EagleAwards''arepresentedtoindividualswhohavegoneaboveandbeyondtoassistacustomer.TheEagleAwardispart
ofanoverallsystemofemployeerewardsandrecognitionatBTDthathashelpedtocreateahighlymotivatedworkforceandmoresatisfiedcustomers.The
companywasfoundedin1979byKenBlanchard,coauthorofTheOneMinuteManager(NewYork:BerkeleyPublishingGroup,1986),andhiswife,Margie.
Sinceitsfounding,BTDhasgrowntoaworkforcenumberingsome150employeesandhasoperationsthroughouttheUnitedStatesandabroad.Someofthestated
goalsoftheorganizationareto:

Developleadershipatalllevels.

Empoweremployeestosetgoalsandsolveproblems.

Provideexemplarycustomerservice.

Implementlearningthroughtechnology.

Managetheorganizationalchangeprocess.

Energizeorganizationsaroundtheworld.

ReasonsfortheProgram

TheEagleAwardwasestablishedtorecognize"legendaryservice"tocustomersoneoftheorganization'sstrategicobjectives.Customersurveysconducted
indicatedthatcustomerservicewasrankedseventhoreighthasanattributebythecompany'scustom

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ers.BTD'sgoalindesigningtheEagleAwardwasspecificallytoincreasetheperceptionofcustomerserviceintheeyesofitscustomers.

HowtheEagleAwardwasDevelopedandHowItWorks

ThefirststepinestablishingtheEagleAwardwastoaskforvolunteerstoformacommitteethatwouldtakechargeofdevelopingandimplementingacustomerservice
recognitionprogram.Thiscommitteewasgiventhesolegoalofimprovingcustomerservice,alongwithcompletefreedomtodowhateverittooktogetthejobdone.
Theonlyconstraintwasthattheprogramwasnotintendedtobeacashbasedprogram.Sinceemployeeswerealreadybeingpaidsalariestodotheirjobs,bonuses
andsimilarfinancialincentiveswouldnotbeapartoftheprogram.However,somefundswereavailabletothecommitteetosupportrecognitionitemsandactivitiesas
needed.

ThecommitteemettodiscussthebestwaystoimprovecustomerserviceatBTD.TheresultofthesediscussionswastheEagleAwardprogram.Anyonecaught
providingexceptionalservicetocustomerscouldbeacknowledgedbyanyothermemberoftheorganization,whowouldcompleteahalfpage"eaglepraising"form
distributedtoallemployeesandavailableinthecompanylunchroomandmailroom.Onesideoftheformcontainedtheprogram'sobjectivestheothersidewasthe
applicationitself.Theapplicationaskedforthenominee'snameandadescriptionofthebehaviorworthyofrecognition.Typicalexamplesofrewardedbehavior
includedstayinglatetoshipmaterials,helpingacustomerlocateacostorderorresolveabillingproblem,andrearrangingtrainingschedulestodeliveralastminute
requestbyacustomer.

Oncecompleted,nominationformscouldbesubmittedtoanymemberoftheEaglecommittee,whichwascomposedoffivevolunteers,includingbothmanagersand
nonmanagers.ThecommitteereviewedeachsubmissionandingeneralhonoredmostwiththeEagleAward,thenmadeasurprisevisittotheindividual'sworkareafor
apictureofthepersonholdinghisorherEagleAward,whichwasactuallyoneofseveraleagletrophiesthatrotatedaroundthecompany.Thewinnergottokeepthe
eagletro

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phyonhisorherdeskuntilitwasneededforanewrecipienttypicallyaweekorso.Thepresentersalsogavetheawardeeachoiceofanominalrewardthat
includedrestaurantdiscounts,zoopasses,carwashcoupons,andsoforth.Mostoftheserewardswereobtainedbybarteringserviceswithotherbusinessesinthe
community.

TofurtherrecognizetheeffortsofeachEagleAwardrecipient,awardeephotoswereplacedonabulletinboardinthefrontlobbyofBTD'sheadquartersbuilding
aroundapictureofaneagleinflight,alongwithacoupleoflinesaboutwhattheemployeehaddonetoearntheaward.Inaddition,alistingof"eaglesightings"was
includedintheemployeemonthlynewsletter.Attheendoftheyear,anEagleoftheYearawardwasselectedbyavoteofemployeesfromalistofmultipleEagle
Awardwinners.Thatpersonwaspresentedanengravedclockatthecompany'sannualcelebrationprogram.

Theprogramwasinitiallyannouncedandexplainedatacompanywidemeeting,anditwasopentoanyemployee,withnolimitonthenumberofawardsgivenouteach
month.TheEagleAwardprogramwasrunentirelybyemployeevolunteers,withnointerventionbymanagement.

PrimaryOutcomesandContinuingEnhancements

TheEagleAwardprogramwascreditedwithmaking"legendarycustomerservice"anestablishedpartofthecompany'sculture.Inthesevenmonthperiodfollowing
introductionoftheEagleAward,customerservicecametobethenumberonecompanyattributeintheeyesofBTD'scustomers.Programcostswerenominalatless
than$200.

Whiletheprogramwasclearlysuccessful,itwasnotwithoutproblems.Sometimeafterimplementation,theEagleAwardprogramwasreviewedtofindoutwhat
workedwellandwhatcouldbeimproved.Twofindingswereprominent:

ItwasdiscoveredthatthemajorityofpeoplewhoreceivedtheEagleAwardhaddirectcustomercontactasapartoftheirjobs.Sinceotherswithoutdirectcustomer
contact(overhalfthecompany)couldhaveagreatimpactonthedeliveryofexceptionalcus

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tomerservice,theprogramwasexpandedtofocusoninternalcustomerstoo.

Attheoutsetoftheprogram,thecommitteeacceptedmostnominations.However,astheprogramevolvedovertime,thecommitteebecamemoreandmore
evaluative,turningdownanincreasingnumberofnominationsforavarietyofreasons.Forexample,somequestionedifyoushouldreceiveanawardif"that'sthat
person'sjob!"Thiswasnotadesiredoutcomeoftheeffort,andKenBlanchardpersonallymetwiththecommitteeandproclaimed,"Yourjobistocelebrate
successeswealreadyhaveenoughevaluations."

TheresultwasthattheprogramwasmodifiedtomakeiteveneasiertobeacknowledgedforhelpingothersbyshiftingfromtheEagleAwardastheendall,beall,to
anewformofrecognitionknownas"EagleHatchlings."EveryemployeereceivedanEagleHatchlingcard,eachofwhichcontainedspacesfor16hatchlings,
nominationpostcards,aswellasasupplyofEagleHatchlingstickers.Wheneveranemployeefeltthatacoworkerdidsomethingworthyofrecognition,heorshe
couldwriteitupandawardanEagleHatchlingstickeronthespot,withoutgoingthroughtheEagleAwardcommittee.Thedate,performance,andnominatorwere
listedonthebackofthehatchlingcardforeachoccurrence.

AcompletedEagleHatchlingcardearnedtheemployeeanEagleAwardplaque,whichwasengravedwiththerecipient'snameandinspiringwordsaboutEagle
behaviorandthenpresentedatacompanymeeting:
EAGLEBEHAVIOR

Eaglebehaviorisbehaviorthatcreatesastory.Itisdoingsomethingextra,unexpected,orspecialforsomeoneelse'sbenefitorthegoodofthecompanyasawhole.

Eaglebehaviorisgoingoutofyourwaytosatisfyaneedthatmightotherwisehavegoneunsatisfied.

TheplaqueincludedspacesfornineEaglechips,smallengravedbrassplatesofaneagleinflightgivenforsubsequentcompletionofEagleHatchlingcards.A
"completed"plaquethusrepresented144instancesofanemployeegoingbeyondhisorherjobrequirementstohelpacoworkerorcustomer.Employeeswho
completed

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aplaquereceivedaU.S.SavingsBond.PlaquerecipientsandtheirspouseswereinvitedtoattendayearenddinnerwithKenandMargieBlanchard,thecompany's
owners.

OutstandingeventscouldalsomeritbypassingEaglechipswithacommitteenominationthataplaquebeawarded.Forexample,BTD'schieffinancialofficeronce
volunteeredtofillinforthecompany'sshippingmanager,whowasoutonthreemonths'disabilityleave,inadditiontohisownjob.ThisearnedhimanEagleplaque
andastandingovationfromthecompanywhenitwaspresented.

RememberingthePurpose

Thistypeofprogramisparticularlyeffectivebecauseitstartswiththeemployeesyouaretryingtomotivatetodosomethingdifferentthusitistheirprogram,not
management's.Itfocusesonagrassrootslevelnamely,thedailyinteractionsamongemployeesyet"rollsup"toincludetraditionalrecognitionelementsofplaques
andpublicpraiseaswellassocialacceptance,communication,andvisibilitywithtopmanagement.Participantslearnedthatit'sokaynottodoarecognitionprogram
perfectlyatfirst.It'smoreimportanttogetitgoingbydoingsomethingthatistimelyandsincereandtomakeimprovementsandmodificationsalongtheway.

TheEagleAwardwassimpleyeteffectivedrivingspecificbehaviorandperformanceandallowingemployeestofeelvaluedfordoingso.

AligningCompensationwithCoreValuesandStrategiesatK/PCorporation

CompanyBackground

K/PCorporation(K/P)isaprivatelyheldcompanyestablishedinSalem,Oregon,in1929.Asingleindividual,JimKnapp,hasowneditsince1967.Thecorporation
nowdoesapproximately$90

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millioninsalesfrom12facilitiesinCalifornia,Oregon,Utah,andWashington.ItisheadquarteredinSanRamon,California,andhasapproximately650employees.

K/PCorporationsuppliesgraphiccommunicationproductsandservices.Itservescorporations,notconsumers.K/PCorporationisinawellestablishedindustryas
farasthecorecompetenciesofimagingpaperwithinkandmaildistributionareconcernedhowever,thereareotherdynamicscausingchange.Computershave
substantiallychangedthewaythecustomersubmitsinformationforreproductionanddistributionoverthepast20yearstheinputtoK/P'sprocesses.Thishasbeen
mostnotableinthepast5to10years.ThepersonalcomputerandtheInternethavenowdramaticallychangedboththeinputandtheoutputoptionsavailabletothe
customer.Inaddition,therehasbeenconsiderableconsolidationamongcompetitors,aneedforglobaldistributionbymanycustomers,arequestforoutsource
solutionsbysomecustomers,andacontinualdemandforfasterturnaroundandlowercost.ConsequentlyK/Pfindsitselfinamatureindustryfacingthesame
marketplacedynamicsashightechorfashion.Thesemarketplacedynamicsinfluencethecareeroptionsandthedevelopmentplanningforeachindividualwithinthe
K/Porganization.

AVisionfortheFuture

In1967JimKnapppurchasedtheSalem,Oregon,commercialprintingbusinessfromhisfather,GardnerKnapp.Hethengrewthecompanybyacquisitionof
geographicallydispersed,privatelyheldcompanies.Duringtheprocessofacquisition,Jimmetandworkedwithmanyretiringbusinessownerswhohadastronglove
andpassionfortheorganizationsthattheyhadbuiltduringtheircareers.Fromtheseassociationsavisionforthefuturewasestablished.Thatvision,andtheassociated
values,continuestoguidethecourseforK/PCorporation.Thevisionremainstodevelopaspecialcompanymadeupofcompetent,ambitiouspeoplewhodirecttheir
livesbyacommonsenseofmission.Thesharedmissionistobuildanorganizationthatenablespeopletoexperiencethattheyare"doingsomethingworthdoing"with
theirbusinesslivesandfeelthattheyare"beingsomeoneworthbeing."Toprac

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ticethisphilosophyeverydaythroughouttheorganization,K/PCorporationseekstoattractandretainpeoplewhostronglyagreewiththesethreesharedbeliefs:
HONESTY

Webelieveintheimportanceofsearchingalwaysfor"intellectualhonesty"beinghonestwithourselvesaboutwhetherwearetruetoourownconvictions.

RESPONSIBILITY

Webelieveeachpersonintheorganizationmustfullyacceptresponsibilityforsuccessfullycompletingtheworkheorsheisassignedoraccepts.

LOVE

Webelievethemostimportantresultofasuccessfulcareeristhelovethatdevelopsovertimeamongpeoplewhoworktogether.Whenallissaidanddone,ourrelationshipswith
eachotherareourmostsignificantandlastingpossessions.

FacingMarketChanges

K/PCorporationcamefacetofacewithtwomarketrealitiesinthelate1980s.First,manyofitscustomersdemandedthatitbecome"qualityliterate"andactively
participateinsuppliercertificationprogramsthattheyintendedtolaunchinordertoachieveturnaroundtimeandcostofgoodsreductiontargets.Second,theindustry
associationsforprintwerepredictingasignificantreductioninnumberofsurvivingfirmsduringthecomingdecade.Themostvulnerablefirmwaspredictedtobethe
mediumsizecommunityprinter.AtthattimeK/PCorporationwasorganizedasaholdingcompanyofseveralmidsizeprintingandmailingfacilities.Eachhaditsown
presidentandoperatedautonomouslywithinitsbusinesscommunity.

Theleadersdecidedtotakeaction.First,theyembracedanaggressiveplantolearn,understand,andimplementthequalityteachingofthetimemostspecificallythat
ofW.EdwardsDeming.Second,theyrealizedtheycould"beattheodds"beingpredictedbytheindustryassociationsbyactingasonecorporation.Asone
corporationitinfactrankedasthe87thlargestintheUnitedStatesintheearly1980s.Therewaspotentialsynergytobe

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hadintheimplementationofthesetwoactivities.Infact,JimKnappandhisleadershipteamfeltthatthevisionandvaluesofK/PCorporationcouldbeexperiencedby
agreaternumberofindividualswithintheorganizationbyeffectivelyactinguponthesetwoinitiatives.

AligningCompensation

Bymid1990,K/PCorporationhadbeenrestructuredasasingleidentityinthemarketplaceallfacilitiesusedonename,onelogo,andconsistentgraphicstandards
sothatthecustomers,suppliers,andemployeeswouldrecognizethemultiplefacilitiesasunitsofonecorporation.Theleadershiphadadoptedconsistentemployee
policies,procedures,andbenefitsacrossthecorporation,whichmadeiteasierforindividualstoconsidertransferasacareeroption.However,compensationwasnot
consistentlyadministered,norwasthereaplaninplacetodoso.Thisseemedasignificanthurdleforcontinuedevolutionoftheorganizationdesignandthebusiness
strategy.TheCEO,KimWright,beganasearchforasolution.Itwasdeterminedthatanoutsideconsultingcompanywouldbeusedtodevelopthecompensation
plan.

Whileataconferenceonthetopicofworldclassmanufacturing,Wrightwasintroducedtoaconsultingfirmthathadhelpedotherorganizationswiththeir
compensationprograms.HefeltthathehadfoundasolutionforK/P.Wrightgatheredtheleadershipteamtogethertoreviewhisfindings.Itwasagreedthatthe
materialpresentedbythisconsultantwasinphilosophicalalignmentwithK/P'svisionandthattherewasconsistencywithpreviousworkaccomplished.Wrightandhis
leadershipteamfurtheragreedthattherewasanopportunitytoleveragetheiractionsoncompensationtoachievebothbusinessinitiativesandgreaterrealizationofthe
visionandvalues.Thus,astrategic"topdown"andatactical"bottomup"implementationprocessbegan.(SeeFigure51.)

DevelopingtheStrategy

ThestrategictopdownportionwasledbyCEOKimWright.Thekeystrategicelementsweretoensurethattheoutcomewouldem

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Figure51.
Evolutionandfoundationforbasecompensationplan"architecture."

 Page139

bracethevision,beaimedatthebusinessmissionofthecorporation,andremainconsistentwiththeguidingprinciplesandvaluesoftheorganization.Wrightalso
facilitatedtheprocesstoprovidestakeholderinputonexpectationsofleadershiproleswithinthecompany.

ThebottomupportionwasledbyBillTaylor,generalmanageroftheNorthernCaliforniaregion.Taylorfacilitatedaprocesstoprovideinputonskillcompetency.
Thisinputcamefromateamofpeoplepulledtogetherforthisspecificpurpose.Theteamwasmadeupofmachineoperators,administrativepersonnel,andfrontline
supervisorstodocumenttheexpectationsthatteammembershaveofeachotherintheworkplace.Theirinputaddressedallroles,fromentryleveltocraftspersonor
professional.

Athreedayworkingsessionwasscheduledwithrepresentativesfromeachofthetwoinputgroups,alongwithhumanresourcespersonnelandtheoutsideconsulting
company.Wrightintendedtobethefacilitatorandessentiallytheconsultant's"client"forthisworkingsession.ItwasagreatplanthatwasputofftrackbyWright's
comingdownwithpneumonia.WithoutaccesstotheCEO,ChuckParsons,generalmanageroftheNorthwestregion,andPatriciaEllsworth,directorofhuman
resourcesfortheNorthernCaliforniaregion,determinedthattheprocessshouldproceedifpossible.Theteamofindividualspulledtogetherfortheeventwere
preparedtheyhadcollectedtheappropriateinformationandtheyhadclarityofpurpose.Inaddition,allinvolvedfelttheyhadhadsufficientdirectionfromWrightto
proceed.Itwasanintensethreedays.ThetaskwasaccomplishedattheendofthethreedayworkingsessionK/PCorporationhadacompanywidecompensation
plan.Theplanincludedabasecompensationphilosophy,abasecompensationstrategy,basecompensationmanagementguidelines,competencydimensions,
competencymeasuresbycareerband,and"benchmarkjobs"identifiedbycareerband.Theteamwasproud.Wrightwasespeciallyproud!

TheK/PCorporationbasecompensationplanconsistsofsixcompetencydimensions.Theseinclude:

1.Knowledgeandskills

2.Customerfocus

3.Continuousimprovement

4.Personaldevelopment

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5.Businessperformance

6.Interpersonalskills

Theplanincludeseightcareerbands.Examplesare:careerbandoneincludesentrylevelcareerbandfourincludeshighlyskilledprofessionalsandcraftspeople
careerbandfiveincludesthosebeginningtoassumeleadershipresponsibilitiescareerbandeightistheCEO.Allsixcompetencydimensionsapplytoeachofthe
careerbands.Thecompetencymeasures(seeFigure52foranexample)varyconsiderablyfromonecareerbandtothenext.

Knowledge Customer Continuous Personal Business Interpersonal

Skills Focus Improvement Development Performance Skills
Interpret Identify Activelyparticipate Bewillingtolearn Workwithin Displayteam
instructions internal/external inprocess newskills establishedwork member
and customers improvementwithin schedulesand characteristics:
understand functionalteams standards commitment
theireffecton initiative
thecustomer proactive
extraeffort
workwith
somesupervision
Basic Anticipate Learnthe Committoa Understandscopeof Practicesix
computer/data customer Plan/Do/Study/Act personal responsibility Humanactions
entryskills requirements cycle career/development
plan
HighSchool Recognize/ Suggest Seekandutilize Understandthat AcceptthatK/P
Diplomaor communicate improvementtools trainingtoenhance assignedworkwill isadiverse
equivalent deviationsfrom personal affectotherareas community
customer contribution
requirements
Trackandplot Suggest Helpothersonce Recognizeaprocess
CICdata improvementsto personaljobisdone problemorvariation
SOPsaswellas andcommunicateto
understandthe appropriateteam
effectonother leader
internal/external
customers
Operational Demonstrateability
knowledgeof toworkwith
mechanically people/teamwork
controlled
equipment
within
functional
level
Performsimple UtilizeR+Boardto Knowledgeof
maintenance acknowledge regulatory/governmental
routineswithin successes compliance
functional requirements
areas
Recognize
needfor
corrective
actions
Perform
accordingto
SOPs

Figure52.K/PCorporation'scareerbandtwocompetencymeasures.

Theplanalsodistinguishesperformancelevelswithinajobpayzone.Therearefourlevelswithinajobpayzone.Theseinclude:

1.Thelearner(thelowestpaylevelfortheindividualwhoisdevelopingthecompetency)

2.Theapplier(theindividualwhosecompetencyissufficienttofullymeetcustomerexpectations)

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3.Theexpander(theindividualwhoconsistentlysharesknowledgewithothersforpurposesofprocessimprovement)

4.Thedeveloper(theindividualwhocoachesandhelpsotherstodevelopthecompetency)

Muchhasbeenstatedaboutthebasecompensation.ItneedstobeemphasizedthatbasecompensationisacomponentoftheK/PCorporationBehaviorBased
RewardStrategy.Thisoverallrewardstrategyalsoincludesthecomponentsofvariablecompensationforsharinginpositivecompanyfinancialresults,and
performancemanagementtobothreinforceorcorrectbehaviorasappropriate.CEOWrightagainfacilitatedtheintegrationofthebasecompensationplanintothe
overallrewardstrategy.

ImplementingtheCompensationPlan

Nextcameimplementation.K/PCorporationhadpreviouslyinitiatedaleadershipdevelopmentseriestoacceleratethelearningandimplementationofbothprocess
improvementandbusinessliteracy.ThisprovidedanappropriateforumtorollouttheK/PCorporationBehaviorBasedRewardStrategyandtoachieveconsistent,
simultaneousimplementationofthebasecompensationplan.Wright,Parsons,Ellsworth,andselectedteammembersofthethreedayworkingsessionconductedthe
twodaytrainingandlaunchmeeting.TheeventbecamethefourthsessionoftheLeadershipDevelopmentSeries.ItincludedbasiceducationmaterialssothattheK/P
leadershipcouldunderstandtheconceptsbehindtherewardstrategyandthespecificsofthebasecompensationplan.Thecontentofthisleadershipdevelopment
sessionwasalignedwithK/Pbusinessinitiatives.Roleplaywasheavilyusedsoallleaderscouldexperiencethematerials,andeachfacilityleadershipteamcompleted
theirindividualimplementationplansbeforeleaving.Ellsworthmetwiththefacilityleadershipteamsshortlyafterthesessiontoansweranyquestionsthataroseasthey
beganimplementationbackattheirfacility.Wrightandhisleadershipteam,whichincludedbothregionmanagers,followedupontheimplementationprogressofeach
oftheseplansduringthefollowingyear.ParsonsandEllsworthcollaboratedtoincorporatethe

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entireplanintothelatestrevisionoftheK/Pemployeehandbook(careerguide)releasedinlate1997.Thecompensationplanhasnowbecomeanintegralpartof
recruitingandcareerplanningatK/PCorporation.

HavingaccomplishedthisprogrameffectivelyremovedthebarrierperceivedearlierbyCEOWright.Moreimportant,itestablishedafoundationforfurtherevolution
withinK/PCorporation.In1997thecorporationlaunchedanemployeestockownershipplan(ESOP)tobeginownershiptransferintothehandsoftheemployees.
Thisrepresentsawholenewdimensionfortheconceptofatotalrewardstrategymuchstrongerthanbasecompensationalonecanoffertheindividual.

IssuesDuringImplementation

Twoissuessurfacedduringimplementation.Thefirstrequirescorporatelevelleadershiptomanage.Thereisatendencyfor''careerbandcreep.''Jobdescriptionscan
bemonitoredtoensurethatbandsfive,six,andsevenarenotexcessivelyused.Thesebandshavesignificantoverlapinpayamount.The"creep"seemstobedriven
byperceivedstatus.

Thesecondissueisrelatedtohumanresourcesdevelopment.Inordertoachievethecompetencydimensionslistedforeachcareerband,allfacilitiesmusthaverather
aggressivehumanresourcesdevelopmentplansinplace.Ifnot,theindividualswilllacktheknowledgenecessarytoachievethecompetencymeasurementsandthus
accomplishingthevisionandvaluesofK/PCorporationwillbeatrisk.Peoplewilljustnotfeelfulfilledwhentheyknowtheyarenotmeasuringuptostated
expectations.

TheFuture

ThemarketplacedynamicsandthechangingneedsofthecustomercontinuetoevolveforK/PCorporation.Itappearsthatthetotalrewardstrategyand,more
specifically,thebasecompensationcomponentwillsupportandendurechange.K/Phascontinuedtomakechangesinorganizationdesignandleadership.New
productsandserviceshavebeenaddedandunneededonesdiscon

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tinued.Theorganizationhashadtoattractandretainnewskillstokeeppacewiththeinformationtechnologyneedsofitscustomers.Alltheseratherdramaticchanges
havebeenaccommodatedwithoutreworkingthestructureandprocessofthebasecompensationprogram.

Theneedfortraininganddevelopmentinthesixcompetencydimensionsdiscussedearliermaybelinkedtoanevenmorefundamentalissueforbusinessestoday.How
doesafacilityleadershipteam,oranorganization,providecontinuous,repeatinglearningopportunities?Perhapstheanswerliesinprovidingmorestructureand
supportforthoseindividualswillingtoparticipateatthe"developer"leveloftheirjobpayzone.It'sanidea.ConsistentwithK/P'scorevalues,thecompanywill
continuetoexperiment,learn,anddevelop.Bydoingso,itstrengthensitsrelationshipwithcustomersanditsemployees.

EvolvingtheRewardsFocusfromEntitlementtoResultsatBaptistHealthSystem,Inc.

Withinthepastdecade,remarkableinnovationsinrewardsystemshavetakenplaceacrossallindustries,inmanycasesunleashingpowerfuldiscretionaryeffortand
strategicresultsthatwerepreviouslyunimaginable.Someindustries,suchasstartuptechnologycompanies,werenaturalincubatorsforrapidinnovationinvariable
pay,andmanyvaluablelessonsweregainedinemployeestockoptions,teampay,andotherincentives.However,morematureindustries,suchashealthcare,which
builttheirverysuccessonmoretraditionalpaypractices,facedthequitedifferentobstacleofchangingrewardsystemsatexactlytherightpace.Thecasestudyof
BaptistHealthSystem,Inc.,inBirmingham,Alabama,showshowaseriesofsmallersuccessesinrewardsystemscanevolveamatureculturetowardapayforresults
philosophy.

AnOverviewofBaptistHealthSystem

BaptistHealthSystem(BHS),anotforprofitcompany,isAlabama'slargestintegratedhealthcaredeliverysystem,providing

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qualityhealthcaretoAlabamiansthroughits11hospitals,primarycarenetwork,BirminghambasedHealthPartnersSoutheastHMO,wellness/exercisefacilities,and
seniorlivingcommunities.BHSwasrecentlyrankedinthetop50oftheIntegratedHealthCare100Directory.Thislistingwasdevelopedincooperationwith
HospitalsandHealthNetworksmagazine(March20,1998)toidentifythetopU.S.healthcareenterprisesthatarepioneeringchangeandhavegonethefurthestin
developingservicesforthecomingmillenniumbybuildingorganizationsthatboastcoordinatedsystemsofcare.Factorsconsideredinthelistingweretypesof
managedcarecontractsforeachsystem,whethermanagementiscentralized,thestatusofinformationtechnologyinnovations,andothermarkersofintegration.

BHStracesitsbeginningsbackto1922,whenagroupoflocalBaptistcongregationsacquiredasmallinfirmaryinBirmingham'sthrivingWestEnd.Onthesiteofthat
original,historicfacilityistoday'sPrincetoncampusofBirminghamBaptistMedicalCenter(BMC).ThecenteriscomplementedonBirmingham'seastbyitssister
flagshiphospital,MontclairBaptistMedicalCenter,andonthesouthbyShelbyBaptistMedicalCenter,whichislocatedinShelbyCountyandhasexperienceda
300%growthrateoverthelast30years.Corporateofficesincludecentralizedsystemwidefunctionssuchaslaundryoperations,accounting,informationtechnologies,
compensation,anemployeebenefitsservicecenter,andpatientaccounting.Eightadditionalhospitalsprovidehealthcaretosmallercommunitiesinnorthandnorth
centralAlabama.

BaptistHealthSystem'sgrowththroughacquisitionsinAlabamahasbeenbreathtaking,withthesystem'ssizedoublingsince1993.However,rapidgrowthhasnot
compromisedquality,withBHSrecentlybeingawardedtheAlabamaQualityAward,whichismodeledaftertheMalcolmBaldrigeNationalQualityAward.BHSis
alsorecognizedasan"employerofchoice,"earningtheWellnessCouncilofAmerica'shighesthonor,theGoldWellWorkplaceAward,andbeingnamedEmployerof
theYearin1997bytheAlabamaCareerDevelopmentAssociationforitscommitmenttocareerdevelopment,literacytraining,andfamilyfriendlyemployment
practices.ThesepracticesgenuinelyflowfromBHS'slongstandingmissionvaluesofcompassionatecare,innovation,performance,andteamwork.

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OneexampleofarecentBHSacquisitionillustratestheimportanceofBHS'sculturalvalues.In1995,BHSacquireda267bedhospitalfacilityinWalkerCounty,75
milesfromBirmingham.BHSinheritedahospitalthathadbeenunionizedinLicensedPracticalNurse(LPN)andlowerwageleveljobsformorethan20years,ina
countywhoselaborforcewashistoricallydominatedbytheUnitedMineWorkersandotherunions.BHSimmediatelyimplementeditscompensation,benefit,and
otherHRpracticesforthenonbargainingRNandprofessional/managementjobs.Withintwoyears,byvirtueofunionemployeesseeingthefairtreatmentofthe
nonbargaininggroup,andthroughcompetitivetotalcompensationpractices,thehospitalunionemployeesmovedtoholdanelectiontodecertifytheunion,voting
unanimouslytodosoin1997.

BHS,alongwithvirtuallyeveryotherhealthcaresystemintheUnitedStates,facesunprecedentedchallengestoitsbusinessmissionfrommultiplepressurepoints,
includingextremeMedicarereimbursementcutsbyCongressandthePresident,continuallydeclininginpatientutilization,intensecompetitivepressure,andaturbulent
managedcareenvironment.BHSisnowinthefourthandbyfarmostaggressiveyearofreengineeringitsoperationsthroughconsolidationofservices,costcutting,and
rightsizing.Thelatter,remarkably,hastakenplacethusfarby"inplacing"morethan90%ofstaffmemberswhosejobswereeliminatedintojobsinthegrowthareasof
thebusiness.Anyoneofthesebusinesspressureswoulditselfrequireahealthcaresystemtomakesignificantbusinessdecisionshowever,theconvergenceof
numerousbusinesspressuresatoncehasforcedperformanceimprovementinitiativesneverbeforewitnessedintheBHSculture.TheplaqueonthewallofBHS's
CFOstatesthecasesuccinctlyNoMargin,NoMission.Inaveryrealsense,thepeoplewhoincreasinglydeclaretheirpreferencefornotforprofit,community
basedhealthcaredependonBHStobefiscallyresponsible.

Fortunately,anevolutiontowardmorevariableandresultsbasedsystemsofpayhadbegunatBHSinthemid1990sintheformoftargetedvariablepayplans.A
reviewofthreetargetedincentiveplansuccessstorieswillshowhowBHShasembracedastrategytoevolvetowardamoreresultsbasedcompensationphilosophy
thatwillserveorganizationalobjectivesintothecomingmillennium.

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AnIncentivePlanWhoseTimeHadCome

Inarecentchallengingfiscalyear,thepatientaccountingareahadbecomethefocusofbothfinancialandcashflowscrutiny.Patientaccountinghasamajorimpacton
criticalfinancialmeasures,includingdaysinaccountsreceivableforpatientbillingaccountsandreductioninbaddebtexpense.Therewardsystemhadbeenbasepay
driven,wasnottiedtoimportantbusinessmeasures,andpromotedashallowemployeeunderstandingoftheoperation.Theentitlementmentalityand
underperformancethattypicallyaccompaniesbaseonlyrewardprogramswasquiteevidentinalltherelevantperformancemeasuresofthepatientaccountingarea.

Accountsreceivablehadcreptupto90days,whichwasbringingthebusinesstoitskneesthroughpoorcashflow,exertingburdensomepressureoncapital
expenditures.Forthecasualreader,thefinancialimpactofmerelyoneday'sdelayinreceivingpaymentonapatientaccountatonlytheMontclairBMChospitalis
equivalentto$800,000indelayedpaymentandtheresultinglosttimevalueofmoney.Problemswerenotlimitedtodelayedaccountsreceivable,asbaselinedata
qualityhadbeenmeasuredatadisappointing72%.Ahighperformingpatientaccountsareabasedonnationalbenchmarkswouldincludeanaveragedaysinaccounts
receivableof60andaqualitymeasureof95%.Theperspectiveofbothoperationsmanagementandtheirhumanresourcesbusinesspartnerswasthat,without
question,desperatetimesexistedinpatientaccounting,andthusafarmoreleadingedgeapproachtopaypracticeswasbusinessjustified.Outofthisdireneedfor
highperformance,thefirstsignificanttargetedvariablepayplanatBHSwasborn.

PatientAccountingIncentivePlanDesign

TheobjectivesofthePatientAccountsPlanareasfollows:

Enhanceteamworkwithinandamongdepartments.

Increaseemployeeunderstandingofhospitaleconomicsandkeybusinessmeasures.

Focusandrewardemployeesforbehaviorsthatsupporthospitalgoals.

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Serveasapilottoassessthefeasibilityofvariablepayprogramselsewhereintheorganization.

Measurementswereselectedthatwouldsupportplanobjectives,includingqualityofbillingdatacollectedandentered,daysinaccountsreceivable,reductionofbad
debtexpense,andpatientsatisfaction.Toemphasizequalityinthestrongestpossiblemanner,plandesigndictatesa"winner'scircle"forqualitymeasures,suchthatno
awardwillbepayableifthespecifiedqualitythresholdisnotattained.Thishadadramaticimpactinimprovingqualityasemployeessuddenlyfoundthequalitymeasure
relevantduetorewardopportunity.

Hastheplanpositivelyimpactedpatientaccountperformance?Withoutquestion,asimprovementsoverbaselineperformanceshowanastoundingreturnonthe
compensationinvestment(ROCI)of29to1:

IncentivePlan FinancialGains* IncentiveInvestment ROCI

PatientAccountPlan $3,658,000 $125,800 29.8:1
TranscriptionistPlan $384,000 $80,132 4.8:1
HMOMemberServices $224,838 $48,892 4.6:1
Combined(3)Plans $4,209,238 $254,824 16.5:1
*FinancialGainsresultfromincreasedproductivity,reduceddaysinaccountsreceivable,increased
quality,anderrorreduction."Soft"gainssuchasimprovedcustomersatisfaction,thoughveryreal,arenot
capturedasfinancialgains.Eachplan'sfirstyearresultsareshown.

WhentheROCIsforincentiveplansarethiseyepopping,skepticismastoadirectcauseandeffectrelationshipisunderstandable,butthefactthattherightresultsare
happeningismoreimportantthanproofoftheirmultiplecauses.Onemustrememberthatoftenotherparametersarechangingconcurrentlywhenredesigningincentive
plans.

Throughanentirelynewwayofworkingtogetherinpatientaccounting,andfocusinggreaterdiscretionaryeffortonquality,daysinaccountsreceivableweredropped
from90to46daysoveratwoyearperiod.Thiscomparestoanationalaverageof60grossdaysinaccountsreceivable,whichmosthealthcareprovidersarehappy
tomaintain.Employeeturnover,whichwasat20%,hasbeencutinhalfto10%.Anecdotalevidencemaybemorecompelling,astheBirminghampatientaccounts
departmentnowholds

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twotothreesitevisitspermonth,hostingconsultantsandhealthcareprovidersfromacrosstheUnitedStateswhoareinterestedinexactlyhowBHSachieved
industryleadingperformancemeasures.MitziWinters,vicepresidentofpatientaccounting,observedthatonerecentvisitorcommentedthat"BHSshouldcharge
admissionforthesitevisits."

Thisplanhasplacedpatientaccountingabovenationalaveragesindaysinaccountsreceivable,customersatisfaction,andbaddebtcollection.Yetpropercourtesy
andbillingcollectionmethodsareensuredsothatorganizationalvaluesofcompassionatecaredonotsuffer.

Infact,customersatisfactionsurveyscoresforpatientaccountingincreasedaftertheincentiveplaninstallation.Theefficienciesfromacceleratingcollectiblesources
alsobenefitthecommunityBHSservesintheformoftheavailabilityofgreaterresourcestoprovidecaretothemostneedypatients.

Teamworkhastakenrootasfingerpointingovererrorsbetweenareashasdisappearedandhasbeenreplacedbyprideinquality.Withqualityatanimpressive98%,
therearetoofewerrorstoevencausethe"blamegame."Employeesunderstandtheirpersonalimpactondaysinaccountsreceivableandqualitymeasures.For
example,failingtoverifyinsurancecoverageofpatientsupfrontmaydisqualifytheteamfromthequarterlypayout.Veteranemployeesnowhelpoutnewhirestoteach
fundamentals,ensurequality,andsolveproblemstogether.

Theplanhaspaidoutconsistently,daysinaccountsreceivableandbaddebtexpensearestillcontinuingtodecrease,andpatientsatisfactioncontinuestoimprove.The
ROCIandthesuccessofplanssuchasthisclearlyhelpedsetthestageforbroaderbasedpayatriskplans.

TheMedicalTranscriptionistsIncentivePlan

Asecondincentiveplan,whichhasbeenhighlysuccessful,istheMedicalTranscriptionistPlan.Thepurposeofthisplanistorewardeachtranscriptionisttodevelop
productivitytopeaklevelsofqualityandquantity,therebybenefitingthemaswellasthehospital.Currently,medicaltranscriptionistsarecompensatedunderamixof
baseandincentivepaydesignedtoattractandretainpeak

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performers,whileencouraginglowperformingcandidatesto"selfdeselect"intheinterviewprocess.Theincentiveispaidoutbiweeklytoensuremaximumreward
immediacy,becausethemeasurementslendthemselvestothisfrequency.Transcriptionistsarepaid$0.05perlineforeachlineinexcessof520lines.BHS
transcriptionistsintheplanareperformingatanaverageproductionof1,700linesperday,whichis70%abovenationalaverageproduction,whichhasallowedBHS
toachievelowerthannationalaveragestaffingratios.Inadditiontothenumberoflines,qualitymeasuresensurecoding,medicalrecords,andphysicianinformationis
accurate.Althoughthebasicincentivedesignpayforthetranscriptionistplanisfairlycommonintheindustry,recentplaninnovationsincludemovingtranscriptioniststo
apureproductionpaymodelconcurrentwithatimetelecommutingimplementation.

ComplementstoVariablePayStrategies

BHSisinthesecondyearofitstelecommutingworkoptionandiswithinsixmonthsofhavingalltranscriptionistsworkingoutoftheirhomes.Theconceptof
telecommutinghascreatedaflexibleworkoptionforemployeesthatissuperiortolocalcompetition,therebydramaticallyreducingturnover.Atatimeof
unprecedentedshortlaborsupply,qualifiedtalentisactuallyseekingoutBHSasanemployerofchoiceduetoitstelecommutingpolicy.Continuousimprovementinthe
areasofinformationtechnologyhasmadethispossible.Telecommutinghasbeenawinwinstrategyimprovingproductivity,creatingfewerdisciplineproblems,
increasingemployeemorale,andrelievingpressureonpaysystemsasbasesalaryfixedcostsweredroppedinfavorofa"100%atrisk"paymodel.Thenewplanis
designedbasedonnumberoflinestypedperdaywithqualityasamodifier.Itisgraduatedsothatasthenumberoflinesproducedincreases,thecentersperline
accelerates.Theoutcomehasbeenslightlyreducedcompensationforunderperformersandincreasedcompensationfortheveryhighestproducers,butwithacost
neutraltransitionthathasthusfarcausedzeroturnover.

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ABalancedPerformanceScorecardforHealthPartnersSoutheastHMOMemberServices

ThecriticalservicelinkbetweenanyHMOorinsuranceprovideranditsmembersisawellrunmemberservicesarea.Thehealthinsuranceindustryhasfaced
particularchallengesinrapidlytrainingservicecenterrepresentativestomastersystems,groupplanbenefits,providernetworks,andothermemberinformation,let
alonedeliveraccurate,timelyanswerstomemberswithconsistentquality.HealthPartnersSoutheastHMOmemberservicesdepartmentwasnoexception.The1996
performancebaselinepaintedableakpicture14%membercallabandonmentrate,35%staffturnoverrate(withmostbeinglosttolocalcompetitors),andlow
membersatisfactionscores.Therewasminimalteamwork,withtrainingofnewmemberservicesrepresentativesleftlargelytotheirmanager.

Adesignteamofcorporatecompensationandmemberservicesmanagementintroducedanincentiveplanwithamonthlytargetpayoutopportunityof8%ofpay,
whichwasaimedatdrivingindividualperformancelevelshigherwhilepromotingnewcollaborativebehaviors.Theperformancematrixestablishedindividualgoalsfor
productivity(callsperweek)andquality(assessmentofasampleofrecordedcallsforaccuracy,courtesy,andotherskills),weightingindividualgoals60%.The
performancescorecardwasthenbalancedwith40%weightedteamgoals,includingthemonth'scallabandonmentrateandmembersatisfactionscores.Specialcare
wasgivenincommunicatingtheplanmechanics,emphasizingthenewbehaviorsthatwouldcreateteamwork.Ofequalimportancewerespecialcelebrationsthatwere
heldformonthlypayoutssothatincentivesextendedbeyondmerefinancialtopsychosocialrewards.

Thefirstyearresults(1997)forthememberservicesincentiveplanposteda4.6to1returnontheincentiveinvestment(referbacktothetable)throughincreased
productivityandquality.Perhapsthemostunexpectedoutcomewasthedramaticreductionofmemberservicesturnoverfrom35%to5%,withtheassociated
operationalstabilityandimprovedquality.Otherbenefitsincludereducedpressureonmanagementtotrain,asthe40%weightedteamgoalshavecreated
collaboration.Employeesareworkingto

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bringanewhirerapidlyupthelearningcurveastheysharesystemshortcuts,communicationskills,andcoachfellowteammembersonHealthPartnersSoutheast's
servicevalues.Employeesfeelapersonalstakeinsharingtheirbestpractices.

WhenPayoutsAreMeaningful

It'salltooeasyforexecutivesandcompensationpractitionerstobecomecynicalaboutthesizeofincentivepayoutsandatwhatleveltheybecomemeaningful.BHS
haslearnedthatpayoutsizeormeaningfulnessisoftenintheeyesofthebeholder.Jane,anaccountsreceivableemployee,receivedaquarterlyincentivepayoutof
$205fortwosuccessivequarters,whichaccordingtorewardandmotivationaltheorywouldbeconsidered"undermotivating"asareward.Someincentiveplan
designerswouldabandonsuchaplan'sveryimplementation.ButthetruthwasthatboththerecognitionforperformingandtherewardwerespecialtoJane.Shesaid,
"EveryMondaynightIthankGodforBHS'sincentiveplan.Forthepastfiveyears,Ialwayshadtogotothelaundromattowashclothesandnevergottospendtime
withmyhusband.Withthefirsttwoincentivechecks,Iwasabletobuyawasheranddryer,andnowmyhusbandandIlookforwardtoMondaynights."Thelimited
purchasingpowerthatoftenexistswithtoday'sworkermighthelpexplainwhyevenmodestlumpsumrewardscanbemotivational,producingbetterperformanceand
strongercommitmenttotheorganization.

TheFoundationforaResultsBasedRewardsFuture
Aninvasionofarmiescanberesisted,butnotanideawhosetimehascome.
VictorHugo
Histoired'unCrime,1852

Thethreeillustratedvariablepayplansdiscussedinthiscasestudy,aswellasfiveadditionaltargetedvariablepayplansthatfollowedatBHS,haveservedasa
springboardtoanevenbroaderbasedpayforresultsphilosophy.Therewasclearbusinessriskin

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eachplan'simplementation,includingperceivedinequitybyemployeesinadjacentareaswhowerenotincentiveeligible,andtheriskthatifperformanceimprovements
werenotachieved,theincentiveplandesignersmightbeviewedas''throwinggoodmoneyafterbad.''Perhapsthegreatestriskwasthepossibilityofafailedpilot
program.Hadtheseplansshownadisappointingreturnonthecompensationinvestment,itmighthavesignaledthecommitmenttoabaseonlypaystrategyforyearsto
come,despitenationaltrendstogreaterpayatriskineveryindustry.Eveninafaithbasedorganization,seeingisbelieving.ItisdifficulttoarguetheROCIoneach
plan,andtheminimalinternalinequitythatisattributabletousingatargetedapproachisoffsetbyeachplan'ssuccessinretainingstaffinwhatwerehistoricallyhigh
turnoverareas.

Thesevariablepaysuccesseshaveintersectedintimewithunprecedentedbusinessfinancialchallenges.Evenifitweredesirable,healthcareorganizationscanno
longeraffordtoprotectemployeesfromthecompany'sfinancialvariability.Thisiswitnessedintheindustry'sshrinking,barelyatinflationmeritincreasebudgets,inthe
aggressivemanagementofbenefitplanutilization,andinunprecedentedleanstaffing.Yetorganizationalvaluesandobjectivesremainthesame:toprovidefaithbased,
notforprofithealthcareofthehighestqualitytothecommunitiesentrustedtoBHS.

Rewardsystemsarenowunderstoodproperlyfortheirroleindrivingpeakperformancetowardresultsthatarecriticaltothebusiness.Inrecentlyapprovinga
systemwidegainsharingplan,seniormanagementhastakenaboldsteptocreateasenseofownershipandcaringamongemployeesateveryleveloftheorganization.
Basicplandesignwillprovideforsystemlevelfundingofapoolfromfinancialgainsoverbudgetednetincomefromoperations.Todriveintensefocusonpatient
satisfaction,qualitywillbeagainsharingplanfacilitylevelthreshold.Finally,operatingmarginwillbetheperformancemodifierateachfacility,focusingteamefforts
towardcontrollableexpensereductionandcontinualprocessimprovement.Despiteanannualpayoutfrequency,rewardimmediacywillbeachievedthroughintensive
communicationofprogresstowardgoals,recognitionofkeysuccesses,andlivelymeasurementfeedbackdisplays.BobRoeder,ofWilliamM.Mercer,Inc.,
observes:"Itismyopinionfromworkingwithhealthcare

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systemsthatitismoreaquestionofwhenthaniftheywilladoptbroadbasedrewardstrategiessuchasgainsharingplans,becauseofthegreatpotentialtoharnessand
focuseffortsontherightresults."

HeadingBoldlyintoanUncertainFuture

ThehealthcareindustryintheUnitedStatesisarguablytheindustryfacingthegreatestdegreeofuncertaintyinthenextmillennium.BHSandotherleadinghealthcare
organizationsarenonethelessconfidentlybuildingrewardsystemsthatwillhelpforgeworkingAmerica's"newdeal,"whichrewardsresultsthatareimportanttothe
businessandsharesthegainscreated.Itispreciselythisrewardstrategythatwillmakebusinesscriticalmeasuresrelevantsothatentitlementrapidlygiveswayto
results.

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6
SupportingaBusinessTurnaround
Whenanorganizationfacesamajorproblem,onethatmeansthatitmightnotsurvive,fearrunsdeepintheculture.Thisoccurswhentheorganizationrealizesthatthe
conditionsarenottemporaryabnormalitiesinthebusiness.Therearetwopossibleresponsesflightorfight.Thosethatdenythecrisiscompoundtheirsituation.
Thosethatchoosetofightatleasthaveachanceofwinning.Succeedinginacrisisrequiresastronggameplanandcommitmentofpeopletoitsimplementation.

Eachoftheorganizationsinthischaptertookonthetaskofturningthemselvesaround.Someofthesituationsweremorecriticalthanothers.Theyeachdevelopeda
strategyandcommunicateditheavilythroughouttheorganization.Butwhatdoesonesaytoemployeesabouttheirstakeinthisstrategy?Istheopportunitytokeep
one'sjobtheonlybenefit?Thesecompaniesknewtheyneededtooffermore.Theyknewthattheturnaroundstrategywouldbemoremeaningfulandcreatemore
commitmentifpeoplecouldseeapersonalstakeintheoutcomes.Thedecisionsandactionswouldbeunderstoodinthecontextofmutualinterest.Whiletheprocess
ofmajorchangeisnoteasy,successfulimplementationisessentialiftheorganizationistosurvive.

TheturnaroundexperienceofSearsisperhapsthemostsignificantintermsoftheculturalchangeandthemagnitudeoftheorganization.AvidTechnologywassmaller
inscope,butnolesssignificantforthoseworkingforthisvideotechnologycompany.BurkeCustomerSatisfactionAssociatesisaconsultingfirmthatdevelopeda
strategytorecapturetheleadershipinitsmarketsbyrestructuringkey

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jobs,accountabilities,andrewards.OSRAMSYLVANIAneededtosignificantlyimproveitsperformanceorientationinordertorecaptureitscompetitivenessinthe
market.Itusedaperformancemanagementprocessasoneofthekeydriversofthismessage.Finally,adivisionofSunLifewasfacingitssaleorclosureifitdidnot
turnintoaprofitcontributor.Thecompanytookan"allhandsondeck"approachandusedavarietyofrewardstodriveasubstantialchange.Theyallsucceeded.

Crisiscanprovideanopportunitytogalvanizepeopleintoacommonmission.Somebelievethisistheeasypart.Oncetheorganizationhasbecomerepositionedand
hascelebratedthevictory,howdoyounotretreatbackintopastpracticesthatledtothecrisisinthefirstplace?Eachoftheseorganizationsisnowfacingthat
challengeofcontinualimprovementwhenthependingcrisishaspast.Sometimesafterwinning,theelementsoftheoldculturereturnbecausethepressureforchangeis
diminished.Thesecompanieshaveabetterchanceofsustainingtheirchangethanthosewhotreatthechangeeffortsasaproject.Thesecompaniesatleasthave
changedthewaytheypaypeopleandthemeaningtheyplaceonrewardsystems.

RegainingMarketLeadershipatSears,RoebuckandCompany

ThereisperhapsnogreaterexampleofaturnaroundofabusinessthanwasachievedatSears.MuchhasbeenwrittenabouthowSearshasachieveditscritical
turnaround.Hereisacompanythatishugeandcomplex,facingachangingmarketplaceandchangingcustomervalues.Inthiscasestudywewillfocusonhowa
varietyofrewardsystems,someformalandothersinformal,wereintegratedbyasetofclearthemestosupportthechangeprocess.Inthisway,wecanunderstand
howSearswasabletobesuccessfulandbuildfundamentalcommitmentofitspeople.

DiscoveringtheNeedforFundamentalChange

FordecadesSearshasbeenpartoftheAmericanculture,growingalongwiththecountryfromitsfoundingin1886.Peoplehadper

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sonalrelationshipswiththecompanyandfoundgreatvalueinbuyingfromitsstoresandcatalogs.Thestructureofthemarketremainedbasicallyunchangedyearafter
year,throughthe1950sand1960s,thoughthesheervolumeofretailoutletsincreaseddramatically.

Thislonghistoryofsuccessandleadershipmayhaveblindedtheexecutives,managers,andprofessionalsaboutthecrisisthatawaitedthem.Theproblemwithbeing
successful,andbeinghighlyrewardedforit,isthatacompanymaybecomeoblivioustocompetitivechangeanddenythepressuresgrowingaroundit.Intheearly
1970s,somethingfundamentalbegantochangeintheretailmarket.SearsstartedseeingcompanieslikeKmartandspecialtyretailersprovidingcustomerswith
comparableproductsatlowercosts,greaterchoiceforitemsofspecialinterest,orservicelevelsthatwerequalitativelydifferentfromwhatpeoplereceivedfromlarge
departmentstores.Peoplebegantochangetheirprimaryretailstoreasanunprecedentednumberofchoicesstartedpresentingthemselves.

ForSears,therewasnosinglecompetitor.Instead,itstartedfacingavarietyofnicheplayers,eachonefindingandfullymeetingtheneedsofaparticularsetof
customers.Theyprovidedservicesinasuperiorfashionandchangedcustomers'traditionalbuyingpatterns.Searsdidnotrestduringthistimeittriedmanystrategies
toregainprominence.Itofferedsalestocompeteonpriceandevenchangedpricingpoliciesto"everydayfairpricing"inresponsetocustomermistrustofsaleprices
(thecustomersstayedaway).Searsopenedstoresinmallsaroundthecountryandclosedstoresthatwerenotshowingsignsofgrowth.Itintroducedmanymarketing
andmerchandisingstrategies,onlytofindthatfewofthemworkedforlong.Searswasbeingattackedfromallsides,anditwashavingtroublesustainingmarket
leadership.

In1992,Searshadsalesofmorethan$33billionandmorethan300,000employees.Whilethissizeenabledittoremainthemajorforceintheretailindustry,itwrote
off$2.3billion,morethanthetotalrevenuesofmostmajorcompaniesintheUnitedStates.SearshiredArthurC.Martinezasthenewchairmanandchiefexecutive
officer.Hischallengewastoturnthismajorenterprisearoundsothatitcouldaddresstheneedsofanewmarketplaceandanewcustomerpreferenceanddoso
predominatelywiththesamepeople,storelocations,andinfrastructure.Timewasnotonhisside.

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ImplementingaStrategyforChange

WhilemuchcanbewrittenabouttherenewalofSears,therewereseveralkeystrategiesthatemergedtoguidetheseefforts.First,thecompanyneededtoreduce
costsandalignthecoststructuretotherevenuesofthecompany.Theactionstosupportthisstrategyledtotheclosingofthe101yearoldSearscatalogoperations,
aswellasmorethan100stores,anddownsizingthousandsofemployees.ThefinancialandrealestatecompaniesSearshadacquiredinthe1980sweredivestedso
thatthecompanycouldfocusonitscorebusinessofmerchandising.

Second,thecompanyneededtoregaintheconfidenceofcustomersandemployeesthatSearswasanattractiveplacetoshop.Onlyactiveexecutiveleadership,not
restructuringactivitiesorpolicies,coulddothis.InApril1993,theCEOtookagroupofmorethan50executivesforanoffsitemeetingtoreviewthebusinessandset
anewcourseforthecompany.Hedirectedthemeetingandengagedeachexecutiveinfacingthenewrealitiesofthebusiness.Theoutputofthemeetingwasan
articulationoffivestrategicimperativesforthecompany'sturnaround:

1.Becomeacompellingplacetoshop.

2.Developalocalmarketfocus.

3.Focusoncorebusiness.

4.Buildawinningculture.

5.Seekcontinuousimprovementincosts.

ThesegoalspersistedthroughoutthefirstfiveyearsofSears'sturnaround,buttheyweredistilledintoasimple,memorablevisionstatement:Searswantstobea
compellingplacetoshop,acompellingplacetowork,andacompellingplacetoinvest.These"3Cs"formedthebasisformajororganizationalchange.

Toimplementtheseconcepts,theexecutivesbeganaprocessofengagingpeoplefromallcornersoftheorganizationtoexplorewhatcouldbedonetoimprovethe
organizationinthesethreeareas.Throughsurveys,focusgroups,andotherintensivedialogues,thousandsofpeoplewerebroughtintotheprocessofchange.Asideas
cameforward,theywerenotdismissed.Taskforceswerecreatedandledbymanagersfromallareasofthecompany.Peoplewhohadbeenhiddenfromsenior
managementhad

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opportunitiestodemonstratetheirleadershipandcommitmenttoreshapingtheorganization.Thosewhowaitedforthechangetopassbecameevidentaswell.

Finally,astheprocessofchangeunfolded,twofactorsworkedinSears'sfavor.First,itdidnotneedtoconvincepeoplethatchangewasneededorimportant.People
werereadyfornewleadershipandwantedtoimprovetheperformanceofthecompany.Second,themarketplacestillhadapositive,trustingimageofSearsasagood
andhonestplacetoshop.Itstillownedmostofthe"hearts"ofthemarketplace,thoughrapidchangewasneededtosustainthatrelationship.

FindingtheDriverstoFocusOrganizationalTransformation

Throughoutthesechangeeffortsandsubsequentseniorleadershipmeetings,aconsensuswasbuildingonwhatwasneededtobesuccessful.Thecompanyhadyears
ofdataonitsfinancialoperations,customerpreferencesandattitudes,andemployeeopinionsthreedatasourcesforwhichtomeasureprogressonthe3Cs.It
analyzedthesefactorstodetermineiftherecouldbeaconnection,andifthiscouldformthebasisforrenewingtheorganization.Throughayearlongprocessof
statisticalanalysis,itwasshownthattherewasindeedastrongcorrelationbetweenthethreefactorsofthebusiness.Thecompanyobservedthefollowing:
Employeeswhowerevaluedfortheircontributionsbehavedinwaysthatwould...

Leadtoimprovedcustomersatisfactionandretention,whichwould...

CreateattractivefinancialreturnsandmakeSearsagoodplacetoinvest.

Thesethreefactorsemployees(acompellingplacetowork),customers(acompellingplacetoshop),andshareholderreturns(acompellingplacetoinvest)would
leadSearsintoastrongleadershippositioninthemarket.Theexecutivesintuitivelyrealizedthatthewaypeopleweretreatedwoulddirectlybemanifestedincustomer
relationshipsandthatcustomerswoulddeterminethe

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company'sfinancialresults,thoughtheempiricalconnectiontookagooddealofworktoconclusivelydemonstrate.

Followingthislogic,thecompanydevelopedabalancedscorecardofperformancemeasuresandusedthesetolinkallrewardsystemsintoanintegratedmanagement
process.ThesebecameknownastheTotalPerformanceIndicators(TPI).Overtheyearsthecompanyhascontinuedtorefinethemeasurementsystemstocapture
employee/customer/financialresults.Itusesthesefactorstoestablishmajor"audacious"goalsaswellasintegratethemintoallincentivecompensationplans.

Toillustrate,thismodel,whichisbasedonrigorouscorrelationanalysis,determinedthata5pointimprovementincertainemployeeattitudeswoulddrivea1.3point
improvementincustomersatisfaction,whichinturnwoulddrivea0.5%improvementinrevenues.Asappliedtoatypicalstore,a5%improvementinemployee
satisfactionwouldresultina$150,000to$200,000increaseinstorerevenues(andasmodelrefinementsaremade,thebottomlineimpactappearsevenstronger).
Managerscouldapplythisanalyticalframeworktotheoverallcompanyaswellasatthestorelevel.Hence,Searsfoundaclear,integratedtooltomanagethe
performanceofthecompany.

ChangingBehavior

Alltheconceptsandstrategies,modelsandmeasures,wouldbeoflittlevalueiftheydidnotresultinchangingbehaviorsthroughouttheorganization.Theorganization
iscomposedoftheactionsthatpeopletake.IfSearswastoultimatelybesuccessful,peopleneededtoembracethechangesandseeapersonalbenefitforimproving
theresultsofthecompany.Thepaybackneededtogobeyondjustkeepingone'sjob.Peoplewouldneedtounderstand,betrained,andreceivereinforcement
continuallyfortheircontributionstoimproveperformance.

Searstookaboldandmultifacetedapproach.In1996itmadeatrulyrevolutionarystepofbasingalllongtermincentivesonthethreekeymeasuresofemployee
satisfaction,customerloyalty,andfinancialresults.Thisinvolvedmorethan200seniormanagers.Theirthreeyearincentiveplanawardswerebasedonabalanceof
improvementsonethirdonemployees,onethirdoncustomer

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measures,andonethirdoninvestormeasures.Theboardofdirectorstooktheleapoffaithofsupportingthisplaneventhoughtheemployeeandcustomermetrics
werestillbeingrefined.

Then,thesemetricswerecascadeddownthroughtheorganizationtoeveryassociate.Asignificantportionofthemanager'svariablepaywasbasedontarget
improvementsinthesethreeareas.Thiscarrieddownthroughthedistrictmanagersresponsibleforamajorareaofstores.Eachmanagerhadaccountabilityfor
improvementsinthesefactorsorsustainingthemathighlevelsofperformance.

Inaddition,initiativeswerebeguntoengageallemployeesintheprocessofbusinessplanningandreapingtherewardsofsuccess.Searshadhadaprofitsharing
programsince1916.Whilestoreshadlongbeenrewardedontheirfinancialperformance,theTPImeasuresexpandedthefocustoemployeesandcustomersaswell.

Finally,all15,000salariedassociatesareparticipatinginthecompany'sstockoptionprogram.Searsismaking"owners"ofitsmanagersandprofessionalsandis
expandingthatownershiptoallemployeesthroughadiscountedstockpurchaseplan.

ChartingtheFutureofChange

WehavewitnessedatSearsaprocessofdiscoveringthatdrivesthesuccessofthebusiness.Thecompanyhasthenimplementedtheseprocessesthroughoutthe
organization.Theresultsoverthepastfiveyearscanspeakforthemselves:

Revenueshaveincreasedbymorethan15%(tomorethan$42billion).

Netincomehasincreasedfromalossof$3billiontoagainof$1.3billion.

Earningspersharehavegonefromalossof$7.02toagainof$3.12.

Customersatisfactionscoreshaveincreased4%whilethecomparativeindustrydatahasremainedflatfrom1995to1996,customersatisfactionjumped5.6%,
morethantwicethatofotherretailers.

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Employeesatisfaction,assurveyed,increasedatcomparablelevels.

TheinvolvementprocesshasbeenkeytoSearssuccess.Thestrategywassimple,clear,andrelatedwelltotheneedsofthemanagersandassociates.Thereward
systemshaveprovidedthepersonalstakeforeachindividualtomakecontributionstotheturnaroundefforts.Searshasonceagainemergedasaleadingretail
company.

Nowtheeffortsofchangearefocusingoncontinuousimprovements.Theprocessofchangeisanunendingprocessthereisnofinishline.Inmanycompetitive
industriesmakingchangeisnotasimportantastherateofchangeoneneedstocontinuallystayaheadoftheimprovementsmadebyone'scompetitors.

Searsisnowfacingthechallengeofsustainingthemomentumofchange.Theyclearlyhavethebuildingblocksandsystemstoimplementacompetitivestrategy.And
whathasevolvedisacompanythatisnowreadyfornewmarketopportunities,aslongascomplacencydoesnotemergewithinthecultureofthenewSears.

LinkingRewardSystemstoaBusinessTurnaroundatAvidTechnology,Inc.

Whencompaniesprimarilyfocusonrevenuegrowth,theyoftenmakesubstantialreinvestmentsinthebusinessorkeeppriceslowtogainmarketshare.Thechallenge
istosustainsufficientcapitaltoinvestandmanagecashfloweffectivelyuntilgrowthinbothrevenueandprofitabilitycanbesustained.Thisisastudyofaunique
technologycompanythatachievedmarketdominanceandfacedanumberofbusinessissues.Whennewleaderswereselected,theyinstitutedaneffectiveturnaround
effort.Theirrewardsystemswereacriticallinktotheimplementationofthestrategy.ThecompanyisAvidTechnology,Inc.

CompanyBackground

AvidTechnologywasfoundedin1987andshippeditsfirstproductin1989,withthedreamofrevolutionizingthefilmandvideoeditingindustry.PriortoAvid's
formation,motionpictures,com

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mercials,broadcastnews,andTVshowswereeditedinalaborintensivewaybycuttingandpastingfilmsegmentstogether.Avidcreatedsoftwarethatenabledthis
entireprocesstobedonedigitally,usingthecomputertoeditthefilmandlatertoaddgraphicsandspecialeffects.

Thecompany'sgrowthwasphenomenalasthemarketsawtheclearadvantagesofdigital,nonlinear,realtimeeditingoffilmandvideo.Revenuesgrewfrom$1million
in1989tomorethan$400millionin1995.Thenumberofemployeesgrewfromthestartingfounderstomorethan1,500.In1994and1995,sixcompanieswere
acquired.Salesofficessprangupacrosstheglobe.In1994,thecompanyearnedthedistinctionofbeingnamedinthetop10oftheFortune100hotgrowth
companiesandwaslaternamedtotheFortunelistof''CoolCompaniestoWorkFor.''Thetechnologywassoadvancedthatitbecamethestandardfortheindustry.
Thiswaseffectiveindrivingoutmajorcompetitors.

Thisgrowth,however,wasnotwithoutitscosts.Inaconcentratedefforttoincreasemarketshareanddominatecompetitors,thecompanydroverevenueswitha
passion.Thisstrategywashighlysuccessfulandledtodramaticincreasesinsales.Yetitalsoresultedinminimalprofitability.Avidfocusedonmakingmajor
investmentsintechnologydevelopmentandsalesandmarketing.Investmentsintheinfrastructure(e.g.,humanresourcessystems,financialreporting,information
systems,manufacturingquality),socrucialtoarapidlygrowingcompany,wereneglected.Whenproblemssurfaced,customerconfidenceandprofitabilityeroded.
Therewaslittleestablishedprotocoltoaddresscustomerconcernsandmanagecosts.

Thecompensationsystemssupportedthisdriveforgrowth.Stockoptionswereusedextensivelyasaninexpensivewaytoattractandretaingrowthoriented
individuals.Toretaintheeffectivenessoftheoptions,thecompanyneededcontinualgrowthinmarketvalue.Iftheywereeffectiveingrowingsharevalue,thiswould
counteractanydilutioneffectoftheseoptionsontheshareprice.Whenthegrowthstartedslipping,shareholdersstartedplacingincreasedpressuretoimprovethe
firm'sprofitability.Additionally,cashbasedincentiveplansbegantocauseadditionalproblemsasthecompanyfaceddecliningcashflow.Finally,achangeincompany
strategyandperformanceorientationwerekeytothefirm'sfutureprosperity.

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Theboardofdirectorsdecidedtotakeseveralboldstepsandputanewleadershipteaminplace.CurtRawley,thechiefexecutiveandtechnologicalvisionary,
becamevicechairmanoftheboardBillMiller,formerCEOofQuantum,themultibilliondollardiskdrivemanufacturer,wasappointedasCEO.

ReasonsforChangesintheCompensationPrograms

WhenBillMillertookovertheleadershipofAvidinApril1996,thecompanywasfacingsubstantialdifficulties.Thecompanyhadanexpenditureprofilethatwould
meanitwouldsoonrunoutofcash.Employeeturnoverhadclimbedto25%onanannualizedbasis.Thedecliningsharepricemadeitdifficulttousestockoptionsfor
retentionoftoptalent,andmanyoftheoutstandingoptionswerebelowtheirexerciseprice.Thecompanywasfacingsignificantlosses,revenuegrowthwasminimal,
andaninformalsurveyrevealedthatmanycriticalemployeesweredisillusioned.Directindustrycompetitors,aswellascompaniesinthesurroundinglabormarket,
startedattractingkeytalentawayfromAvid,furtherplacinganyrecoveryatrisk.

Uponassumingcontrolofthecompany,Millerknewthatwhilehehadtakenoveracompanywithoutstandingtechnologyandmarketleadership,itwasacompany
facingincrediblechallenges.Hehadtomakechangesquicklyanddecisively.Heformedthreecorestrategies.First,heneededtoaddresscashflowconcernsand
restorethecompanytoprofitability.Second,hewantedtoreturnAvidtobeingagreatplacetoworkandstememployeeturnover.Withoutkeypeople,any
comebackattemptwouldbeverydifficult.Finally,thecompanyneededtoretainitstechnologicalleadershipandmakesignificantinvestmentsintheinfrastructureofthe
company.

Withinseveralmonthsofassumingcontrol,Millerhadassembledanewseniorleadershipteamandcraftedthedetailsofhisstrategyforthecompany.Healsoworked
withthevicepresidentofhumanresourcesandthedirectorofcompensationandbenefitstodevelopnewcompensationsystemstosupportthechangeshehad
initiated.

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HowtheNewCompensationProgramsWork

Thedirectorofcompensationandbenefitsdevelopedthenewcompensationsystem,inconjunctionwithaninternalcompensationandbenefitscommitteeandan
outsideconsultingfirm.Thiscommitteewascomposedofvicepresidentsanddirectorswithinthecompanyandwascharteredtoprovideseniorlevelinvolvementin
thedesign.

Theydevelopedseveralprogramstobetteralignthecompensationsystemwithnewbusinessobjectives.First,themanagementincentiveprogram,inwhichall
directorsandvicepresidentsinthecompanyparticipated,waschangedfromaplanbasedonearningspersharetofocusonreturnoninvestedcapital(ROIC).This
changewasinstitutedtofocusonbothprofitabilityandeffectiveassetmanagement,twoareasthecompanydesperatelyneededtoimprove.

Second,allotheremployeesinthecompanybecameeligibleforaprofitsharingprogrambasedonthesamemeasureastheseniormanagementincentiveprogram
returnoninvestedcapital.Thisprogramwasinstitutedinthecompanytoensurethateveryonehadastakeinthesamegoalsincreasingprofitabilityandeffectively
managingtheassetsofthecompany.AllemployeesattendedpresentationsthateducatedthemontheROICconcepts,andextensivewrittencommunicationmaterials
weredevelopedtoexplainwhatactionswouldleadtoimprovedperformance.Eachareaofthecompanydiscussedthecriticalactionsitcouldtaketoimprovethe
profitabilityofthefirm.

Third,thestockoptionprogramwascompletelyredesignedtorewardkeyperformersandretaincriticaltalent,whileatthesametimereducingshareusageand
concernsaboutdilution.Theseprovisionswereaccomplishedinseveralways.First,thesharedistribution,whichhadbeenheavilyweightedtograntsfornewhires,
shiftedmoretowardgrantsbasedonperformanceofexistingstaff.Thiswouldrecognizeexceptionalcontributionsofexistingemployeesandhelpretaincriticaltalent.
Newhiregrantscontinuedtobegiven,buttheywenttoamorelimitedpopulationthosehiredintokeytechnicalstaffandmajorleadershiproles.

Toalignemployeeswiththenewbusinessstrategyandin

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creaseretentionefforts,aperformanceacceleratedrestrictedstockawardplanwasadopted.Theprogramwasappliedtoapproximately150keyexecutives,
managers,andindividualcontributors.Itusedfiveyearvestingrestrictionswithanopportunitytoacceleratevestingbasedonthecorporationachievingcertainstock
priceobjectivesandfinancialreturns.Furthermore,ifthecompanyachievedspecificstockpriceobjectives,individualswouldreceiveadditionalstockgrants.This
ensuredthatshareholderswouldrealizeexceptionalgainsinstockvaluebeforemoresharesweregrantedtoexecutivesandkeyemployees.

Finally,atargetedcashcompensationstrategywasimplementedforcriticalhardwareandsoftwaredevelopmenttalent.Itwasimperativetomeetnewproduct
developmentschedules,supportthecurrentcustomerbase,andretainhighlytalentedindividuals.Thisstrategyincludedadjustmentstobasesalariesandinstituting
retentionbonuses.Forbasesalaries,paylevelsforallpositionsweretargetedatthemarketaverageinthetechnicalcommunityhowever,individualsidentifiedas
criticalperformersweretargetedatthe75thpercentileofthecompetitivemarketplaceandspecialpayadjustmentsweremadeaccordingly.Selectedindividualswere
alsograntedsubstantialcashbasedretentionbonusesiftheystayedthroughthecompletionofcriticalprojects.Iftheyleftbeforetheprojectcompletion,theywould
forfeitasignificantamountofmoney.

ResultsofthePrograms

Theresultsoftheseprogramshavebeendramatic.Overallcorporateturnoverhasdroppedfrom25%tojustover12%,orslightlyunderthelabormarketaverage.
Moreimportant,turnoverofcriticaltalenthasvirtuallyhalted.In1997,turnoverofcriticalemployeeswasaremarkable3%.

Fromabusinessperspective,thecompanyresultshavebeenevenbetter.UntilQ1(firstquarter)1997,thecompanyhadreportedfiveconsecutivequartersoflosses.
InQ11997,thecompanyreturnedtoprofitability,substantiallybeatinganalystprojections.ThisoccurredagaininQ2of1997.InQ3,whilerevenuegrowthfellshort
ofexpectations,profitabilitywasatrecordlevels.Returnoninvestedcapitalalsosoared,duetointensemanagementand

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employeeactions.Inventoriescameundercontrol,accountsreceivablefell,duplicativecapitalspendingwasreduced,inventoryturnsincreased,anddaysofsales
outstandingdroppedmarkedly.Asaresult,thecompany'scashpositionquadrupledin15months.

Aftertwoyearsofnobonuspayouts,theexecutiveandseniormanagementincentiveplananticipatesmakingpayoutswellabovetargetlevels.Employeeprofitsharing
shouldalsopayoutovertarget,yieldinganattractiverewardforemployees.Finally,thestockpricehasrisenfromalowof$9pershareinearly1997to$45per
shareinlate1997.Thesewereremarkableperformanceachievements.

LessonsLearnedfortheFuture

Severallessonswerelearnedfromtheimplementationofthesechangeefforts.First,thecompensationsystemprovidedtremendoussupporttochangingthebusiness
andachievingkeyobjectives.Itwascloselyalignedwitheffectivelyexecutedstrategies.Second,effectivecommunicationoftheprograms,alongwithcontinual
reinforcementandreportingonprogress,wascriticaltosuccess.Avidmanagerswereeffectiveinprovidingstrongrolloutcommunicationsandcontinualupdatesand
reinforcementsofefforts.TheCEOandotherexecutiveswereactivelyengagedinthesecommunicationandrecognitionefforts.

Third,thecompanylearnedthatusingseveralleversatonceandinstitutingsignificantchangesatonetimecanwork.Ifthebusinessisundergoingmajorchange,human
resourcesandcompensationsystemsmustalsoundergofundamentalchange.IfAvidexecutiveshadlimitedtheirboldactions,whoknowswhethertheturnaround
goalswouldhavebeenachieved.

Finally,Avidlearnedthattakingbig,carefullycalculatedrisksisnecessaryintroubledtimes.Nothavinggonethroughsimilarchangebefore,andhavingfewpositive
examplesinthemarketplace,manyunchartedwaterswereexplored.Thetraditionalmeasureswerenotworkingandsubstantivechangewasnecessary.Thecompany
andthenewexecutiveteamdecidedthattakingriskswastheonlyoptiontheyhadriskofupsettinginternalequity,riskofshareholderbacklash,andriskofinfusing
toomuchchange

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intooshortatime.Theriskswerecarefullymanagedcommunicationonwhytheseactionswerebeingtakenwasopenandoften,andtheexecutiveteamledmanyof
thediscussionswithinthecompany.Theirinvolvementandabilitytoengageothersledeveryonetounderstandtheimportanceoftheirtasks.

Whilethefutureisnotcompletelyclear,itissafetosaythatthecompanyhasachievedaremarkableturnaroundandthatthecompensationsystemplayedanimportant
roleinmakingithappen.Itgavepeopleaclearstakeinthesuccessoftheirefforts.Whilecompensationisbutoneoftheleversinhelpingachievebusinesschangeand
theaccomplishmentofbusinessobjectives,itisaleverthatshouldnotbeunderestimatedoroverlooked.

RetainingCriticalTalentwithCustomerFocusedRewardsatBurke,Inc.

Burke,Inc.,isaleadinginternationalbusinessresearchandconsultingfirm.Sinceitwasfoundedin1931,Burkehasbeenhelpingmanufacturingandservice
companiesunderstandandaccuratelypredictmarketplacebehavior.Burkeisknownforitsanalyticalcapabilities,leadingedgeresearchmethods,andconsultative
abilitythathelpcompaniesdriveimprovementsthroughacomprehensiveunderstandingoftheirmarketsandclients.

Burkeisamongthe20largestmarketingresearchandconsultingfirmsintheUnitedStates.Itspartner,InfratestBurkeAGofMunich,Germany,istheworld's
seventhlargestresearchbasedconsultingcompany.

Burkeprovidesbusinesssolutionstoitsclientsinfourareasofexpertise:

1.BurkeMarketingResearch(BMR)providesfullservicecustommarketingresearch,analysis,andconsultingforconsumerandbusinesstobusinessproductand
servicecompaniestohelpthemunderstandmarketplacedynamics.

2.BurkeCustomerSatisfactionAssociates(BurkeCSA)offersspecializedservicesincustomersatisfactionmeasurementand

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managementtoawiderangeofbusinesscategories.BurkeCSA'sSecureCustomerIndexprovidesindustryand"bestinclass"standardsforassessingandimproving
customerdrivenpracticesinordertoimprovecustomerretentionandloyalty.

3.BurkeStrategicConsultingGroup(BSCG)offersservicesinimplementingstrategicchangethroughservicelinesthatincludeemployeesurveysandevaluation,
workprocessreengineering,activitybasedcosting,selectionsystems,executiveassessments,andcoachingfortoplevelmanagers.

4.TheTraining&DevelopmentCenter(BurkeTDC)offerspublicseminarsonmarketingresearch,dataanalysis,customersatisfactionmeasurement,and
qualitativeresearchtechniques.

TheRoleandChallengesoftheSeniorConsultant/AccountExecutive

TheemployeespurchasedBurkefromControlDataCorporationin1989.Overthenextfewyears,theybegantounderstandthatpartofwhattheyboughtwasan
enormousamountoffixedcostssubstantiallybeyondwhatwasreasonableforaprofessionalservicebusiness.Inaddition,thecompanyhadlostanumberofsenior
staffmembersnottoentrenchedcompetitors,buttosmallbusinessesthatwerestartingupandthatwerebecomingcompetitors.Also,duringtheyearorsoafterthe
purchase,Burkebegantoinstallacustomerfocusprogramwithinthecompany,creatingbothacultureandspecificmechanismsforbetterunderstandingcustomers'
requirementsandexpectationsandsignificantlyincreasingitsabilitytorespondtothem.

TheseniorconsultantoraccountexecutiveisakeyroleinBurke'sbusiness.Thisisasalesandconsultingpositionwithresponsibilityforoverallaccountdevelopment
andaccountmanagement.IndividualsinthisrolehavetheresponsibilityforsellingandservicingallBurkeproductsandservices.Theyareorganizedintospecificareas
ofexpertise(e.g.,customersatisfaction,strategicmarketingresearch,andspecializedconsultingservices).Regardlessofthespecificareaofcompetency,senior
consultantsareresponsibleforproposalpreparation,salespresentations,programdesignandmanagement,oversightofanalysisofresults,responsi

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bilityforresultspresentations,andfurtherconsultingwithclientsasnecessary.Overall,theresponsibilityoftheseniorconsultantpositionistodevelopandmaintaina
profitableconsultingpracticewithintheoverallserviceandproductlinesofBurke.InmanywaysseniorconsultantsarethelinkbetweenBurkeanditscustomers.

Becauseofthestrategicchanges,thecompanyneededtogainthefullsupportandeffortoftheseniorconsultants.IfBurkewereevertoachievethedesiredstrategic
objectives,seniorconsultantswouldneedtobeclosepartnersinthisprocess.Thecompanydecidedatthatpointtomakefundamentalchangesinitscompensation
programanddevelopaperformancefocusedplan.

Thenewprogramhadfourprincipalobjectives:

1.Realignfixedandvariablecosts.Theseniorconsultantstaffwasthemostexpensiveperheadasset,so"salarycreep"occurredintheorganization.Thatis,
regardlessofwhetherrevenuesandprofitswereincreasing,itneededtoincreasecompensation"atmarketorbetter"toremaincompetitive.Thus,thecompanywas
increasingfixedcostswithnoguaranteethatitwasincreasingprofitabilitysufficientlytocoverthesecosts.Thenewcompensationplanneededtorealignfixedand
variablecostsassociatedwiththeseinternalassets.

2.Retainbestperformers.Whenthecompanylostatopperformer,itwasalmostalwaysbecauseheorshewasstartingacompetingbusiness,ratherthangoingtoa
traditionalcompetitor.Theprimaryinterestsofthosewholeftweretheindependenceofrunningtheirownbusinessandthehighercompensationpotential.Thenew
performancecompensationplanneededtoofferseniorconsultantsvirtuallythesameopportunitiesthattheymightseeinleavingBurketostarttheirownbusiness.In
addition,Burkewouldcontinuetoprovideattractivemarketing,operational,andadministrativesupport,resourcestheywouldhavetodevelopthemselvesinstarting
theirownbusinesses.

3.Incorporatecustomerfocusmeasuresintocompanyoperations.ConsultantsandeveryoneelseatBurkeacceptedthecustomerfocusprograminconcept,
becauseitwasthecorebusinessofBurke.Tomakeitrealtostaff,thecompanyneededtofindwaystoincorporateitintocompanyoperations.Thereappearedtobe
nomoredirect

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statementoftheimportanceofcustomersatisfactiontothecompany'ssuccessthantolinkthatconceptdirectlytocompensation.

4.Increasethecompany'smarketleadership,revenues,andprofits.Thegrowthofthecompanyhadstalled,andyetthemarketwasexpanding.Burkeneededto
repositionitselfasamarketleader.Theseniorconsultantswerekeytothisstrategy.Theircompensationplanneededtoemphasizerevenuegrowth,withparticular
focusongrowthinprofits.Inadditiontotheseobjectives,thedevelopmentprocessidentifiedaparadoxofcorevaluesthatneededtoberesolvedinthenewprogram.
ThesuccessofBurkedependedonthecollectivesuccessoftheorganization.IfBurkeweretogrowthesharevalueofthecompanysubstantiallybeyondtheoriginal
investmentofitsshareholders,itwouldrequireacollectiveeffort.ItwouldhavetotakeadvantageofthediversityofskillsandexperienceatBurketomarket
effectivelytonewcustomersegments,withnewproductsandservices.Burkewouldhavetofunctionasmorethanacollectionofindividualsitswholewouldhaveto
begreaterthanthesumofitsparts.

Butindividualcontributionswouldbeexpectedandrewarded.Eachindividualwouldbeexpectedtocontributetothecompany'soverallsuccess.Exceedingthe
minimumindividualcontributionwouldberecognizedandrewarded.Withoutsometrulyoutstandingindividualperformances,thecompany'soverallresultswould
invariablysuffer.ThenewperformancecompensationprogramneededtobalancecollectivesuccessandindividualrewardsinordertoimplementBurke'sstrategyand
strengthenitsleadershipinthemarket.

HowtheProgramWorks

Thecompensationprogramiscomposedofthreepartsbasesalaries,performancepay,andreferralcommissions.Eachoftheseelementsisdescribedbelow,with
anexpansionofthemeasuresassociatedwiththeperformancepayprogram.

Basepayfortheseniorconsultantstaffisconsideredafixedannualcostandissetwithinrelativelynarrowrangesbylevel.Itisreviewedannuallyforpossible
adjustmentbasedonconsumerpriceindex(CPI).Basepaybyindividualmaybesupplementedthrougha"draw"(advancepayagainstprojectedfutureperfor

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mancepayearnings)orthrougha"subsidy"(additional,nonpermanentsupplementalpaytypicallyforpeoplemovingintotheseniorconsultantrolefromoutsidethe
firm).

Performancepayisthevariableportionofcompensationandwillbedrivenbyindividualresultsfortheyear.Earlyinone'ssalesandconsultingcareer,itisnot
expectedthatperformancepaywillbeasubstantialportionoftotalcompensation.Initially,Burkewillprovidebasesalariesatalevelthatexceedstheshortterm
(annual)financialcontributionoftheindividual,asitinvestsinskilldevelopmentandbusinessbuilding.Asindividualsgrowtheirfinancialcontributionbeyondthe
investmentcost,theywillreceiveperformancepaycommensuratewithcontributionsbeyondtheindividuals'cost.Attheseniormostlevels,performancepaywillbe
expectedtoprovideasubstantialproportionoftotalcompensation.

Thevariablepayprogramutilizesthreecoremeasuresfordeterminingpayouts:

1.Thelevelofindividualfinancialcontribution

2.Theratingsonexternalcustomerfeedback(externalcustomerfocus)

3.Theratingsbyinternalteams(internalcustomerfocus)

FinancialContribution

Seniorconsultantshadtheirownprofitandloss(P&L)statementgeneratedbypersonalsales,theprojectdeliverycosts,andpersonaloperatingexpenses.The
financialcontributionismeasuredonanindividualP&Lbasisby"netcontribution."ThekeyelementsoftheseniorconsultantP&Lusedinthecalculationofnet
contributionareshownhere:

REVENUE Revenuefromallclientsbeingservedby
theseniorconsultant'spractice.
DIRECTJOBCOSTS Thecostincurreddirectlyonallclient
projects.
GROSSMARGIN Thedifferencebetweenrevenueanddirect
costs.
EXPENSES Laborandotherexpenses.Base

(tablecontinuedonnextpage)

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(tablecontinuedfrompreviouspage)

salaryandbenefitsofseniorconsultants
anddirectreports'expenses(e.g.,travel
andliving)neededtomaintainpractice.
OFFICESUPPORT Expensesformaintainingtheconsultant's
office(e.g.,rent,equipmentleases).
PROFESSIONALSUPPORT Costofsupportprovidedbyotherstaffat
Burkenotdirectlychargedtoaclient
project.
NETOVERHEAD Totalexpenses.
CONTRIBUTION Grossmarginminusnetoverhead.
CORPORATEOVERHEAD Deductedfromcontributiontocovera
portionofcorporateoverhead.
NETCONTRIBUTION Contributionminuscorporateoverhead.
PERFORMANCE Percentage(significant)ofnet
COMPENSATION contributionremaindergoestothe
company.

Seniorconsultantsareresponsibleforgeneratingrevenuesatsufficientlevelsandmanagingtheassociatedcostssothatadesiredprofitabilityisgeneratedthat
ultimatelyresultsincorporateprofitability.Thisencouragesstrongsellingefforts,targetingofprofitableandlongtermclients,andefficientmanagementofaccount
servicingefforts.

Seniorconsultantscandrawoncompanyresourcesforsupport,butsincetheseexpensesarechargedagainsttheirP&L,theyareencouragedtousethissupport
efficiently.Companyresources(overhead)are''fixed''andallconsultantsneedtoshareinensuringthatthecostsoftheseresourcesarecovered.

Furthermore,theplanhasa"selfaccelerating"feature:Oncethecostsarecovered,seniorconsultantsarepersonallyrewardedwithasignificantsplitofeachadditional
dollarearnedbytheirprojects.Thisencouragesthemto"thinkandactliketheywererunningtheirownbusiness."Inalmostallbusinessdecisionmakingcases,the
correctdecisionistakenonethatservesthe

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interestsoftheindividualconsultant,thecustomer,andthecompany.

ExternalCustomerFocus

EachseniorconsultantismeasuredwiththeSecureCustomerIndex(SCI).ThroughBurke'sowncustomersatisfactionprogram,itmonitorsclients'satisfactionwith
thesametypeofmonitoringprogramitdevelopedforclientstomonitortheircustomers'satisfaction.Theminimumstandardforeachseniorconsultantistoachievean
SCIequaltotheoverallcompanytarget.Anyperformancepayearnedwillbereducedbythesamepercentagethataconsultant'stotalSCIfallsbelowthecompany
target.

TheSCIismadeupofthreecriticalideas:Thegroupofcustomerswho(1)areverysatisfied,(2)willdefinitelyrecommendyoutoothers,and(3)willdefinitely
repurchasefromorcontinuetouseyourproductsandservicesinthefuture.Figure61illustratestheSCIconcept.

Figure61.
SecureCustomerIndex.

Anindexiscomputedbasedontheratingsinthesethreeareasandcomparedtotheoverallcompany'sstandard.

Thecustomersatisfactionprogramalsoemphasizesrecoverywithdissatisfiedcustomers.Thiscouldinvolveworkingwithinternalstaffmemberstocorrectaproblem
orworkingdirectlywiththeclienttofixanyproblems.Bydocumentingtheproblemandwhatwasdonetoresolvetheissues,theseniorconsultantcan"recover"from
anyeffectadissatisfiedcustomermighthaveonperformancepay.

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InternalCustomerFocus

Thisisasurveyofeachseniorconsultant'sperformancebyinternalBurkestaffmemberswhohaveworkedwiththeindividualduringtheperformanceperiod.A
minimumaverageoverallratingisrequired,whichindicatestheconsultantisadequatelymeetingtheneedsoftheinternalsupportstaffanddirectingthemtomeetthe
needsofexternalclients.Consultantsareevaluateduptothreetimesduringthefiscalyearonthismeasure.Anyperformancepayearnedisreducedbythesame
percentagethataconsultant'soverallratingfallsbelowtheminimumstandard.

BusinessDevelopmentReferrals

Inadditiontotheirdirectbusinessdevelopmentactivities,seniorconsultantsareencouragedtoreferbusinesstootherareasorassisttheminachievingnewbusiness.
ThisdirectlysupportsBurke'scultureofcollaborationandimprovesthecompany'sabilitytogrow.Theperformancecompensationprogramrewardstheseresultsby
providingadditionalcompensationforreferralsandsalesassistanceactivities.

Referralsareanyclientopportunitiesorrequestsforproposalsthatbusinessdevelopmentleadersprovidetootherareasoftheorganization.Salesassistanceincludes
anyworkaseniorconsultantmayperformthatenablesanotherconsultanttoachievethesale.Whenresultsareachievedbytheseactions,the"supporting"consultant
willreceivearoyaltyonanyrevenuegeneratedbythe"managing"consultant.Theroyaltywillbechargedasacosttothemanagingconsultantandappliedtothenet
contributionofthesupportingconsultant.

Finally,theperformancecompensationprogrammaintainsseveralimportantprovisionsandspecialfeatures.Performanceincentivepayispaidoutattheendofthe
fiscalyear.Onlymembersoftheconsultantstaffwhoareemployedbythecompanyatthedateofpaymentareeligibletoreceivetheperformancepay.Thecompany
canpayupto20%oftheperformancepayincompanystockratherthanincash.Anypaymentsincompanystockwillbemadeatthetimeoffiscalyearend
performancepaydistributionsandwillbeincompliancewithallnecessarylegalrequirements.

Attheendofthefirstsixmonthsofthefiscalyear,individual

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performancepayearnedforthatperiodwillbereviewed,aswellastheindividual'sbusinessoutlookfortheremainderoftheyear.Uptoonethirdoftheperformance
compensationearnedthroughthisperiodmaybepaidout.Ifconsultantsareunabletocovertheirmidyearincentivecompensationpaymentbytheendofthefiscal
year,theamountnotcoveredwillcarryoverintothefollowingfiscalyearandbeshownasadecreasetotheirperformancecompensation.

PrimaryOutcomesoftheProgram

Burke'sseniorconsultantshaverealizedsignificantbenefitsfromthisprogram.Somearefinancialandothersarequalitative,butallarestrategicandhavestrengthened
thefirm'sabilitiestogrowandbecompetitive.Theresultsinclude:

1.Notasingleseniorconsultantthatthecompanyhaswantedtokeephasbeenlosttoatraditionalcompetitorortoastartupcompanyinthefiveyearssincetheplan
wasimplemented.

2.Consultantshaveamuchstrongerunderstandingofthefinancialimperativesandoperationsofthecompanyatacorporatelevel.Theyarebetterbusinessmanagers.

3.Nonchargeabletravelandlivingcostswerereducedby20%thefirstyearandhavebeenmaintainedatasubstantiallylowerpercentageofrevenuethanpriorto
implementationoftheplan.

4.Thefirstyearofplanimplementationwasthefirstprofitableyearforthecompanyfollowingtwounprofitableyearssincethecompanywaspurchased.

5.Duringthefouryearssincetheplanwasimplemented,performancecompensationpaymentshaveincreasedbyafactorof6,andcompanyprofitabilityhas
increasedbyafactorof9.5.

KeyLessonsLearnedfromtheProgram

Whenanorganizationaltersthecompensationforoneofitsmostcriticalpositions,thereisastrongsenseofrisk.WhenBurkeas

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sessedtheopportunitiesversustherisk,itknewthattheremightbesituationswheretheprogramwouldnotachieveitsobjectives.However,theimportanceofthe
changewasclearlyworththepotentialrisks.Thecompanylearnedseveralimportantprinciplesnecessarytotheimplementationofsimilarprograms.First,theprogram
couldbesetupasawinwinastheconsultantsgeneratedincreasedpersonalcompensation,thecompanygeneratedincreasedprofitability(anditwouldnotworkin
reverseorder).

Second,performancebasedcompensationcanbeselffunding.Performancebasedcompensationcanhelptotransfersomefixedcoststovariablecostsandcreate
selfcontrollingmechanisms.Thecostsarevariableandonlyneedtobecoveredifsufficientprofitabilityisgeneratedtocoverthecostsofincreasedcompensation.
Performancebasedcompensationcanincreaseoverallcompanyprofitability.

Third,theprogramfulfilleditsobjectivesbecausepersonalcompensationwasnottiedtooffice,region,orcompanygoalsorperformance.Itwasneverconsidered
"bonus"ordependentuponotherperformancemetricsoutsidethecontroloftheindividualconsultant.Itwasearnedonthebasisofindividualperformancemetrics.

Fourth,theprogramrequiredconsultantstofocusonbeinggoodbusinessmanagers,notjustonbeinggoodbusinessdevelopersandconsultants.Thishasledtoa
betterunderstandingofthecoststodeliverprojectsandthecorporatesuccessfactorsasawhole.Asaresult,theymakebetterbusinessdecisionsthatbenefitnotonly
theirownpractices,butthecompanyaswell.Inthemajorityofsituations,thebestbusinessdecisionforanindividualconsultantpracticeisalsothebestdecisionfor
thecompany.

Thisapproachrequiredrisktakingonthepartoftheconsultantandthecompanytheconsultantcannolongerdependonconsistentlyincreasingcompensation
throughstandardbasesalaryadjustments.Highperformancegeneratescommensuratelyhighcompensationinagivenyear.However,averageorbelowaverage
performanceinagivenyeargenerateslowercompensationthanonemighthaveexpectedfromastandard,annualincreaseinbasesalary.Theriskforthecompanyis
thatifonlyasmallsegmentofthestaffgeneratesexceptionalrevenuesandprofitsandtheremainderofthestaffisbelowaverage,averyhighpercentageofcompany
profitabilityisreturnedtothosefewhighperformingin

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dividuals.Thesystemonlyworkstothebenefitofindividualstaffandthecompanyifthemajorityofstaffmembersarehighperformers.

Thistypeofperformancecompensationsystemcanappearoverlydirectedtoindividualperformanceandnotsufficientlyconcernedwithteamworkamongpeers.Yet
theroyaltysystemsinstalledhaveencouragedteamactivityamongconsultantsandmadeteambasedincentivesamoreimportantpartoftheoverallcompensation
system.Inthefuturethecompanywillcontinuetoexplorewaystoreinforceteamworkwithteamincentivesandotherformsofspecialrecognition.Theissuesthat
relatetoretainingtheseniorconsultantshavediminisheddramatically,enablingBurketoexploreadditionalstrategicdriversofthebusinessanddevelopsupport
systemsforthosedriversthatdirectlycontributetothesuccessoftheorganization.

BreakingtheChainsofEntitlementatOsramSylvania,Inc.

Timesliketheserequireboldaction.Aftertheorganizationunderwentachangeinownership,OSRAMSYLVANIA,Inc.,neededtotakeclear,demonstrableaction
tofocusperformance.Foryears,employeesandmanagershadbeenshieldedfrommakingdramaticchange.Thecompanyhadbeenpartofalarge,bureaucratic
organizationwithmultiplelinesofbusiness.Now,withanewcorporateparentfocusedonOSRAMSYLVANIA'slightingbusiness,actionwasneeded.

Perhapsitwastheappointmentofanewvicepresidentofhumanresources,anindividualwhowasageneralmanagerandknownforhiscriticismofthefunction.
Perhapsitwasacombinationoffactors,butOSRAMSYLVANIAbegantofindnewwaystofocusandencourageemployeestomakemajorimprovementsin
productquality,costs,deliveryperformance,anddevelopment.

CompanyBackground

OSRAMSYLVANIA(OSI)isa$1.8billionmanufacturerandmarketerofprecisionmaterials,components,andlightingproducts.

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ItistheNorthAmericansubsidiaryofOSRAMGmbH,basedinGermany,whichisoneoftheleadingpartsoftheSiemensfamilyofcompanies.Itoperates20plants
andhasmorethan12,000employeesapproximately30%areexemptand70%arehourly.Thehistoryofthecompanyparallelstheevolutionofelectriclighting.The
companyinitscurrentformwascreatedinJanuary1993,butmanytraditionsandpracticeshavebeeninplaceforyears.Acentralchallengewasthatmanyaspectsof
theculturewereinconsistentwiththenewperformancerequirementsofthecompany.

OSIhadatraditionalcompensationandperformancemanagementsystemforitssalariedemployees.Fewemployeeswereeverratedinthelowestcategoryorwere
refusedapayincrease.Therewaslimiteduseofincentivecompensationplans.Managerssetallperformanceobjectivesandstandardsandjudgedpeopleagainst
thesefactorswithlittlerevieworaccountability.Theperformancereviewprocesswasanannualevent,andonlythebettermanagersusedtheprocessforconstructive
careercoachinganddevelopment.Duringthesereviewmeetings,employeeswaitedtohearabouttheirpayincreaseandjudgedthefairnessoftheamountinrelationto
theirexpectations.Mostmanagersdidnotcompletethecareerdevelopmentplanningortakemeaningfulactions.Humanresourcesconductedaperiodicreviewand
upgradeofthepolicies.Noonewassatisfiedwiththeprocess.

Duringthistime,OSIdidnotremainunchanged.Itimplementedanextensivequalitymanagementprocessandavarietyofnewstructuresandprocessimprovements
toincreaseproductivity.Buttherewasaclearneedleftunmetemployeeswantedhonestandtimelyfeedbackonperformance,aswellasrewardsconsistentwiththeir
achievements.

TimeforaNewPerformanceManagementProcess(PMP)

OSI'shumanresourcesleadershipwantedtomakeachange.HRfoundsignificantsupportamongOSI'sseniorexecutives.Theydidnotwanttocontinuewiththe
inflationdrivensalaryincreaseprocesstheydidnotwanttoviewpayincreasesasjusta"costofdoingbusiness."Therewasastrongcommitmenttomakethenew
payforperformancephilosophyworkforOSI.Thiseffortwould

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beamajorelementoftheorganizationalculturechangeprocessoftheorganization.

OneofthefirststepswastoreconstituteajobevaluationcommitteeintoaHumanResourcesAdvisoryCommittee(HRAC).Thegroupwascomposedofsenior
managersfromOSIandservedtheroleofprovidingadvice,feedback,andsupporttocriticalhumanresourcesinitiatives.HRACdevelopedfournewgoalsforthe
newperformancemanagementprogram:

1.Employees'performancemeasuresneedtosupporttheobjectivesofthebusiness.

2.Frequentandhonestfeedbackneedstobeprovidedtoallmanagersandemployees.

3.Performanceratingsneedtobecomeequitableandbeseenasequitable.

4.Employeesshouldnotfeelentitledtoreceivingafullystandardperformancerating.

Theseobjectivesthenguidedthereengineeringeffortoftheentireprocess.Whilethereweresignificantchallengesasdifferentelementswerebeingimplemented,the
commitmenttochangebytheseniormanagersdidnotwaver.Thiswasessentialtothenewprogram'sultimatesuccess.

PerformancePlanning:AProcessofGoalAlignment

AcriticalrequirementofthePMPwasthattheperformanceandactionsofemployeeswouldbeassessedagainsttheobjectivesofthebusiness.Thereweretwo
elementsdevelopedforthistask.

First,jobobjectiveswereestablishedforeachsalariedemployeeintheorganization.Theseweredevelopedbycascadingthegoalsofthecompanytoeachbusiness
unitandeachindividual.Althoughemployeesoftengavetheirinputontheirobjectivesorstandards,thisoccurredaftersupervisorssharedtheirownperformance
plans.Thisestablishedaclearanddirectrelationshipbetweenthemanager'sandstaffmember'sobjectivesfortheyear.Thisoftenresultedina7030splitbetween
topdowninfluenceandbottomupinputs.Thisratiowasintentional.

Forjobsorunitswheretherewerecommonpriorities,people

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sharedthesameobjectives.Membersofteamsoftensharedthesameobjectives.Itwasimportanttoalignthesejointaccountabilitiesthroughtheperformanceplanning
process.Inthiswaytheprocesswasregardedasimportantandserioustoeveryone.

Second,OSIdevelopedasetofcompetenciesthatwereintegratedintotheperformancemanagementprocess.Asetofcorecompetencieswaslinkedtotheidentified
valuesofthecompanyandoutlinedthedesiredbehaviorsbyallstaffmembers.Manyofthedepartmentswentfurthertodescribecompetencyprioritiesthatwere
uniquetotheirspecificrolesintheorganization.Employeesreceivedfeedbackonthesecompetencydimensionsaswellastheirperformanceonjobobjectives.

PerformanceReviews:NotJustanAnnualEventAnymore

Historically,employeeslearnedhowtheywereperformingduringtheannualreviewcycle.Obviously,thiswasacounterproductiveeffortandledtoneedless
argumentsabouteventsthatcouldnotbechanged.ThenewPMPapproachrequiredmidyearreviewsbyallmanagers.Employeescouldrequestmorefrequent
performancedialoguewiththeirsupervisors,andmanydid.Thedocumentationwasalsoavailableonthecompany'sintranet,andthisencouragedfrequentdiscussion
ofprogressanddata.Thisprocesshelpedtheorganizationtoupdatemeasuresandstandardsasneeded.

RankingEmployeePerformance:BreakingtheEntitlementMindSet

Thecompanyadjustedallreviewsandmeritpaydecisionstoacommondate.Thisoccursthreemonthsaftertheendofthefiscalyear.Thispermitssufficienttimeto
reviewannualresults,assesstheperformanceofallstaffmembers,andprepareperformancereviews.Butperhapsthemostdramaticelementwastheprocess
establishedtorankorderemployeesbytheirperformance.

Therankingofemployeesbyperformancesubstitutedforthetraditionalpracticeofamanager'sratingemployeesonaoneto

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fivescale.Thenewprogramusedthisrankingprocessforallocatingmeritpayanddevelopmentplanning.Tosupportthisprocess,OSIidentifiedanewroleofthe
"meritmanager."Thisisanindividualwhosupervises30ormoresalariedemployeesthroughdirectsupervisionorsubordinatesupervisors.Inmanycasesthiswould
beplantmanagersandtheirdirectstaff.Withinamonthaftertheendofthefiscalyear,themeritmanagerswouldleadtheirstaffsthrougharankingprocessoftheir
employees.

Therankingprocesswasnotanartificialrankingof1to100(orwhateverthetotalnumberofemployees).Instead,themeritmanagersandtheirstaffswouldrankall
theiremployeesintooneofthreegroups:

Clearlyexceptional

Successful/satisfactory

Lowestcontributors

Thesewererankingcategories.Theprocesswasrolleduptoprovidethepresidentandtheseniorstaffwithanassessmentoftheentirestaff.Seniorhumanresources
staffmembersandthemeritmanagerswouldleadtherankingmeetings.Inpreparation,themanagerswouldsendtohumanresourcestheirassessmentofstaff
membersagainstjobobjectives.TheHRmanagerinturnwouldpreparethematerialsforreviewinthemeeting.Thesemeetingsgenerallylastedahalfdaythiswas
regardedasaminimumamountofinvestmentforthesubjectandthecriticalnatureofthediscussions.

Employeeswerereviewedbasedontheirperformancetojobobjectives.Thentheycouldbemovedtoadifferentlevelbasedontheirassessmentagainstthe
competencies.Inotherwords,performanceresultswoulddeterminethepreliminaryranking,butthecompetenciesutilizedwouldmodifytheresults.Mostofthe
discussionscenteredaround"how"oneachievedcertainobjectivesandwhetherthisdemonstratedlongtermvaluefortheorganization.

Formaldistributionrequirementswereestablishedfortherankingprocess.Nomorethan10%oftheemployeescouldberatedas"clearlyexceptional."Initially,no
lessthan10%couldberatedas"lowestcontributor,"butthiswasadjustedto5%thefollowingyear.Overtime,afourthcategory("successfulplus")

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emergedtodesignatethosewhowerestrongperformersbutdidnotwarrantbeingdesignatedasclearlyexceptional.ActualdistributionofperformanceratingsatOSI
hasevolvedto10%clearlyexceptional,35%successfulplus,50%successful/satisfactory,and5%lowestcontributors.

Thisprocessenabledthemeritmanagersandtheirteamstoclearlyidentifyemployeesconsistentwiththeircontributions.The''softgraders''becamemoreconsistent
withthe"hardgraders,"andallworkerslearnedagreatdealabouttheirlocation'sstaffmembers.Althoughtherewasconsiderablerebellionabouttherankingprocess
earlyintheimplementationoftheprogram,topmanagementusedthisasanopportunitytosendastrongmessagethatdesiredperformanceandthenewculture
necessitatednewwaysofmanagingperformance.

ApplyingMeritPaytotheRankings

Theoutcomesoftherankingmeetingswereusedtodistributemeritdollarsandplaninvestmentsinpeople.Theclearlyexceptionalperformersreceivedthehighest
meritpayincrease,usuallyabouttwotimesthestandardmeritthesuccessful/satisfactoryreceivedastandardpayincreasefortheyearthelowestcontributorsdidnot
receiveanypayincrease.Whenthesuccessfulpluscategoryemerged,theseindividualsreceiveda2%valueaddedpremiumtothestandardmeritpayincrease.
Becausemanagerswereabletobalancetheratingsandthenumberofpeoplewhowouldreceivemeritincreases,OSIwasabletodistributemeritpaydollarstothe
betterperformersandremainwithindesiredcostparameters.

Inaddition,therankingdiscussionsstrengthenedthecareermanagementprocess.Themanagersidentifiedindividualsreadyforpromotionsortransfersintokey
assignments.Theywerebetterabletodeterminetheinvestmentrequirementsandaddresspotentialretentionissuesbeforetheybecameproblems.Thesemeetingsalso
addressedperformanceissuesintheopen.

PrimaryOutcomesfortheNewPMP

Performancemanagementsystemshavelongbeenregardedasfrustratingorwastedeffortsinmanyorganizations.AtOSI,align

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mentbetweenpeopleandtheobjectivesofthecompanyhasbeenachieved.Therehasbeenasuccessfulshiftintheculturefromonecharacterizedbyentitlementto
onebasedonperformance.Whenemployeesrealizedthattheirperformancewouldbeassessedonarelativebasisandthatseniormanagerswoulddothisthrough
opendiscussions,theypaidcloseattentiontotheiractions.Forsomeitproducedawakeupcallforothers,itwasarealaffirmationoftheircontributions.

Intheearlystagesofthisnewprocess,therewassignificantdiscomfortwithrankingindividualperformers.Managerswereuncomfortableandemployeeswerehighly
skeptical.Managerswereconcernedthattheywouldneedto"dobattle"fortheirbestpeople,andemployeesfelttheprocesswasapopularitycontest.Both
expectationshavebeenprovedwrong.Managersnowviewtherankingprocessasanimportantqualityassurancetechniquethatallowshonestandfairopendialogue
totakeplace.Theyoftenlearnnewinsightsabouttheirpeople,andtheyhaveanopportunitytoexpressopinionsaboutthestaffofothersinaconstructiveandhelpful
manner.Whilemostemployeesstilldonotunderstandwhathappensinthesemeetings,mostfeeltheyaregettingbetterfeedbackontheirperformanceaswellasan
opportunityfortheirworktobediscussedbytheseniormanagementteamoftheirbusinessunit.Thishasopenednewcareeropportunitiesforsomeandhasreassured
othersoftheirpositivecontributiontothecompany.

Fromaturnoverperspective,someinterestingresultshavebeenachieved.Overthefirstfewyearsoftheprogram,theaverageoverallemployeeturnoverwasabout
9%similartotherateunderpreviousownership.However,forthelowestcontributors,turnoveraveragedabout30%.Thiswasadesiredoutcome,becauseit
meantthatsomeofthepoorerperformersweredecidingtoleavethecompany.Asunitswereabletoachievesuchterminations,theyreceiveda"credit"forthese
positionsinmeetingtheirlowestcontributors'distributionallocation.Thisencouragedmanagementactiontoaddressperformanceissueswithouthavingnegativeside
effectsforremainingemployees.

Forthefirsttwoyearsoftheprogram,thebusinessunitsexceededtheiroperatingprofitobjectives.Theyachievedrecordprofitabilityfromthe1993baselineyear.
Furthermore,overthreefourthsoftheperformanceplansdemonstratedstrongsupporttothecompany'sbusinessobjectives,ascomparedtoonefourthseveralyears
before.Whileallthiscannotbecreditedtotheperfor

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mancemanagementprocess,actionstoimprovetheperformanceofthecompanyhaveincreaseddramatically.Theresultsshowtheimpactofthesebehaviors.

TheFuturePlansforPerformanceManagement

ThenewPMPhasclearlydemonstrateditspositiveimpactonthecompany.Thereareconcernsabouttheabilitytocontinuemeetingthelowestcontributordistribution
standardasmoreandmoreofthelowerperformersleavethecompany.However,thereisaconstantneedtocontinuetoimproveandgrowthebusiness.Thismeans
thatpeopleneedtocontinuetogrowandimprovetheirabilitiesandcontributionstoOSI.

Thisprocesshascreatedthefoundationforincentivecompensationplansandotherformsofrecognition.Thecompanywillcontinuetorefinetheprocessandmakeit
morefairandeffective.Thereisamajorchallengeofincreasingemployees'understandingandconfidenceinthesystem.Theparticipantsinrankingtreatthisasan
importantandobjectiveprocess,butemployeesstilldonotfullytrusttheprocess.Communicationandfeedbackwillbekeytoaddressingtheirconcerns.Most
important,thenewPMPhasenabledpeopletoseehowperformanceisrecognizedandvaluedbytheorganization.Theentitlementculture,whichhadheldthe
organizationbackfromtakingboldandsignificantactions,hasrecededintothecornersoftheorganization.

TheRoleofIncentivesinaTurnaroundOperationatSunLifeofCanada

InsuranceRisk

Characterizingtherelationshipbetweenthesetwoconceptspresentsaprovocativechallenge.Thebusinessofinsurance,byitsnature,attemptstomitigaterisk.Asthe
chiefexecutivesaidtoallemployees,"Riskmanagementisourbusinessandeffectiveriskmanagementrestsondiversification."Actuariesaretrainedinthe
mathematicalscienceofcalculatingmorbidityandmortalitytablesandpremiumratesbasedonamultitudeof"risk"factors.Under

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writersdeterminethepotentialriskofinsuranceapplicantstoappropriatelyratepoliciesthatbalancepotentiallosswithopportunity.

Inrecentyearstheinsuranceindustryhasgonethroughsomemajorshifts.Businesshasbecomeincreasinglycompetitive,withlowerinterestratesspurringvariable
productpurchases.Thegovernmenthasbeenscrutinizingsalespracticestoensurecompliancewithregulatoryrequirements.Andcompanieshavebeenrequiredto
reininexpensesinordertocreatesomecompetitiveadvantage.Asaresult,insurancecompanieshavebeenforcedtoreexaminetraditionalcompensationpracticesin
ordertorewardemployeesforfocusingonandachievingspecificstrategicresults.

BackgroundofSunLife

SunLifeAssuranceCompanyofCanadahasbeeninexistenceformorethan125years.Itisadiversifiedfinancialservicesorganizationwithtotalassetsunder
managementofmorethan$103billion($US)andoperationsinCanada,theUnitedStates,GreatBritain,andthePhilippines.TheU.S.nationaloffice(USNO)is
basedinWellesleyHills,Massachusetts,andiscomposedoftheIndividualInsuranceDivision,GroupInsuranceDivision,andRetirementProductsandServices
Division(pensionsandannuities).Altogetherthereareroughly1,500employeeslocatedintheU.S.homeoffice.
Asproductareasbegantoreporttheirpreliminaryprofitnumbers,mystaffstartedaskingmewhatourproductcoulddotomakemoremoneyinordertosupporttheother
productsreachingtheirprofitgoals.Ihadn'thadateamofpeoplepulltogetherlikethatinsuchalongtime.

SunLifehadhistoricallystruggledwiththeconceptof"puttingpayatrisk."Foravarietyofreasons,primarilyculturallybased,theorganizationresistedeffortsto
rewardexceptionalachievementswithincentivepayevenattheofficerlevel.Itisnotuncommonforanorganizationtofearthedevelopmentofan"expectation"of
incentiverewards,whetherearnedornot(thesocalledentitlementmentality).Lotsofquestionssurroundincentivepaysuchas:

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Willtherebeanappropriatereturnontheinvestment?

Isitfairormotivatingtoincludesomeemployeesbutnotothers?

Howdowedealwiththeexternalfactorsthatarebeyondanyone'scontrol?

ThisisastoryabouthowtheGroupInsuranceDivisionmovedfrom"outoftheredandintotheblack"duringtheearlytomid1990s,andtherolethatrisksand
rewardsplayedinhelpingtorevitalizethedivision.

FacingtheChallengesofaChangedMarketplace

Priorto1990,theGroupInsuranceDivisionwasintoughshape.TheorganizationwaslosingmoneyandJamesA.McNultyIII(Jim)washiredtoheadthedivision
andmakeitsuccessful.Hehadhisworkcutoutforhimashebegantofocusemployeesonemphasizingthefollowingthings:accountability(clearexpectationsof
performanceandhowtomeasure),profit(numberonedivisionalpriority),andgrowth(balancedwithprofitpriority).Hedidthisinseveralways.

First,Jiminvestedinthefieldsalesforceandreorganizedhomeofficeoperationstoalignaccountabilitiesconsistentwiththisstrategy.

Next,hefocusedmanagersandstaffonattentiontobottomlineresultsandthewaysinwhichtheyimpactedprofitability.

Finally,Jimhelpedcreatea"stakeinthebusiness"bycreatingaprofitsharingincentiveplanfortheStop/LossUnit(i.e.,excessrisk),whichwasatriskofbeing
discontinuedduetorepeatedlossesandpoorperformance.

ApplyingaTeamIncentivePlan

TheStop/LossUnitintheGroupInsuranceDivisionconsistedof14people.Forthoseunfamiliarwithinsurancelingo,Stop/Lossreferstoatypeofinsurancepolicy
designedtoprotectanemployerfromincurringcatastrophiclossoneitheranindividualemployeeoragroupinaggregate.Itsmosttypicalapplicationinthegroup
insuranceareaistoreinsurecompaniesthatchoosetoself

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insuremedicalbenefitsusingathirdpartyadministrator,toprotectagainstclaimsexceedingacertainlevel,thereby"stoppingtheloss."

Thefirstyear,1990,theprofitsharingplanwasimplementedfortheStop/LossUnitonly.Initiallyitincludedtheunderwriters,claimsarea,andmarketing,withmore
thanadozenfactorsbuiltintomeasureprofitability.Itwasacumbersomeandcomplicatedprogramwithaminimumthresholdtargetthatwasbottomlineoriented.

Someoftheperformancemeasuresfirstusedwere:

Unitproductivity

Casesunderwritten

Claimsprocessed

Quotesissued

Pricingofcasesversusresultsoneyearhence

Servicelevels(measuredthroughsurveys)

Overallproductivityofallproductlines

Oneoftheprimaryreasonstheplanwasapprovedwasthatitwouldbeentirelyselffunding,therebycostingthecompanynothingunlesstheunitproducedresults.The
risksandtherewardsweremadequiteclearandwerequitehigh:Eithertheunitwasgoingtomakethethresholdoritwouldbeshutdown.Prettytoughandquite
clear.

Whathappenednextwasremarkable.Jimconvincedthegroupthatthey"owned"thischallengeandcouldmakeithappen.Heprovidedcontinualfeedbackand
reinforcementsothatthegroupbelieveditcouldmakeadifference.Theplanwasdesignedasapointsystemwithvariouslevelsofperformancepayinguptoa
maximumpercentofsalary.Nothingabouttheplanwassubjectiveordiscretionaryandtheactualresultsrelativetotargetswerepublishedquarterly.Initsfirstyear,
everyone"blewthroughtheirtargets,"receivingasignificantpayout.

Eachyeartheplanwasrevisedtobesimplerandmorecloselyalignedwithcorporateincentivessothatthepotentialpayouteventuallyreachedamaximumof10%of
basepay.By1994theunitwasturningaconsistentprofitandtheplanwasrolledouttoallproductareas.By1995,itwasinclusiveoftheentiredivision.

Whatismostexcitingisthatbytheendof1997,theStop/Loss

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productlinewasoneofthemostprofitablelinesinthecompany,andSunLiferankedamongthetopthreecarriersinthecountry.Whiletherearemanyfactors
contributingtothissuccess,clearlytheincentivecompensationplanprovidedtheburstofenergyneededtogetthingsmovingintherightdirection.

WideningtheParticipation

Theexpansionoftheprofitsharingplantoallthedivisionalproductlineswascarriedoutwithseveralkeyobjectivesinmind.First,ataskforcerepresentingeachof
theproductlineswasbroughttogethertodesigntheprogram.Oneofthemostvaluablelessonslearnedfromthepreviousprogramwasthevalueofemployeeinput
andsubsequentownership.Theparametersthegroupwasgivenincludedanemphasisonprofit,withpayoutsbasedontheincrementalgainoverplanortarget,thus
ensuringapositiveROI.

Theareasoffocusforthedivisionalplanincludedthefollowing:

Profitability(athreshold"triggered"theplanintoeffect)

Efficiencygains/productivity

Increasedmarketshare

Inadditiontodivisionalprofitabilitygoals,eachoftheproductlineshaditsownprofitabilitylevelstoachieveintheareasof:

Longtermdisability

Shorttermdisability

Life

dental

Excessrisk(i.e.,Stop/Loss)

Anothermeasureregardingprogressondivisionwideprojectswasalsoincludedintheevaluationforplanpayouts.Eligibleemployeeshaveabonustargetof6%of
basepayfortheplanyear,withamaximumcapof10%ofbasesalary.In1995,whentheplanwasexpandedyetagaintoincludealladministrativeandstaffsupport
functionswithinthedivision,differentweightswereappliedtodifferentobjectivesdependingontheemployee'srole.

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JimMcNultyhassuccessfullymovedthisdivisiontobelievethatresultsmatterandthateveryonecanhaveapositiveimpactontheresults.Hecontinuallyreinforcesthe
conceptualizationofa"senseofownership"andemployeeattitudeshaveimproveddramaticallyinthisregard.Oneofhisstaffcited:
Thereisaheightenedawarenessofprofitconsiderations...thereisaclearlyunderstoodconnectionbetweenactionsthatresultinsavingsandtheopportunitytoshareinthose
savingsastheycontributetoprofitability.

WiththecontinuedgrowthoftheGroupInsuranceDivision,bonuspayoutshavenotonlyoccurredforeachplanyear,buttheyhaveincreasedasapercentageofthe
annualregularrateofpayandimprovedperformancelevelsofindividualemployees.

KeyLessonsLearned

Therehavebeenseveralsignificantlearningsasaresultofthedesignandimplementationofvariablerewardsinatraditionallyriskaverseenvironment:

1.InvolvementofemployeesintheprocesshasbeenacriticalcomponentoftheturnaroundintheGroupInsuranceDivisionbyfocusingenergyontheattainmentof
specific,challenginggoals.

2.Theincreasingdemandsofthemarketplacehaveputanemphasisonvariablecomponentsofpayandenabledtheorganizationtoattractandkeephighperforming
people.

3.Theselffundingcomponentoftheplanhascontinuedtoallowforthecontrolofcompensationexpenses.

4.Frequentfeedback,suchasthequarterlyprogressreports,andseniormanagement'sreinforcementofachievementsprovidedafertilegroundfortheplan,and
companyresults,toflourish.

TheselessonshaveservedtotransformthedesignandmanagementofvariablepayplansinotherareasofSunLife.Thebusinessisonastrongerfooting,especially
nowthatemployeesareinvolved.

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7
RetainingCriticalTalent
Thecompetitionfortalentinmostindustriesisintense.Ifoneexaminesthepopulationdemographicsandchangingskillrequirements,thetrendsforthesupplyof
peoplewithintheUnitedStatesisfarlessthanthedemand.Socompanieswillbeengagedinacontinualstruggletoattractandretainthetalenttheyneedforgrowth.
Moreandmorecompaniesarerealizingthattheirgrowthisbeingrestrictedbytheirinabilitytoattractthetalenttheyneed.Peoplearebecomingthetruecompetitive
advantage.

Companiesthatofferexorbitantfinancialpackagestopeopleoftenfindtheloyaltyandcommitmentonlytemporary.Theygetcaughtinabiddingwarforindividuals,
andfeworganizationscomeoutwinners.

Thecompaniesthathavebeensuccessfulinaddressingthe"talentissue"haveplacedagreatdealofimportanceontheirrewardsystems,formalandinformal.Theyuse
rewardstosupportatotalworkplaceenvironmentthatisattractivetotheindividualandreinforcestheirimportancetotheorganization.Peoplefeelvalued.

FleetFinancial,aftermonthsofstudyandanalysis,foundthekeytoitsabilitytoretaintechnicaltalentwastocommunicatethatemployeeswereimportantandback
thisupwithreasonablecompensation.CIGNAHealthCareneededtoretainpeopleinorganizationsthatitacquired.Bylearningfrompastproblemscausedbynot
addressingthisissueeffectively,itdevelopedasimpleandhighlyeffectiveprocessforretainingtalent.HealthServicesMedicalCorporation,ahealthmaintenance
organization,createdacompetencyapproachtopaythatopenedopportunitiesforcareergrowthandpersonaldevelopment.Finally,Keane,amajorsoftwaresystems
developmentcompany,hasgrowndramaticallyandusesitsformalandinformal

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rewardstosupportthisgrowth.Ineachcase,retentionofkeytalenthasbeenanessentialelementinsuccessstrategy.

Thereisnosimpleanswertoretainingcriticaltalent.Butthesecompanies,andmanyotherslikethem,haveusedastrategicapproachtoaddressthiscomplexconcern
andfullyintegraterewardsintotheformula.

PreparingfortheNewMillennium:RetentionfortheTechnologySolutionsGroupatFleetFinancialGroup,Inc.

Theadventofthenewmillenniumisacauseofgrowingconcerntocorporationsacrossthecountryandaroundtheworld.Exactlywhatwillhappenatthestrokeof
midnightonthelastdayofthiscenturyislargelyunknown.Whatiscertain,however,isthatmarketdemandsforthetechnicalpersonnelnecessarytoprepare
companiesforthiseventhavealreadyreachedunprecedentedheights.Allcomputerizedsystems,whetherusedtomonitoraBoeing747'sflightpath,thefederal
government'spayroll,oryourownATMcard,mustbeYear2000compliant.Formostcompanies,complianceextendsbeyondtheirownfrontdoortoincludeall
systemsoftheirvendors,suppliers,andcustomers,thusmakingthescopeoftheprojectenormous.

IfthescopeofYear2000complianceisenormous,thenthecostisextreme.Formanyfirms,totalcompliancewillbemeasuredinthetensofmillions.Nottheleastof
thesecostsisthatofattractingandmaintainingastable,criticallyskilledworkforce.WithmanyorganizationsfacingthechoiceofbecomingYear2000compliantor
closingtheirdoors,anemployer'stechnical(human)resourcesbecomepivotaltotheircontinuedsuccess.

Fleet'sretentionplanwasdevelopedinresponsetotheuniqueconditionsprecipitatedbyYear2000projectdemands.Itisathreeprongedstrategyaimedatretaining
keytechnicalpersonnelinthefaceofseverelycompetitivemarketpressures.

Theplancomponentsare:

AMeritAugmentationProgramdesignedtoprovidehighlycompetitivebasesalariestoalltechnicalpersonnel

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Anenhancednonqualifiedstockoptionoffering

AretentionbonusawardforkeycontributorstobepaidinMarchoftheyear2000

BackgroundoftheSituation

FleetFinancialGroup,Inc.(Fleet)isadiversifiedfinancialservicescorporationbasedinBoston,Massachusetts,withassetsinexcessof$85billionandarichhistory
spanningmorethan200years.Fleetisthe11thlargestcommercialbankintheUnitedStates,employingmorethan35,000peoplein36states.Asafinancialservices
institutionregulatedbytheFederalReserveBoardandtheOfficeoftheComptrolleroftheCurrency,FleetissubjecttoanacceleratedYear2000compliance
deadlineofDecember31,1998.

FleetTechnologySolutions(FTS)istheformalnameforthetechnicalservicesarmofFleet.FTSincludesallsystemsandprogrammingpersonnelaswellasrelated
dataprocessing,operations,andtechnicalfunctions.Thisplanwasdevelopedtoretainthesehighlyskilledandspecializedemployees.

ReasonsfortheProgram

Byearly1997,competitionforcriticallyskilledtechnicalemployeeswasbeginningtogrow,causingincreasedturnoverandrecruitingdifficulty.(Itisimportanttonote
thatsinceearly1996,NewEnglandhasbeenexperiencingitslowestunemploymentratesinnearlytwodecades.)Bymidyear,Fleet'sannualizedturnoverforkey
technicalstaffwastrackingatmorethan20%,anincreaseofnearly150%from1996.Consultingfirmsbeckoned,withpromisesofincreasedsalaries(somebyas
muchas500%),flexibleworkhours,andpaidovertime.Recruitingcostsskyrocketedduetothe''seller'smarket''philosophyemployedbyindividualcandidatesand
searchfirmsalike.Fleetwasfacedwiththreechoices:continuetorunonthe"recruitingtreadmill,"hireconsultantstofillopenpositions,ordevelopanaggressive
retentionplan.

Thecosttofillpositionsastechnicalstaffturnedoverwasincreasing.MarketdemandsandthelowestunemploymentratestheNortheasthadseenin20yearsteamed
uptoinflatesalariesat

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alllevels.Signonbonuses,onceatrumpcardusedtoattractkeyplayers,werebecomingastandardpartofmostjoboffers.Relocationpackages,usuallyreserved
forhighlevelpersonnel,werenownecessarytoattractqualifiedcandidatesatalllevelsaslocallaborpoolsdriedup.Searchfirmandheadhuntingfeesgrewalongwith
marketdemand.Feestructuresthatnormallycappedat20%to25%ofacandidate'sfirstyearbasesalarybegantoclimbtoover30%.Inadditiontothedirectcosts
ofthe"recruitingtreadmill,"indirectcosts(e.g.,productivitydowntimeduetothelearningcurveandlowmoraleduetoincreasedworkloadofremainingstaff)were
alsoontherise.However,ofgreatestconcernwasthelargelyunquantifiableopportunitycostofstrategicinitiativesnotundertakenduetoalackofqualifiedstaff.

Asecondoptionwastofillopenpositionswithcontractemployees.In1997,theaverageannualcosttohireaconsultantwasmorethantwoandonehalftimesthe
position'saveragemarketsalary.Addtothistheindirectcostsassociatedwiththelearningcurve,lowmoraleofexistingstaffduetoconsultants'highersalaries,andthe
mobilenatureoftheconsultant,anditbecomesanunattractivealternative.

Afterreviewingtheoptions,theanswerwasclearFTSneededtoworkquicklyandaggressivelytoretainthestaffithad,whilepositioningitselfinthemarkettoattract
newtalent.Ithadtodothis,butthequestionwas,how?

HowtheRetentionPlanwasDeveloped

TosaythattheFleetTechnologySolutionsYear2000RetentionPlan(thePlan)waschallengingtodevelopisanunderstatement.FTSwasattemptingtoanticipate
futuremarketconditionscausedbyanasyetunprecedentedevent.Consultingandsurveyfirms,usuallyexcellentsourcesofinformation,weredryandaskedtheir
usualclientcompanies,likeFleet,toletthemknowiftheycameupwithasolutiontowhatwasbecomingawidespreadproblem.Competitorcompanieswerealso
seekinganswers,andthosewhohadbeenquicktodevelopretentionstrategieswerehesitanttosharetheirfindingsforfearoflosingtheircompetitiveedge.Thislack
ofharddatanotonlymadetheplandifficulttodevelop,butnearlyimpossibletoselltomanagement.

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Aswithanyprojectofthisscope,thePlanevolvedovertime.Eachpiecewasdevelopedandintroducedseparately,allowingformaximumimpactwhilegiving
employeesanopportunitytodigesttheinformation.

Thefirststepwastocollectcompetitivesalarydataanddeterminewherethecompanystoodinrelationtotherestofthemarket.Todothis,FTSreliedonspecialized
informationtechnology(IT)salarysurveys.Uponreviewingthecompositesurveydata,itwasclearthatmanyofemployees'basesalarieswerenotkeepingpacewith
therapidlyrisingmarket,makingadjustmentsnecessary.Usingmoniessetasideinacorporatemarketequitypool,Fleetprovidedincreasestomorethan600
technicalemployeesinSeptember1997.ThiseffortwasknownastheMeritAugmentationProgram.

Nowthatthecompanyhadcreatedalevelplayingfield,itwastimetoaddresstheissueofretention.Toaccomplishthis,Fleetfirstturnedtoatraditionallongterm
incentivestrategy,theuseofnonqualifiedstockoptions.Fleethasathreeyearvestingscheduleforstockoptions,sothistimeframewasappropriate(itsurpassedthe
criticaldateofJanuary1,2000).InOctober1997,apoolofoptions,separatefromthecompany'sregularannualgrant,wascreatedforthisinitiativeanddistributed
torecommendedemployees.

TheMeritAugmentationProgramandthestockoptiongrantwerebothwellreceivedhowever,Fleetcontinuedtobeplaguedbyhighturnoverandrecruiting
difficulties.Theoptiongrant,althoughanexcellentlongtermretentiontoolintheory,didnotreachenoughpeopleorprovideenoughmonetaryrewardtobeeffective.
Tobeeligibleforagrant,anemployee'ssalarylevelandmanagerialresponsibilitieswereheavilyweighted.ManyoftheemployeesFleetaimedtoretaineitherfell
belowthesalarythresholdorwereindividualcontributors.Thecompanyneededanotherretentiontoolthatwouldsignificantlybenefitabroaderpopulation.

Thislastpiece,aretentionbonusaward,turnedouttobethemostdifficulttocreate.Theelaborateplandocumenthadnumerousschedules,attachments,andexhibits.
Thefirstattemptresultedinacomplicateddeferredcompensationschemewithstaggeredcontributions,interestcalculations,andparticipantstatements.Managers
laboredformonthsovereligibilityrequirements,awardamounts,fundingissues,payoutschedules,andthe

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treatmentofnewhires,terminations,retirees,andtransfers.Theywrotelongwindedmanagers'toolsandmeetingagendas.Intheend,thefinalproductwas
surprisinglysimple.InDecember1997,aonepageletterwaspresentedtoeachof500eligibleemployees.Theletter,signedbyFleet'sCIO,thankedthemfortheir
commitmenttothecompanyandindicatedtheawardamounttheywouldreceiveiftheyremainedintheircriticalroleuntilMarch31,2000.(Awardamountswere
roughly50%ofbasesalary.)Asinglepageoftermsandconditionsaccompaniedtheletterandaddressedadministrativeissues.Thisbrief,personalized
correspondencesaidmorethanalloftheelaboratedocumentsthatprecededit:"Weappreciateyou,weneedyou,weentrustourfuturetoyou."

PrimaryOutcomesAttributedtotheProgram

Itisimpossibletopredicttheoutcomeoroverallsuccessofthisplan,asitstermstretchestwoyearsintothefuture.However,theshorttermsuccessesoftheplanare
clear.Turnoverisdown,moraleisup.FTSisattractingpeople(newhiresreceivecompetitivesalariesandareeligibleforaretentionbonusawardifhiredbefore
January1,1999)andiskeepingthepeopleithas.Theweektheretentionbonusawardprogramwasannounced,HRstaffbeganleveragingittosalvageexternaljob
offersandenhancecounterofferstosaveexistingemployees.Thegreatestsuccess,however,isthemostdifficulttocalculate.Howdoyoumeasuregoodwill,
employeesatisfaction,andpositivemorale?

Lookingahead,FleetrealizesthatcontinuallyescalatingmarketpressuresmaymakeitnecessarytorepeatoneormoreoftheinitiativesoftheFTSYear2000
RetentionPlan.Ifthathappens,itwillbeready.

KeyLessonsLearned

Thelessonslearnedfromthisprojectmayseemfundamental,buthadFleetfocusedonthemfromtheverybeginning,itcouldhavebeenmoreeffectiveearlierinthe
process.Thekeylessonsare:

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1.Simpleisbest.Peoplereactmorepositivelytothingstheyunderstand.

2.Whenyougivesomeoneamonetaryaward,don'tovershadowitwithlotsofverbiage.Remember,moneytalks.

3.Ifyouappreciatesomeone'sefforts,alwayssay"Thankyou."

ClosingComments

Fewinitiativescomealongthatareascloselylinkedtoanorganization'sultimatesuccessorfailureastheYear2000project.Manyfirmshavealreadydeterminedthe
costofcomplianceistooburdensome,andtheyarechoosingtoclosetheirdoors.Forthose,likeFleet,thatchoosetoremainviable,maintainingastable,critically
skilledtechnicalworkforceisthekeytofuturesuccess.

Nooneknowsexactlywhatwillhappenat12:01A.M.onJanuary1,2000,butatleastnowFleetisconfidentthatithasastrategyinplacetohandlewhatevercomes.

RetainingEmployeesWhenFacedwithConsolidationsatCIGNAHealthCare

Thedecisiontoconsolidatetwooperationsmeantthatmorethan100peoplewouldlosetheirjobs.Yetifpeopleleftthecompanybeforetheotheroperationalareas
couldassumetheadditionalworkload,majorcustomerimplicationswouldresult.Theemploymentmarketwasrelativelystrong,sotheriskoflosingpeople,especially
topperformers,washigh.Yettherewasastrongviewpointthatretentionpackagesdonotwork.

"Theseretentionprogramsneverwork,"expressedafrustratedsenioroperationsdirectorinameetingwithMikeJaques,vicepresidentofcompensationandbenefits
forCIGNAHealthCare.

"Whatifwehadofferedthemafullyear'ssalarytostaywithus?Wouldthathaveworked?"askedJaques.

"Well,ofcourse,"thesenioroperationsdirectorresponded."Butwecan'taffordthat."

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"Then,it'snotthattheseprogramsdon'tworkwedidn'tofferthemenough,"Jaquescountered."Howimportantisitforustokeeptheoperationsgoinguntilwecan
makeasmoothtransition,andhowmuchwouldittaketokeepthesepeopleoverthistime?"

Whenthemeetingconcluded,Jaquesandthelocalhumanresourcesmanagersagreedtodevelopadifferentapproachthancompanypractice.Thistimewouldbe
different.

WhyDoThingsDifferently?

ThiswastheHealthsourceexperiencepriortoitsacquisitionbyCIGNAHealthCareinJune1997.AscompanieslikeCIGNAacquireothers,itisoftenimportantto
consolidateoperations.Thiscreatesgreatereconomiesofscalefortheoperationalareasandoftenincreasescustomerserviceorreducescosts,hopefullyboth.The
mergerbetweenCIGNAandHealthsourcewasamajormoveinthemanagedcareindustrythechallengetoCIGNAwastomakethetransitionwork.

Oneofthemostcriticalareasimpactedbythisacquisitionwasinoperations.Thisfunctioncreatespatientaccountsprocesseshealthcareclaimsprovides
reimbursementstophysicians,hospitals,andothercareprovidershandlesmemberquestionsandneedsandmakesasignificantnumberofnecessarytransactionsfor
patientsandtheiremployers.Thisistheinformationalbackboneofthehealthcareinsuranceorganization.

AftertheacquisitionbyCIGNA,twoHealthsourceoperationalareas,oneinIndianaandoneinupstateNewYork,neededtobecloseddownandtherecordsand
servicesystemsconsolidatedwithotheroperationalcenters.Whileafewemployeeswouldbetransferred,mostofthemorethan100employeeswouldlosetheirjobs.

Tomakethisprocessmorecomplicated,Healthsourcehadmanageditsbusinessinadecentralizedmanner.Manyofthecustomermanagedcarecontractswere
uniqueandhadtocomplywithdifferentstateregulations.Thismeantthattheoperationalprovisionsofthecontractsweredifferent,knownbythelocalcenters,and
neededtobeprocessedinspecializedways.Sotransferringcustomeraccountstoothercenterswasamajorundertaking.

Furthermore,ifpeopleintheseaffectedlocationswereto

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leaveprematurely,thecompanywaslikelytoexperiencemajorcustomerproblems.Theconsequencesofthesepotentialproblemsandmanyotherslikethemcouldbe
catastrophictoCIGNAinitsattempttobuildmarketshareintheareasservedbyHealthsource.Thesewereveryrealandseriousissues.

BackgroundonRetentionPrograms

Whencompaniesseektodevelopretentionprogramsforemployeesofunitsthataretargetedforclosure,theytraditionallyfirstdeterminetheprevalentpracticeinthe
marketplaceandthendeterminewhattheycanafford.TheythendevelopapolicyofprovidingemployeesXnumberofweeksofpayandbenefitsforYnumberof
yearsofemployment.Theyoftendothisregardlessoftheemploymentmarket,theimpactonthecompanyanditscustomersifthisprogramdoesnotsucceed,andthe
timeoftheyear.Theyseldomconsiderwhatemployeeswant.

Incontrast,employeesoftenknowthattheirpositionswillbeeliminatedlongbeforemanagementmakestheformalannouncement.Becausethissituationposesa
fundamentalthreattotheirincomeandsurvival,eachpersonassessesthesituationandmakespersonaldecisionsonwhattodo.Peoplewilloftenstartlookingforjobs
manyweeksbeforetheyneedto.Thehighperformersorselfstartersoftendothiswithouthesitationandcanoftenfindemploymentquickly.The"slowstarters"may
needtoworkthroughtheemotionalissuesofjoblossandfearofbeingunemployedbeforetheybegintheirsearchforanewjob.Inbothcases,theworkofthe
organizationsuffersbecausepeoplewilldoonlytheminimumlevelofworktoretaintheirpositionsduringthistransitionperiodandspendmostoftheirenergyonthe
jobsearch.Theyseeneitherafuturefortheircareersnoranopportunityforrewardstheynolongerfeelanycommitmenttotheorganizationbecausethecompanyhas
brokentheties.Eachemployeemakesdecisionsbasedonwhatisbestforhimorher.

Thepotentialimpactonthecompanycanbeserious.Asstrongperformersfindemploymentelsewhere,agradualimplosioninperformanceoccurs.Thecompanydoes
notseektoreplaceemployeesthatleave.Becausetheworkisoftennotdiminished,theremainingemployeesbecomeburdenedwithmoretodo.

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However,theyseelittlepersonalbenefitforincreasingproductivity.Thecustomersuffersandsodoesthecompany.Itemstakelongertobeprocessedanderrors
increase.Improvementsintheprocessareminimalandthereislittleconcernbyemployees(andsometimesmanagers)aboutmanagingcosts.Thisissimplyacrisisthat
isbuildingandbuilding.ThiswasthepotentialriskthatCIGNAwasfacing.

TheprogramCIGNAdevelopedtoretainemployeesinthetwooperationscenterswasrelativelysimple.Theimportantpointwasthethinkingprocessusedto
developtheprogram.Oncethedecisionwasmadetoconsolidatetheoperationsandthepositionstobeeliminatedwereselected,thetaskthenfocusedonhowto
retainemployeesthroughthistransitionperiod.Ateamofhumanresourcesandoperationalmanagersassessedtheimpactonthecompanyiftheoperationalareas
experiencedprematureterminations.Sotheretentionplanwasviewedasa"preventiveinvestment"thatwouldhavesignificantbenefitstothecompanyorserious
businessimplicationsifitwerenotsuccessful.

ANewApproachtoRetainingEmployees

Thedecisionprocessbeganinthefallof1997andthetargetdateforconsolidatingtheoperationswassetatNovember15,1997.Givenpastexperienceswithother
organizations,MikeJaquesknewthemorelikelytargetdatewouldbeearlytomidDecember.Thisimmediatelysurfacedaproblem:Shouldtheysettheretentiondate
inthemiddleoftheholidayseason?Eventhoughthisisabusiness,theydidnotwanttohavestrongnegativebacklashbyemployeestimingisoftenasensitiveand
criticalissueindevelopingtheseprograms.

ThenextdecisionwastodeterminethedatethroughwhichCIGNAwantedemployeestoremainwiththecompany.Untilthiswasdetermined,CIGNAneeded
employeestostayfocusedontheircurrentjobs.Thentheyshouldstartjobsearches.December31,1997,wasselectedasthetargetdateforclosingtheoperations.
Peoplewereassuredthattheirjobsandresponsibilitieswouldcontinueuntilthatdateunlesstherewereseriousperformanceproblems.Itwascriticaltoestablishafirm
datearoundwhichpeoplecouldplantheirlivesandorganizetheiractivities.Thenthesever

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ancepayshouldprovidethemwithsufficientincomeduringthe"posttargetdate"perioduntiltheyfoundanewjob.

Next,Jaquesandhisstaffworkedwiththemanagerstodeterminehowlongitwouldlikelytakefortheseemployeestofindotherjobs.Theywantedtoseethe
situationfromtheemployees'viewpoint.Theyexaminedthemarketplaceintheexistingcitiesandidentifiedthepotentialemployersofpeoplewiththeskillsetssimilar
tothoseatCIGNA.Itwasdeterminedthatpeoplewouldmostlikelyneedapproximatelytwotothreemonthstofindsimilaremployment.

Thenextdecisionwastodeterminethelengthoftheseveranceprogram.Howlongshouldpeoplereceivesalarycontinuation?Thecorporatepolicywasthemarket
standardoneweekofpayandbenefitsforeachyearofemployment,withaminimumoffourweeks.Formanyemployees,thispolicywouldnotfitthetimeneededto
findnewemploymentandtheorganizationknewthesepeoplewouldbeginlookingduringtheperformanceperiod.Thiswouldlikelydisrupttheoperations.Also,
CIGNAknewthatpeoplewouldseektofindajobbeforetheholidaysiftherewasnotsufficientincentivetostaywithCIGNA.Throughthisanalysisitdetermined
thateightweeksshouldbeaddedtothestandardcompanypolicy.Thiswasnotascientificallyderiveddecisionbutwasbasedonwhatthemanagersbelievedwould
reflectaneffectiveincentiveforpeopletoremainuntilthetargetdate.

Theimportantconsiderationinthisprocessistodeterminewhenpeoplewillbegintheirjobsearchandhowlongitwilltakethemtofindagoodjob.Obviously,high
performerswillmovemorequickly.Thecompanyalsorealizedthatoncepeoplestartedlookingseriously,theirjobfocusandperformancewouldbegintodecline,at
leastatthediscretionarylevelthatextralevelofperformancethatisabovestandard.CIGNAwantedtoencouragepeoplenottobeginlookingfornewjobsuntilthe
operationswerepastthemajortransitionperiod,inorderforcustomerstoexperiencenodisruptioninservicelevelsorquality.Furthermore,itwantedpeopletofeel
thattheorganizationwasconcernedabouttheirpersonalcircumstancesandwouldbeappropriatelygenerousandsupportive.

AsacontingencyiftheclosingtargetdateneededtobeextendedbeyondDecember31,thecompanywouldprovideadditionalbonusestoindividualswhoremained
tocompletethe

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transition.Thiswastoensurethattherewasnointerruptioninthework.Thebonusamountwassetatbetweentwoandfouradditionalweeksofpay.

Insummary,theprogramprovisionswerethese:

1.EmployeeswouldneedtoremainwiththecompanyuntilDecember31,1997,orreleasedate,whicheveroccurredfirst.Anyoneresigningbeforethisdatewould
notreceiveanyofthebenefitsoftheprogram.

2.CIGNAwouldpaythecompany'sseverancepackageofoneweekofpayforeachyearofemployment,withaminimumoffourweeks,withacontinuationof
healthcarebenefitsfortheappropriatetimeperiod.

3.Inaddition,CIGNAwouldprovideaspecialbonusofeightweeksofpayandcontinuewiththehealthcarebenefitsforthisadditionaltime.

4.IfindividualswereneededpasttheDecember31date,thenCIGNAwouldprovideanadditionalbonusoftwotofourweeksofpayandbenefits,dependingonthe
timing.

5.Employeeswereexpectedtocontinuetheirhighlevelofperformanceandservicetocustomersandhelpmakethetransitionassmoothaspossible.

WhatReallyHappened

Peoplewerenotsurprisedbytheannouncementofclosingtheoperations.Theyweresurprisedthattheyweretoldabouttheseveranceprogramthreemonthsbefore
thetargetdate.CIGNAwantedtoavoidtheproblemofpeoplegettingintothejobmarkettooearly,especiallytheirhighperformers.Becauseofrumorsand
uncertainty,itwantedpeopletohaveafirmdatetheycouldplanaround.Italsowantedpeopletounderstandthatthisprogramandthisclosurewerenotgoingtobe
rescinded.

Whenfacingturbulenttimes,peoplewilloftenseeksecurityandcertainty.Remainingwiththecompanyrepresenteduncertaintyfindinganewjobrepresented
certainty.Thus,itwascriticalforCIGNAtoestablishcertaintyandprovideanattractive"bonus"thatwouldencouragepeopletoremaincommittedtoprovidingtheir
customerswithservicesandassistinthetransition.Itwas

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importantforpeopletofeeltheyhadenoughmoneytofindajobbeforeitranoutandtohaveachancetogetsomethingextra.

Theimpactofthisprogramwasremarkable.Thetwooperationalgroupsexperiencedminimalturnover.PeopleremaineduntiltheDecember31targetdate.The
customerscontinuedtoreceivethesamelevelofhighservice,andtheoperationalgroupswereabletomakethetransitionstothenewsystems.Thecompany
continuedtoincreaserenewalsandretaincredibilitywithhealthcareproviders.Mostemployeesfoundnewpositionsbeforetheirseverancepaymentsranoutand
severalusedtheextraincomeforsomethingspecialfortheirfamilies.Byallaccounts,theprogramwasasuccessfromtheviewpointofthecustomer,theemployee,
andCIGNAHealthCare.

PrimaryLessons

TherewereseveralimportantlessonsforCIGNAinthisexperience.First,itwasimportanttounderstandthetimeofyear,theemploymentenvironment,andhowthey
wouldaffecttheemployees'perspectiveonthesituationtheyfacedknowingthattheyweregoingtolosetheirjobs.Fortheprogramtobesuccessfulinretainingthese
individuals,peopleneededtoseehowtheywouldbebetterofftoremainwiththecompanyforthegiventimeperiod,thantofindemploymentelsewhere.Fromthe
organization'sbusinessperspective,itwasessentialthatthehighperformersremain.Onlybyunderstandingtheemployees'perspectiveandaddressingtheirprimary
concernscouldasoundprogrambedeveloped.

Second,itwasimportanttocommunicatetheprogramearlytopreventrumorsanduncertaintyfromforcingpeopleintothejobmarketwhilethecompanystillneeded
theirfullworkefforts.Somecompaniesaddressthisproblembydelayingthecommunicationthisoftenhasadisastrouseffect.CIGNAchosetocommunicatethedate
clearlyandearly.Peopleappreciatedknowingthesituation,sotheycouldplantheirlivesaccordingly.CIGNAactuallycreatedcertaintyoutofuncertainty.

Third,CIGNAlearnedthatbeingconservativeaboutspendingmoneyonretentioncanactuallycosttheorganizationalotmore.Thereturnoninvestmentofthe
programneedstobebasedonthetotalcostsandimpactonthebusiness,notjustthesimple

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costsoftheprogram.CIGNA'sanalysisincludedcomparingtheretentionprogramcostswith:

Revenuesfromcustomerretention

Costsoflostproductivityandincreasederrorrates

CIGNAwouldbeprudentlygenerousinordertomaximizeitsreturnoninvestment.

Fourth,providinga''sweetener''tothestandardprogramwasamajorbenefit.Peoplefeltthatiftheyremainedtheycouldactuallycomeoutaheadonthetransition,
andthisincentiveprovidedthatextraspecialcomponentthatpersuadedpeopletomakethemutuallybeneficialdecision.

Finally,thiswasaonetimeprogramwithaclearendpoint.CIGNAdidnotneedtochangecompanypolicies,butitdidneedtobeflexible.Eachprogramneedstobe
customdesigned.Eachsituationhasuniqueissues,andtheprogramneedstobestructured,communicated,andmanagedtoaddressthemeffectively.CIGNAlearned
theimportantvalueofcustomization.

Likeothercompaniesthatconsolidateoperations,CIGNAfoundthatretainingemployeesduringthetransitiontimeisacriticalbusinessissue.Careandattentionare
neededtoensurethedesiredfinancialandcustomerobjectivesarerealized.Peoplemakedecisionsabouttheiremploymentcircumstancesanddiscretionary
performancebasedonwhattheyviewasbeingintheirbestinterests.Aligningemployeeinterestswiththebusinessinterestisthekeytosuccess.

Thissimplesituationisrichinitsdemonstrationofwhatcanbedoneandwhatshouldbedonetomakemajortransitionssuccessful.

BuildingCompetenciesinTurbulentTimesatHealthServicesMedicalCorporation

Oneofthecomplexchallengesofthemanagedcaresectoristodevelopandretaintalent.Becausetheindustryisrelativelyyoung,organizationsoftenneedtodevelop
talentinternallytomeetuniquerequirements.Placethisinthecontextofamarketplace

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thatisundergoingfundamentalchangeandonebeginstoseethenatureoftheissues.Theenvironmentisbecomingmorecompetitive,andcustomersarebecoming
moresophisticatedanddemanding.Employeesoftenjointheseorganizationsoutofacommitmenttothehealthcareindustry,butfindthatnewjobopportunities
emergeastheybecomemoreexperienced.Soacriticalhumanresourcestaskistohirepeoplewithgreatpotential,trainthemwell,andretainthem,allthiswhilethe
pressuresforsurvivalarebecomingmoreintense.

ThesearesomeofthechallengesfacingHealthServicesMedicalCorporation(HSMC)ofCentralNewYork.BasedinSyracuse,NewYork,HSMCwhichis
knownasPrepaidHealthPlan(PHP)isanotforprofithealthcareinsurancecompany.Alongwithitsrelatedcompany,HealthServicesAssociation(HSA)of
CentralNewYork,HSMCprovideshealthcareservicesandinsurancetomorethan150,000membersandpatientsservicedbyatotalof1,100employees.The
companywasfoundedin1972,whenmanysimilarstartupmedicalgrouppracticeswereemergingonthescene.Asmanagedcarecontinuestobeahighlycost
effectivewayforemployersandthefederalgovernmenttosupporthealthcareservices,thesecompanieshaveestablishedtheirmarkonthebroaderhealthcare
industry.

CompanyBackground

UpstateNewYorkhasnotbeenahighgrowthmarketforemployersoremployeesintherecentpast.Nonetheless,ithasbecomeintensivelycompetitiveasnew
managedcarecompaniesenterthemarketandphysicianpracticesofferalternativehealthcareservicearrangementstoareaemployers.HSMCandHSAneedto
continuetohireandretaintalentwithinthecontextofimprovingtheirperformanceandcompetitiveness.

Thesecompaniesarelocatedclosetoeachotherandoftenactasoneorganization.Althoughtheyareseparatelegalentities,theysharethesamehumanresources,
finance,andbusinessplanningfunctions.Bothcompaniesarefacingasignificantturnoveroftalent,bothwithinandoutsidetheorganizations.Tomanagers,theturnover
tootherinternaldepartmentscanbejustaspainfulaslosingpeopletoothercompanies.Turnovermeansthelossoftrainedstaff,increasedworkpressureonexisting
staff,andcontin

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ualeffortstohireandtrainnewstaffmembers.Furthermore,manyofthechangesinthemarketplacerequirenewskillsbystaffmembersandmanagers.Thereisa
continualneedtoupgradestaffmembers'skillsandproductivity.

Iftheycouldreduceturnoverandbuildstrongerhumanresourcescapabilities,HSMCandHSAcouldimprovetheirservicesandlowercosts.Theparadoxes
surroundingthistaskwere:

Increasingthecompetitivenessofpaylevelswithoutincreasingpayrollcosts

Buildingnewcapabilitiesandimprovingperformance

Creatingstabilityintheworkforceandofferingpeopleclearcareerpaths

Howeffectivelytheorganizationsaddressedtheseissueswoulddeterminemuchoftheirfuturesuccess.

Inaddition,HSMCandHSAhadacomplexcompensationprogram.Itwasestablishedseveralyearsearlierwhentheorganizationwassmallerandsimpler.There
havebeenmajorrevisionsandmodificationssincethen,resultinginagreatnumberoflevels,differentpayscales,andanadministrativeprocessthathadbecome
politicized.Executivemanagementandhumanresources(HR)staffdecidedtoreplacetheentiresystemwithonethatwouldfocusoncompetenciesandhowthey
wereemployedintheworkplace.

HowtheCompetencyManagementProcesswasDeveloped

Afteranassessmentofthecurrentsituation,adesignteamcomposedofseniormanagersdevelopedanewconceptfortheircompensationprogram.Thepurposeof
thenewprogramwastodefineandrewardthekeycompetencieswithindepartmentsthatenablethemtoimproveservices,productivity,andcontributiontotheoverall
organization.

Thismeantthatthecompensationsystemwouldbeintegratedintoacomprehensivemanagementprocessforpeoplewithintheorganization.Compensationwouldnot
standasanindependentprogram,butratherwouldsupporttheorganization'seffortstoimproveperformance.Competencieswouldformthecorefoundation

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onwhichmanyhumanresourcesprogramswouldbeestablishedandmanaged.Thisincludedhiring,traininganddevelopment,planningstaffinglevels,andrewarding
performance.Finally,theprocesswouldreflectoverallorganizationalrequirements,theuniqueneedsofeachmajordepartment,andskills/behaviorsspecifictoeach
jobfamilyorcareertrack(e.g.,management,professional,service).ItbecameknownastheCompetencyBasedManagementProgram.

Theprogramwasdevelopedwithagroupofseniormanagerswithextensiveguidancefromthehumanresourcesleadershipteam,JenniferFultonVacco,directorof
humanresources,andEllenWilson,vicepresidentofhumanresourcesandcommunications.Therewerenumerousreviewsbydepartmentmanagersasideaswere
developedandtested.Managersandotherhumanresourcesstaffmembersprovidedalotofinputandfeedback,sotheresultingprogramaddressedmanyoperational
andadministrativequestionsandwasgenerallyunderstood.Furthermore,thecommunicationprocesswasextensiveandhighlyvisiblethisledtheprogramtobe
viewedasquitecomprehensiveandrobust.

OverviewoftheCompetencyBasedManagementProgram

Thisnewapproachhasseveralimportantelementsthataredefinedanddescribedinthefollowingsections.

Step1
DefinitionoftheCompetencies

CompetencieswithinthecontextofHSMCandHSAweresimplestatementsthatarticulatedkeybehaviorsoractionsneededfortheorganizationtobesuccessful.
Thedesignteam,throughanumberofiterations,determinedthattheyneededanoverallsetofcompetencies,aswellasonesthatwereappliedtodifferentrolesor
unitswithintheorganization.Althoughmuchdetailisbehindeachstatement,theoverallcorecompetencieswere:

Functionalortechnicalexpertise

Customerfocus

Actionorientation

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Abilitytodealwithambiguity

Integrityandtrust

Organizationalagility

Eachofthesestatementswasdefinedfurtherbythreetofivebehavioralactionstatements.Thesecompetencydimensionsbecamethefocusformuchoftheprogram
designwork.

Step2
EstablishmentoftheKeyCareerTracks

Thenextstepinvolveddefiningtheprimarycareertracks(orroles)withintheorganization.Thesecareertrackswere:

Service.Thesefunctionsareimportantbuildingblocksforthedepartmentandprovidebasictasksandservicesforitscustomers,internalorexternal.Theseare
usuallystandardizedactivitiesandgenerallyencompassnonexemptpositions.

Professional.Thesefunctionsareuniqueandrequireacomplexarrayoftasks,capabilities,andexperience.Theyareusuallyresultoroutcomeorientedandmost
likelyincludeexemptpositions.

Managerial.Thesefunctionsareorientedtoprovidingbusinessorpeopleleadershipforthedepartmentorcompany.Theyareusuallyuniquewithinadepartmentor
group(i.e.,heldbyonlyoneperson)andrequireextensiveexperienceinthemanagementofpeopleandworkprocesstoachievedesiredresults.

Thesethreecareertrackswerehelpfulinsortingthroughtherolesandjobswithinadepartmentandidentifyingtheiruniquecompetencyrequirements.Asetofsalary
rangeswasestablishedforeachcareertracktosupporttheattractionandretentionofpeoplewiththedesiredcompetenciesandperformance.

Step3
DevelopmentofDepartmentSpecificCompetencies

Forthethreecareertracksindicatedabove,thelinemanagersforeachdepartmentwerechargedwiththeresponsibilityofdevelopingthecriticalcompetenciesfor
theirownunits.Eachdepart

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mentalmanagerworkedwithaseniorhumanresourcesrepresentativetoidentifyandselectthecompetenciesthatwouldbecriticaltotheirownunit.Managerswere
encouragedtogobeyondthecorecompetencylistthatappliestothewholecompanyandidentifytheirspecialrequirements.Additionalcompetenciesincludedthose
listedbelow:

ManagerialTrack: ManagingforresultsBuilding
teamspiritMeasuring
performance
ProfessionalTrack: PlanningPerseverance
Understandingothers
ServiceTrack: SettingprioritiesInforming
othersOrganizingtasks

Aswiththecorecorporatecompetencies,theseweredefinedandbehavioralindicatorsweredevelopedforeachdimension.Theprocesswasopenandinvolveda
highdegreeofreflectionbytheunit'smanagersandseniorstaffmembers.Thisagainbecameaclearfocalpointfordevelopingandmanagingthekeyhumanresources
programs.

Step4
TheAssessmentFramework

Whilethecompetencieswereusefulinfocusingonthefundamentalrequirements,themostchallengingtaskwastoassesseachpersonwithinthedepartments.The
managersandhumanresourcesrepresentativeswereinvolvedindefiningthecompetencies,sotheyunderstoodtheprincipalmeaningsofeachdimension.Managers
thenreviewedtheperformancehistoryandotherrelevantbackgroundofeachpersonandusedthisdatatocompileaninventoryofabilities.Toaidthisprocess,a
fourlevelassessmentscalewasused.Eachpersonwasgivenaratingforeachcompetencydimensionusingthefollowinglevels:

1.Developer.Thisindividualhasonlybasiclevelskillsinthisareaandshouldworkatimprovinghowheorsheperformstheparticularcompetency.

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2.Applier.Thisindividualperformsthecompetencyinafullycompetentorproficientmannerthemanagercanalwayscountonthesepeopletodowhatisneededto
makethedepartmentsuccessful.

3.Expander.Thisindividualgoesbeyondthestandardexpectationsandisinnovativeorcreativeinhowthecompetencyisappliedexpandersaretheindividualsthat
work"outsidethebox"andexceednormallyexpectedlevels.

4.Leader.Thisindividualisarolemodelforthecompetencydimensionsandprovidestraining,coaching,oruniqueguidancetoothers.

Theselevelswereeasilyinterpretedandappliedtothecompetencydimensions.Theyenabledmanagerstogainafullperspectiveoftheirstaffingtalent,andthenplan
theoveralldevelopmenteffortsforthedepartment.Theseassessmentlevelswouldbeusedlaterwhenintegratinggoalaccomplishmentswithcompetencies.

Step5
BuildingtheSupportingCompensationPlan

Independentofthesecompetencydevelopmentandpeopleassessmentactivities,thehumanresourcesteamandoveralldesignteamdevelopedanewcompensation
planthatwouldintegratewithandsupportthedevelopmentofcompetencies.Tosummarizethetasksbriefly,theyidentifiedalargenumberofpositionswherecurrent
compensationlevelscouldbecomparedtovalidandreliablemarketdata.Inmanycases,severalcompensationsurveyswereusedforeachposition.Fromthisdata,
theywereabletoestablishatargetmarketrangeforeachposition,consistentwithanoverallcompensationstrategythatissufficientlycompetitiveandaffordableby
theorganization.

Thenexttaskwastoconstructasetofbroadsalaryrangesandtoplaceallpositionsintothenewpayranges.HSMCandHSAusedsixprogressivesalaryranges,
withaspreadof75%fromminimumtomaximum.Positionswereslottedintothenewsalaryrangesbasedonacombinationofmarketratesandcurrentcompensation
levels,andinrelationtocomparablepositionswithintheorganization.Thisenabledthecompanytoeliminatethecomplexarrayofsalaryrangesandjobevaluation
controls,andprovidepeoplewithsignificantupsidepayopportunities.

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Oncethesalaryrangeswereestablished,theyweredividedintofourcompetencyzones.ThesecorrelatedpreciselytotheassessmentcriteriaDeveloper,Applier,
Expander,andLeader.Thesezonesreflectedappropriatepayparametersforindividualsperformingattheassociatedoverallcompetencylevel.Thesepayzones
representeddesiredortargetpayrangesaspecifictargetratewasnotnecessary.Itwasfelttherangewithineachzonewasanacceptablevariancefromaninternally
equitableorexternallycompetitivestandpoint.Whentherewasagapbetweentheamountastaffmember"should"receiveand"did"receiveintermsofapaychange,
themanagercouldaddressthisissueasaspecialadjustment(tobediscussedlater).

Step6
IntegrationoftheElementswithSalaryManagementPolicies

Atthispointallthecriticalprogramelementsweredeveloped.Asetofcompetencieswasdefinedfortheentireorganization,foreachspecificdepartment,andfor
eachcareertrackpeoplewereassessedagainstthesecompetenciesasalarystructurewascreatedtolinkpaytothemarketandtointernalpractices.Thetasknow
wastointegratethemintoacommonsystem.Thatwasthepurposeofthesalarymanagementpolicies.Thehumanresourcesgroup,incollaborationwiththedesign
team,developedasetofpoliciesthatwouldservetointegratetheseelementsintoaprocessformanagingpeople.Thepoliciescoveredsuchtopicsashiring,transfers,
promotions,demotions,andsalaryactions.

Thesalaryactionpolicieshadthemostuniquefeatures.First,thecompanymovedallsalaryincreasestoacommonreviewdate.Thiswasestablishedatthreemonths
aftertheendofthefiscalyear.Theorganizationaddressedthetransitionalpayissuessopeoplewouldnotexperienceasignificantwindfallorlossofsalary
adjustments.Second,managerswererequiredtoassesstheirstaffontwodimensionsperformanceagainstgoalsorstandardsandcompetenciesapplied(seeFigure
71).Theperformancedimensionincludedthreelevels:fullymeetsstandards,fallsshortofestablishedstandards,andexceedsexpectations.Thecompetencylevels
werethesameasdiscussedaboveDeveloper,Applier,Expander,andLeader.Anewformwasdevisedtoassistmanagerswithdocumentingtheircompetency
assessmentstobeusedinad

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Figure71.
Performanceassessmentform.

ditiontothetraditionalperformanceappraisal.Therewerenosalaryincreaseguidelinesatthistime.Theperformanceratingsandcompetencyassessmentswere
furnishedtohumanresourcesbyaspecifieddateaftertheendofthefiscalyear,onemonthbeforethecommonreviewdate.

Third,humanresourcesstaffreviewedtheratingsandmeritincreasebudget.Theyexaminedthemarketdataandidentifiedcaseswhereaspecialmarketadjustmentor
internalequityadjustmentwasneeded.Thentheypreparedthesalaryincreaseamountthateachmanagercouldgivetostaffmembers.Fourth,theseamountswere
reviewedwiththemanagersindividually,sotheycoulddiscussanyconcernsabouttheamounts.Ifmanagersratedmostoftheirstaffmembersatthehighestlevelsand
thiswasnotjustifiedbyunitperformance,theneachmemberreceivedtheaverageincrease.Ifadepartment'sreviewsreflectedperformanceatalllevelsoftherating
scale,thentherewasawidevariationofpayincreases.Thisensuredthatthetopperformerswouldreceivethehighestpayincreasesandthatraterbiaswasminimized.
Thisprocessalsoensuredthatthepayincreaseswerewithinbudgetguide

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linesandintegratedwiththeperformanceandcompetencyassessmentsofthemanagers,andthatinternalormarketpayissueswereaddressed.

Thisprocessisconductedannually.If,however,managershaveparticular"specialpayadjustment"needsintheirdepartments,thedesignteamdevisedawaytofund
thesesolutions.Ifduringtheyearmanagersareabletoreduceheadcountthroughvoluntaryorinvoluntaryterminations,theycanusesomeofthesedollarsformidyear
salaryadjustments.

Theprincipleofthispolicyissimpleandrepresentsamajordelegationofresponsibilitytothemanagers.Whenamemberofthestaffleavesforwhateverreasonand
theworkispickedupbyothermembers,thenthemanagercanuseupto50%ofthebudgetedbutunusedportionofthesalaryforspecialadjustmentsinpaytothose
thattookontheextraresponsibility.HRstaffreviewseachrecommendationforequityandlegalpurposesbeforetheyareapproved.Thepositioncreatedbythe
terminationisthen"eliminated"andcannotberefilledthenextyear.Butifprocessimprovementcontinuesorenhancesthehighperformanceoftheunit,theseactions
arewellworththeinvestment.Thisencouragesthedepartmentstoimprovetheirworkprocess,developtheircompetencies,andsharethebenefitsoftheseefforts.

Theprocessiscoordinatedcloselywithhumanresourcesanddivisionalseniormanagement.Furthermore,iftherearedepartmentsthatsignificantlyincreasetheir
productivitywithoutstaffadditions,theycanreceiveadditional"specialadjustmentinvestments"fortheirpeople.Thesefundscomefromaportionofthecompany's
shareofthecostreductionsandtheperformanceimprovements.

ImpactofthesePolicies

HSMCandHSAcontinuetoundergochangeanddevelopmentinresponsetoadynamicmarketplace.Fundamentally,thenewcompensationprogramservedasa
catalystforencouragingandrewardingimprovementsneededintheorganization.Inessence,thepaylevelsprovidedtherewardopportunitythecompetenciesapplied
andtheperformanceachieveddefinedthepaylevels.

Thisisalongtermdevelopmentprocess.Theresultswill

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buildovertime.Theimmediateimpacthasbeeninseveralcriticalareas:

Turnoverwithinandexternaltothecompanyhasbeguntodecrease.Thecompanywasabletoprovidebothasenseofnewcareeropportunitieswithindepartments
andimprovethecompetitivenessofpayinatriskareas.

Managersandemployeesarediscussingandembracingthecompetencies,whichhavebeenusedtofocushiring,staffing,anddevelopmentefforts.

Severaldepartments,includinghumanresources,haveusedspecialadjustmentsandreducedtheirpayrollexpenseswhileincreasingsalariesabovelimitedmerit
budgets.

Thecompensationsystemisnolongerseenasadragonthecompany'schangeeffortsorasanimpedimenttotheabilitytorecruitpeoplefromthemarketithas
becomeanimportantanduniquefeatureoftheorganization.

Managersareexcited,executivesaresupportive,andthehumanresourcesgrouphasbecomeanactivepartnerwithlinemanagers.Thishaschangedthemoodofthe
organizationinmanyprofoundways.

Thisprocesshasenabledthefocustoshiftfromjobstructurestoemployeecontributionsandorganizationalperformance.Thishaschangedthepayprogramfroma
highlycontrolled,misunderstoodstructuretoonethatisinthehandsofmanagersandiswellunderstood.Theneededcontrolsareaddressedthroughfinancial
decisions,notsalaryincreaseguidelines.Thishasgivenmanagerstheresponsibilityandempowermenttomakechangesintheirorganizationsthatwillimprove
performance,thenbenefitfromtheresults.Hence,theemphasisisonincreasingcapabilitiesandproductivity.Overtime,executivesexpectthatmoredollarswillbe
goingtofewerpeopleandtheorganizationwillbebetterabletoattract,retain,anddeveloptalentforthenewmarketplace.

Perhapsthemostimportantshiftinmindsetwasexpressedbyamanagerduringtherolloutprocess.Sheindicatedthattheprogrammovedfromaphilosophyof
complexityandcompliancetoonethatbroughtopportunityandresponsibility.Managersneedtocoordinatetheireffortswitheachotherandwithhumanresources
managersweregiventheresponsibilitytoimprovethe

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performanceoftheirorganizationsandtheopportunitytobenefitfromit.Thosewhounderstoodthetruemessageshavemademanyimportantchangesthosewhosat
backandcomplainedbecameevident.ThisprocessisclearlymakingHSMCandHSAaveryspecialorganizationatwhichtoworkandbuildacareer.

UtilizingValuestoAchieveCompetitiveAdvantageatKeane,Inc.

Intoday'sworldofcomplexmarketsandchangingcompetitors,theeffectivenessofanorganization'sinformationtechnology(IT)canoftendeterminethedifferencein
successorfailureofitsstrategy.Thisfunctioncanprovidethecompanywithinformation,transactions,andcustomerservicethatcreate(orfailtocreate)competitive
advantage.

Yetmanycompaniesaremiredinsupportingacomplexaccumulationofsoftwareapplications.Manyoftheapplicationsareincompatiblewithbusinessneedsandfail
toprovideaneasywaytolinkinformationtodifferentfunctionalneeds.Furthermore,asofthiswriting,theinabilityofinternalcomputerclockstorecognizetheYear
2000problemmayleadtotremendousoperatingbreakdowns.Finally,astechnologycontinuestochangeandprogressateverfasterrates,acompanyneedstostay
abreastoftheseadvancesanddeterminetherightnewtechnology,thenimplementandmaintainitwithtremendouseffort.Theseconditionsoftenexistinmission
criticalareasoforganizationsinmanyindustries.Feworganizationshaveaddressedtheseissuestotheirsatisfaction.

ThissituationopenstheopportunityforacompanylikeKeane,Inc.,toprovideorganizationswithmeaningfulsolutions.Keaneisasoftwareconsultingfirmbasedin
Boston,Massachusetts.Itspurposeistohelpclientsbuildandmanagehighperformanceinformationtechnologysystems.Ithasgrowntobecomeoneofthelargest
firmsinthisindustryandamajorcontributortoITsolutions.Sinceitsbeginningsinthemid1960s,thecompanyhasexpandeditsofficenetworkandserviceofferings
greatly.Keanewillachieverevenuesin1998inexcessof$900million,supportedby40officesthroughouttheUnitedStatesand

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Canada.IthasbeenrecognizedbyTheWallStreetJournalasthenumberonecompanyforcreatingshareholdervalueoverthelast10years,andbytheGartner
Group,anITindustryresearchfirm,asoneoftheindustry'stopthreeconsultingfirmsforaddressingYear2000issues.Finally,KeanehasreceivedtheSoftware
EngineeringInstitute(SEI)levelthreecertificationforitssoftwaremaintenancecapabilities.Eachoftheseachievementsshareholderreturn,reputation,andquality
haspositionedKeaneasaleadingcompanyintheITindustry.

Keane'sKeystoSuccess

Keanehasbeenabletoachievethisgrowthandmarketleadershippositionwhilestayingtruetoitsmissionandvalues.Keaneisoftenregardedasa''shirtsleeve''
consultingfirm,becauseconsultantsworkwiththeirclientstomakeITchanges.Whiletheyprovideassessmentservices,thestaffareoftenseenasmoreofapartner
totheirclientsthanothermajorITconsultingfirms.Furthermore,theytrulyembraceandfostertheconceptthattheonlysustainablecompetitiveadvantageistolearn
fasterthanone'scompetitors.

KeanedemonstratesitscommitmenttobuildinghighperformanceITorganizationsbyutilizingaserviceofferingframeworkinthreeareas:

1.Formulatingastrategicinformationplanandassessingaclient'scurrentcapabilitiesandperformanceagainsttheserequirements

2.Developingprogrammanagementcompetenciestomanageriskandensurealignmentbetweeninformationsystemsandtheclient'sbusinessimperatives

3.DeliveringITapplicationsdevelopmentandmaintenanceprojects,outsourcingservices,andYear2000complianceupgradesthatenhancetheclient'sabilityto
compete

TherehavebeenseveralkeyelementstoKeane'ssuccess.First,Keanehasdevelopedtheabilitytoreplicatesuccessesfromprojecttoprojectandclienttoclient
throughitsprojectmanagementmethodology.Thisisaqualityassuranceframeworkforplanning

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andcontrollingtheITdevelopmentwork.Second,ithasbuiltofficesfromacquisitionsorinvestmentstoservecompaniesinlocalmarkets.Therearethreeissuesin
consideringanycompanyforanacquisition.Theseare:

Financialstrengthandpotential

Compatibilitywiththecompanyculture

Duediligenceforlegalandaccountingrecords

Concernwithanyoneofthesefactorscanstopanacquisition.Furthermore,Keanestronglyinvestsinthecommunitiesitservesandthecompaniesbasedinthese
locations.ThishasalsoenabledKeanetoofferaworkplaceenvironmentwherefulltimetravelisnotanemploymentrequirement(asfoundinmanylargeITconsulting
firms).

Third,itinvestsheavilyintraininganddevelopment.Itregularlyinvestsmorethan5%ofitsrevenuesinthedevelopmentanddeliveryoftrainingcurricula.In1997,
KeanebuiltamultimilliondollarLearningCenterinBoston.Itusestrainingformultiplepurposes.ForKeane,trainingisawaytoenhancetheskillsofstaffmembers
andencourageitsdesiredculture.Itusesthetrainingprocesstofostersharingofinformation,learningwhatworksanddoesn'tworkinitsclientprojects,andtodrive
continuousimprovements.Theinvestmentintrainingisalsoreflectedineachofthebranchofficesandisanimportantelementisassessingtheperformanceofbranch
managers.

Finally,manyoftheconventionalhumanresourcesfunctionsaredecentralizedintolineoperations.Forexample,recruitmentishandledatalocalbranchlevel.
Professionalrecruitersreportdirectlytoseniorlineoperatingmanagers,andtheyareresponsibleforfindingandrecommendingattractivecandidatesforthe
organization.Thescreeningofcandidatesrelatestobothtechnicalskillsand"style,"orthoseattributesandcompetenciesKeanewantstobeknownbywithits
customers.PeoplearewhatKeaneofferstoitsclients,andtheprocessandmethodologiesarehowthesepeopleaddvaluetotheirclients.

Theseelementstosuccessareareflectionofthecompany'scorevalues.Thesevaluesincludeacommitmentto:

Learnfromexperiencesofallkinds

Driveforcontinuousimprovement

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Teamworkandcollaboration

Respectideasandpeople

Thesuccessofitsclients

RewardSystemsthatReflectCorporateValues

ThemajorforcedrivingtheKeanecultureisthedesiretolearnandusethislearningtosupportclientsandthecompany'scompetitiveness.Rewardsystemsserveasa
processtosupportthisphilosophywithameaningfulstakeintheoutcomes.Theyarenotoverlysophisticatedthevalueoftherewardsystemsisintheirsimplicityand
flexibility.

Thereareseverallayersofrewardsystemsthatformafabricofreinforcementforcorporatevalues.First,theyseektoprovidesalariesthatarecompetitivetothe
marketplacefortalent.BecauseKeaneoffersmanyotheradvantagesforworkingwiththefirm,itdoesnotattempttoleadthemarketwhenitcomestosalaryorfixed
compensation.Furthermore,itseekstofindpeoplewhoareneworatemergingstagesoftheirtechnicalcareers.Thenitinvestsindevelopingandretainingthemtobe
meaningfulcontributors.Becausethebranchofficenetworkisfocusedonlocalmarkets,thelackofexcessivetravelisanothercompetitiveadvantagetoattractingand
retainingdesiredtalent.

ThoseinvolvedinrecruitingforKeanehaveaspecialbonusprogram.Theseindividualssupporttheapplicationsdevelopmentandoutsourcingstaffingneeds.Thisis
regardedasateameffortwithinthelocalbranch.Consequently,foreachpersonwhoishired,aspecifiedamountiscontributedtoacommonpool.Thepoolis
distributedtoallrecruitersevenlyattheendofeachmonth.Therecruitershavepersonalgoalstoachieve,andiftheyexceedthem,theyreceiveapersonalbonusin
additiontothepooledbonuses.Thisencouragesbothindividualperformancetomeetorexceedone'spersonalgoalsandcollaborationtoassistothersinmeetingtheir
goals.

Forthoseinvolvedinsales,Keaneoffersaspecialcompensationprogram.Thisprogramhasevolvedovertimeandcontinuestoreflectcorporatestrategiesand
priorities.Thesesalesstaffmemberssupportthebusinessdevelopmenteffortsofeachbranch,andtheyreferbusinessleadstootherbranches.Theyreceiveatwo

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tieredbonus.Theyreceiveanacquisitionbonuswhentheyacquireaclientprojectcontract.Thisrecognizestheimmediateachievementofapieceofbusiness.The
amountvariesbasedonthesizeandbusinesstypeofthecontract.Then,theyreceiveapercentoftherevenuesfromtheprojectssoldovertheirquota.Sales
representativeshaveaquotathatrelatestotheirmarketandtheirsalary.Whenrevenuesexceedthislevel,thentheyareeligiblefortherevenuecommission.

Thereareseveralqualificationstothesecontracts.First,eachpracticearea(e.g.,applicationsdevelopment,outsourcing)hasaminimumcontractvaluethatmustbe
exceededbeforebonusescanbeearned.Second,thecontractedworkmustuseKeane'sprojectmanagementmethodologies.Thisensuresthattheprojectis
consistentwithKeane'squalitystandardsandtypeofdesiredbusiness.Finally,thecommissionratevariesbasedonthedesiredbusinessworkhigherratesarepaid
fordesiredbusinessmix.Consequently,Keaneusesasalesplantoaddressfutureyear'sbusinessneeds.

Ineachbranchandwithinthecorporationtherearepracticemanagers.Theseareindividualswhoseresponsibilityistodevelopmethodologiesandensurethatquality
standardsareappliedtothecapabilitiesKeaneprovidesitscustomers.Theyalsoserveastheprimaryresourcetosupportlearningandinnovationacrossthe
corporationwithintheirpracticearea.Theyareassociatedwitheachbranchofficeaswellascorporatewidefunctions.Theydirectlysupportthesalesrepresentatives
andotherprojectmanagersinthedeliveryofhighqualityservices.Theirincentivecompensationrelatestothreeareas:theprofitabilityoftheirbranch,therevenues
fromone'spracticeareainthebranch(orcorporation),andthequalityofservicesreceivedbytheclient.Thequalityismeasuredbybothexternaltechnicalstandards
(i.e.,SEIcertification)andcustomersatisfaction.Theyreceivecreditintheirpracticeareasforbothsalesandimplementationresults.

Thebranchmanagershaveprofitandlossaccountabilityfortheirarea.Agivenbranchmayvaryinsize,dependingonthemarketopportunity.Theirsuccessis
assessedaccordingtosimilarcriteriaasthepracticemanagers'profits,revenues,andquality.Goalsaresetinrelationtomarketopportunities,desiredprojectmix,
andcorporaterequirements.Assalesrepresentativesdevelopnewbusiness,practicemanagerspromotequalityperformance,andprojectleadersimplementclient
projectseveryonegains.The

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branchmanagers'roleistoleadtheseeffortswithintheirmarketsandassistotherbranchesinachievingprofitablegrowth.

IntegratingStockOptionsandSpecialRecognition

Inadditiontocashcompensation,Keaneutilizesatargetedapproachtostockoptionsandemployeerecognition.Thestockoptionshavebeenasourceofsubstantial
opportunityincapitalappreciation.Asthestockvaluehasgrownovertheyears,thecompanyhasbeenabletoprovideasubstantialamountofoptionstomanagers
andtechnicalleaders.Thestockoptionprogramhassupportedthegrowthofthebusinesssothattherehasbeenminimumdilutioninshareholdervalue.Ashighlighted
byTheWallStreetJournal,Keanehasbeenabletocreatesubstantialshareholderwealthoverthelast10years.

Thestockoptionsprogramhasbeenusedtoreflecttwopriorities:Thenumberofoptionsonereceivesisbasedonindividualperformanceandthevalueisestablished
throughthegainintheshareprice.Thisperformancerelatestothecorefactorsofprofitability,revenuegrowth,andquality.Seniorexecutivesreviewtherevenue,
profit,andleadershipperformanceofbranchmanagerseachyearanddeterminewhohavebeenthestrongestcontributorstothecompany.Anindividualmayreceive
optionsinoneyearandnoneinthenext.Therearenorulesthatrestricthoworwhoreceivesstockoptions.Thesymbolicvalueoftheawardsisachievedbybeing
selectedtoreceiveanoptionaward.Thevalueoftheoptionsisbasedonthegrowthinmarketvalueofthecompany.Theyarenotdiscountedandtheyneedtobe
turnedintostockinarelativelyshortperiodoftimereinforcingtheideathatindividuals"buyinto"thecompany.Furthermore,therearerestrictionstowhenan
individualcanexercisetheoptionsandsellthestock.Thisreinforcestheprincipleofretention,butthegrowthopportunityhasbeenthetruevalue.Fortunately,the
growthinvalueoftheshareshascontributedtoasignificantgainformanyindividuals.

Inadditiontostockoptions,thebranchorganizationshavebeenhighlyactivewithcreativespecialrecognitionprograms.Eachbranchhasanemployeecommitteethat
hastheresponsibilityofdevelopingandmanagingarecognitionprogram.Thebasisfortheseawardslinksbacktotheoverallcorporatevalues.Manypro

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videstrongpeerrecognitionandcelebrationsforbranchlevelachievements.

Forexample,oneofthebrancheshasarecognitionprogramwiththreelevels.Theselevelsandtheawardsaredescribedbelow.

1.Specialcontributions.Thereareawardsthataregivenforcompletingaspecialeducationprogram,servingonselectedcommittees,participatinginspecial
communityserviceactivities,orcontributingtorecruitingstaff.Individualsreceivespecialthankyoulettersfromexecutives,mentionsoftheireffortsinthebranch
newsletters,anddiscussionoftheireffortsinmanagementandbranchteammeetings.

2.Greatachievements.Thislevelofcontributionisbasedonreceivingaclientqualityorserviceaward,makingaspecialcontributiontosalesefforts,orfulfillinga
majorresponsibilitythatwasnotinone'sstandardjob.Thesearegiventoindividualsandteams.Theymayreceivegroupdinners,membershipintechnical
organizations,subscriptionstohighpreferencejournals,orotherawardsofparticularvalue.

3.Grandcontributions.Thislevelofawardisformakingamajorcontributiontothesuccessofthebranchandtheclientsitserves.Itmayincludemakingaspecial
"breakthrough"contributiontoaclientprojectthatimprovestheimpactoftheITprojectontheclientorreducesthetimeorcostsofmajorefforts,publishingpapers
thatpromotesKeane'sreputationasathoughtleaderintheindustry,andsimilarlargescopeimpacts.Individualsorteamsmayreceivecashawards,paidtimeoff,or
certificatesfornewsoftwareorhardwareoftheirchoosing.

Ineachoftheserecognitionprograms,employeesarehighlyinvolvedintheselectionaswellastheawards.Therecognitionteamand/orbranchorcorporatesenior
executivesareinvolvedinmanyawardceremonies.Theseeventshappenthroughouttheyearandaretiedtotheprojectmanagementcultureoftheorganization.All
individualsareeligible(excludingseniormanagers),andmanyoftheawardrecipientsandceremoniesarecommunicatedthroughoutthecorporation.Theyhaveserved
asanimportantprocessforreinforcingthecorporatecultureandvalues.Inthisway,Keaneisabletosustainacultureeventhoughitisspreadthroughoutabroad
networkofoffices,projects,andclientlocations.

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TheFutureinanIncreasinglyCompetitiveWorld

ThefutureforITconsultingisindeedgreat.Companiesaremakingmajorinvestmentsindevelopmentorareconsideringoutsourcingtheentireoperations.Ineach
case,Keaneistheretohelp.ThechallengeofattractingandretainingcriticaltalentisamajorissueforKeaneasitisforallorganizationswhereITisanimportant
function.

Keanehasmadeapolicynottoofferhiringbonusesorretentionpackagesforremainingwiththecompany.Sofar,itdoesn'tneedto.Thecompensationprogramisso
flexiblethatifbranchofficeswanttoofferadifferentpackage,aslongastheyarewithincorporateguidelinestheyarefreetodoso.Executiveswanttopayfor
performance,notjustretention.Ifindividualsperformwell,theywillreceivemeaningfulincentivepayoutsincashandstockoptions,aswellasspecialrecognitionfor
theiraccomplishments.

Keaneexperiencedarecentchallengetothispolicy.Amajorclientinalargemetropolitanareawantedtoofferretentionbonusestoretaincertainkeyindividualswho
hadbecomeinstrumentaltotheclient'sconversionprocess.Keaneexecutivesdidnotallowthistoproceed.Theyfeltthiswouldcompromisetheircommitmentto
integrity,wouldbedifficulttomanageinternally,andmightchangethefocusoftheworkfromKeanetotheclient.TheywantedemployeestobecommittedtoKeane,
nottotheclient.Whiletheydidnotapprovetheretentionprogram,theydidworkwiththecompanytoprepareaperformancebasedretentionprogram(i.e.,aproject
bonusprogram)consistentwiththeneedsoftheclient.ThisdemonstrationofflexibilityandresponsivenesshasbeenahallmarkofKeane'ssuccess.

Retainingthislevelofintegrityinamarketplacewheretalentisscarceandexpensivewillbedifficult.Keaneisaboutsustainingitsuniquecultureandreflectingitsvalues
ineverydecisionandinvestmentmadebythecompany.Itkeepsthefocusontheclient,notchasingtalentedindividuals.Consultantshavefun,contributetotheir
client'sabilitytocompete,andlearnfromtheprocess.ThisbuildsconfidenceandensuresthatKeanecontinuestohaveabrightfuture.

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8
ReinforcingtheQualityProcess
Retainingcompetitiveleadershipdependsonmanyelements.Oneofthemostimportantisaqualityprocessthatengagestheentireorganizationtoproducesuperior
productsandservices.Highqualityhasbecomeabasicrequirementforexistenceinmostmarkets.Organizationsthathavemadethisanessentialelementoftheir
culturehavefoundthattheyareabletorespondeffectivelytochangesinthemarketplace.Theyhavealsofoundwaystoeliminatewaste,increasethespeedtomarket,
andbuildgreatercustomerloyalty.

Thequalitymanagementmovementhasmadeamajorimpactonallindustries.Ithastaughtorganizationsmanythings.Thosethattreatqualityasaprojectoran
objectivetobeachievedhavefoundlittlesustainingvalue.Organizationsthatusethekeyprinciplesineverydaylifecontinuetofindsignificantbenefits.Qualityhas
becomeaprocessandanessentialdimensionoftheirorganization.Butthekeyisnotachievingsomepredeterminedlevelofquality,butimprovingataratethatis
betterthanone'scompetitors.Ifanorganizationcanprovidethemarketwithproductsandservicesofgreatervaluetoitscustomers,anddothisonacontinualbasis,it
willsucceed.Thoseorganizationsthatforgetthisbasicconceptofcompetitivenessoftenfailtoliveuptoexpectations.

Inthischapteryouwillseehowseveralcompanieshaveintegratedavarietyofqualitymanagementprocessesintotheirorganizations.Theyfoundtheiruseofrewards
acceleratedandenhancedthechangeprocess.AlliedSignalhasusedauniquemeasurementandrewardsystemtodrivethepointsofcontinuousimprovementhome.
Techneglashasachievedremarkableresults.Itsuniqueapproachto

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againsharingprogramservedasacatalysttochange,anditsprocessforrecognitioniswhathasgivenit"everyday"benefits.CorningIncorporatedstarteditsgoal
sharingprogramasapilot,anditssuccesshasspreadtoallcornersoftheorganization.Finally,therearetwoexamplesofphysicianincentiveprogramsthatencourage
change.Thefocusofeachhasbeenonthequalityofcare,satisfactionofpatients,andfinancialbenefitsfromabetteruseofresources.Althoughthereisconsiderable
controversywithphysicianbasedincentives,CommunityHealthPlanandHarvardUniversityHealthServiceshavefoundthatimprovingthequalityandmanagementof
careyieldsimportantfinancialandcommunitybenefits.

CreatingaProcessforWinningTogetheratAlliedSignal

Eventhemostsuccessfulteamscontinuetoimproveandstrengthentheircompetitiveness.Successfulorganizationsknowthattheyneedtocontinuallytakeactionsto
makethemselvesmorecompetitiveandattractivetocustomers.Oneofthemostimportantelementsofcontinuousimprovementisthealignmentbetweenthestrategy
ofanorganizationandtheactionsofitspeople.Bygettingpeopletounderstandandfeelavestedinterestinthesuccessoftheorganization,onecancreateamore
competitiveandsuccessfulorganization.Withoutthisconnection,itisdifficultforsuccesstoendure.

AlliedSignal'sEngineeringMaterialsbusinessescreatedsuchanalignment.Theydevelopedaprogramcalled"WinningTogether"tobuildaprocessofgoalalignment,
communication,andrewardsthatwouldimpacteveryemployeeintheorganization.Ithasbecomeanimportantsupporttothecorporation'scontinuingeffortstodrive
growthandproductivity.

CompanyBackground

AlliedSignalisa$15billionworldwidecompanythatdevelopsandmanufacturescomponentsandsystemsfortheaerospace,automotive,chemical,fibers,andplastics
industries.Itisahighlydiversifiedmanufacturerwithmorethan70,000peoplein300facilities

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aroundtheworld.Ithasmaintainedanintensecommitmenttototalquality,withaparticularemphasisoncustomersatisfaction,productandprocessquality,andtime
tomarket.

Thecommitmenttoqualityresultedinananalysisofthecompany'smanufacturingprocessesandrecognitionthatthereweresubstantialopportunitiesinmovingtheseto
worldclasslevels.Aspartoftheeffortstoimprovemanufacturing,AlliedSignaldevelopedandtrainedpeopleinprocessimprovement,thenimplementedawide
varietyoftotalqualitymanagementtoolsinmeasurementandprocessanalysis.Inaddition,managementrealizedthatforthehighperformanceorientationtoendure,
peopleinthecompanyneededtohaveapersonalstakeinthesuccess.Theyneededtounderstandkeygoals,receivetrainingandsupporttoaddressopportunities,
andanswertheburningquestion:"What'sinitforme?"

In1995,AlliedSignalformallylaunchedanoperationalexcellenceefforttofocusonacceleratingtheimplementationofimprovementsincludingyield,costs,leadtimeto
manufactureproducts,andcustomersatisfaction.Thegoalswerequiteaggressive,andbusinesseswithinAlliedSignalneededtoimplementtheirownapproachto
achieveplannedresults.

AnumberofspecialtychemicalbusinesseswithinAlliedSignaldevelopedauniqueandpowerfulsupportingprocesstooperationalexcellence.Thebusinesses
representedmorethan$3billioninsalesthroughtheproductionofanarrayofspecialtymaterialswithapplicationsinautomotive,refrigeration,carpeting,construction,
electronics,computers,andutilities.Theymanufacturedproductsinmorethan30plantsworldwidewithaworkforceofmorethan10,000people.Togetthisgroupof
peoplecommittedtoasinglepurposewasasignificantchallenge.

Realizingthecomplexityofthistask,FredericM.Poses,presidentofthisgroupofspecialtychemicalbusinesses,broughttogetherrepresentativesfromeachfacility,
includingplantmanagersandotherleadersfromquality,finance,humanresources,andcommunicationtodevelopaframeworktoimplementoperationalexcellence.

Tomakeitsoperationalexcellencegoals,EngineeringMaterialsbelievedtherewerethreecriticalfactors:

1.Setcleargoalsthatenabletheunitstofocusonwhatisimportant.

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2.Helpallindividualstoseehowtheycancontributetothoseplant/businessgoals.

3.Providerewardsandrecognitionforachievements.

Challengedwiththetaskofimplementingthisprocessquickly,thebusinessessetupdesignteamstoaddresseachcriticalfactor:metrics,communication,and
recognition.Eachteamincludedsixtoeightrepresentativesfromacrossthebusinesses.Acoreleadershipteamcoordinatedtheseefforts.Fromthisprocessthey
developedtheWinningTogetherapproach.

WinningTogether:HowitWorks

WinningTogetherbecameanorganizingframeworkfortheoperationalimprovementsthatwouldultimatelytoucheverypersoninthebusinesses.Theframeworkwas
implementedineachplantasastandaloneunitandtailoredtotherequirementsofeachsettingwithinasetofguidelines.Thebusinessesimplementedanintegrated
approachthatincludedthefollowing:

Metrics.Eachplantestablishedprioritiesandgoalsinsafety,customersatisfaction,operationalexcellence,andbusinessgoalsrelatedtorevenueandincome.Each
planthadfivegoalstofocusitsimprovementefforts.Theplantssetannualandquarterlytargetsineachareaandimplementedorutilizedsystemstotrackprogress.

Communication.Eachplantcreatedscoreboardstodisplaythegoalsandtracktheprogressthroughouttheperformanceperiod.TheWinningTogetherconcept
neededathemetoreflectspeed,continuousimprovement,andprogresstoachievegoals.Theplantsdevelopedandincorporatedracecarandtrafficsignalimages
intothedescriptionoftheprogramandthefeedbackmechanismsothateveryonecouldseeataglancetheperformanceineachgoalarea:

Greenlightmeantperformancewasatorabovegoal.

Yellowlightmeantthatresultswerejustbelowgoal.

Redlightmeantthattheymissedthetarget.

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However,thecolorfulfeedbackchartswereonlyonecomponentemployeesweretaughtwhateachmeasurementmeantandhowthescoringsystemworked.They
translatedplantwidegoalsintoeachdepartmentorareawithintheplant.Andtheysetmonthlymeetingstoreviewprogress,discussissues,andgiveideasfor
improvements.

Recognition.Thethirdelementfocusedonrecognizingemployees'effortstoachievethedesiredresults.Duringmonthlymeetingstheplantandarealeaders
recognizedindividualsandteamswhomadeaparticularcontributionduringtheperiod.Inaddition,therewerenumerousinformalwaysinwhichpeoplewere
recognizedandappreciatedfortheircontributions.Finally,theydevelopedasystemthatprovidedatangibleawardtoallindividualsintheplant.

TherecognitioncomponentoftheWinningTogetherprogramwasthewayinwhichpeoplereceivedspecialrewardsfortheirachievements.Indevelopingthe
program,FrederickPoseswantedemployeestoreceivesomethingtheycouldkeepovertime,tocreatea''trophy''ratherthanprovidemoney,whichwouldquicklybe
spent.Thiswouldthensymbolizethesuccessandserveasaremindertoindividualsofwhattheyhaddone.

Thegoalsetting,performancemanagement,andrewardprocessforeachplantwasestablishedaroundthequarterlytimeframe.Theawardwasdeterminedbythe
numberof"greenlights"theplantreceivedforitsperformance.Asstatedearlier,thegreenlightindicatedtheplantwaseitheratorabovethegoal.Forexample,if
duringaquartertheplantachievedorexceededfourofitsfivegoals,eachmemberoftheplantwouldreceivefourgreenlights.Atyearend,therewerealsoawards
formeetingannualgoals.Aftergreenlightshadbeenawarded,individualscouldtradetheminforgiftsattheendofthequarterorsavethemtobuildupgreenlights
andredeemthemforanevengreaterprizelater.

TheAwardsforWinningTogether

Employees'choiceastowhattheyreceivedandwhentheywouldreceiveanawardwasamajorfeatureoftheprogram.Theprogram'sprizesweretieredintofour
levels,withincreasingvaluefromlevelsonetofour.Theyinitiallyusedelectronics(e.g.,cord

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lessphones,CDplayers,VCRs,televisions,camcorders).Eachplantmonitoreditsownredemptionrecordsandwouldworkwithacorporatevendorwhoprovided
theitemstoemployeesatadiscountedpricetothecorporation.Theadministrativesystemwasquitesimpleandeasilyintegratedintotheoperationsoftheplant.

Theprocessofaligninggoalswasoneofthemostimportantaspectsoftheprogram.Theoverallbusinessgoalsofsales,income,andcustomerdelightweretranslated
intotheplant'sperformancemeasures.Incomecouldbetranslatedintocostdriversoftheplant,suchaswaste,unitcosts,andsafety.Salescouldbetranslatedinto
productivityunitsorrevenuesassociatedwithproductionordelivery.Customerdelightwasreflectedinsuchcustomersatisfactionindicatorsasontimedelivery,
surveyresponses,orproblemresolutiontime.Eachplant,dependingonitsbusiness,wouldtranslatebusinessgoalsintothosemeasuresonwhichtheyhadthegreatest
impact.

Theresultsfromthisprogramhavebeenremarkable.Theperformanceyieldedmajorimprovementsinsafety,productcostsandquality,andontimedelivery.After
thefirstyear,23ofthe25sitesachievedsufficientgoalstoprovideawards.Onaveragetheplantsgaveout19greenlightsfromapossibletotalof30.Plantsachieved
avarietyofperformancelevels,asfollows:

4plantsachievedbetween8and11greenlights

4plantsachievedbetween12and16greenlights

6plantsachievedbetween17and21greenlights

6plantsachievedbetween22and25greenlights

3plantsachievedgreaterthan26greenlights

UnderstandingWhyitwasSuccessful

Consistentwithatotalqualityapproach,AlliedSignalanalyzedtheactivityandapproachofthehighperformingplantstoidentifybestpracticesthatcouldbeshared
andreplicatedinothersites.Astudyteamwasdevelopedandidentifiedthefollowingdifferencesbetweenthehighandlowperformingplants:

1.Leadershipwasakeydeterminantintheplants'results.Intheplantswithahighnumberofawards,leaderswereactiveincom

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municatingprogressandreinforcingactionspeopletooktoimprovetheprocess.

2.Employeesatisfactionwasverystronginspecificareasfortheplantswiththemostawards.Employeeopinionsurveysindicatedthesecomments,which
weresignificantlydifferentfromthecommentsofthelowperformingplants:

"Ireceiveinformationonplantperformance."

"IhavetheinformationIneedtodomyjobwell."

"Mymanagerkeepsmeinformed."

"Mycontributionisoftenrecognized."

"Iunderstandmysite'sgoals."

3.Educationwasemphasized.Peoplereceivedsignificanteducationonhowtheiractivitiessupportordistractfromachievingthegoalsoftheplant.

4.Feedbackonprogresswasdisplayedinmanyways.Thehighawardplantswentbeyondtheplantscoreboardanddevelopedvisualfeedbackinallmajorareas
oftheplant.Manyofthesedisplaysweredevelopedandkeptuptodatebytheworkteammembers.

5.Managersandotheremployeeslistenedandrespondedfrequentlytoideaspeoplehadtoimprovetheoperations.Theideaswerenotintheformofa
suggestionsystem,butcamethroughdialogueanddiscussionswithpeopleonarealtimebasis.

Hence,theplantswiththegreatestnumberofawards,asreflectedinthehighestperformance,placedaparticularemphasisongoalalignment,communicationonthe
progress,andfrequentandmeaningfulappreciationofthecontributionsofpeople.Theyfoundthekeystotheirsuccessthroughinformation,education,involvement,
andreinforcement.

Duringthesecondyearoftheprogram,manyoftheprinciplesandpracticesoftheWinningTogetherprogramwerecommunicatedandadoptedbymanyoftheother
businessesofAlliedSignal.Additionalitemswereaddedtotherewardsbasedoninputfromemployeefocusgroups.Twoadditionalawardlevelswereestablished.
Theawarditemsintheselevelsincludedpersonalcomputers,largescreentelevisions,mountainbikes,fitnessequip

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ment,campinggear,andtravelpackages.Furthermore,individualswhohadaccumulated"lights"sufficientforlevelfourandaboveawardscouldselecttoreceive
AlliedSignalstock.Theycouldreceive10or20shares,dependingonthelevel.Thissentapowerfulmessageofsharingownershipinthecompanytothosewhohelp
makeAlliedSignalsuccessful.Theycontinuedthepartnershipthemeintheirawardsandtheprocessoftheprogram.Theseadditionalawardopportunitieswere
developedagainthroughdiscussionswithemployeesandmanagers.

TheaccomplishmentsoftheWinningTogetherprogramhavecreatedanimportantlinkagebetweenpeopleandtheorganization.Morethan80%oftheemployees
havecashedin"lights"foratotalof5,000awards.Theredemptionsatthesitesrunashighas95%oftheemployees.

Atmorethan20sites,employeeshavebeeneligibleforstockawards.Approximatelyonethirdhaveselectedstockovertheprizes,foratotalofmorethan50,000
shares.

Thisprogramhasbeenexpandedtomoreplantswithinthebusiness.Thetotalcostsoftheprogramtodatehavebeenbetween$6millionand$7million.TheWinning
Togetherprogramhashelpedtogenerateprocessimprovementsthathaveresultedinsavingsinexcessof$250million.Thisisareturnofmorethan40timesthe
dollarsspentontheprogram.

TheFutureofWinningTogether

ThechallengetoAlliedSignalforthefutureistocontinuetosetthebarhigherandsustainsuccessinproductivityandgrowth.Whatdomanagersandotherleaders
needtodosothatmoreemployeescanachieveawardsandthebusinessescontinuetoimprovetheiroperationsandservicestocustomers?Whatdoemployeesneed
todotoachievetheseimprovedresults?Whatisthebenefittotheorganizationoftheseresults,andwhatreturnoninvestmentdotheyprovide?

ItisquiteclearthattheWinningTogetherprogramhascreatedatrulywinningpartnership.Employeeshaveclearlybenefitedfromparticipationinthisprogramand
realizedatangiblereturnfromtheireffortstomaketheirplantmoreproductive,efficient,andcompetitive.Managementandseniorleadershavere

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ceivedthebenefitsofamoresuccessfulandcompetitivecompanyandaworkforcethatbetterunderstandsandactsonthestrategyofthecompany.Customershave
clearlybenefitedfromworkingwithacompanythatcaresabouttheirsatisfactionandhasimplementeddemonstrableprogramstomeettheirneeds.Onlythe
competitorshavebeenleftbehind.

GainingCompetitivenesswithProductivityImprovementsatTechneglas,Inc.

Perhapsoneofthegreatestbusinesschallengesisfacedwhenacompetitordecidestobuildastateoftheartmanufacturingfacilitythatcompetesdirectlywithyou.
Theimplicationofthisactionisthatthecompetitorwillbeabletoreducepricesbecauseoflowercosts,producehigherqualityproducts,andgoaftergreatermarket
sharewiththeenhancedcapabilities.Unlessoneisreadytomatchthetechnologyinvestments,theonlyoffensivestrategyistoimproveproductivityandqualityof
products,orlowercostssuchthatthecompetitordecidesitisnotcosteffectivetogoaheadwiththeexpansionplans.

ThiswastheissuefacingTechneglas,Inc.,severalyearsago.Techneglasisoneoftheworld'sleadingproducersofglassusedintheproductionoftelevisiontubesand
thelargestsuchmanufacturerintheUnitedStates.Thecompany,headquarteredinColumbus,Ohio,employsmorethan3,000peopleandoperatesthree
manufacturingplants.ThecompanyisawhollyownedsubsidiaryofNipponElectricGlass,Ltd.(NEG).Priortothecompleteacquisitionin1993,Techneglaswasa
50%jointventurebetweenNEGandOwensIllinois,astrategicalliancethatbeganin1960.

Themanufacturingofglasscomponentsforcolortelevisionsisahighlycomplextechnology.Theglassissubjectedtoprecisevariancesintemperatureandpressure
andmoldedtoexactrequirements.Theformingprocessusesmoltenglassthatismanipulatedbycentrifugalforceandpresses,cooledinhighlycontrolled
environments,finishedwithvariouspolishingsteps,andinspectedfordefectsinmaterial,size,shape,andform.Productsaremadeintwocomponents,thefrontpanel
andthefunnel.Thetelevisionmanufacturerwillthenassemblethesepartswithelec

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tronics.Ifastructuralintegrityproblemintheproductemergesduringtheelectronicsassemblystage,thecostscanbesignificant.Qualityiscrucial.

Themarketdemandfortheproductsisusuallyestablishedayearortwoinadvance,basedontheforecastofthemajormanufacturingcompanies.ThenTechneglas
anditscompetitorsbattleovercontractsanddemandsfulfillment.IfTechneglasisabletomaintainahighlevelofproductivity,competitiveprices,andhighquality,it
willcontinuemarketdominance.Ifitslipsinanyoftheserelativetocompetitors,itwillfacenegativeimplicationsforyearstocome.Thisisthestoryofhowits
manufacturingfacilityinPittston,Pennsylvania,tookonthiscompetitivechallenge.

BackgroundoftheSituation

ThePittstonplantofTechneglascurrentlyemploysmorethan1,800peopleandisamajoremployerinthenortheastPennsylvaniaregion.Itsprimaryproductsarethe
faceplatesorglasspanelsforcolortelevisionsetswithscreensrangingfrom19to36diagonalinches.Theplantproducesmorethan13millionglasspanelsperyear.It
continuestomakeinvestmentsinplantandequipmenttomeetthedemandforlargerglasscomponentsaswellashighdefinitiontelevision(HDTV)products.
However,capitalinvestmentalonewouldnotallowtheplanttomeetitsfullpotential.Also,therewastheperceptionbyitsownersthattheplantwasnotmaximizingits
returnoninvestment.

Inthelate1980sandearly1990s,Techneglaswasfacingincreasingcompetitionandcostpressures.Theparentcompaniesquestionedwhethercontinuedinvestments
inthePittstonplantwerejustified,giventhedifficultchallengesitfacedtoremaincompetitive.Iftheplantcoulddemonstrateimprovedcapacityandsustainedhigh
quality,thentheinvestmentsneededtoretainmarketleadershipwouldbemade.Theleadershipteamattheplantknewofthesependingdecisionsandtookonthe
challengetodramaticallyimprovetheplant'sperformance.

Oneofthefirststrategieswastoimplementavarietyofqualitymanagementinitiativestoimprovethemanufacturingprocess.Theyimplementedstatisticalprocess
controls(SPC),createdperformanceimprovementteams(PITs)toengageemployeesinprob

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lemsolving,andtrainedmanagersinperformancemanagement,aprocessforprovidingmeasurements,feedback,andbehavioralreinforcement.Eachoftheseactions
madeimportantstridesinimprovingtheperformanceoftheplant.Butsoonaftertheinitialgains,performancewouldreturntonearpreviouslevels.Thetaskwasto
sustainandincreasethepositiveimpactofthesechanges.

Theplantmanager,BobReynolds,andhisstaff,inconjunctionwithlocallaborunionleadership,discussedthechallengestheyfacedincommon.Theywantedto
improvetheproductivityoftheplanttomakeitanattractiveplaceforinvestmentsandtoretainfullemployment.Theydeterminedthatamissingelementwasan
incentiveforeachmemberoftheorganizationtofeelpartoftheprocessofchangeandtocreateastakeinthesuccessoftheorganization.Inthepast,thenew
programstoimprovequalityorproductivitywereviewedasjustmoreworkoratroublesomechangetoone'sroutine.Therewaslittleselfinterestinmakingthe
changeslast.

TheDevelopmentofPRIDE+

Oncethedecisionwasmadetomoveforwardwithanincentiveplan,managementhadtoovercometheusualskepticism.Somefeltthiswouldbejustanother
managementfad,aprogramdujour.However,ReynoldsandRonDrennan,theadministrativemanager,remainedcommittedandfocusedtheireffortsongetting
othersinvolved.Theirsponsorshipwaskeytogainingsupportforthedevelopmentoftheincentiveplanatmultiplelevelsoftheorganization.

Theyselectedanoutsideconsultanttoguideandfacilitatetheprocess,buttheyclearlywantedtheprogramtobeownedbytheorganization.Theyselectedadesign
teamcomposedofacrosssectionoftheorganization,includingproductionsupervisors,thecontroller,laborleaders,anddirectlaboremployees.Theirassignmentwas
toreviewallthevariousapproachesandtorecommendanincentivepayprogramthatwouldsupportthegoalsoftheplant.Theprogramneededtobeacceptableto
bothlaborandmanagement,todirectfactoryemployeesandtheownersofthecompany.

TheteambecameknownasthePerformanceRewardDesign

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Teamandwascomposedof12members.Theymetperiodicallyforoverfourmonthstolearn,discuss,anddebatetheissuesofvariablepay.Theyselectedto
approachtheprogramwithagainsharingthemethatis,iftheplantwereabletoimproveitsproductivity,theywouldsharethegainswithallmembersoftheplant.
Theprogramwasnamedduringtheprocessbyoneofthemembersoftheteam,BernieNerbecki,thenadirectlaborselectorinthefinalselectingprocess.Hecoined
theacronymPRIDE+(PerformanceRelatedIncentivesDistributedEqually).Thistitlecapturedtheessentialthemeandpurposeofthenewprogram.

HowtheProgramWorks

PRIDE+involvestheentireplantinasingleincentiveprogram.Althoughunitorteambasedincentiveplanoptionswereexploredextensivelybythedesignteam,it
wasfeltthatacommonplanforallmemberswouldbetterreflecttheworkstructureandvaluesoftheorganization.Theprimaryconcernwashowtokeeppeople
engagedinmakingadifferencewhentheresultsarebasedonthecombinedeffortsofmorethan1,600employees(whichnumberhasnowgrowntomorethan1,800).

Theprogramwasessentiallystructuredwithseveralcomponents.First,theplantneededtoproducehighqualityglasspanelsinexcessofahistoricalbaseline
performancelevel.Ifitdidso,thenanincentivepoolwouldbecreated.Thepoolwouldbeinproportiontothenumberofpanelsthatexceededthebaseline,basedon
aportionoftheunitpriceofthepanel.

Second,theformulatodeterminetheportionoftheunitpricethatwentintothepoolwasdependentonthefinancialhealthoftheorganization.Duetoanumberof
previousevents,theplantwasnothighlyprofitableandneededtopaydownasignificantdebtburden.Ifthefinancialhealthremainedunchanged,theformulaforthe
incentivepoolwouldbe30%ofeachunit'spricegoingtothepool,with70%remainingwiththecompany.Ifthecompanyimproveditsperformancetoaspecific
level,thenthesplitwouldchangeto40%pool,60%company.Andifthefinancialperformancewasevengreater,thenthepoolcouldbebasedona50%evensplitin
thepriceoftheproducts.Thisthenestablishedthegainsharingpool.

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Third,becausethecompany'spriceandcustomerdemandhaveastronginfluenceonthevalueoftheunits,employeescouldearnalargegainsharingpayoutfordoing
littletoimprovetheprocessoftheplant.Thepoolhadtobebemodifiedbasedonotherperformancefactorsoftheplant.Theseperformancemeasuresbecame
additionalfocalpointsforcorrectiveactionsbydifferentdepartmentsnottieddirectlytotheproductionfunction.Thecombinedperformanceofthesemeasureswould
modifythepoolbyplusorminus25%.

Thesemeasureswere:

Productquality

Employeesafety

Customersatisfaction

Grossprofitcontribution

Eachofthesemeasureswasassessedanddisplayedtotheentireplant,alongwiththeproductivitytobaselineperformance,onamonthlybasis.Theresultswere
displayedonamatrixtoshowcurrentresultsversuspredeterminedlevels.ThisisshowninFigure81.Thescoreattheendoftheperformanceperiodwould
determinethe"modifier"tothepool.

Finally,thegainsharingprogramincludedallfulltimeemployeesandmanagersintheplant.Itwasbasedonannualgoalsandregardedasanannualplan.However,
"progress"payoutswouldbemadequarterly.Basedontheresultsofeachquarter,75%oftheearnedamountwouldbepaidoutand25%heldinreserve.This
reservecoveredforanyunforeseenlosesthatmightoccurduringtheyear.Iftheproductivitypoolremainedabovethebaselinelevel,thenthebalancewouldbepaid
outattheendoftheyear.Thepoolwouldthenbedistributedasapercentageoftheemployee'searnings(basewageplusovertimeandvacationpay,excludingshift
differentialsorotherbonusesorpremiums)duringtheperiod.ThesestepsareshowninFigure82.

MakingPRIDE+Personal

Oncetheprogramwasdevelopedandreviewedbymanagers,laborrepresentatives,andemployees,itwasapprovedbysenior

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Figure81.
Techneglasperformancematrix(illustrative).

 Page236

NumberofAvailablePanels 4,068,609
AcceptablePanelsOverGoal 3.2%
AdditionalPanelsoverGoal 130,195
PanelValueforPool(40/60split) $8.69
TotalValueofAdditionalPanels $1,131,395
PerformanceMatrixScore 100%
FinalPool $1,131,395
Reserve(25%) $282,849
PRIDE+Payout $848,546

Figure82.PRIDE+payoutformula.

management.Notonlydidthecommunicationsessionsdescribetheprogramindetail,theyincludedquestionsandanswersonwhatindividualscoulddotoimprove
performance.Acriticalfeatureoftheprogramwastouseittoinfluencebehavior,andthismeanttheprogramneededtobepersonalized.

Tofurthersupporttheimplementationandmanagementoftheprogram,thedesignteamwasreconstitutedintothePRIDE+council.Thisgrouphadresponsibilityfor
communicatingtheresults,coordinatingtheinformation,andpromotingthegainsharingprogram.Chartsweredisplayedthroughoutthefacilitytohighlightmonthlyand
quarterlyprogress.Furthermore,thecounciladvisedseniormanagementonactionswithinthedepartmentsthatenhancedordetractedfromthesupportofthe
program.Thecouncilservedinimportantadvisory,communication,andadministrativerolesfortheprogram.

OneoftheimportantfeaturesoftheprogramhasbeenhowdepartmentmanagershavetranslatedtheoverallPRIDE+performancemeasuresintoresponsibilitiesof
theirownunits.Manyset

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upchartsandmadeweeklyandmonthlyprogressreportstotheirdepartments.Whendepartmentsexceededtheirgoals,theydidnotreceiveanyadditionalpayouts,
buttheydidreceivesignificantrecognitionbyothermembersoftheplant.Onerewardforexceedingmonthlygoalswastheoptiontotakethedepartmentouttolunch
onagivendayorforthedepartmentto''buylunch''foreveryoneintheplantforagivendayinthecafeteria.Thedepartmentemployeescoulddecidewhichthey
preferred.Iftheyprovidedlunchtoallemployees,thenaspecialsignwasdisplayedinthecafeteriaonwhatthedepartmentachieved.Thishasalwaysbeenanexciting
celebrationdayfortheplant.

Inadditiontofeedbackandrecognition,theorganizationcontinuedtoincreasetheSPCandPITteams'improvementprocess.Theyfurtherimplementedspecial
employeesafetyimprovementprogramsthatmeasuredandreinforcedemployeesusingsafebehaviors.Awidevarietyofprogramswererenewedorimplemented,but
thistimeemployeesfeltthingsweredifferent.WhentheprogramcouldmakeadifferencetothePRIDE+measures,directlyorindirectly,itgotpeople'sattention.
Employeeswantedtolearnthetoolorprocedureswell,andimplementthemintheirworkplace.Theenthusiasmforchangebecamestrong.

TheDramaticResultsAchievedbythisOrganization

Theprogramwasimplementedatthebeginningof1993.TheresultsthattheTechneglasPittstonplantachievedwerenothingbutdramatic.Therewerefinancial,
operational,andserviceenhancements.Butmoreimportant,thespiritoftheorganizationhasincreasedremarkably.Peoplefromallsectorsoftheorganizationhave
beenworkingtogethertomakechanges,improveprocesses,holdothersaccountable,anddrivesuccess.ThePRIDE+programhasservedasasignificantcatalyst
andsupporttothischange,butitwasleadershipfrommanylevelsthathasmadethedifference.

Someoftheachievementsbetween1993and1998areasfollows:

Productivityhasincreasedby41%.

Productqualityhasincreasedbymorethan60%.

Customersatisfactionhasincreasedbymorethan60%.

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Employeegrievanceshavebeenreducedby54%.

Therehasbeena250%increaseinthenumberofPITteams,witha400%increaseinthenumberofparticipantstomorethan1,000peopleinvolved.

Employeesafetyhasincreasedby21%.

Costsforworkers'compensationandhealthcarehavedeclinedby$11million.

Grossprofitcontributionhasstayedatlevelsacceptabletoowners,eventhoughtherehasbeensubstantialpriceerosion.

Thelaborcontractwasapprovedwitha95%yesvote.

TherehasbeenaPRIDE+payoutin20ofthe22quarters.

Basedontheseresults,theparentcompanyhasinvestedmillionsofdollarstoupgradetheplantandequipmenttostateofthearttechnology.Ithasincreasedand
expandedtheproductsprovidedbythisplant.And,mostimportant,thecompetitordecidednottobuildthenewplant!

TheFutureisEasytoSee

AtthePittstonplant,theyhaveasaying:WEAREWHATYOUSEE.Thishasmultiplemeanings.Theproductsrequiretheconsumertoseethebroadcasttelevision
signalwithoutobstructionsordistortions.Clarityofpictureiscritical.Whenyouwalkthroughtheplant,youcanquicklyseewhatmeasuresareimportantandhow
theyaredoing,asanoverallorganizationandasindividualunits.Finally,theinvestmentsinnewtechnologyareenablingthecompanytoprovidemore,better,and
lowercostproductstocustomers.Theimpactisallaroundcustomers,employees,managers,andtheowners.

Techneglascontinuestomakeimprovementsandtakeactionstoremainhighlycompetitive.Thechallengeofsuccessisnowtoremainthemarketleader.Ithascreated
anenvironmentwhereachievementfocusesoncontinualimprovementsandisrewardedinavarietyofways.Peopleshareinthesuccesstheyhelpcreate.Thefutureis
clearlylookingbright.

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TheCaseofContinuousImprovementatCorningIncorporated

Thechallengetothoseatthe"topoftheirgame"isremainingthere.CorningIncorporated(formerlyCorningGlassWorks)isfacingsuchachallenge.Itsabilityto
retainmarketleadershipinanincreasinglycompetitivemarketplacetakesafulleffort.Itisabletoachievethisleadershippositioninthemarketbecauseofmany
fundamentaloperatingsystems.Everyemployeeisengaged,makesacontributionindifferentways,andisrewardedforachievements.

Performance,asstatedbyJamesR.Houghton,chairmanandchiefexecutiveofficer(1983to1996,currentlyretired),isaresultofputtingpeopleandcustomersfirst.
Peoplemakedecisionsandtakeactionsthatneedtoreflectthecorevaluesofthecorporationquality,integrity,performance,leadership,innovation,independence,
andtheindividual.Theoutcomesaresuperiorperformanceandanorganizationthatcontinuestoimproveandbeinnovative.Acenterpieceofthismanagement
philosophyisasimple,butpowerfulteambasedincentiveplan:goalsharing.

TheGoalSharingPhilosophy

Goalsharingasaconceptwasnotdevelopedovernight.Oneneedstounderstandthecontextanddevelopmentprocessthathasmadethegoalsharingprogramwhat
itistoday.Thishasbecomenotjustacompensationprogram,buthasstimulatedawayofmanagingpeopleandperformancethatreflectsCorning'scorevalues.Inthis
way,onecanappreciatethesignificantimpactgoalsharinghashadonthecompany.

Oftengoodideasarespawnedfromproblems.In1987Corningimplementedacompanywideprofitsharingprogram.Itwasquitesimple:Whenthecompany
achievedacertainlevelofROE(returnonequity),aportionoftheprofitswouldbepaidtoallsalariedemployeesinrelationtotheirsalary.ButsoonCorning
executivesrealizedthattherewaslittlelineofsightbetweenthedriversoftheprofitsharingplan(ROE)andwhatpeopleper

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ceivedastheiractions.Individualsinpoorlyperformingunitsreceivedthesameamountofprofitsharingasthoseinhighperformingunits.WhileROEremainscritical
toCorning'sperformancetoday,metricsneededtobeestablishedatlowerlevelssothatpeoplecouldseearelationshipbetweentheirperformanceandtheirpay.

In1989thegoalsharingprogramwaspilottestedinamanufacturingplantinBlacksburg,Virginia.Thisplantwasbeingrestartedforathirdtimeandrepresentedan
opportunitytodeveloptheprogramata"GreenfieldStartup"typelocation.Theprogramwouldnotneedtoaddressexistingworkrules,culture,orexpectations.It
wasanidealsituationfordevelopingideasthatwerenewtotheCorningculture.

Ateamof12to14membersoftheneworganizationdevelopedthegoalsharingprogram.Theyrepresentedacrosssectionoftheorganizationtheunionexecutives
andmanagementselectedtheindividuals.Laborunionrepresentativeswereontheteamaswellasengineering,production,finance,andhumanresources.Anexternal
consultantwasusedtoprovideeducationaboutalternativesandservedasaperiodicresourcetotheteam.Theteamdevelopedallaspectsoftheprogram.

TheApplicationofGoalSharing

TheprimaryunitoffocusfortheinitialprogramwastheBlacksburgplant.Therewereapproximately100jobsintheneworganizationandtheyproducedanew
productforCorning,asubstrateforcatalyticconverters.Theyidentifiedcriticalperformancemeasuresbasedonanassessmentoftherequirementsforsuccessinthe
plant.Themodelprogramhasdevelopedandbeenmodifiedslightlyovertheyearstoimprovetheprogram'simpactonperformance.

Todaytheprimarygoalsharing"team"maybeabusinessunit,plant,orfunctionaldepartment(e.g.,researchanddevelopment,financialservices).Aspartofthe
process,eachgroupthathasagoalsharingprogramneedstoutilizeateamtodevelopthemeasuresandoverseetheprogram'simplementation.Thebasicstructureis
thesameforallplansthroughoutthecompany.

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Sinceeachunitmaydevelopitsownprogramwithinabasicframework,someofthemeasuresinclude:

Quality(asmeasuredbythevolumeofscrapandrework)

Revenues(asmeasuredbysalesperperson)

Delivery(asmeasuredbytheactualdeliverytothepromiseddate)

Productivity(asmeasuredbythecostmanagementsystem)

Customerservice(asmeasuredbysurveysorotherreliableindicatorsofservice)

Financial(astypicallymeasuredbycostperunitofservice/products)

EachgroupshouldhavenomorethanthreetofivemeasuresinadditiontothecorporateROEmeasure.Thebalanceoffinancial,operational,andcustomeroriented
measuresisanimportantfeatureofthegoalsharingprogram.Thisflexibilityenableseachunittoestablishwhatiswithinitslineofsightandwhatiscriticalfortheunit
toaccomplishforthecorporation.

Tointegratethesemeasuresintoasimpleincentivesystem,agoalsharingmatrixwasdevised.SeeFigure83.Eachmeasureisweightedbasedonitsimportanceand
reliability.ThecorporateROEmeasureneedstobeweightedby25%forallgoalsharingmatrices.Theremaining75%isallocatedtomeasuresbasedonthepriorities
ofthebusinessunit.Thenarangeofperformancelevelsisestablishedfrom20%to200%.Thisrangeoflevelsreflectsacontinuousimprovementphilosophy.

Thepayoutopportunityrangesfrom0%to10%ofone'stotalearningsfortheperformanceperiod.Apayoutlevelisestablishedforeachperformancelevelofeach
measure.Payoutisdeterminedbymultiplyingtheperformancelevelachievedbytheweightforthemeasureandthenmultiplyingthisbytheoveralltarget.Inthisway,if
anabovethresholdlevelofperformanceisachievedonanyoneofthemeasures,individualswouldreceiveanincentivepayout.Eventhoughthepayoutmaybesmall,
thedesignteamfeltitwasimportanttohavesomepayoutsforachievementandtokeepthefocusoncontinuousimprovementsoverthepreviousyear'saverage.

Settinggoalsforthegoalsharingprocessisoneofthemostimportantaspectsoftheprogram.Asindicatedearlier,thegoal

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Figure83.
Corninggoalsharingmatrix.

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sharingoversightteamforthebusinessunitsetsthegoallevelsinconcertwiththeseniormanagersofthegroup.Thentheseplansarepresentedtooneoftwo
corporatereviewcommittees.Thereviewcommitteesarecomposedofseniorexecutivesoftheareathatensurethereisanalignmentbetweentheunit'sgoalsandthe
corporation'spriorities.Thisisapositivefeatureandonethatprovidesincreasedvisibilityforindividualsandteams.Italsoenablesseniorexecutivestocommunicate
directlywiththeworkforceatalllevels.Hence,thegoalsharingprocessfacilitatesthealignmentofgoalsandcommunicationthroughouttheorganization.

Theprogramprovidespayoutsannually.Althoughtherewasandcontinuestobeconsiderablediscussionaboutthetimingofpayouts,itwasconcludedthatthe
programshouldprovidemeaningfulpayouts.Thebonusiscashandiscountedasincomefor401(k)matchingpurposes.Thereasonissimple:Theywantpeopletouse
thepayoutsforsomethingspecial.

DevelopingthePilotSite

DuringtheinitialpilotrunoftheprogramattheBlacksburgplant,thepayoutwasnotintheformofmoney.Thecompanywasnotsureatthattimewhetherthe
programwouldhavethedesiredimpactonperformance.Ithadnothadasuccessfulexperiencewiththeprofitsharingprogram,andtherewasconsiderableconcern
thatlinkingpaytooearlywouldlockmanagementintoaformalprogramevenafteronlyatrialperiod.Instead,itusedsymbolicawardsinsteadofcash.Theseawards
includedajacketprintedwiththecompany'sname,awatch,ordinnerfortwo,dependingonthelevelofresultsachieved.Thisappliedtothefirstsixmonths,sincethe
programwasimplementedinmidfiscalyear.Theseawardsweresufficientlyattractivetogettheattentionoftheplant'sworkforce,butfinancialpayoutswouldbe
neededtosustaintheprogram.

SinceitsinceptionintheVirginiaplantin1988,theprogramhasspreadtoallunitswithintheCorningorganization.Eventhechiefexecutiveofficerandsenior
managersparticipateintheprogram.Theprocessofgoalsettinginvolvesnumerousgroupsthroughoutthecompanyandhasbecomeanimportantperformance
alignmentprocess.Furthermore,thereisconsiderableinter

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estintheROEresultsthatarepublishedanddistributedquarterlytoeveryoneinthecompany.

Theprogramhasbecomeanintegralelementinmanagingtheorganization.Sinceitsinception,theoverallgoalsharingprogramhasmetorexceededitsgoals.While
someunitsmaynothaveachievedfullpayouts,agreatpercentagehasbeensuccessful.Thepaybacktothecorporationhasincreasedovertheyearsthesavingsto
costratiowas3.6in1993and4.6in1994.ThecorporationhasrealizedstrongrevenuegrowthandhasachievedatopquartileratingofROEamongotherFortune
500companies.Newproductsarebeingreleasedandcostsarebettermanaged.

HowGoalSharingImpactsPerformance

Theseachievementsdidnotjusthappen.Therehasbeenconsiderableefforttousethegoalsharingprocesstostimulategrowthandimprovementsinperformance.
Severalunitshaveusedittoleadmajorturnaroundefforts,andtheyhaveseenconsiderableimprovementsinquality,service,andproductivitymeasures.Goalsharing
hasbecomeadriverforchangeandisviewednotasacompensationplan,butmoreasanorganizationalunifyingprocesswithinthecompany.Becausethelevelsof
performanceincreaseeachyear,continuousimprovementhasbecomeacoreprincipleoftheprogramandoftheCorningculture.

Thecompanyhaslearnedandinstitutionalizedseveralcriticalaspectsoftheprogram.First,thegoalsettingprocesshasbecomeanimportanthallmarkoftheprogram.
Thisincreasesemployeeinvolvementandcommunicationacrossmanylevelsoftheorganization.Second,continuouscommunicationofprogresshasbecomea
necessity.Themeasuresareimportanttotheorganizationandtrackingresultsintheselectedareasisnotseenasanadministrativeburdenitisthewaythebusinessis
run.

Third,feedbackisinexorablylinkedtothemeasurementprocess.Invirtuallyeverybusinessunitthereisan"eyechart."Thisisachartthatdisplaystheprimary
measuresandthecurrentstanding.Italsotracksthecurrentpayoutcalculationbutisamovingtargetbasedonperformance.Furthermore,everyothermonthCorning
producesavideotapecalled"CorningLive."Thisprovidesastatusreportonthecompany'sperformanceanddescribes

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criticaleventsimpactingthecompany.Theseprogramsarealsousedtohighlightbusinessunitsthathavemadeaparticularlyimportantcontributioneitherbyimproving
theirownperformanceorassistingotherstoachievegreaterresults.Thiscreatesastrongsenseofcommunitywithintheorganizationandclearlykeepsthespiritofthe
goalsharingprogramalive.

Fourth,initiallytheprogramrequiredconsiderableeducation.Thefocusofthiseducationwasintranslatingperformancemeasuresofthebusinessunitwiththeactions
neededbypeopletobesuccessful.Ratherthanlettingpeoplefigureoutforthemselveswhatwasneeded,theeducationanddiscussionsessionswereseenas
instrumentaltoachievingajumpstarttotheprogram.Asmeasureschangeforthebusinessunit,peopleoftenneedtobeeducatedaboutthekeyperformancedrivers.
Thisonceagainsupportsthecorporatevaluesofpeopleandbusinessdevelopment.

Finally,Corninghaslearnedthatcompetitiveadvantageissustainedbytheinvolvementoftheirpeople.Itseeksopportunitiestogetemployeesinvolvedinthe
improvementprocessandimplementationofchange.Thissupportsthecontinuousimprovementprocessandallowspeopletoseehowtheycanmakeagreater
contributiontothecompany.Whilethedegreeandeffectivenessofemployeeinvolvementvariesacrossunits,thereisclearlyahighstandardwithinthecorporation.
Goalsharinganswersthefundamentalquestionoftenassociatedwithemployeeinvolvementefforts"What'sinitforme?"beforeitneedstobeasked.

ContinuingtheImprovementstoGoalSharing

Oneoftherecentenhancementstotheprogramhasbeentoofferemployeestheoptionoftakingthegoalsharingawardsincashorincompanystock.Individualsare
abletopurchasestockwiththeirpayoutsat85%ofthemarketvaluethroughthecompany'semployeestockpurchaseplan.Thishastheaddedbenefitoflinking
individualsintothelongtermsuccessofthecompany.Itwasimportant,however,tointroducethisfeatureonlyaftergoalsharinghadbecomeintegratedintothe
business.ThatwasachievedapproximatelythreeyearsaftertheprogramwasintroducedbeyondtheBlacksburgplant.

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Corningcontinuestochange.Businessunitsarebeingdivestedandnewonesarebeingcreated.Themarketplacefortheirbreadthofproductsischangingrapidly,and
Corningisattemptingtodowhatisnecessarytoremaintheleader.Manyofthegroupsthatspinofffromthecorporationretainasimilarversiontothegoalsharing
program.Thisaloneisastatementofhowpositivetheimpacthasbeenontheorganization.

Theprogramhaschangedanddevelopedovertime.Corninghasmaintainedthecoreprinciplesoftheplanandappliedtheprocesstoawiderangeoforganizational
units.Whileattimestheprocessisdifficult,fewwouldbewillingtoreturntostraightsalariesandlimitedbonusopportunities.Theyhaveseenthepowerofthis
programandcontinuetomoveforward.Managingtheprocessofchangeandseekingsolutionstoperplexingproblemsofmarketleadershipcontinuestobeamajor
challenge.

EngagingPhysiciansintheProcessofChangeatCommunityHealthPlan

Thehealthcareindustryisundergoingsuchfundamentalchangethatfewcanagreeonitsdirection.Hospitalsarenolongertheprimaryprovidersofhealthcareservices,
physiciansnolongerexclusivelycontroltheprovisionofservices,reimbursementorganizationsareseekingtomanagecostsandservicesaggressively,andmanaged
careorganizationsarenolongerboutiquesinthemarketplace.

Patientcarehasbecomemultidimensional,includingaccesstoservices,diseaseprevention,clinicaltreatment,andinterpersonaleffectiveness.Accountabilityforthe
costsofprovidingcareandtheaccesstothedeliveryofcarearebeinginfluencedbyacomplexarrayofgroups.Atthevortexofthewhirlwindofchangeisthe
physician.Thephysician'sroleischangingfromaprimaryfocusoncaringforpatientstomanagingacomplexarrayofresourcestoachievedesiredclinicaloutcomes.
Yetthebasicframeworkonwhichphysiciansarecompensatedhasnotchangedinmostorganizations.

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BackgroundofCommunityHealthPlan:TheVermontRegion

TheVermontregionoftheCommunityHealthPlan(CHP)hastakentheboldstepofchangingthewayitcompensatesphysicians.Thisorganizationisthemedical
groupthatservestheneedsofmemberpatientsinVermontandnearbyNewYorkcommunities.Itincludedapproximately70physiciansinpediatrics,adultmedicine,
andfamilypractice.Theywerelocatedin16healthcentersinVermont.

Therewereseveralfactorsthatledtothisdecision.First,theorganizationwasfacingincreasingcompetitionfromgrouppracticesandothermanagedcare
organizations.Itneededtoimproveeffectivenessindeliveringservicesaswellasthepaylevelsforclinicalpractitioners.Second,ithadcompletedseveralimportant
reorganizationsthatchangedstaffinglevelswithinthehealthcentersanddevelopednewcaremanagementprograms.Finally,itwasincreasinglydifficulttoreduce
certainmajorcoststhatwereattributeddirectlytothephysicians.Theseincludedhospitalutilization,referralsandconsultswithexternalspecialists,andotherrelated
costs.Thechallengewastoretainahighlevelofpatientcarewhilereducingtheassociatedcosts.

Tothisend,VermontRegionalMedicalDirectorPaulJarris,M.D.,M.B.A.,andBruceNash,M.D.,thevicepresidentofmedicalaffairsforCommunityHealthPlan,
decidedtodevelopanincentivecompensationprogramforthephysicians.TheVermontregionwouldserveasapilotsiteforthenewprogram.Iftheplanwere
successful,itwouldcontributetotheirabilitytogrowthepracticeandinvestinthecapabilitiesoftheorganization.

DevelopingthePhysicianIncentiveProgram

Todesigntheprogram,Dr.Jarrisandhisstaffselectedadesignteamoffulltimepracticingphysiciansandphysicianmanagers.Therewere10peopleontheteam.
Theymetforaseriesofsessionsoverfivemonthsandworkedwithanexternalconsultantwhoplannedandguidedthemeetings.Theplanwasapprovedby
managementandwasimplementedinthefallof1995.

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Indevelopingtheprogram,thedesignteamhadtoaddressseveralcriticalissues.First,thereneededtobeacompellingreasonfortheprogramsothatitwouldbe
appealingtophysicians.Thegroupdiscussedatlengththeissuesfacingtheorganizationandcametorealizethatphysiciansneededtotakemoreaccountabilityover
thecareofthepatientsandtheresourcesoftheorganization.Akeyoutcomeofthisdiscussionwastoidentifyasetofcharacteristicsthatdefinedthe''idealpractice''
oftheorganization.Thisprocessidentifiedtheconditionsthatshouldexistiftheorganizationwerepracticingmedicalcareinan"ideal"fashion.Someofthesefactors
included:

Meetorexceedthatpatient'sexpectationforservice.

Createvaluablehealthcareservicesforourpatientsandpayers.

Improvethehealthstatusofthepopulationweserve.

Deliverservicesininnovativewaysthatanticipatechangesinthemarketplace.

Workasateamthroughouttheorganization.

Berespectedasactiveparticipantsincommunityprograms.

Second,thequestionofethicsinhealthcareandtheroleofphysicianincentiveswasthesinglemostimportanttopicfordiscussion.Althoughanexplorationofthe
ethicalissuesisbeyondthescopeofthiscasestudy,thefundamentalconclusionwasthatincentiveswouldindeedbeappropriateiftheywerebalancedandmeasured
improvementsincare.Forexample,measuresofproductivitymustbebalancedwithpatientsatisfactionandqualityofcaremeasurestoavoidthechurningofpatients.
Thedesignteamaddressedthisissueatnumeroustimesthroughoutthedesignprocess,inparticularwhenidentifyingperformancemeasuresandestablishingthe
emphasisbetweenindividualandteamrewards.

Third,selectingtheperformancemeasureswasperhapsthemostimportantandchallengingaspectofthedesignprocess.Notonlydidtheteamneedtoidentifythe
"right"measuresandachieveadesiredbalance,theyneededtoensurethatthesystemswereinplaceandthemeasuresprovidedeffectivefeedbackonperformance.
Thegroupidentifiedfiveareasthatwouldbeimportanttothephysiciansandtheorganization:

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1.Patientsatisfaction.Asurveyofpatientswasconductedbyanexternalpublicopinionsurveycompany,withmeasuresbasedonthesatisfactionwithhealthcenter
andclinicalcareproviders.

2.Clinicalquality.Thesespecificdepartmentmeasures(e.g.,pediatrics)wereselectedfromprioritiesidentifiedbyCHP,andwereamongthosemeasuredbythe
NationalCommitteeforQualityAssuranceandHEDIS(theHealthEmployersDataInformationSet).

3.Resourcemanagement.Thisentailedhowwellthehealthcenterutilizeditsresourcesforhospitals,emergencyroomvisits,specialtyreferrals,andotherassociated
costsofprovidinghighqualitycare.

4.Personalproductivity.Relativevalueunits(RVUs),amethoddevelopedbytheU.S.HealthcareFinancingAgency(HCFA),wasusedtomeasuretheamount,
intensity,andcomplexityoftheservicesprovidedbyindividualclinicians.

5.Teamworkeffectiveness.Aninternalsurveyofpeerswasconductedbyregionaladministrationtodeterminethedegreetowhichclinicalprovidersworkedina
collaborativeandsupportivemanner.

Threeofthesemeasureswerecapturedattheteamlevelclinicalqualityforthedepartment,resourcemanagement,andpatientsatisfactionforthehealthcenters.
Onlythepersonalproductivityandteamworkeffectivenesswerelinkedtotheindividualphysician.Thisthereforeachievedadesiredbalancebetweenindividualand
team,healthcenter,andtheclinicaldiscipline.Performanceimprovementsintheseareaswouldreflectapositiveimpactonthepatient,thereputationofthe
organization,andtheoveralleffectivenessoftheVermontregion.

Theprogramincludedphysicians,nursepractitioners,andphysicianassistants.Aperformancescorefromtheincentiveplan"scorecard"woulddeterminethepayouts.
SeeFigure84foranillustrationoftheCHPperformancescorecard.Thepayoutsweredeterminedbymultiplyingtheperformancescorebyapercentofthe
individual'sincomeovertheperformanceperiod.Thisenabledadjustmentsforindividualswhowerenotworkingafulltimeschedule.Payoutswereplannedforevery
sixmonths.

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Figure84.
TheperformancescorecardusedatCHP.

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ImplementingtheIncentiveCompensation

Theimplementationprocessprovedtobeascriticalasthedesignprocess.Duringthedesignmeetings,teammembersfrequentlydiscussedthequestionsandconcerns
thatwerevoicedtothembytheirpeers.Thiswashighlybeneficialtomanageanyissuesabouttheprogramandbuildsupportduringthedevelopmentperiod.The
rolloutoftheplanincludedapresentationoftheplantoallphysicians.Thiswasintendedsoeveryoneunderstoodhowtheplanworkedandallheardthesame
message.Membersofthedesignteamwhowereclinicalpeersattendedthesessionandansweredmanyoftheproviders'questionsthisenhancedthecredibilityofthe
program.Second,eachphysicianreceivedabrochurethatdescribedtheprogramandaddressedthemostfrequentlyaskedquestions.Thisbrochureservedasa
reminderandtoupdatenewphysiciansontheprogram.Third,allphysiciansmetasateamwithotherdepartmentmembersoroneononewiththeirmanagersto
reviewspecificgoalsandquestions.Theyusedthistimetodevelopstrategiesandspecificactionplanstoimproveperformanceinthecriticalareas.Thegoalofthese
meetingswastoprovidetheneededguidanceonthedesiredactions.

Whatbecameveryclearwasthattheprogramprovidedanimportantmechanismtoguideactionsandrewardthegainsthatwererealized.Noonewasplacedina
situationwheretheyreceivedlessincomeinsteadtheprogramwasaddedtoexistingsalaries.Theregionhadnotprovidedpayincreasesforseveralyearsduetoits
overallfinancialperformance.Theprogramprovidedamechanismforthegrouptocatchuptothemarketandgobeyonditifhighlevelsofperformancewere
achieved.Itwasanticipatedthatovertimethepayoutlevelswouldincreaseasthepeoplegainedconfidenceintheprogramandtheprogramwassupportedby
strongerinformationsystems.

AssessingtheImpact

Theresultsoftheprogramhavebeenquiteremarkable.Themostsignificantimprovementsinperformanceoccurredinthequalityofcareandphysicianproductivity
areas.Inparticular,thegroupdevelopedandimplementedagreaternumberofasthmatreat

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mentplansandsignificantlyincreasedtheuseofpeakflowmeters.Italsoincreasedthenumberofwomenreceivingmammographytestsandchildrenbeingfully
immunized.Thesepreventativeactionsparalleledadecreaseinuseofemergencyroomservices.

Themedianperformanceinpersonalproductivity(i.e.,RVUs)increasedbycloseto10%.Thiswasachievedbyphysiciansincreasingtheirpanelsizewithnew
members,openingappointmentsforfeeforservicepatients,andassumingpatientsofphysicianswhoterminatedemployment.

TheVermontregionofCHPexperiencedanimportantimprovementinqualityofcareandastrongoverallriseinfinancialperformance.Althoughtheprogramwasnot
dependentonfinancialresults,theachievementsrealizedfromthisprogramclearlyincreasedthefinancialstrengthoftheorganization.Overtheseveralperformance
periods,anincreasingnumberofphysiciansreceivedpayouts.Dr.Jarrisindicatedthat"theprogramdidnotreallybecomeoperationaluntiltheprovidersreceivedtheir
firstpayouts.Thentheyknewwewereseriousandtheycouldmakeadifference."

Thedistributionofpayoutstoprovidersoverthefirstyearoftheplanwere:

Nopayout: 15%
Between$500and$1,000: 5%
Between$1,000and$3,000: 20%
Between$3,000and$5,000: 19%
Morethan$5,000: 41%

Themedicalgroupwasabletodemonstrateapproximatelya4:1returnoninvestmentfromtheprogram.Thismeantthatifthegrouppaidout$350,000inincentives,it
realized$1.4millioninincreasedincomeandsavings.Thefundingoftheprogramwasbuiltintothemeasuresandperformancelevels.Duringthedesignprocess,the
designteamexaminedthepayoutopportunitiesandassociatedthesetothemeasures.Theyrealizedthattheydidnotneedanadditionalfundingmechanismforthe
program.Thistechniqueprovedtobeanimportantconfidencebuildingprocessforthephysiciansandkepttheprogramfocusedonqualityofcare(notfinancial)
issues.

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GoingForward

Theprogramhasachieveditsprimaryobjectiveofimprovingperformanceandbuildingastrongsenseofcommitmentbytheproviders.Thisprogramhasenabled
physicianstorealizepersonalbenefitfromtheactionstheytaketoimprovethequalityofcare,beingmoreresponsivetopatientsandimprovingtheoverall
organization.Onephysicianindicatedthattheprogramwasausefulmechanismtomeasureandrecognizecontributions,andthatphysiciansseldomreceivedsuch
feedback.Itgavethemanopportunitytoshareintheimprovementstheyhelpcreate.

BridgingtheGapbetweenPhysiciansandtheOrganizationatHarvardUniversityHealthServices

Therearethosewhobelievethereisaninherentconflictbetweenphysicianincentivesandthequalityofcare.Theargumentsuggeststhatifphysiciansaremore
interestedinthefinancialaspectsoftheorganization,theywillpaylessattentiontocaringforpatientsandprovidingsoundqualityofcare.Organizationsthathave
establishedqualityandpatientbasedphysicianincentiveplanshaveexperiencedjusttheopposite.Whenphysicianshaveaportionoftheircompensationlinkedtothe
effectivemanagementofcare,thepatientandtheemployingorganizationbenefit.ThishasbeentheexperienceofHarvardUniversityHealthServices.

Thereismuchcontroversyaboutphysiciancompensation.Asmanagedcareorganizationsorprivatephysiciangroupsemploymoreandmorephysicians,theissueof
designingafaircompensationprogramisofparamountimportance.Thereasonissimple:Theyneedtoencourageandreinforcetherightbehaviors.Thedevelopment
ofacompensationprogramneedstoconsideravarietyofpersonal,healthcare,andbusinessfactors.Itinvolvesmorethanjustprovidingcompetitivesalariesandpay
increasesbasedonseniority.

Traditionally,physiciansjoinedmanagedcareorganizationsforlifestylereasons.Theymadetradeoffdecisionsofcompensationopportunityfortheabilitytohave
morefreetime,operatewithgreaterautonomy,andbefreeofthebusinessresponsibilitiesofmanagingapractice.However,pressuresofthemarketplace

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havecausedmanyoftheseemployingorganizationstochangetheseroleexpectations.Physiciansneedtoconsidertheresourceutilizationnecessarytoprovidethe
highestqualityofcare,andtheyneedtocoordinatecareacrossawidearrayofgroups,includingnursingandspecialties,andparticipateactivelyinmanyorganizational
committeesandprograms.Theconfluenceofthedifferentrequirementshascreatedsignificantconflictinthesehealthcareorganizations.

DealingwithChange

HarvardUniversityHealthServices(HUHS)hasfacedtheseissuesandmadesignificantprogress.HUHSisownedbyHarvardUniversity.Itservesthefaculty,
students,andstaffmembersoftheuniversityandoperatesasanindependentmanagedcareorganization.Facultyandstaffmembershaveseveralchoicesfor
healthcareinsurance,soHUHSneedsto"compete"forpatientslikeanyprivatehealthmaintenanceorganization(HMO).Fortunately,ithasachievedthedistinctive
reputationofprovidingexcellentcareandisthelowestcostprovideroftheseservices.

HUHSfacesthesamemarketplaceandservicepressuresasmostmanagedcarecompanies.Itprimarilyemploysinternistandpediatricphysicians,aswellasastrong
nursepractitionerstaffandanetworkofhealthcentersandadministrativeservices.Ithasservicecontractswithspecialtyphysiciangroups(e.g.,surgeons,
obstetricians)andtwomajorBostonteachinghospitals.

HUHScontinuallydevelopsandimplementsprogramstoimproveitsabilitytomanagediseaseandcareforpatients.In1994,itdecidedtotakeaboldsteptochange
thecompensationarrangementforitsphysicians.Theactionsthatresultedfromthisdecisionhavemadefundamentalchangesinthecultureandperformancesystemsof
theorganization.

TheTaskofDesigningaNewCompensationProgram

HUHSdecidedtochangethephysiciancompensationprogramforseveralreasons.First,itwashavingincreasingdifficultyinat

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tractingandretainingnewtalent.Whilelongservicephysicianscontinuedtoearnabovemarketpaylevels,otherorganizationswereofferingmoreattractivepay
packagestonewphysicians.HUHSneededtocompetefortalent.

Second,theorganizationhadneverfullyclarifiedtheworkexpectationsforitsphysicians.Whatisanacceptablelevelofclinicaltime?Howshouldphysicians
participateinorganizationalcommittees?Howmanypatientsshouldtheyhaveintheirpanel(orassignedtothem)?Shouldphysiciansberesponsibleforhospital
rounding?Whataboutbeingoncallorcoveringforotherphysicians?Theperformancerequirementsfortheorganizationwerechanging,anditneededa"newdeal"
withthephysicians.

Tobeginthisprocess,DirectorofHealthServicesDavidRosenthal,M.D.,andAssociateDirectorofAdministrationMaryHennings,alongwithseveralchiefsof
clinicalservices,agreedthatthecompensationprogramneededtobeclarifiedandchanged.Forthenextseveralmonthstheyconductedmeetingswithmanyofthe
formalandinformalleaderstocreatesupportforchange.WhileHUHSdidnotexperiencethesamemajorcompetitivepressuresoftheotherBostonareaHMOs,it
didneedareasonforchange.Throughthesediscussionsthefocusbecamecreatingaprogramthatwouldenablethemtoattractandretainnewtalentandprovidea
compensationprogramthatwasfairandreflectiveofthecontributionsmadebythephysicians.

Onceageneralconsensushadbeenachieved,theseniormanagersselectedadesignteamtoworkwithadministrationandanoutsideconsultanttoreviewthecurrent
compensationplanandrecommendanewprimarycarecompensationplan.Theywerechargedspecificallywiththeresponsibilityofdevelopingguidelinesforthe
workexpectationandavariablepayprogramforphysicians.

Thegroupmetbiweeklyformorethan15months.Therewereseveralstatusreportmeetingswiththegeneralphysicianpopulation,andtheysolicitedinputand
consensusfrommanysectorsoftheorganization.Thegroupincludedphysiciansaswellasadministrators.Whilemanyofthediscussionswerequiteprotracted,the
groupultimatelydevelopedaworkableplanandachievedapprovalofitsrecommendations.

Theprimaryobjectivesofthephysiciancompensationplanincludedthefollowing:

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1.Motivateandrewardachievementofstrategicgoals.

2.Ensurethequalityofcare.

3.Attractandretainexcellentphysicians.

4.Encourageteamwork.

5.Fosterorganizationalcommitment.

WorkExpectationsandBaseSalary

Thefirsttaskthedesigngrouptackledwasdefiningworkexpectations.Theywantedtorelatesalariestothebasicperformancerequirementstoensurepaywas
internallyequitableandexternallycompetitive.Thebasicworkexpectationsdescribethebaselinelevelofresponsibilitiesforthephysician.Theyareexpectedtoevolve
anddevelopovertimeasrolesandorganizationalneedschange.Theexpectationsneededtorelatetothedesiredlevelofcompensationthatwascomparabletoother
organizations.Thiswasasimpleprincipleof"marketworkformarketpay."Ifindividualsachievedthedesiredlevelofbasicworkexpectation,theywouldbeableto
participateinthevariablecompensationplan.

Theworkexpectationsdefinethefollowingkeyaccountabilities:

1.ProvideprimarycaretomembersoftheUniversityHealthServices.

2.Servethepatient'smedicalandpsychosocialissues,whichincludesthenumberofclinicalhours,collaborationwithothercareteammembers,educatingandadvising
patients,referringpatientstotheappropriatespecialistswhennecessary,andothercareresponsibilities.

3.Fulfillone'sresponsibilityforacutetreatmentservicesatHUHS.

4.Admitpatientstotheinfirmarynetworkhospitalsorotherappropriatecontinuouscareproviderorganizations.

5.Overseepatients'inpatientcare.

6.Participateindepartmentalandorganizationalactivities,suchascommittees,workgroups,andteachingandcontinuousmedicaleducationprograms.

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Eachoftheseexpectationstatementsisdefinedmorefullythanpresentedhere.Theywerediscussedwiththephysiciansandclarified.Theyarecalibratedbasedonthe
fulltimeequivalent(FTE)statusofemployment.Thephysiciansareevaluatedannuallyoneachoftheseexpectationfactorsandreceiveuptoamaximumof100
points.Thisprovidesthephysicianwithaperformancescore.

Thescoretranslatesintobasepayincreasesandvariablecompensationeligibility.Physiciansreceivingascoreoflessthan80willnotreceiveapayincrease.Ifthe
performanceisnotimprovedbeyondthispointoverthreeyears,thesearegroundsfordismissal.Individualsreceivingbetween80and84pointswillreceiveapaystep
increase,butwillnotbeeligibleforvariablepay.Ifthescoreis85orhigher,thephysicianwillreceivethepaystepincreaseandbeeligibleforvariablepay.Individuals
atthetopofthesalaryrangewhoreceiveaperformancescoreof85orgreaterwillbeeligibleforvariablepaybutnotasalaryincrease.Thislinksthework
expectationsdirectlytothepaybasestepincreasesystemofHUHS.

ThePhysicianVariablePayPlan

Thepurposeofthevariablepayplanistorecognizeandrewardphysicianswhodemonstratesignificantcontributionsasteammembers.Thegoalsareestablishedeach
yearbasedonthestrategicprioritiesoftheorganization.Theyarecommunicatedtoallmembersoftheorganization,anddiscussedindepthwiththephysicians.

PriortomakinganypayouttheHUHSorganizationneedstoreachorsurpassitstargetedbudget.Thepayoutswillbesuspendedifthisoverallfinanciallevelof
performanceisnotachieved.ThepercentagepayoutisbasedonthecorrectsteprateforthephysiciansregardlessofcurrentactualpaythisisadjustedforFTE
status.

Thevariablepayplanusesfiveindependentmeasuresandamaximumpayoutof3%foreach.Apayoutcanbeearnedonanyorallofthemeasures.Thereisapoint
scoreforeachmeasurebasedonperformanceinspecificdimensions.Thetotalperformancedeterminesthetotalpayout.

Themeasuresincludethefollowing:

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1.Excellenceofcare.ThismeasureincorporatesHEDISmeasures,NCQA(NationalCouncilforQualityAssurance)medicalrecordsstandards,andthechief's
ratingofqualitydecisionmaking.

2.Collaboration.Thismeasureshowwellthephysicianscoordinatethecareofpatientswithothermembersofthecaredeliveryteam,includingfellowphysicians,
nurses,specialtyclinics,andworkgroups.Thisismeasuredthroughasurveyfeedbackprocess.

3.Patientsatisfaction.HUHSconductsperiodicpatientsatisfactionsurveys,andtheseresponsesareappliedtoeachphysician.Thismeasurealsoexaminesthe
growthinthephysician'spanelsizeandthenumberofpatientswhoseekamidyearchangeinprimarycarephysician.

4.Practicemanagement.ThisinvolvestheuseofresourcesinternalorexternaltoHUHS.Practicemanagementincludeshospitalizationandhomecareservices,
laboratoryandothertests,andtherateofreferralstospecialists.Italsoincludesavarietyofactivitymeasures.

5.Overallcontribution.Thismeasureinvolvesthedegreetowhichthephysicianmakesameaningfulandsignificantcontributiontoimprovingthequalityofcare,the
deliverysystem,andtheannualgoalsofthedepartment.Thepayoutofthismeasureisrestrictedtoonly10%ofthephysiciansandisafullornoamountforpayout
(i.e.,noproration).

Asstatedearlier,thesefiveareasrepresentimportantperformancefactorsoftheorganizationandsupportitsmissionandstrategicgoals.Improvementsareneededin
eacharea.Physicianshaveahighdegreeofinfluenceineachoftheseareas.Thereareavarietyoftoolsandsystemsneededtosupportthesemeasures.Theimportant
conceptforHUHSisthatitisdevelopingmeasuresbecauseitisimportanttohaveinformationontheseareas,nottosupportthevariablepayplanperse.The
compensationprogrambecameacatalysttofocusingonthemostimportantfactorsoftheorganization.

TheImpactoftheNewCompensationPlan

Whenthedesignteamfirstmetwiththephysicianstodiscusstheworkexpectationsandcompensationprogram,therewassignifi

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cantnegativereaction.Thephysicianshadbeenusedtohavinglittlecontrolovertheiractivitiesandfewpositiveornegativeconsequencesaslongastheyworked
withinbroadparameters.Thisprogramrepresentedtheorganization'seffortstoclarifyaccountabilitiesandperformancerequirements.Therewouldbeclear
consequencesforperformingornotperformingtothesestandards.Overthenextseveralweeks,mostofthestrongperformingphysiciansappreciatedtheeffortand
startedsupportingtheobjectives.Theresistancediminished,andinsomeareastheopportunitytoberecognizedfortheircontributionsbecameanimportantbenefitof
theprogram.

Themeasuresthatusepeerfeedbackbecamethemostvaluedbythephysicians.Performanceassessmentsprovidedbypeerphysiciansandspecialistsinspecific
dimensionsareveryvaluable.Itnotonlybecamecredible,butitprovidedimportantinformationaboutwhatbehaviorisimportant.Thisinformationhasbecomea
majorforceforinfluencingphysicianbehavior.

Performanceinmanyofthequalityofcaremeasuresincreased,andthecostsassociatedwiththemhavedecreased.Thiswasachievedbythephysicians'takinga
moreproactiveapproachtomanagingcare.Ratherthanlettingthe''system''careforthepatients,manyofthephysiciansincreasedtheireffortstosupportthecare
deliverysystem.Thepatientsatisfactionsurveyscoreincreasedslightly.HUHSexistsinahighlydemandingenvironmentbecausemanyofthemembersarefacultyand
studentsofHarvardUniversity.Theytendtobewellreadandwillchallengethephysician'sjudgmentregardingprescriptionsandtreatmentmethods.Yetpatient
satisfactionremainsstrong.

Oneadditionalareaofimprovementhasbeeninthepatientassignments.Physiciansareseekingtoaddpatientstotheirpanelsandtoformalizetherelationships.This
establishesanimportantconnectionbetweenthememberandthehealthservicesorganization.Peoplenowclearlyunderstandwhomtheyneedtogotoforhealthcare,
andthecontinuityofcarehasbeenenhanced.

Whenaskediftheresultswereworththeeffort,MaryHenningssaid,"Absolutely.Theprogramhasgivenuswhatweneededtofocusandtalkaboutthekeyissues.
Wehavecreatedasenseofcommongoalsandaccountability.Wehavemuchtodotoimprove,butthechangehasbeendramatic."

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TheFutureofPhysicianIncentives

Therearetwokeyareasofdesiredchangeinthephysicianincentiveplans.First,thefeedbackonthemeasuresneedstobeprovidedtothephysiciansinafasterand
easiertounderstandformat.Itisessentialforthephysicianstounderstandthedataduringtheperformanceperiodsotheycanhavethechancetoadjustandmodify
theiractions.Thisinvolvesbothsystemstasksandsimplificationsofthemeasures.

Second,physiciansneedcoachinginhowtomaximizetheirperformance.Inthepast,itwasaninformalprocessbywhichaphysicianlearnedaboutdifferent
programs,howtohandledifficultpatients,andhowtosupportthehealthcenters.Somefoundaneffectivemeanstoachievestrongresultsotherfloundered.HUHSis
identifyingbestpracticesandthencreatinginformationandcoachingsessionsforthephysiciansonhowtodramaticallyimprovetheircontributions.Mostoftheareas
willnotbeinclinicaltasks,butinhandlingpatients,educatingthem,andmanagingtheresourcesofthebroadnetworkofhealthcareresources.Ifthephysiciansexcelin
theirperformance,everyonewins.

ThechangeprocessisclearlyunderwayatHUHS.Thethreatsfromexternalcompetitorsarenolongerveryeffective.Instead,theorganizationislookingtofocusthe
physiciansandallproviderswithavisionofwhattheorganizationcanbecome.Itwantstocreateafoundationfromwhichtomakemajoradvancesinpromotinghealth
andmanagingdisease.ThetaskswillbetoimprovemanyofthethingsHUHSdoesverywellandtoenhancethecollaborationandcoordinationofefforts.Onepointis
clear:Ifitissuccessfulinachievingtheseimportantdevelopments,thephysiciansandallmembersoftheorganizationwillshareinthesegains.

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9
MatchingRewardstoaChangingStrategy
Strategieschangebecausecompanies,andthemarketstheyserve,change.Achangeinstrategycanbeinspiredbyanewchiefexecutiveofficer,alossinmarket
share,anewbusinessopportunity,oraninnovationwithinthefirm.Anewstrategymaybenecessarybecausetheoldonefailedorwasnolongerrelevanttothenew
organization.

Organizationsneedtocontinuetorenewanddevelopthemselves,justaspeopledo.Thosethatfailtodothisoftendieorbecomeacquiredandintegratedintoanother
organization.Strengthcomesfromhavingastrategythatfitswiththemarketplace,thecapabilitiestoimplementitwell,andapersonalcommitmentbyallmembersof
theorganization.Rewardsystems,whenalignedwiththestrategyandeffectivelymanaged,enhancecommitmentandenableorganizationstoimplementtheirstrategyin
asuperiorfashion.

Thischapterlooksathowcompanieshavechangedtheirrewardsystemstosupportnewbusinessstrategies.Ascompanieschange,theyeventuallyneedtoreexamine
howtheycompensateandrecognizepeople.Rewardsystemssendpowerfulmessagesaboutwhatisimportantinanorganization.Themoretherewardssupportthe
organization'skeysuccessfactors,thebetterpeoplewillunderstandandvalueitsstrategy.

Eachoftheseorganizationshasmadeachangeinstrategyaswellastheirrewards.HarvardPilgrimHealthCareisintegratingamergerandaddressingtheneedsofa
changingmarketplace.Itsexecutivecompensationplanprovidesaleadershipagendafortheorganization.W.W.Graingerengagedalargegroupofpeopletoexamine
awidevarietyofrewardsystemanddevelopchangesthatcreateda

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betteralignmentbetweenthecompanyandtheirpeople.Genzymeistransformingitselffromabiotechnologycompanytoapharmaceuticalcompany,butwiththe
qualitiesofahighgrowth,developmentfocusedorganization.Itscompensationplansmadetheadjustmentandcontributedtothetransformationofthecompany's
culture.KeyPrivateBankdevelopedaspecializedincentiveplanforthebusinessthatservicestheaffluentcustomer.Thisapproachrefocusedstaffmembersonthe
essentialelementsofsuccess.Finally,LeviStrausshasbuiltanorganizationbasedonitsfoundingvalues.Thoughthegarmentmarketandorganizationhavechanged
dramatically,Levihasretainedafocusonitscorevaluesandreinforcedthiscommitmentwithavarietyofrewardsystems.Theyarealluniquestorieswithpowerful
messages.

Whilemarketschangeduetoawidevarietyofforces,changeswithinorganizationsdon'tjusthappen.Tobeeffective,changeneedstobefocused,driven,and
reinforced.Rewardsystemsperformacrucialroleandshouldnotbeoverlooked.Thesecompaniesareinacontinuousprocessofchange,andtheirprocessof
rewardssupportsthem.Peoplearedecidedlypartoftheprocess.

AligningExecutiveCompensationwithCorporateBusinessObjectivesatHarvardPilgrimHealthCare

Inthe1970sand1980s,managedcareorganizationswereregardedasboutiques.Manythoughttheywouldnotlast.Historycontinuestoprovethemwrong.Robert
Ebert,M.D.,formerdeanoftheHarvardMedicalSchool,hadaverysimpleconceptwhenhefoundedHarvardCommunityHealthPlan:Ifpeoplecouldreceivehigh
quality,easilyaccessiblehealthcareservices,wecouldreducethecostofhealthcareandenhancepeople'slives.

So,in1969Dr.EbertfoundedHarvardCommunityHealthPlan,andithasgrowntobethelargestmanagedcareorganizationinNewEngland.Itisanotforprofit
organizationwithmorethan1.3millionmembersandmorethan20,000physiciansand110hospitalsinitsnetworkofproviders.Itisrecognizedthroughouttheworld
asaleadingproviderofqualityhealthcare.Butthechal

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lengesofgrowthandmarketchangecontinuetobeformidable.Thiscasestudywillexaminethedynamicsfacingasuccessfulmanagedcareorganizationandhowits
executiveshavealignedwiththestrategyandvaluesoftheorganization.

OverviewoftheContextforLeadershipinManagedCare

Thereisperhapsnoindustrythathasfacedsuchcomplexchangesasthehealthcareindustry.Whilehistoricallyithasbeenanindustryfocusedonserviceatwhatever
thecost,theeconomicpressuresontheindustryhavecreatedmajorchange.Whileorganizationshavetraditionallyfocusedonthequalityofcare,theynowneedto
integratethecostandmanagementofcareintotheiroperations.Themanagedcaresegmentofthehealthcareindustryhasrespondedtogrowingopportunitiesand
pressuresfrombothemployergroupsandhealthcareproviders(e.g.,hospitals,specialtyphysicianpractices)inavarietyofways.Thelandscapehasbecomeintensely
competitiveasbothwellfundedcompaniesentervariousmarketsandattractivestartuporganizationsstealmarketniches.Successdependsonsatisfyingavarietyof
conflictingconstituenciespatients,employers,physicians,providergroups,andgovernmentregulatoryagencies.Insomeareas,suppliershavebecomecompetitors
(e.g.,whenhospitalsenterthemanagedcaremarket)andcustomershaveestablishedcompetitororganizations(e.g.,whenemployergroupsformnewphysicianbased
carenetworks).Furthermore,companiesinthisindustryfacethesamepressuresforaccesstopeople,capital,andtechnologyasinotherindustries.Butmanyoftheir
challengesarequiteunique.

Companiesinthemanagedcareindustryarefacingerosionoftheiralreadyslimprofitmargins.Competitorsandpressuresfromemployergroupshaverestrainedtheir
abilitytoincreasepremiumrates.Costsrelatedtomedicalservices,especiallyforhospitalandpharmaceuticalservices,aregrowingmorerapidlythanrevenues.In
fact,JoeDorsey,M.D.andmedicaldirectorforHarvardPilgrimHealthCare,projectsthatinthenextfewyears,thecostsrelatedtodrugswillbegreaterthanthe
costsassociatedwith

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hospitalization.Theabilitytocreatevalue(qualityofcareasafunctionofitscosts)fortheemployercustomerandpatientwilllikelybetheprimarydeterminantof
successfortheseorganizationsinthefuture.

Themovementofpatientstomanagedcarecontinuestoremainstronghowever,themedicalcostsassociatedwiththesepopulationsaregreaterthanhistorical
standards.Individualsandcompaniesliketheeaseofaccessandfinancialarrangementtheseplansofferovertheindemnitytypehealthinsuranceplans.Manyalso
favortheproactiveemphasisonhealthanddiseasemanagement,ratherthanpayingforcostsafterserviceshavebeenincurred.Acquisitionsareincreasingastheonce
cottagelikeindustryisconsolidating.Thelargerorganizationsareabletoprovidegreaterresourceinvestmentsandastrongerabilitytoinfluencetherateschargedby
healthcareproviders.Consequently,thepathtolongtermgrowthandsuccessisuncertain.

BackgroundofHarvardPilgrimHealthCare

TheHarvardPilgrimHealthCareorganizationhasgrownthroughacombinationofgainsinmarketshareandfrommergersandacquisitions.Themostsignificant
mergerwaswithPilgrimHealthCare.TheneworganizationchangeditsnamefromHarvardCommunityHealthPlanandPilgrimHealthCaretoHarvardPilgrim
HealthCare(HPHC).Butthechangeswentfarbeyondthecorporatenameandimage.

FundamentaltotheneworganizationwasacommitmenttocontinuetogrowintheNewEnglandmarketplace.HarvardCommunityHealthPlan(HCHP)grewto
becomethelargestmanagedcareorganizationintheregion,andPilgrimHealthCare(PHC)wasemergingtochallengethisleadership.Whiletheyoperatedin
somewhatdifferentmarketsintheBostonarea,therewasaclearadvantagetobothorganizationsiftheycouldimplementthemergersuccessfully.Theorganizations
agreedtojoinforceseffectiveinJanuary1995.

Theneworganizationcreatedabroadandattractivedeliverysystemforhealthcare.First,HCHPownedandoperatedabroadseriesofhealthcenters,throughoutthe
Bostonareaandthenorth

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ernandwesternsuburbs.PHCutilizedanetworkofindependentphysiciansandjointventureproviderrelationshipstodeliverpatientcareprimarilyincommunities
southandsouthwestofBoston.Theintegrationoftheiroperationsandorganizationalculturesbecameamajorchallengetothesuccessofthenewenterprise.

Atthetimetheorganizationwasundergoingsignificantintegration,elementswithinwereseekingtoseparate.Seeingatrendoccurringinotherlargemanagedcare
organizations,staffphysicianswithinHCHPdesiredtoestablishanindependentmedicalgroup.Fromthisplatformtheybelievedtheycouldprovidemorecost
effectivecaretopatientsandhavemorecontrolovertheirfuture.Theywerealsoviewingtheuncertaintiesofthemarketplaceandwantedtoestablishanew
relationshipwiththeorganization.ThephysiciansformedtheHarvardVanguardMedicalGroupin1997andestablishedanexclusivecontractualcapitatedrelationship
withHPHC.

Finally,thecomplexionoftheBostonmarketwaschanging.Thediversityofthepopulationwasgrowingrapidly.Peoplewithdifferentculturalvaluesandapproaches
tomedicalcare(otherthanWesternmedicalpractices)werebecomingmembersofHPHC.Iftheorganizationwasgoingtobeabletoservethemarketfully,itneeded
tobroadenitsviewofpatientneedsandvalues.

AMultidimensionalApproachtoExecutiveCompensation

Formanyyears,HPHChadoperatedwithanexecutivecompensationplanthatemphasizedbothorganizationalandpersonalobjectives.Itusedasetofannual
objectives,withafinancial"circuitbreaker"thatneededtobeexceededtofundtheplan.Theactualpayoutswerebasedontheaccomplishmentoftheorganizational
objectivesandtheindividual'spersonalobjectives.Thepayoutcouldrangefrom50%to150%oftarget.

Pilgrim'sexecutivecompensationplanutilizedateamapproachtoexecutivecompensation.Iftheorganizationachievedaspecifiedoperatingincomelevel,apoolwas
generated.Fromthispoolthechiefexecutiveandseniormanagementstaffwereawardedpayoutsthatwereacommonpercentageoftheirsalary.

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Theiremphasiswasonreinforcingacommoncommitmenttoachievingorganizationalobjectives.

Withthemergerbetweenthetwoorganizations,issuesinmedicalcostmanagement,changingpatientrequirements,andmanyotherorganizationalintegrationfactors,
theexecutivecompensationplanneededtochange.LarryGibson,seniorvicepresidentforhumanresources,qualitymanagement,andinformationsystems,ledthe
executivecompensationprogramredesigneffort.Hewasassistedbyaconsultant.Itwasclearthatadoptingoneorganization'sincentiveplanwouldnotreflectthe
spiritofthemergerandfocustheexecutivesonthemajorchallengesoftheneworganization.Instead,theorganizationneededabalancedsetofmeasuresthat
reflectedthestrategyanddesiredvaluesofthenewlymergedorganization.

Tothatend,thenewexecutivecompensationprogramwasdevelopedbasedonfourprimarymeasures:

1.Financialresults(i.e.,meetingandexceedingthenetsurplustarget).Fortheorganizationtosurviveandcontinuetogrow,itneedsthefinancialresources
createdwhenrevenuesaregreaterthanexpenses.

2.Membership(i.e.,netgrowthinthenumberofmembersoftheorganization).MembersareindividualswhoaresubscribersandpatientsofHPHCnetgrowth
meansthattheorganizationhasincreasedthenumberofmembersbeyondthenormalturnover.

3.Customersatisfaction,asreflectedinbothpurchaserandmembersatisfaction.Whenpeoplefeeltheyarereceivingqualityofcare,theservicestheywant
fromtheorganization,andtheintenttoreenroll,thisisastrongreflectionoftheorganization'sperformance.Thisismeasuredbyaprofessionallyconductedsetof
surveysofkeydecisionmakersinemployergroupsandpatients/membersoftheorganization.

4.Staffinitiatives(i.e.,achievementofemployeesatisfaction,asmeasuredinvoluntaryturnover,anddiversitygoals).Theleadershipoftheorganizationis
accountabletobuildanenvironmentwherepeopleremainwiththecompanyandperceivethereareopportunitiesforcareerfulfillment.Furthermore,diversitywasalso
definedinhiringandretaininganemployeebasethatreflectsthemarketplaceHPHCserves.

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Performanceinthesefourmeasurementareasdeterminestheincentivecompensationofallmanagersandexecutivesoftheorganization.Thereareatthistimeno
individualdiscretionarybasedincentives.TherationaleforthisboldstatementisthatHPHCneededtounifytheleadershipteamaroundacommonsetofperformance
measures.Everyonewhoparticipatesintheincentiveplanwouldhaveadirectimpactononeorseveralofthemeasurementareas.However,theamountofpayout
opportunitydifferedbylevelanddegreeofimpactontheperformanceoftheorganization.

Eachofthemeasurementareaswereweightedthesame25%each.Therewasarangeofperformancelevelsforeachmeasure,andthecombinedresultswould
determinethepayout.Thepayoutwouldbeexpressedasapercentofone'stargetincentiveopportunity.Iftheorganizationachievedabovetargetfinancial
performance,thentheindividualcouldreceiveabovetargetpayoutsifallothermeasureswereatleastattarget.

Finally,theorganizationmaintainedafinancial"circuitbreaker."Thiswasapredeterminednetsurplusnumberthatneededtobeexceededbeforeanyoftheincentive
payoutsweremade.Althoughthisplacedtheincentivepayoutsatgreaterrisk,thecircuitbreakerensuredthattheorganizationwasnotplacedinafiscallydifficult
situationbecauseoftheincentivepayouts.Furthermore,individualscouldreceiveapayoutthatwastwicetheirpersonaltargetincentivebasedondoublingthenet
surplustarget.Thefinancialmeasurewasbothameasureofsuccessandamodifiertotheoverallpayout.However,itwasonlyonecomponentoftheoverallprogram.

TheImpactoftheExecutiveCompensationProgram

Theimportanceofthisprogramcannotbeunderestimated.First,ifthenewlymergedorganizationwastobesuccessful,itneededtoalignandallocatetheresourcesto
meettheneedsofthemarketplace.Thismeantthatoperatingcostsneededtobereducedinsomeareasandincreasedinothers.Takingactionwascritical.The
programservedtoencourageafasterconsolidationoftheorganizationthanhadbeenanticipated.

Second,thetransitionneededtonotonlyassurethemembers

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ofthetwoformerorganizationsHarvardCommunityHealthPlanandPilgrimHealthCarethattheywouldbebetterofftheneworganizationalsoneededtobe
attractivetoacquirenewmembers.Manycompaniesoftenexperiencemajordisaffectionsoftheircustomersduringamajormerger.Thecompetitorswereseekingto
acquiretheiremployerandemployeecustomers.Asuccessfultransitioninproducts,services,andcustomerrelationshipswaskeytoHPHC'scontinuedsuccess.

Third,customersatisfactioniscriticaltothisorganization.Customersinthisindustryarebothemployers(whopurchasetheservices)andemployees(whousethe
services).Onceagain,asuccessfultransitionwaskeytotheirabilitytoholdontotheexistingcustomerbaseandperhapsgrowit.Finally,thepeopleinthenew
organizationneededtoseeitasanattractiveplacetowork.Ifturnoverincreasedsignificantly,thenprovidinghighqualityserviceswouldbenearlyimpossible.Ifthe
organizationwasnotabletoattractadiverseworkforce,includingphysicians,nurses,andcustomerserviceprofessionals,itwouldnotbeabletoserveachangingand
diversemarketplace.Simplystated,diversityoftheworkforcewasviewedasanexecutivetoppriorityandacorebusinessimperative.

Thesewerethechallengesfacingtheexecutivesoftheneworganization.Theexecutiveincentiveplanprovidedthefocusontheorganization'scriticalpriorities.Itwas
supportedbyfrequentfeedbackonprogressandactionplanswhereindividualswereaccountableforspecificresults.Theprogramservedtobringthepeopleinto
alignment,frombothaperformanceandapsychologicalperspective.Theirsuccessdependedonthecombinedeffortsofeachindividualmemberoftheexecutiveand
managementteam.

Theprogrammadeapayoutforthefirstyear.Althoughtheachievementswereslightlybelowtarget,thisreflectedperformancegiventhecomplexityofmergingthe
twoorganizations.Theteamdidexceedtheminimumfinancialperformancerequirement.Forthesecondyear,theorganizationdidnotsurpassthecircuitbreaker.
However,performanceineachoftheotherthreeareasshowedadramaticimprovement.Thefinancialshortfallwasprimarilyduetocompetitiveratesthatcouldnot
supporthighermedicalexpensestoservethepatients.

Oneofthecriticalissuesnowfacingtheboardwastodeter

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minewhethertheyshouldmakeapayout.Iftheydid,thentheintegrityoftheprogramcouldbecompromised.AllanGreenburg,thechiefexecutiveofficer,Larry
Gibson,andtheboardofdirectorsdecidedthattheplanshouldreinforceitsprinciplesandnotmakeapayout.Althoughpeopleweredisappointed,theyunderstood
why.Astheexecutivesfacethenextyear,thereisanevengreaterfocusonimprovingperformanceineachofthekeymeasurementareas.Theexecutiveshaveshown
theircommitmenttotheorganizationbyremainingwithandfocusedonthekeydriversoftheorganization'sfuture.

TrendsfortheFuture

ThereisoneobviousandprofoundstatementforHPHC:Thefuturewillbecomemorecompetitiveandturbulent.Itisclearthatthefutureofmanagedcare
organizationswilldependheavilyontheirabilitytoinfluencethedeliveryofhealthcareservicesthatpromotewellness,diseasemanagement,andeffectiveuseof
resources.Holdingbackonhealthcareserviceshasclearlybeenshowntohavemajorlongtermcostimplicationsthelongtermnegativeeffectsclearlyoutweighany
immediatebenefit.Instead,proactivetreatmentofdiseaseshasbeenshowntoprovidesubstantialbenefitstoboththeindividualandthemedicalinsurancecompany.
Sotherolewillbetoprovidephysiciansandotherproviderswithinformation,support,andresourcestodowhattheydobestmanagethehealthcareoftheir
patients.

Thereareseveralstrategiescompaniesinthisindustrycanandwillemploytoachieveleadershippositions.AtHarvardPilgrimHealthCare,themeasuresreflect
businessobjectivesregardinghighqualityservice,customersatisfaction,organizationaldevelopment,andfinancialresults.HPHCcontinuestoexaminehowtoprovide
informationandservicestoitsphysiciansandotherprovidernetworksoitcanachievethehighestlevelofqualityofcare.HPHC'srolewillbeindirect,butitwillhave
amajorimpactonthecapabilitiesandbehaviorsoftheprovidernetwork.Theexecutivecompensationplanhascreatedtheintegrationacrossallareasofthe
organizationandwillbealteredasneededtoreflecttheorganization'sstrategiesandvalues.Inthisway,HPHC

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integratesitsfoundingphilosophyintomeasuresofsuccessandtherewardsassociatedwithachievements.

ReshapingRewardstoAchieveAlignmentatW.W.Grainger,Inc.

Whenabusinessmovesthroughaperiodofrapidchange,therewardandrecognitionprogramsareusuallyleftfarbehind.W.W.Grainger,Inc.(Grainger)tookthe
initiativetoavoidtheconfusionthatoccurswhenbusinessdirectionischangingandemployeesarebeingrewardedforbehaviorsandachievementofresultsthatwere
effectiveinthepreviousenvironment.

Graingeristheleadingdistributorofmaintenance,repair,andoperating(MRO)suppliesandrelatedinformationtothecommercial,industrial,andinstitutionalmarkets
inNorthAmerica.Witha70yearrecordofsuccess,thecompanycontinuedawinningformulaofafocusoncustomersandhowbesttomeettheirchangingneeds.

Anemphasisonthetotalcostoftheacquisition,possession,anduseofMROproductsandnewtechnologiesledGraingercustomerstoexpectdifferentalternativesto
bettersuittheirneeds.Thisshiftinexpectationsmeantofferingmorethana''onesizefitsall''approach.WhilemanycustomerscontinuedtovalueGrainger'sproduct
breadth,speedofdelivery,andeaseofdoingbusiness,othercustomersrequiredamorecustomizedapproach.Somecustomersbegantoaskforconsultingsupport
oninventorymanagementorevenaskedGraingertotakeoveronsitedaytodaymanagementoftheirMROsupplies.Newalternativesolutionsoftenrequired
employeestochangetheirapproach.TheInternetgavecustomersaccesstoproductinformation24hoursaday,7daysaweek.

"Tobesuccessfulintoday'smarketplace,"accordingtoCEODickKeyser,"ouremployeegoalsmustbealignedwiththebusinessgoals.Employeesareaccountable
forgettingresults.Gettingresultsrequireshavingtherequiredtoolsandfreedomtosucceed."Keyserbelievedanecessaryfirststepwastoexamineeveryrewardand
recognitionprograminthecompany.

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TheRedesignProject

"Initially,itwasbelievedthatourcompensationprogramswerebroken.Butanexaminationofourcompetitiveposition,turnoverratesandtrends,andhiring
experiencesdidn'tsupportthisassertion.Performancemanagementseemedtobetheleveragepoint,"accordingtoJackieBarry,compensationdirector.Thereward
andrecognitionredesignprojectstartedwiththeestablishmentofasteeringcommitteetodevelopanoverallRewardandRecognitionPhilosophyandPolicy
Statement.Thedevelopmentofthestatementbeganwithanexaminationofthecompany'sstrategyandchallengesandtheidentificationofpeoplerequirements.The
steeringcommitteeidentifiedfivemajorpeoplerequirements:

1.Thelinkagebetweenbusinessstrategy,performanceexpectations,andrewardandrecognitionwerecrucialtothesuccessofthebusiness.

2.Bothdepthandbreadthofcompetencewouldbeneeded.

3.Encouragingandrecognizingteamworkwouldsupportaresultsdrivenprocessorientation.

4.Innovationwouldrequireawillingnesstoacceptafewmistakesasemployeessearchforimprovements.

5.Flexibilityindesignwouldbenecessarytoaccommodatethedifferingneedsofthecompany.

Oncethestatementwasdeveloped,currentprogramswerereviewedforalignment.Itwasdecidedthateightdesignteamswouldbecreated.Eachdesignteamwasto
addressthemajorissuesinaligningtheprogramswiththedesiredrewardandrecognitionphilosophy.

Designteamswereassignedto:basepay,benefits,companywidecompetencies,performancemanagement,premiumpay,profitsharingandownership,recognition
andvariablepay.Theseteamsdevelopedobjectives,currentstateanalysis,desiredstate,andcriticalsuccessfactorsaswellasdeliverablesspecifictotheirassigned
area.Anintegrationteamwasthenformedtoconsideralloftherecommendationsandcreateanintegratedapproachtoimplementingthedesignteam
recommendations.

Earlyon,thedesignteamsidentifiedcriticalcultureissues

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thathadtobeaddressedfortheentireredesignefforttobesuccessful.Theywere:

Theroleofthemanagerwouldhavetochangefromadministrationtoownershipforthesuccessoftherewardandrecognitionprograms.Managerswouldnowbe
heldaccountableforemployeeperformanceandemployeedevelopment.

Employeeswerealsoexpectedtoassumegreateraccountabilityformanagingtheirperformance,developingandguidingtheircareers,andcoachingandrecognizing
teammatesandothercoworkers.

Communication,education,andtrainingonallaspectsofrewardandrecognitionwouldneedtobesignificantlyincreasedandbeongoing.Thetoolsprovidedwould
needtobesimpletouseandunderstand.

Theeightdesignteamsgottoworkquickly.Thesteeringcommitteedecideditwouldbemoreeffectiveforthedesignteamstostayfocusedonthesubjectby
dedicatingasolidweekofuninterruptedeffortinsteadoftakingthetraditionalapproachofregularshortmeetingsoveralongerperiodoftime.Theresultswere
impressiveandtheprocessmovedquickly.

RecommendationsoftheTeams

Eachoftheteamsdevelopedasetofrecommendations.Theyaredescribedthroughoutthiscasestudy.

RecognitionwouldhavetobecomeawayoflifewithinGrainger.Everyone,notjustmanagers,wouldberesponsibleforrecognition.Servicerecognition,attendance
awards,andsimilarprogramsweretocomplementcompanyvalues.Newprograms/actionswouldhavetosupportthesevalues.Recognitionguidelineswere
developedforusebymanagers,andthecommunicationoftheseguidelinesfocusedoncreatingarecognitionrichenvironmentratherthanavarietyofformalprograms.

Companywidecompetencieswereidentifiedbasedonbusinessrequirements.TheNovationsmodelofcompetenciesdescribesfourstagesofincreasedcontribution:
layingafoundation,contributingindependently,contributingthroughothers,andlead

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ingthroughvision.Competenciesweretoserveasanintegratorofthemajorhumanresourcessystems,withemployeedevelopmentbeingtheleadsystem
implemented.Whereappropriate,supplementalcompetencies(boltons)wouldbedevelopedforspecificbusinessunitsorprocesses(notfunctions).

Theperformancemanagementsystemwouldincludebothperformanceevaluationandperformancedevelopment.Thenewperformanceexcellenceprocess(PEP)
wouldconsistofthreephases:settingandaligningobjectivesandexpectations,performing/coachingandcounseling,andsummarizingresults.Settingobjectivesand
expectationswouldbeginatthecompanyorbusinessunitlevelandcascadedownthroughtheorganization.Employeesweretohaveperformanceobjectivesaswell
aspersonaldevelopmentobjectives.Employeedevelopment,careerplanning,andsuccessionplanningwouldbecriticallinkstothePEP.

Theperformancecyclewouldbebasedontherelevantbusinesscycleandwouldbeseparatefromthecompensationreviewcycle.Anoverallsummaryratingwould
notbedeveloped.Instead,employeeswouldbeassessedonachievinggoals/results(e.g.,doesnotmeet/meets/exceeds),developingcompetencies,andlivingthe
values(e.g.,progressing/notprogressing).Multisourcefeedbackwouldbeusedtoprovideadditionalinsighttodeterminedevelopmentneeds.

Becauseoftheemphasisonflexibilityandemployeedevelopment,thebasepaystructurewouldbebasedonacareerbandingconcept,withjobsbeingplacedinto
bandsbasedonthebanddescriptors/roles.Careerbandsarecharacterizedbyfewerbandswithwiderrangesofpayopportunity.Jobswouldbeassignedtoamarket
referencepointwithintherelevantbandbasedonthemarketvalueoftheposition.Careerbandingwouldbeimplementedaftersuccessfulimplementationofa
competencybasedemployeedevelopmentprocessandaperformancemanagementprocess.Ratherthanusingmeritincreaseguidelinesbasedontheemployee's
performanceratingandrangeposition,ameritpoolconceptwithgeneralincreasecriteriawouldbeused.Salaryreviewswouldnolongeroccuronanemployee's
anniversarydatebutonacommonreviewdate.Usingacommonreviewdate,alongwithhavingtheperformancemanagementcyclecoincidewiththebusinesscycle,
servestoseparatethesediscussions.

Thepremiumpayteamdevelopedrecommendationsthatpro

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videgreaterflexibilitytomanagingworkschedules.Theserecommendationsincluded:payingweeklyovertimeunlessbusinessneedsdictatedotherwise,convertingall
fulltimenonexemptemployeestoa40hourworkweek,andprovidingforalternateworkschedules(i.e.,flexiblehours,compressedworkweeks).Inaddition,shift
differential,oncallpay,andcallinpaypolicieswererecommended.

The1998RecognitionAwardprogramwouldprovidemanagerswiththeabilitytorecognizeexceptionalcontributionbyindividualsorteams.Thisprogramisaligned
withtheRecognitionGuidelines.Ratherthandesigningacompanywideincentiveprogram,adesignguidewouldbeusedbymanagerstodevelopincentiveprograms.

Theexistingprofitsharingplan(PST)wasastrongretirementvehicle,andincreasedcommunicationreinforcedthevalueofthisprogram.Anemployeesurveywould
bedonetodetermineeachemployee'ssenseofownershipandwhatchangesneededtobemadetothePSTtoincreasethissense.

Finally,employeetimeoffwouldbemademoreflexiblebyestablishingapaidtimeoffbankandamanagedshorttermdisability(STD)program.Newbenefits,some
ofwhichwerevoluntaryandwouldbeprovidedonanaftertaxbasis,included:lifecyclesavingsaccounts,resourceandreferralprograms,adoptionassistance,
dependentlifeinsurance,longtermcareinsurance,visioncare,andtravelservices.Healthbenefitswouldbeprovidedtoparttimeemployeeswhometspecific
serviceandhoursworkedrequirements."Someoftherecommendationswerenotconsideredhighcostorhighimpactinitiatives.However,thelackofmedical
coverageforparttimeemployees,referralbonuses,andrecognitionawardswerecitedasbarrierstorecruitingandrecognizingemployees.Oncetheseprogramswere
implemented,theywereoffthetableasissues,"saidJackieBarry.

ImplementationistheKey

Anintegratedimplementationschedulewasdevelopedthatpositionedeachrecommendationforsuccess.Thecommunicationthemefortheimplementationofthe
redesignedrewardandrecog

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nitionstrategywas"AligningforExcellence."Allcommunicationsstressedmanagerialandemployeeownershipof:

Theirroletounderstand,use,andbeaccountablefortheseprocessesandtheactionstakenanddecisionsmadewithinthem

Amutualaccountabilityformeetingshorttermandlongtermperformanceexpectationsandforemployeedevelopment

Creatingworkschedulesthatmeettheneedsofthebusinessandtheneedsofemployees,andthencomplyingwiththeseworkschedules

Thesuccessoftheorganizationandtheappropriatesharinginthatownership

Theimplementationprocessbeganinearly1998andisexpectedtobecompletedbyJuly1999.

Oneearlysuccessoccurredasthenewperformanceexcellenceprocesswasbeingdevelopedandimplemented.Thegoalalignmentprocess,calledFastStart,was
designedtotakebusinessobjectivesanddevelopunit,department,team,andemployeeobjectives.Asmanagerswereparticipatinginthisprocess,itbecameclearto
themthatthisprocesswasn'tjustforperformancemanagementitwasthewaytheyhadtoruntheirbusiness.Theleverageofaligningperformancegoalsbecame
apparent.

Onerecommendationofthedesignteamswastoestablishpaidtimeoffbanksratherthanmaintainingseparatevacation,holiday,sicktime,andSTDprograms.This
approachwasconsideredtobeimportanttogreateremployeeaccountability.Thoseemployeeswhowerehighusersofpaidtimeoffwouldhavetomanagetheirtime
better.However,whentherecommendationwaspresentedtoseniormanagementtherewasaconcernthatemployeeswhohadn'tbeenhighuserswoulduseallofthe
additionaltimeavailable.Furtheranalysiswasrequestedtoensurethisprogramwouldbecosteffective.

CEODickKeyserbelievestheresultsoftherewardandrecognitionredesigneffortareinalignmentwiththestrategicdirectionofthecompany."Ifeachoneofus
takesaccountability,orownership,forgettingthejobdone,successwillcertainlyfollow."

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MeetingtheCompensationNeedsofaRapidlyEvolvingCompanyatGenzymeCorporation

GenzymeCorporationwasfoundedin1981inCambridge,Massachusetts.Overthelastdecadeandahalfithasevolvedintoadiversifiedhealthcareproducts
companywithaworldwideemployeebase.Withitsrootsinthebiotechnologyarena,Genzyme'scompensationprogramshavebeenmodeledafterthosetraditionally
foundinstartupcompanies:lowercashwithhigherequity.

Asthecompanyhasevolvedandthediversificationofproductshasbecomemorepronounced,ithasperiodicallypausedtoreviewthecomponentsofthetotal
compensationprogramtoensurethatitisstillreflectiveofthebusinessstrategiesandneeds.

CompanyBackground

Genzyme'srecruitingbrochurestartswiththefollowing:
Itbeganwithasimplepremise.Focusondevelopingproductsandservicesthataddressmajorunresolvedhealthneedsnotjustinonecountryorcontinentbutaroundthe
world.

Genzymehasheldtruetothatstatementandnowsupportsanemployeepopulationofmorethan3,500throughouttheworld.ItsbusinessunitsincludeSpecialty
Therapeutics,includingGenzyme'spremierproducts,CeredaseanditsrecombinantsuccessorCerezymeDiagnosticProducts,whichdevelopsandmanufacturestest
kitsforusebylabsandhospitalsGenetics,aproviderofprenatalandDNAtestingservicesandPharmaceuticals,whoseproductsincludebiomoleculesandare
increasinglyinvolvedintheresearchanddevelopmentofalternatedrugdeliverysystems.

AdditionalbusinessunitshavebeencreatedwhenGenzymeproductshavebeenteamedwiththeexistingproductstrengthofitsnewestcolleagues.GenzymeTissue
RepairrepresentsthecombiningofthetissueresearchprogramsatGenzymewithformer

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BiosurfaceTechnologiesanditsCarticelandEpicelsmproducts.GenzymeSurgicalProductswasformedwhenGenzymeacquiredDeknatelSnowdenPencer,Inc.,in
1995.Thismergerwithamanufacturerofhighqualitysurgicalproductsepitomizesthecompany'sdiversegrowthstrategy."Wearegrowingthroughacombinationof
internaldevelopment,strategicacquisitions,andcollaborationswithothercompaniesthatareleadersintheirrespectivefields."

ThenewestbusinessunitisGenzymeMolecularOncology,avirtualbusinessthathasbeenchargedwiththedevelopmentandcommercializationofmolecular
approachestocancerdiagnosisandtherapybyintegratingfourkeytechnologies:genomics,genetherapy,geneticdiagnostics,andsmallmoleculecombinatorial
chemistrydrugdiscovery.

TheEvolutionofaCompensationProgram

Genzymehasitsrootsinbiotechnology,aworldwithmanyparallelstothemoretraditionalpharmaceuticalindustry,exceptthatresearchtendstoemphasizebiology
insteadofchemistryandmanyofitstechniques,suchasworkingwithrecombinantDNA,genetherapy,andtransgenicanimals,areconsideredcuttingedge.

Compensationinthebiotechnologyworldtendstobemodeledafterotherstartupindustriesusingstrategiesthatconservecashintheshorttermandprovidefora
largereturnonalongertermbasisifthecompanyissuccessful.Thepharmaceuticalcompensationpatternsmirrorthemorematureindustrythatitis.Cashismore
availableandequitycompensationtendstobereservedforthosewhohaveamorepronouncedimpactonthelongtermresultsofthecompany.

Genzymeisoneoftheleadersinthebiotechnologyindustryintermsofageofproductsandrevenue.Itwasoneofthefirstbiotechnologyfirmstobringaproductto
marketandcontinuetohaveapipelineofproductsinbothbasicresearchandclinicalevaluation.Tomovethebusinessforward,itneedstohireexperiencedtalent.
Soundslogical,buttheexperiencedtalentisinthepharmaceuticalindustry.Whenitlosestalentedemployees,itisoftentoasmallerbiotechnologyfirm.The
compensationchallengehasbeentostraddlethetwocompensationstylesandcreatepro

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gramsthatallowGenzymetohirefromoneworldandkeepitfromlosingtotheother.

In1994,itundertookaseriousreviewofthebasesalarystructuresofthetwoindustrygroups.Throughathoroughanalysisoftheavailablesurveydata,itmadeakey
discovery.Themidpointlineofthebiotechcompaniesdidnotcontainthepronounced"Jcurve"ofthepharmaceuticalindustry,anobservationnotedinHeinzKohler's
StatisticsforBusinessandEconomics,SecondEdition(Glenview,Illinois:Scott,ForesmanandCompany,1988,pp.561,564).Genzymetookafirststeptoward
thepharmaceuticalpatternandrepositioneditsmidpointlinetomorecloselyresemblethesteepercurveshowninthesurveys.Thismeantthatmidpointsformiddle
managersmovedasmuchas15%.

Thesecondstepwastodeterminehowtoadaptmarketpricingstrategytoreinforcethecompany'slookatboth"worlds."Hiringmanagerswerefeelingpressuredto
matchthepharmaceuticalindustry'scashcompensation.Theimpactofwholesaleadoptionofthatstanceonthecompany'sbottomlinewastoosevere.Genzyme
choseaphilosophythatgaveweighttomarketdatafromboththebiotechandpharmaceuticalindustrygroups.Forpositionswhereitcouldobtaindatafromboth
groups,itwouldcalculateanartificialmarketrateweighted60%tothepharmaceuticalmarketrateand40%tothebiotechnologymarket.Psychologically,this
acknowledgedanevolutionawayfromapurelybiotechworld.

Thethirdaspecttobeaddressedwasequitycompensation.AcomprehensivereviewandredesignofGenzyme'sstockoptionprogramwascompletedinthefallof
1997.WithinGenzyme's(andthereforecompensation)culture,theannual,worldwidestockoptiongrantiskey.Theseniormanagementteamisquiteemphaticinits
desirethatallemployeeshavestockinthecompany.Arecentcommunicationpiecereflectedthisasfollows:"GenzymestockownershipbyGenzymeemployeesis
veryimportanttothecompany.Wearecommittedtopromotingacultureofallowingemployeestoinfluenceandparticipateinthesuccessofthecompany."

Theliabilitythatacompanyfacesintheextensiveuseofequitycompensationisoverhang,oralargenumberofoutstandingstockoptions.Thereareanumberof
factorsthatcancontributetoacompany'shavingalargenumberofoutstandingoptionsbesideshighoptionusageforexample,lowturnoveroranunfavorablestock
price(readthatasoptionsunderwater).

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Itiscommonknowledgethatshareholdersdonotappreciatelargenumbersofoutstandingstockoptionsbecauseoftheirdilutiveeffect.Inthepopularpressthere
havebeenarticlessuggestingthoseshareholdersshouldacceptoutstandingoptionsashighas10%ofsharesoutstanding.Inthebiotechnologyworld,10%isfairly
low.The"panicpoint"iscloserto20%,andGenzymehadbeenhoveringnearthatdilutionlevelforanumberofyears.Eachtimethecompanydecidedthatitneeded
tooverhaultheprogram,thestockpricewouldswingandtherewouldbesignificantnumbersofexercises.Itwouldreducethenumberofoptionsinthenextyear's
annualdistributionmatrix,butkeeptheprinciplesoftheprogramintact.ThiswasaBandAidthenin1997cametheopportunitytoperformthenecessarydrastic
surgery.

Keepingtheprincipleofthe60/40split,Genzymeundertookanexaminationoftheuseofequitycompensationinthepharmaceuticalandbiotechnologymarketplaces.
Thisincludednotonlythevalueofoptionsgrantedatvarioussalarylevels,butalsotheextentofeligibilitywithintheorganizationand,beyondthat,theactualextentof
distributiontotheeligiblepopulation.

Establishingthemarketvaluelinewasarelativelystraightforwardtask.Determiningtheactualdistributionpatternswithinkeycompetitorswasabitmoredaunting.The
keydiscoverywasthatGenzymewasfairlyuniqueinthegenerosityofitsannualdistribution,notjustinthevalueoftheoptionsgrantedbutintheextentof
participation.Manyofthelargerbiotechnologyfirmshaveextensiveeligibilitybutfewgranttoover90%ofthoseeligibleonanannualbasis.

Thecompanyhadextensivediscussionswiththeseniormanagementteamandtheboardofdirectorsontheculturalimplicationofchangingitsdistributionpattern.It
wasobviousthatthemostexpedientwaytocutdilutionwasnottogiveoutsomanyoptions.Buthowcouldthecompanyholdtruetothephilosophyithadvoicedand
stillgiveoutabouthalftheoptionsonanannualbasis,comparedtowhatitwasdistributingpreviously?

Genzymesetabouttomodel,asaccuratelyaspossible,thenumberofsharesitwouldtaketogiveeacheligibleemployeeagrantequalinvaluetothemarketlineit
haddeveloped.Thismarketlineusedvaluesfromthepharmaceuticalandbiotechindustrycompetitorsandthesame60/40weightingusedforthebasesalary
program.Remarkably,thenumberofsharesrequiredwasjust

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abouthalfoftheaveragedistributionoverthelastthreeyears.Thenumberpresumedthateveryonewouldreceivethemostpopularperformanceratingandthatall
raisesforthereminderoftheyearwouldbeatthecompanyaverage.

Themodelsgavethecompanytheconfidencetoreporttotheseniorteamandboardofdirectorsthatitcouldachieveasignificantreductioninusageandbettercontrol
distributionbyadoptingtheconceptofanannualoptionpoolfundedasasetpercentageofsharesoutstanding.Thiswouldallowthecompanytokeepacompetitive
optiongrantvalueand,justasimportant,maintaintheculturalstatementthatitisimportantforallGenzymeemployeestoparticipateinequityownershipofthe
company.

The1997annualoptiongrantwasmadeinOctober,whichwasadelayofsixmonthsasthecompanyundertookthisprogramredesign.Optionswereagaintobe
distributedinconjunctionwiththeannualmeetinginMay1998,andthusarebackonschedule.

Thetopicfor1998isthis:Inaneverdiversifyingbusiness,canGenzymemaintainasinglecompensationprogram,orcanitbettersupportitsbusinessesbyfurther
tailoringitsprogramstoeachareaandtheircompetitivepractices(withoutcreatinganadministrativeorcostmonster)?

TuneinagainasGenzymecontinuestoevolve.

RedesigningtheSalesIncentivePlanatKeyPrivateBank

Thebankingindustrybeganshiftingfromassetmanagementtocustomermanagementstrategiesintheearly1990storespondtoincreasingcompetitionfromother
financialandnonfinancialcompetitors.Manybanksbegansegmentingtheircustomersaccordingtotheirindividualneedsandprovidingtailoredproductsandservices
viacustomerfocuseddeliverychannels.Customersatisfaction,alongwithafullarrayofvalueaddedproductsandservices,becamecriticaldeterminantsofsuccessin
thisnewcompetitiveenvironment.

Privatebankers,whoprovideanintegratedmixofproductsandservicestoaffluentbankcustomers,evolvedfromordertakerstorelationshipmanagersliketheirretail
bankingcounterparts.

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Thisnewfocusonrelationshipmanagementrequiredcoordinationacrossmultiplefunctionalareasandoftenledtothedevelopmentofmultiskilledteamstoimprove
productandservicedelivery.Alongwithanemphasisonrelationshipmanagement,retailandprivatebanksbeganshiftingthefocusoftheircompensationprograms
frombasepaytovariablepayprograms,drivenbycustomersatisfaction,teamproductivity,andfinancialperformance.

BackgroundofKeyPrivateBank

Inearly1995,KeyCorpwasasuperregionalbankwithapproximately$66billioninassets,25,000employees,andbankingoperationsin18statesacrossthe
northernUnitedStates.KeyPrivateBank(KPB),KeyCorp'sprivatebankingarm,hadreconfigureditsdeliverychannelstofocusonrelationshipmanagementand
customersegmentation.Multiplebankingrelationshipshadbeenconsolidatedintosinglepointsofcontactforcustomers,andproductsandserviceshadbeenrealigned
tofocusoncustomerneeds,aswellasprofitability.

KPB'scompensationprogramhadnotkeptpacewiththesestrategicchangesandwasagrowingimpedimenttothenewcustomerfocusedbusinessstrategy.
Relationshipmanagerswerenowexpectedtofocusoncustomerneeds,ratherthanproductprofitability,butwerestillrewardedonpurelyfinancialmeasures.Team
memberswereexpectedtocooperateandpartnerwithoneanothertobetterservethecustomer'sneeds,buttheyreceivedwidelydifferinglevelsofcompensation.

DesignGuidelinesforaNewIncentivePlan

BasedonthisassessmentofagrowingdisconnectbetweenKPB'sbusinessstrategyanditscompensationprogram,theKPBmanagementteamdecidedinearly1995
toredesignitssalesincentiveplan.Attheoutsetofthisredesignproject,themanagementteamdefinedseveralsuccesscriteriaforanewsalesincentiveplan.They
were:

Theredesignedplanshouldbuildfromandreinforcetheprivatebank'sbusinessstrategy.Itmustsupportthematch

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ingofproductsandservicestocustomerneedsandreinforceseamlesscustomerservicefromanyteammember.

Theredesignedplanshouldfocusonbuildingshortandlongtermcustomervaluefortheprivatebank.ItmustreinforcethenotionthatcustomersbelongtoKPB,
ratherthantherelationshipmanagerinitiatingasalescontactormanaginganongoingcustomerrelationship.

Thenewplanshouldcreateaservicequalityfocusforallteammembers.Customerservicemustbeaprimarygoalofallteammembersinalltransactionswithnew
orexistingcustomers.

Theredesignedplanmusttakeatotalcompensationperspectivetoaccommodatewidelyvaryingcompensationpackagesforindividualteammembers.

ThesesuccesscriteriaforanewsalesincentiveplanwerecommunicatedtorepresentativesfromKPBsalesmanagement,humanresources,andfinanceinamid1995
meetingonthecurrentsalesincentiveplan.Asaresultofthismeeting,asteeringcommitteewasformedtooverseethedevelopmentofanewKPBsalesincentive
plan.ThissteeringcommitteeidentifiedJanuary1996asthetargetimplementationdateforthenewplan,engagedanexternalconsultanttoleadthedesigneffort,and
definedamultifunctionprojectteamtoworkwiththeexternalconsultant.ProjectteammemberswereselectedfromKPB'ssalesmanagementfunction,aswellasthe
humanresourcesandfinancefunctions.

TheConceptualDesign

Inaseriesofearlymeetings,theprojectteamreviewedmanagement'sconcernsandsuccesscriteriaandinterviewedacrosssectionofcurrentincentiveplan
participants.ThesesuccesscriteriaandinterviewsledtothedevelopmentofaconceptualdesignforthenewKPBsalesincentiveplan.Thisproposeddesignwas
reviewedwiththesteeringcommitteeandprivatebankmanagementinAugust1995.

Thisconceptualplandesignwasbasedontheneedforteammemberswithdifferingrolesandtechnicalskillstopartnerwithoneanothertocompletethesales
process.Theprivatebanking

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relationshipmanagerwasprimarilyresponsibleforcustomeracquisitionandmanagement,whereastrustrepresentativesandinvestmentrepresentativeswereviewedas
technicalspecialistswithsecondarysalesresponsibilities.Thesethreejobsweresupportedbyproductspecialistsfromtrust,mortgage,insurance,andfinancial
planning.Together,theyformedafullserviceteamthatprovidedonestopshoppingforcustomers

Basesalariesforthethreemanagerswithdirectsellingresponsibilitiesweretargetedatmarketmedianstoavoidtheneedto''churnandburn''customerportfoliosto
earnreasonablelevelsofcompensation.Anumbrellaincentiveplanwithteamandindividualcomponentswasdesignedtoreinforcecooperationamongthevarious
teammembers.Eachofthethreemanagerswithdirectsellingresponsibilitieshadanindividualsalesincentivecomponent,andallteammemberswereeligibleforthe
teamcomponentofthisnewincentiveplan.

Afterreviewingtheplandesignproposedbytheprojectteam,thesteeringcommitteeandKPBmanagementteaminstructedtheprojectteamtocompletethefinal
KPBsalesincentiveplanfromthisconceptualframework.Basedonmanagement'sendorsement,theprojectteamconductedatotalcompensationanalysisforall
positionsthatwouldbeeligibletoparticipateinthisnewincentiveplan,finalizedmeasuresforeachplancomponent,andthenmodeledperformancerangesforeach
planmeasure.

DesignParameters

ThesalesincentivecomponentofthenewKPBplanwasdesignedtofocusoneconomicmeasuresthatweretiedtobroadeningrelationshipswithexistingcustomers
andacquiringnewcustomers.Thecostofreplacinglostprivatebankingcustomerswasapproximatelyfivetimeshigherthancrosssellingtoexistingcustomers.
Therefore,itwascleartotheprojectteamthatmaintainingandexpandingrelationshipswithexistingcustomerswasasimportanttorevenuegrowthasacquiringnew
customers.Standardsalesmeasureswereadoptedforthisplancomponent,suchasrevenuegeneration,customerrunoff,productmix,andassetsundermanagement.

Thesalesincentiveplancomponentfocusedonthethreecore

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jobswithdirectsellingresponsibilities:theprivatebankingrelationshipmanager,thetrustandtheinvestmentrepresentatives.Afterreviewanddiscussion,itwas
decidedtomaintainindustrystandardsalesincentivepaymentcyclesforthisplancomponent.Asaresult,therelationshipmanagerreceivedannualpayments,thetrust
representativereceivedquarterlypayments,andtheinvestmentrepresentativereceivedmonthlyincentivepayments.

Theteamincentivecomponentofthenewincentiveplanwasdesignedtoreinforcethepartnershipaspectoftheplanbyfocusingongroupperformancewithin
geographicclustersthathadcommonmarketsandinterdependencies.Animportantstrategicobjectiveoftheteamcomponentwasrewardingteammembersfor
effectivecustomerhandoffsandhighqualitycustomerservice.Teamincentivepoolswerefundedbyachievingamixofcustomersatisfactionandrevenuegoals.

Participants'shareoftheteamincentivepoolwasbasedonestimatesoftheirjob'srelativecontributiontooverallteamperformance.Therelativejobvaluetimesthe
numberofparticipantsinaparticularjobdeterminedthatjob'sshareoftheteamincentivepool.Teammembersinthesamejobcategoryreceivedthesamedollar
awardfromtheirteampool.Teampayoutsoccurredatyearendforallteammembers.

TheResultsofthePlan

ThenewKPBsalesincentiveplanwasimplementedinJanuary1996,andbyyearenditwasevidentthatthisplanwassupportingandreinforcingKPB'sbusiness
strategies.Specifically:

IthelpedshiftthefocusofKPB'ssalesprocessfromatransactionorientationtoabalancedfocusoncustomeracquisitionandretention.Thisstrategicshiftwas
supportedbyweightingcustomerretentionandacquisitiongoalsequallyforparticipantswithdirectsalesresponsibilities.

ThenewplanincreasedKPB'soverallfocusoncustomersatisfactionasamajordriverofrevenuegrowth.Revenuegenerationwasdirectlycorrelatedwithcustomer
satisfactionandoverallcustomersatisfactionbeganimprovingforrelationshipmanagers.

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Theteamcomponentofthenewincentiveplanhelpedcreateapartnershiporteammentalityacrossthevariousfunctionalareasthatparticipateintheplan.
Relationshipmanagerswillinglyhandoffcustomerstothetechnicalspecialistswhocanaddressspecificcustomerneeds.

Revenuegenerationin1996exceededKPB'sbusinessplanforthefirsttimeinthreeyears,andseniormanagementattributedasignificantportionofthissuccessto
theorganizationalalignmentandfocuscreatedbythenewsalesincentiveplan.

OneofthemoresignificantachievementsofKPB'snewsalesincentiveplanistheinterestithasgeneratedinimprovingcustomersatisfaction.Anewmeasurement
systemwasdevelopedbyKPB,andanexternalvendorwasselectedtosupportthecustomersatisfactionaspectsofthenewsalesincentiveplan.Thissystemisbased
onquestionnairesthataresenttoastatisticallyvalidrandomsampleofKPBcustomersfollowingtheirtransactionswithanyteammember.Thesequestionnairestiethe
customer'sresponsedirectlytotherelationshipmanagerandteammemberswhosupportedthattransaction.Returnedquestionnairesarescoredandanalyzedfor
statisticalvaliditybytheexternalvendor,andtheresultsareprovidedtoKPBinanonlinedatabase.

Customersatisfactionismeasuredweeklyonanindividualandteambasis,scoredonafivepointratingscale,andtheresultsareprovidedtoindividualandteam
participantsmonthly.KPB'sgoalisanaverageratingoffourorbetteragainstthiscustomersatisfactionratingscale.During1997,KPBdistributedapproximately
60,000surveysandaveragedbetterthana40%surveyreturnrate.Approximately30%ofthereturnedsurveysalsohadwrittencomments,whichwerecontent
codedandanalyzedbythevendorandKPB.Bymid1997,agrowingcorrelationbetweencustomersatisfactionandrevenuegenerationhadbeenidentified,asnoted
inFigure91.

Astherelationshipbetweencustomersatisfactionandrevenuegenerationbecameapparent,thefocusoncustomersatisfactioncontinuedtoimprovethroughoutKPB.
Thismeasurementfeedbackloopcreateda"motivationaleffect"thathelpedtofurtherimproveKPBrevenuegeneration.Figure92illustratesthecustomersatisfaction
improvementtrendinrelationshipmanagers'scoresfromMarch1996untilJuly1997.

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Figure91.
RevenuegenerationversuscustomersatisfactionatKPB.

Figure92.
Overallsatisfactionwithrelationshipmanagers.

LessonsLearned

SeveralimportantlessonswerelearnedbyKPBandKeyCorpfromthissalesincentivedesignproject.First,salesincentiveplandesignisoftenmorethanjust
changingfinancialformulas.Effectiveincentiveplandesignsthatrequireathoroughdiagnosisofthesituationmayrequirerewardingnonfinancialaswellasfinancial
resultstoachievetheirstrategicgoals.Byincludingastrongfocusoncus

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tomersatisfaction,anonfinancialmeasure,initsnewincentiveplan,KPBwasabletoimproverevenuegeneration.

Asecondlearningfromthisincentivedesignprojectwasthatmultiplerolescanbeaccommodatedwithinasingleincentiveplantoimproveitsoverallimpact.Team
participationwascrucialforthesuccessofKPB'sbusinessstrategy.Byemployingamixofteamandindividualperformancemeasures,thenewsalesincentiveplan
motivatedproductspecialistsandsalessupportstafftopartnerwithrevenuegeneratorstoprovideeffectivecustomerservice.

Finally,itmaybenecessarytocreatenewmeasurementsystemsormodifyexistingmeasurementsystemstofocusontruemeasuresofcustomervalue.KPB's
managementinformationsystemneededtochangeinordertoadequatelymeasureandreportcustomersatisfaction.Ratherthanacceptingthelimitationsoftheir
existingsystems,KPBmanagementboughtcustomersatisfactionmeasurementservicesfromanexternalvendor.ThisallowedKPBtoimplementthenewincentive
planandrealizetheresultingrevenuegainsmuchmorequicklythanwouldhaveotherwisebeenpossible.

IntegratingCorporateValuesandPerformanceatLeviStrauss&Co.

Companies,bothlargeandsmall,areoftenconflictedbetweenthevaluestheyespousedandtheperformancetheyrequire.Valuesoftendefinethecharacterand
workingenvironmentofanorganization.Performancereflectsitscompetitivenessandoftendeterminesthefirm'sworthinthemarketplace.LeviStrauss&Co.
(LS&CO)hasfoundawaytooptimizethisbalance,yetthisrequirescontinuingvigilance.

Overits145yearhistory,LS&COhasstruggledtoretainthecorevaluesofafamilytypebusiness.Thismeanscaringdeeplyforemployees'welfare,responding
effectivelytocustomersandchangingmarkets,andgeneratingstrongprofitability.ThiscasestudywillexplorehowLS&COhasaddressedchallengestothesefactors
andusedrewardsystemstoreinforcethecommitmenttoitsformulaforsuccess.

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CompanyBackground

Totrulyunderstandacompany'sculture,oneneedstoexaminehowitaddressedseveralmajorcrisispointsinitshistory.LeviStrauss&Co.beganinresponsetoa
basicneed.InCaliforniainthe1850s,thegoldrushprospectorscomplainedthattheirpantscouldnotwithstandtheabusesassociatedwiththiswork.LeviStrauss,a
Bavarianborndrygoodsmerchant,believedthatstrongcottondenimcouldsolvethisproblem.JacobDavis,aNevadatailorwhomadepantswithdenimpurchased
fromLevi,haddiscoveredanovelmethodtoreinforcethestresspointsonminers'pants(orwaistoveralls,astheywerethencalled).Davisputcopperrivetsinhis
pants,butheneeded$68forapatenttousemetalrivetstoreinforcepockets.Straussprovidedthecashandmaterial,Davisprovidedthetechnologytheir
collaborationmadethedifference.TheirnewproductLevi'swaistoverallswasincrediblysuccessful.

Duringthedepressionofthe1930s,LS&COfacedthechallengeofengaginginmajorlayoffsatatimeofhistoricunemployment.Itfeltaresponsibilitytoitsworkforce
toprovideemployment.Consequently,thecompanyretainedmostofitsworkforceandengagedtheminmaintenanceanddevelopmentprojects.Throughoutthis
period,LS&COdidnotsignificantlyreduceitsphilanthropiccontributions.

Buoyedbyitsproducts'becomingthepreferredclothingforthebabyboomyouthofthe1950s,1960s,and1970s,LS&COsawrevenuesandprofitsskyrocket.Yet
itfacedadilemmainvalues.Thecountrywasinthegripofpressuresforsocialchange,andmanyoftheexecutiveswantedthecorporationtoliveuptotheprinciples
theywereespousing.Inthe1950s,LS&CObecameoneofthefirstcompaniestoraciallyintegrateallmanufacturingplantsintheSouthandotherareasofthecountry,
longbeforeitbecamefashionable.Itestablishedequitablewageratesforallemployeesandinvestedinspecializedtrainingforitsworkforce.ThisenabledLS&COto
liveitsvaluesandbuildahighlyproductiveworkforce.

In1971,thedescendantsofLeviStrausstookthecompanypublic.Then,respondingtoinvestorpressure,managementdiversifiedintorelatedbusinesses,suchas
rainwear,men'ssuits,women'sfashion,hats,andskiwear.Theyweredrivenbyshareholderpressuresforfinancialgain.Mostofthesenewventuresfailedto

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producesustainableresults.Furthermore,manybelievedthefinancialpressureswerecrushingthecultureoftheorganization.By1984,netincomehadplungedmore
than80%fromafouryearpeakthecompanysoldorclosedonequarterofitsfactoriesandreducedtheworkforceby15,000,onethirdoftotalemployment.The
companywasfacingacrisisofitsconscienceithadlostmanyofthefamilybasedvaluesitsoughtasanorganization.

StrategiesforTakingtheCompanyBacktoitsFoundations

RobertD.Haas,afifthgenerationnephewofthefounder,assumedthepositionofchiefexecutiveofficerin1984.HischallengewastoreturnLS&COtomanyofthe
corporatevaluesthathadbeenthehallmarkoftheorganization.AshetoldFortunemagazine,"Ourfocusbecamediffused.Webecamelessattentiveinourhiring,
staff,andcostcontrolefforts.Management,includingmyself,allshareresponsibility."Hebeganastrategythatreshapedthecorporation.

Themajorcommitmentbehindthechangeprocesswastheimportanceofemployeeandcustomersatisfactiontoachievingfinancialperformance.Haasstatedinmany
interviewsandcompanymeetingsthatemployeemorale,consumersatisfaction,ontimedelivery,brandperceptionsofquality,andmeetingtheneedsofretailer
customerswereinstrumentaldriversoffinancialperformance.HaastoldFortune,"Ibelievethatifyoucreateanenvironmentthatyourpeopleidentifywith,thatis
responsivetotheirsenseofvalues,justice,fairness,ethics,compassion,andappreciation,theywillhelpyoubesuccessful.There'snoguaranteebutIwillstakeall
mychipsonthisvision."

Inthelate1980s,undertheleadershipofBobHaas,LS&COemployeescreatedthecompany'smission,businessvision,andaspirationsstatements.Theaspiration
statementisadocumentthatoutlinesthevaluesthathavebecometenetsbywhichthecorporationoperates.Theyincludestatementsregardingteamwork,trust,
diversity,recognition,ethics,openness,empowerment,promisekeeping,compassion,integrity,andcommunication.Thesewerecommunicatedtoallmanagersand
employeesworldwideandtheysetthestageforavarietyofnewchanges.

Thecompanywasmadeprivateduringaleveragedbuyoutin

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1984.InApril1996,LeviStrauss&Co.completedaleveragedbuyoutthatwasarecapitalizationthatfurtherconstrictedstockownershiptofamilymembersonly.
Thisproducedadebtofmorethan$3billioninordertofinancetheprivatizationofthecompany.Mostofthedebtwasacquiredthroughstandardfinancing.Thisdebt
loadthenplacedsubstantialcostandcashflowpressuresonthecorporation.Yetthecommitmenttotheaspirationstatementshasnotfaltered.Infact,ithasbecome
sharperandbetterdefinedasthestandardbywhichdecisionsandactionsarejudged.

RewardSystemsthatDemonstrateCommitment

LS&COhasusedawidevarietyofrewardsystemstosupportthestrategyandcorevaluesofthecompany.Thephilosophyandbasicstructureoftheseprograms
haveenabledpeopletoseetheimportanceoftheorganization'soperatingprinciples.Theseprogramshaveincludedsalary,shortandlongtermincentives,aswellas
specialrecognition.

PartnersinPerformance(PIP)isoneoftheprogramsthattoucheseveryemployee.Itisanannualperformancereviewplanthatincludesanassessmentof
performanceagainstcorporate,divisional,andindividualgoalsaswellasthekeycomponentsoftheaspirationstatement.Thereareavarietyoffeedbacktoolsand
linkswithincentivepayforeligibleemployees.

Theannualperformanceassessmentimpactsalaryadjustmentsandannuallongtermincentives.Theamountofmoneyavailableisdeterminedbythefinancialearnings
ofthecorporationanddivisions,asmeasuredbyoperatingearningsandreturnoninvestment.Theresultsarecomparedtothecorporation'sbusinessplan,andthe
payoutopportunityisdifferentiatedbylevelwithintheorganization.Byintegratingsalaryadjustmentswithincentivepayouts,managersareabletofullyintegratethe
appropriaterewardswithperformance.

OneoftheoptionalfeaturesofthePIPprocessistouse360degreefeedbacktoolsaspartoftheperformanceassessment.Ifmanagerswanttheirstaffmembersto
receivefeedbackfrommultiplesources,thenaquestionnaireisusedtocollectspecificinformationabouttheindividual'scapabilitiesandimpact.Theconnection
betweenperformanceandtheaspirationstatementismeasuredwiththistool.Thisprocessisnotforcedonbusiness

 Page291

unitsbutisofferedasahighlyattractivewaytoenhancethefeedbackonereceives.Asunitsfindthisprocessmeaningful,theusageisincreasingacrossthe
organization.

Thenumberofpeopleeligibleforthelongtermincentiveplanwasalsoexpandeddramatically.Whentheprogramwasoriginallyestablished,itincluded400senior
levelmanagersandprofessionalsinthecorporation.Throughaseriesoftrainingsessions,focusgroupreviews,andemployeediscussiongroups,themessagewassent
thattheexclusivenatureofthisprogramwasinconsistentwiththeaspirationstatement.Middlemanagerscommentedthatseniormanagersweregainingmorefromthe
performanceimprovements,andtheywerenotrewardedfortheirachievementsinasimilarmanner.Theprogramwasconsequentlychangedandthenumberofeligible
participantsincreasedtothe10,000salariedemployeesworldwide.

Thecompanyhasalsointegrateditspieceworkincentivesystemsinthemanufacturingplantswithteambasedtotalperformanceincentiveplans.Therewereseveral
importantobjectivesforthischange.Traditionally,thekeytosuccessfulperformancewiththepieceworksystemwastheworker'sskillsandstaminaforthehighly
repetitivetasksofstitchingfabricandassemblingtheapparel.Thisresultedinunacceptablyhighinjuryratesandproblemswithnonproductivitybasedperformance,
suchasontimedelivery,inventorycontrol,andintroductionofnewsystemsandprocesses.Theteam'sperformanceisnowbasedonacombinationofmeasures,
involvingproductivity,safety,andontimedelivery.

Inadditiontotheseprograms,thecompanyhasdevelopedaninnovativegloballongtermincentiveprogram.Whenthecompanyrecapitalized,itassumeda$3billion
debt.Theinterestandprinciplepaymentsonthisdebtneedtobemeteachyearfromtheoperatingearningsofthecompany.Thesoonerthedebtcanbepaiddown,
themoreresourcesitwillhavetoreinvestinthebusiness.Tothatend,alongtermincentiveprogramwascreated.ItiscalledtheGlobalSuccessSharingProgram
(GSSP).

TheessentialfeaturesoftheGSSPisthatifthecompanycanmeetthepaybackscheduleforthedebtandeliminateitwithinsixyears,everyemployeewillreceive
approximatelyonetimestheirannualsalaryinaspecialaward.Regardlessofwhereemployeesarebased,theyallshareinproportiontotheirannualsalary.Thisvery
largepayoutopportunityhasencouragedpeopletoexaminecostscarefully,seekwaystoenhancerevenues,andmonitorthe

 Page292

successofthecorporationinpersonalterms.Thisincentiveopportunityfurtherrepresentsthecommitmentoftheexecutivestosharetherisksandrewardsofbuildinga
strongorganizationwithallemployees.

SustainingaRenewalStrategy

Inordertoremaincompetitivefromacostperspective,LS&COneedsahighlyproductiveworkforce.Therewardsystemshaveenhancedthecommitmentofthe
employeestothecompanyandencouragedcollaborationandprocessimprovementsatthemostbasicleveloftheorganization.Thecompanyretainsanaggressive
approachtotraininganddevelopment,aswellasprovidingopportunitiesforemployeestomakecontributionsbeyondtheirstandardjob.Thisenhancesitsabilityto
compete.

LS&COcontinuestoreinventitselfasanorganization.TheDockersandSLATESbrandshavebecomeleadingbrandsintheirrespectiveapparelcategories.The
corporationisalsofocusingitseffortsonthepopulationsegmentthatprovidedthegreatestgrowththeyouthmarket.Thecompanyiscontinuallyintroducingnew
productsandspecialpromotionstoconnectwithitsnewgenerationsofconsumers.Thisisanexcitingandhighlycompetitivetime.Furthermore,LeviStrauss&Co.
continuestoprosperanddevelopmarketsthroughouttheworldandsustainitscommitmenttohighqualityproducts.

LeviStrauss&Co.haswonnumerousindustry,national,andcommunityawards.Itcontinuestoholdstrongtothecommitmentsthatcreatedafamilyoriented
businessandreinforcethesevaluesasfrequentlyaspossible.Thecompanysharesitscommunityrecognitionwithemployeesandpromotestheiractiveinvolvement.
Thecompanypromotesitseffortstodevelopandemployahighlydiverseworkforceineverydimensionofrace,nationality,religion,sexualorientation,age,and
personalcircumstances.

The30,000employeesofLS&COshareacommonbondtothesuccessofthecompany,andeachhasashareinitsachievements.Inthisway,thecompanyhas
createdaworkplaceinwhichperformanceandvaluesstrengthentheabilityoftheorganizationtoservethecommunitiesinwhichitoperatesandremainaglobal
leader.

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10
NottheLastChapter
Thesecasestudiesrepresentonlyasampleofwhatisoccurringinorganizationstodayandwhatispossiblefororganizationsinthefuture.Wearebeginningtoseea
levelofchangeandrenewalthatisunparalleledinhumanhistory.

Thesecasestudiesalsoreflectavastarrayofpossibilities.Theyincluderetailworkersandphysicians,executiveswhowouldfeelcomfortableintheboardroom,and
bluecollarworkerswhohaveseldomleftthefactoryfloor.Eachorganizationapproachedrewardsdifferently,reflectingitsculture,managementphilosophy,andthe
degreeofchangeneeded.Bymovingthroughadeliberateprocess,guidedbyasimplemission,eachoftheseorganizationshascreatedsomethingspecialandunique.
Eachhasfounditsownwaytosucceed,insteadofadoptingsomeoneelse'sprogram.

Yettheseorganizationshaveonethingincommontheyhavereshapedtheemployeremployeerelationship,creatinganenvironmentwherepeoplearevaluedfor
achievingdesiredresults.Andbycreatingthisenvironment,inwhichrewardsarealignedwiththecorporatestrategy,theyhavemanagedtoimprovetheiroverall
performanceandgainacompetitiveadvantage.Thiswasdonebypeopletakingdesiredactions.

Similartopolitics,behavioralchangeisalocalissue.Theseorganizationsandtheunitswithinthesefirmshavedevelopedtheirownplans.Theirsituationsareunique
andtheirresponsehasbeentailoredtolocalcircumstances.Thereisnouniversal''right''rewardsystem,buteveryrewardsystemwillnotbeequallyeffective.
Therefore,theremustbecoreprinciplesthatdeterminehowtomakethemwork.

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LessonsfromtheLeaders

Thecasestudiespresentedinthisbookhavemuchtoteachus.Likestoriesfromancientcivilizations,theyprovideasenseofhowtheseorganizationsoperateand
whattheyvalue.Theyshowwhatcanbedone,aswellashowtheseorganizationswillcontinuetheprocessofimprovement.Thereareimportantlessonsfromthese
leadingorganizationsinhowtheywereabletomaketheiruniquerewardsystemswork.However,itismoreimportanttounderstandwhytheyweresuccessfulthanto
adoptoneoftheseprogramsandexpectsimilarresults.

Toaidyouindevelopingyourownapproachtochange,Ihavesummarizedthe10keyfactorsthatseemtomostaccuratelydeterminewhatmakesrewardsystems
successful.Whilethislistsummarizescommoncharacteristics,thetruesignificanceisinapplyingtheseprinciplestoyourownsituationandtolearnfromthedirect
applicationofexperience.Then,thevalueofthesepageswillbemultiplied.

1
RewardSystemsPlayaCrucialRoleinPerformance

Everyorganizationhassometypeofrewardsystem.Whetheritisformalorinformal,principallydrivenbycash,stockoptions,orspecialrecognition,itshapesthe
cultureoftheorganization.Therewardsystemsendsmessagestomanagersandemployeesaboutwhatisimportantandvaluedbytheorganization.Itdefineswhatthe
organizationwantstopayforandwhatbehaviorsitwantstoreinforce.Theextenttowhichtherewardsystemisalignedwiththestrategyandkeysuccessfactorsof
theorganizationoftendetermineswhetherthestrategyisimplementedeffectively.

Leadershipandeffectivemanagementpracticescaninspirepeopletoachievegreatresults,butpeoplewillultimatelyask,"What'sinitforme?"Rewards,likewise,do
notcreateperformancetheyonlyencourageandreinforceactions.Exercisingtheirdiscretion,employeesmaybarelyachievewhatisexpectedofthem,ortheymay
excelwellbeyondwhatisexpected.

Rewardsincreasetheprobabilitythatanygivenemployeewillperformatahigherlevel,buttomakealongtermdifferenceinperformance,effectiverewardsystems
mustbecoupledwitheffec

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tiveleadership.Inshort,theycontributedirectlytobuildingcommitmenttotheorganization'sgoalsaprerequisiteforsuccess.

2
MeasuresGiveRewardsRelevanceRewardsGiveMeasuresMeaning

Rewardsystemsworkintheoperatingcontextofanorganization.Tobeeffective,theyneedtobelinkedtowhatisimportanttotheorganization.Performance
measurescreatethislinkage.Whenperformanceismeasuredbuttherearenoconsequencestotheresults,thedataquicklylosesitscredibilityandhasnolasting
impactonbehavior.

Initially,employeeswhoneverreceivedmeaningfulfeedbackwillfindfeedbackdatatobeofgreatvalue.Theymayexercisesignificantadditionaleffortandproduce
shorttermimprovements.However,unlessthefeedbackdataispairedwithsomeformofrecognitionorreward,theimpactwillnotendure.

Dataisobjectiveanddoesnotcarryamessage.Datatakesonmeaningwhenpeopleexpectsomethingtohappentothembecauseofthemessagesthedatabrings.If
theconsequenceofthefeedbackisusuallynegative,peoplewilllikelyresist,fear,orrefutethedata.Whentheresponsetothefeedbackisusuallypositive,suchas
providingsomemeaningfulencouragement,peopleoftenmakegreateffortstounderstand,learn,andapplyadditionalefforts.Measures,andthedatatheybring,can
createopportunitiesforreinforcingperformance.Lookbeyondthefinancialtransactionsandintotheheartsandmindsoftheparticipantsandyouwillrecognizewhat
peopleexpectfromthedatatheyreceive.Theroleofrewards,therefore,istocreateasystemofpositiveconsequencesforachievingdesiredperformance.

3
AlignmentandConsistencyareEssential

Everyprofiledcompanyspentconsiderabletimemakingcertainthemeasuresofperformancewerealignedwiththeorganization'sstrategyandkeysuccessfactors,
andensuringthatthestructureofitsrewardsystemswasconsistentwithitsmanagementphilosophyandvalues.

Peoplecanoftenseethroughtherhetoricoforganizationalcommunication.Whenthewordsannouncinganewcompensa

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tionprogramdonotmatchtheactionsthatfollow,employeesstoplisteningtothewords.Theybelieveonlywhattheyexperience.Thiswillhurtleadershipcredibility,
whichcantakeyearstorebuild.

Inanenvironmentwherecommitmenttoanorganizationiskeytoitsresponsivenesstoachangingmarketplace,credibilityisessentialandprecious.Some
compensationprograms,bytheirnature,structure,andcommunication,arenotintendedtomakepayouts.Theyfailbecauseemployeesdonotbelievetheorganization
issincereaboutsharingthegains.Itisbettertoplacepeopleonstraightsalarythantosetexpectationsthatareneverintendedtobemet.

Whenmeaningfulrewardsaredirectlylinkedtothesuccessfactorsoftheorganization,thepowerofthisalignmentcannotbereplicatedbyacompetitor.Theagilityof
theorganizationisenhancedbecausepeoplefeelacommonstakeinitssuccess.Combinedwithastrongstrategy,adequateresources,andotherkeyfactors,aligned
rewardscreateanenduringcompetitiveadvantage.Thishasbeenamajorlearningformanyoftheseleadingcompanies.

4
HowPeoplearePaidisOftenMoreImportantthanHowMuchtheyarePaid

Manyorganizationsseecompensationmerelyasafixedcostthatisnecessarytoattractandretainaworkforce.Theyviewthecompetitivenessofcompensationasthe
centralissue.Thisisreflectedincompensationstrategystatementsthatspendconsiderabletimedefiningamarketplaceandadesiredlevelofcompetitiveness.Some
organizationsspendthousandsofdollarsoncompensationsurveysandthousandsofstaffhoursanalyzingdatatojustifytheircompensationarrangements.

Whilerewardscannotmakeupforapoormarketpositionforsalaries,thewaypeoplearerewardedoftenhasagreaterimpactontheirperformanceandcommitment
thantheamounttheyarepaid.Someorganizationshavefoundthatiftheydoapoorjobofcreatingvaluablerewards,theyneedtoincreasetheamountoftherewards.
Othershavefoundthataslongaspayisgenerallycompetitive,otherrewardscanmakethedifferenceintheirabilitytoattractandretaintalent.

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Whenitcomestothedesignofasalesincentiveprogram,aretentionbonusprogram,oraperformancerecognitionprocess,someorganizationsinvestlimitedtimein
design,implementation,orcommunication.Why?Whereisthegreatestvaluetobegaineddetermininghowmuchpeopleshouldbepaidorhowtheyshouldbe
paid?Thelessonistounderstandwhatisimportanttopeopleandhowtouserewardsystemstogivethemwhattheyarelookingforinreturnforthelevelof
performancetheorganizationstrivestoachieve.Then,atruewinwinconditionisrealized.

5
BuildProgramswithaVision,andthenImproveThemOverTime

Teamsthatdesignnewpayorrecognitionprogramsareoftenexcitedbythetasksandwanttocreatebreakthroughprograms.Buttheyoftenfindthatthemostthey
canaccomplishistoupgradetheexistingprograms.Astheyconductreviewsandseekapprovals,theymayfacemanycriticisms.Theirprogramisseldomperfect,and
inherentweaknessesoftheplanareaccentuatedduringthereviewprocess.Evenwhentheprogramisbeingintroducedintotheorganization,criticismsofitsdesignor
sincerityemergewiththeparticipants.

Challengesandcriticismoftherecommendedprogramoftenreflectresistancetochangeandafearofrepeatingpastmistakes.Thevalueofthenewprogrammaynot
beappreciated,eventhoughitmaybebetterthanthecurrentprogram.Theprogram'sdesignmaynotliveuptotheoriginalexpectationsbecauseofthelackof
effectivemeasurementsystems,managerialskills,orresistancetochange.

Toovercometheseissues,astrongbeliefinandcommitmenttothenewprogramarenecessary.Rememberwhythedesigneffortstartedandtheimportanceofwhat
canbeachieved.Clearlystatetheconcernswiththecurrentprocessandthereasonswhythechangeisimportant.Thenreviewtheobjectivesandphilosophyofthe
newprogramthevisionforwhatitcanaccomplish.Thebenefitsneedtobestatedintermsoftheneedsoftherecipient.Whatisimportanttoexecutivesisdifferent
fromwhatisimportanttooperationalemployees,salesstaff,ormanagers.Completethedesigneventhoughitmaynotbeperfect.Asyou

 Page298

implementthenewprogram,continuetheprocessofupgradingitasthemeasurementsystemsandworkproceduresimprove.Thiswillgetyoustartedonthedesired
path,buildconfidenceintheprogram,andkeepitrefreshedandfocused.

6
TheValueoftheRewardShouldExceedtheCost

Inadditiontothefinancialimpact,rewardshaveapsychevaluetoeachemployeeforsomeitisfoundwithfinancialpayouts,forothersitcomesfromrecognition.The
organizationsprofiledrealizedthisandmadeanefforttoprovideemployeeswithmultidimensionalrewardsfortheirperformance.

Thevalueoftheprogramisdeterminedbyhowitisdesigned,howfeaturesarecommunicated,howfeedbackisprovidedtoparticipants,andthelevelofeffort
managersputintosupportingtheprogram.Thecompaniesprofiledrarelymissedanopportunitytoprovideparticipantswithcelebrationsorspecialeventsthat
recognizedtheirachievements.Theycreatedvaluegreaterthanthefinancialortangibleawards,enhancingthepositiveimpactoftheculture.Organizationsthatdirect
depositbonuseswithlittleornorecognitionwilllikelyneedasubstantiallyhigheramountofmoneytogainthesameimpact.

7
TheProgramBeginsAftertheFirstPayouts

Typically,asmallgroupofemployeesandmanagers(andsometimesconsultants)spendagreatdealoftimeandeffortdesigningthecompany'snewrewardsystem.
Theyprepareanalysis,presentations,publications,andpromotionstoannouncetheprogram.Andthentheybecomesurprisedanddisappointedwhentheprogram
participantsfailtosharetheirenthusiasm.

Itisimportantforthedesignteamtorecognizethattheprogramisnotrealformostparticipantsuntilthefirstpayoutsaremadeoraspecialawardispresented.Until
then,theprogramistheoretical.Employeesmayevenbeskepticalofitsauthenticity.Afterthefirstpayout,though,theywillbegintotakenotice.Theymaybe
pleasantlysurprisedbytheirawards,ortheymayrealizethattheycouldhaveearnedmoreiftheyhadtriedalittleharder.Eveniftheyreactwithjealousyoranger
towardthosewhoreceivelargerrewards,theywillrecognizethatmanagementisserious

 Page299

abouttheprogram.Theywillpaymoreattentionnextperformanceperiod,andevenmoreinthenextperiod.Theyarelikelytostartaskingquestionsabouthowthe
programworksandwhatisneededtosucceed.Theywillbemoreactiveparticipantsinthefuture.Managersandemployeesneedtosupportthisnewlevelofinterest
andprovidetheanswerspeopleseekaboutwhattheyneedtodotowin.

8
TranslateMeasuresintoAction

Manyorganizationsspendagreatdealoftimedevelopinganelaboratebusinessplan,buttheplanfailstobeexecutedeffectivelybecauseemployeesneverknewwhat
theyhadtododifferently.Strategiesarenottranslatedintomeaningfulmeasures,andmeasuresarenotsupportedbyarticulatingtheactionsneededforsuccess.A
majorseriesofdisconnectsoccurbetweenthestrategyofanorganizationandtheactionsitspeopletake.

Improvementsareachievedwhenemployeesstartdoingthingsthatalignwiththedesiredplans,andnotuntilthen.Butbeforeemployeessignificantlyaltertheir
performance,theyneedtoknowwhatneedstobedone.Ifmanagementisseriousaboutusingtherewardprogramtoimproveperformance,peopleneedtoknow
whattododifferently,havetheskillstodoit,andreceivefrequentfeedback,coaching,andencouragement.Managersshouldthentakethefollowingactions:

Translateperformancemeasuresintodescriptionsofactivities.

Measureprogressandresultsinmeaningfulways.

Providetheparticipantswithfrequentfeedback.

Trainemployeestoimprovetheirskillsinhighlyfocusedareas.

Makeneededresourcesavailablethatwillenhancetheparticipants'opportunitytosucceed.

Recognizeachievementsduringtheperformanceperiodandwhentheperiodhasended.

Takingthesestepscanengageemployeesintheprocessofachievement,andthiswillhelpensurethattherewardprogramgeneratesahighreturnoninvestmentfor
everyone.

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9
MakeRewardsMeaningful

Somebelievethatmoneyistheonlymeaningfulreward.Othersbelievenoncashrewardsarethekeytomotivationandcondemncashawardsasbeingdestructive.
Bothpointsofviewhavemeritandneedtobecarefullyunderstood,butneitheriscompletelyaccurate.

Iftherewardisnonfinancial,howcanemployeesbenefitbeyondpersonalsatisfactionfromwhatthey'veaccomplished?Iftheirachievementscreategreater
profitability,higherrevenues,strongercompetitiveadvantage,andimprovedshareholdervalue,shouldn'ttheyshareinthefinancialgain?However,many
compensationbasedrewardprogramsareinherentlyunabletoinfluencespecificbehaviors.Withafinancialincentiveplan,whatdoyoudoforanindividualorteam
makingamajorcontributionduringtheperformanceperiod?Musttheywaittilltheendoftheyeartoberecognized?

Severalofthecasestudiesdemonstratehownonfinancialrecognitionandrewardsreinforcethebehaviorsthatleadtoimprovedresults.Othersshowhowfinancial
incentivesorstockoptionshavebecomethereal"stake"inthesuccessofthecompany.

Thetruthliesinusingfinancialandnonfinancialrewardsincombination.Togethertheycreateamultipliereffect,makingrewardsmoremeaningfultoemployeesthan
wheneithertypeofrewardisgivenalone.

10
TakeaStrategic,Systematic,andHolisticApproach

Itisintriguinghowcompaniesspendconsiderableeffortinjustifyinglargecapitalexpendituresandusesophisticatedanalyticaltoolsthatdeterminethereturnon
investment.Yetcompensationrepresentsthelargestexpenseformanyorganizations,andfeworganizationsseektousethesedollarsasaninvestment.Instead,they
seekwaystoreducecostsorbuildinautomaticescalationsinannualbudgets.

Theproblemisthatorganizationsdonotseeperformanceimprovementsasareturnontheinvestmentsrelatedtocompensation.Forexample,thecostofvariable
compensationplansisusuallyconsideredwithoutthecontextoftheperformanceim

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provementstheyareexpectedtoencourage.Theorganizationsprofiledherehaveachievedremarkableresultsbecausetheyunderstandhowtoutilizerewardsas
strategicmanagementsystemswithintheorganization.Theygainpowerfulbusinessresultsbecausetheyeffectivelydesign,implement,andmanagethesystemsas
importantprioritiesofthebusiness.

Rewardsystemsareonlyapartoftheprocessofmanagement.Theyarenottheonlydeterminantofhumanbehavior.Theirroleistoencourageandreinforcedesired
actions.Awellthoughtoutstrategy,strongleadership,effectiveorganizationalstructuresandsystems,andadvancedfacilitiesandequipmentareallessentialelements
ofthehighperformanceorganization.

However,whenemployeesarenotcommittedtoachievingdesiredperformancegoals,theorganizationcannottransformintoahighperformanceenterprise.
Commitmentcannotbedictateditcanonlybedevelopedandearned.Rewardscanaidinbuildingaspiritandculturethatcannotbereplicatedbyanycompetitor.If
allthesepartsareworkinginconcert,theorganizationwillachieveandsustainacompetitiveadvantage.

Todeveloparewardstrategy,buildthelinkbetweenperformancerequirementsandneedsofemployees.Understandwhateachelementofatotalrewardssystem
needstodotosupportthestrategyandvaluesoftheorganization.Thendesignanduseeachprogramaspartofatotalsystem,notasindependent,discreteprograms.
Thepowerofeachprogramisinhowitworksincombinationwiththeotherprograms.Theymultiplytheirimpactonpeopleandperformance.

ThePeopleDimension

Thepeoplewhoareemployedbytheorganizationsprofiledinthisbookviewtheirorganizationsverypositivelyandoftentakegreatprideintheworktheydo.Many
otherstoriescouldbetoldthatwoulddemonstratethehumandimensionoftheseprograms.Theymaynotbemeasurable,buttheyexist.Theymaynotimmediately
affectthebottomline,buttheyareprimarydeterminantsofsuccess.Theycreatethoseconditionsinwhichemployeesfeeltheycanovercomechallengesandhave
confidenceinthemselvesandcommitmenttotheirorganization.

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Asstatedinthefirstchapterofthisbook,theseorganizationsrepresentonlyahandfulofcompaniesthatarechangingthewaytheyrelatetotheirpeople.Thesestories
areapartialviewintotheseorganizations.Theirworkplacesarenotperfectandwithoutissues.Butsomehowtheirpeopleareabletoovercomethechallengesand
takepartincreatingsolutions,becausetheywantto.

Itismyhopethatthosewhoread,learn,andapplytheprinciplesthathavebeendemonstratedinthesepageswillbecomeagentsofchange.Regardlessofhowlarge
theplatformonwhichoneoperatesortheroleoneperforms,wecaneachmakeanimportantdifference.Manyoftheprogramsandsystemsdevelopedinthese
companiesstartedwithasingleindividualwhohadanidea,caredenoughtotakeaction,andremainedcommittedtothepossibilities.Theyknewwhatcouldbe
accomplishedandknewwhatneededtobedone.Theyhave,inwayslargeandsmall,changedapieceoftheworld.

Yourchallengeistodothesame.Inanorganizationwherewinningisrecognizedoften,winningbecomesahabit.Assuch,thisisnotthelastchapter.Itisonlythe
beginning.Acceptandenjoythechallenge.

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 Page305

Index

AchievementSharing(DuPontCorporation),120123

ActionDirect,8788

airlinesindustry,rewardsin,2936

AlabamaQualityAward,144

AlliedSignal,223230

communicationat,225226

futureof,229230

leadershipat,227228

managersat,228

operationalexcellenceframeworkat,224225

recognitionat,226

scopeof,223224

WinningTogetherprogramat,225230

Amazon.com,1015

cultureat,1112

employeesof,1214

founderof,11

futureof,1415

growth/developmentof,1011

rewardsystemat,1314

annualincentiveprogram(TheCocaColaCompany),5657

ArdentCommunications,81

AtlasCrankshaft,124129

automobileindustry,rewardsin,6066

AvidTechnology,Inc.,161167

compensationprogramsat,163166

formation/growthof,161162

futureof,166167

profitsharingat,164

stockoptionprogramat,164165

bankingindustry,rewardsin

atBooneCountyNationalBank,6674

atFleetFinancialGroup,Inc.,191196

atKeyPrivateBank,280287

atRoyalBankFinancialGroup,8796

BaptistHealthSystem,Inc.(BHS),143153

futureof,153

growthof,144145

incentiveplanat,146153

marketpressuresfacing,145

scopeof,143144

telecommutingat,149

unionsat,145

Barnes&Noble,11

Barry,Jackie,271

BCNB,seeBooneCountyNationalBank

 Page306

BeanStock,113

behavioralchange,293

bestpractices,6

beverageindustry,rewardsin

atTheCocaColaCompany,5459

atStarbucksCoffeeCompany,111116

Bezos,Jeff,1113

BHS,seeBaptistHealthSystem,Inc.

Blanchard,Ken,130,134

Blanchard,Margie,130,134

BlanchardTraining&Development,Inc.(BTD),129134

BooneCountyNationalBank(BCNB),6674

brainstormingsessionsat,7173

GainSharingprogramat,6874

growth/developmentof,67

incentiveplanat,69,71

Borders,11

Bosack,Leonard,79

brainstormingsessions,7173

BTD,seeBlanchardTraining&Development,Inc.

BuilttoLast,37

Burke,Inc.,167177

businessreferralsat,174175

compensationprogramat,169177

customerfocusat,173174

scopeof,167168

seniorconsultantsat,168169

BurkeCustomerSatisfactionAssociates,167168

BurkeMarketingResearch,167

BurkeStrategicConsultingGroup,168

businessturnarounds,supporting,154189

atAvidTechnology,Inc.,161167

atBurke,Inc.,167177

atOSRAMSYLVANIA,Inc.,177184

atSears,RoebuckandCompany,155161

atSunLifeofCanada,184189

Chambers,John,83,84

CHP,seeCommunityHealthPlan

CIGNAHealthCare,196203

CiscoSystems,Inc.,7985

cultureat,8182

growth/developmentof,7982

rewardsystemsat,8285

stockoptionsprogramat,8385

TheCocaColaCompany,5459

annualincentiveprogramat,5657

impactofprogramsat,5759

stockoptionsprogramat,57

strategicmeasuresfor,5556

ColonyCommunications,Inc.,96102

communityinvolvementat,99

competitionwith,96

performancemeasuresat,98

SPIRITprogramat,97102

communication

atAlliedSignal,225226

atCopleyPharmaceutical,Inc.,109110

atRoyalBankFinancialGroup,94

CommunityHealthPlan(CHP),246253

communityinvolvement,99

compensationprograms,296297

atAvidTechnology,Inc.,163166

atBurke,Inc.,169177

atCommunityHealthPlan,247253

atCopleyPharmaceutical,Inc.,104110

 Page307

atCumminsEngine,125128

atGenzymeCorporation,277280

atHarvardPilgrimHealthCare,265269

atHarvardUniversityHealthServices,253260

atK/PCorporation,137142

seealsopaysystems

CompetencyBasedManagementProgram(HealthServicesMedicalCorporation),205212

competition,1

computerindustry,rewardsin,7985,seealsosoftwareindustry,rewardsin

consistency,295296

consolidation,retainingemployeesafter,196203

consultingindustry,rewardsin

atBlanchardTraining&Development,Inc.,129134

atBurke,Inc.,167177

atIdeaScopeAssociates,Inc.,7478

atKeane,Inc.,214221

atWilsonGroup,Inc.,3648

consumerpriceindex(CPI),170

ControlDataCorporation,168

CopleyPharmaceutical,Inc.,103111

communicationat,109110

compensationsystemat,104110

futureof,110111

growth/developmentof,103104

CorningIncorporated,239246

goalsharingprogramat,240246

profitsharingat,239240

corporateculture

atAmazon.com,1112

atCorningIncorporated,244

atKeane,Inc.,217

atSouthwestAirlines,3132

atStarbucksCoffeeCompany,112114

CPI(consumerpriceindex),170

CrescendoCommunications,81

CumminsEngine,123129

profitsharingat,124

unionsat,124,125

variablecompensationprogramat,125128

customer,focusingon,86116

atBlanchardTraining&Development,Inc.,130134

atBurke,Inc.,173174

atCiscoSystems,Inc.,82

atColonyCommunications,Inc.,96102

atCopleyPharmaceutical,Inc.,103111

atRoyalBankFinancialGroup,8796

atSears,RoebuckandCompany,159

atStarbucksCoffeeCompany,111116

Davis,Jacob,288

DeknatelSnowdenPencer,Inc.,277

Dell,81

Deming,W.Edwards,136

Dorsey,Joe,263

downsizing,1

Drennan,Ron,232

Dunscombe,Vicki,74

DuPontCorporation,5054

AchievementSharingat,120123

FibersDepartmentof,118123

incentiveprogramat,119120

 Page308

EagleAwardprogram(BlanchardTraining&Development,Inc.),130134

earningsbeforeinterestandtaxes(EBIT),63

economicvalueadded(EVA),55,59

Ellsworth,Patricia,139,141

employeestockownershipplans(ESOPs),seestockoptions,employee

employeremployeerelationship,293

entrepreneurialspirit,creating,948

atAmazon.com,1015

atTheMathWorks,Inc.,1521

atSouthwestAirlines,2936

atTicona,LLC,2129

atWilsonGroup,Inc.,3648

ESOPs(employeestockownershipplans),seestockoptions,employee

EVA,seeeconomicvalueadded

financialrewards,34

Finn,Dennis,60

FleetFinancialGroup,Inc.,191196

FleetTechnologySolutions,192195

Fraser,Bo,66,67

FultonVacco,Jennifer,206

GainSharingprogram(BooneCountyNationalBank),6874

GeneralMotorsCorporation,6061,63,64,66

GenzymeCorporation,276280

Gibson,Larry,266,268

GlobalInternetSoftwareGroup,81

globalization,1

GlobalSuccessSharingProgram(LeviStrauss&Co.),291292

goalsharingprogram(atCorningIncorporated),240246

GoldWellWorkplaceAward,144

Grainger,seeW.W.Grainger,Inc.

graphiccommunicationsindustry,rewardsin

atAvidTechnology,Inc.,161167

atK/PCorporation,134143

Greenburg,Allan,268

Haas,RobertD.,289

HarvardPilgrimHealthCare(HPHC),262269

executivecompensationprogramat,265269

futureof,269

andmanagedcare,263264

performancemeasuresat,266267

scope/growthof,264265

HarvardUniversityHealthServices(HUHS),253260

healthcareindustry,rewardsin

atBaptistHealthSystem,Inc.,143153

atCIGNAHealthCare,196203

atCommunityHealthPlan,246253

atGenzymeCorporation,276280

atHarvardPilgrimHealthCare,262269

atHarvardUniversityHealthServices,253260

atHealthServicesMedicalCorporation,203214

HealthPartnersSoutheastHMO,144,150151

HealthServicesAssociation(HSA),204214

 Page309

HealthServicesMedicalCorporation(HSMC),203214

careertracksat,207

competencybasedmanagementprogramat,205212

departmentspecificcompetenciesat,207208

development/growthof,204205

performanceassessmentat,208209,211

supportingcompensationplanat,209210

Hennings,Mary,255

HewlettPackard,81

HoechstCorporation,103

HoechstGroup,21

holisticapproachtorewards,300301

Houghton,JamesR.,239

HPHC,seeHarvardPilgrimHealthCare

HR,seehumanresources

HSA,seeHealthServicesAssociation

HSMC,seeHealthServicesMedicalCorporation

Hugo,Victor,onideas,151

HUHS,seeHarvardUniversityHealthServices

humanresources(HR)

atHealthServicesMedicalCorporation,211212

atOSRAMSYLVANIA,178179

atStarbucksCoffeeCompany,114116

IdeaScopeAssociates,Inc.,7478

incentiveprograms

atBaptistHealthSystem,Inc.,146153

atBooneCountyNationalBank,69,71

atCiscoSystems,Inc.,8283

atTheCocaColaCompany,5657

atColonyCommunications,Inc.,97102

atCommunityHealthPlan,247253

atDuPontCorporation,119120

atKeyPrivateBank,281287

atSaturnCorporation,6264

atSears,RoebuckandCompany,159160

atWilsonGroup,Inc.,4142

InfratestBurkeAG,167

innovation,9

insuranceindustry,rewardsin,184189

Jaques,Mike,196197,199,200

Jarris,Paul,247,252

Jcurve,278

jobdescriptions,106

Kalpana,81

Keane,Inc.,214221

corporatecultureat,217

development/growthof,214215

elementsofsuccessat,215217

futureof,221

managersat,218219

specialcompensationprogramat,217218

specialrecognitionprogramsat,219220

stockoptionsat,219

Kelleher,Herb,30,31,33

KeyCorp,281

KeyPrivateBank(KPB),280287

salesincentiveprogramat,281287

scopeof,281

Keyser,Dick,270,275

 Page310

King,Rollin,30

KMart,156

Knapp,Gardner,135

Knapp,Jim,134,135

Kohler,Heinz,278

KPB,seeKeyPrivateBank

K/PCorporation,134143

compensationplanat,137142

development/growthof,134135

futureof,142143

andmarketchanges,136137

stockoptionsat,142

valuesat,135136

visionof,135136

learning,4

LeviStrauss&Co.(LS&CO),287292

development/growthof,288

GlobalSuccessSharingProgramat,291292

PartnersinPerformanceprogramat,290291

performanceassessmentat,290291

privatizationof,289290

valuesat,288289

LightStream,81

Little,Jack,15,16

LS&CO,seeLeviStrauss&Co.

MalcolmBaldrigeNationalQualityAward,144

management

atAlliedSignal,228

atKeane,Inc.,218219

atMathWorks,Inc.,20

atSouthwestAirlines,32,33

atTechneglas,Inc.,236237

manufacturing,rewardsin

atAlliedSignal,223230

atCorningIncorporated,239246

atCumminsEngine,123129

atDuPontCorporation,5054,118123

atOSRAMSYLVANIA,Inc.,177184

atTechneglas,Inc.,230238

atTicona,LLC,2129

Martinez,ArthurC.,156,157

TheMathWorks,Inc.,1521

growth/developmentof,1516

managementat,20

performancereviewsat,1819

profitsharingat,1718,20

StakeholderProgramat,1621

MATLAB,15

McNulty,JamesA.,III,186,187,189

McNutt,RobertP.,119,120

meaningfulnessofrewards,300

MedialTranscriptionistPlan(BaptistHealthSystem,Inc.),148149

MemorandumofAgreement(SaturnCorporation),61,62,6465

MeritAugmentationProgram(FleetFinancial),194

MidwayAirlines,35

Miller,Bill,163

MissionReview(StarbucksCoffeeCompany),113114

Moler,Cleve,15

Morse,Barbara,105

motivation,2,129130

Nash,Bruce,247

netoperatingprofitaftertaxes(NOPAT),55

NipponElectricGlass,Ltd.,230

NOPAT(netoperatingprofitaftertaxes),55

 Page311

O'Keefe,Jeanne,17

TheOneMinuteManager,130

organizationalstructure

atCopleyPharmaceutical,Inc.,110

ofTicona,LLC,2223

OSRAMSYLVANIA,Inc.(OSI),177184

goalalignmentat,179180

performancemanagementprocessat,178184

scopeof,177178

Parsons,Chuck,139,141

PartnersinPerformanceprogram(LeviStrauss&Co.),290291

paysystems

atAmazon.com,13

atIdeaScopeAssociates,Inc.,7576

atSaturnCorporation,6263

atTicona,LLC,24

atWilsonGroup,Inc.,41

seealsocompensationprograms

pensionplans,94

PEP(performanceexcellenceprocess),273

performanceexcellenceprocess(PEP),273

performanceimprovementteams(PITs),231232,237,238

performancemanagementprocess(OSRAMSYLVANIA),178184

performancemeasures,295

atCiscoSystems,Inc.,8283

atColonyCommunications,Inc.,98

atHarvardPilgrimHealthCare,266267

atHarvardUniversityHealthServices,257258

atHealthServicesMedicalCorporation,208209,211

atIdeaScopeAssociates,Inc.,7778

atLeviStrauss&Co.,290291

performancereviews

atMathWorks,Inc.,1819

atOSRAMSYLVANIA,180182

pharmaceuticalindustry,rewardsin,103111

PhysicianIncentiveProgram(CommunityHealthPlan),247253

PITs,seeperformanceimprovementteams

Poses,FredericM.,224

PreceptSoftware,81

PRIDE+program(Techneglas,Inc.),232238

profitandlossstatements,individual,171172

profitsharing

atAvidTechnology,Inc.,164

atMathWorks,Inc.,1718,20

atSouthwestAirlines,33

atSunLifeofCanada,187189

atW.W.Grainger,Inc.,274

QualityPerformanceIncentiveProgram(atRoyalBankFinancialGroup),8796

qualityprocess,reinforcementof,222260

atAlliedSignal,223230

atCommunityHealthPlan,246253

atCorningIncorporated,239246

atHarvardUniversityHealthServices,253260

atTechneglas,Inc.,230238

Radford,John,84

Rawley,Curt,163

 Page312

RBFG,seeRoyalBankFinancialGroup

recognition

atAlliedSignal,226

atSouthwestAirlines,3436

atWilsonGroup,Inc.,45

reengineering,1

referrals,businessdevelopment,174175

restructuring,1

retentionprograms,seetalent,retainingcritical

returnoncompensationinvestment(ROCI),147,148,152

returnoninvestedcapital(ROIC),164

rewardsystems,294295,301

Reynolds,Bob,232

ROCI,seereturnoncompensationinvestment

ROIC(returnoninvestedcapital),164

Rosenthal,David,255

RoyalBankFinancialGroup(RBFG),8796

communicationat,94

employeecommitmentat,92

futureof,9596

rewardssystemat,8889

scopeof,8788

salaries,seepaysystems

salesincentiveprograms,297

atKeyPrivateBank,281287

atTicona,LLC,2329

Sartain,Libby,32

SaturnCorporation,6066

formationof,6061

futureof,6566

growthof,6364

rewardsystemat,6163

unionat,6465

SaturnStudyCenter,61

Schultz,Howard,111,112

SCI(SecureCustomerIndex),173

scorecards

atBooneCountyNationalBank,69,70

atTicona,LLC,24

Sears,RoebuckandCompany,155161

andcustomersatisfaction,159

development/growthof,155156

driversoforganizationaltransformationat,158159

futureof,160161

implementationofchangestrategyat,157158

incentivesat,159160

andmarketchange,156

SEC(SecuritiesandExchangeCommission),121

SecureCustomerIndex(SCI),173

SecuritiesandExchangeCommission(SEC),121

SEI(SoftwareEngineeringInstitute),215

SharesProgram(DuPontCorporation),5054

shorttermdisability,274,275

Smith,Roger,60

SoftwareEngineeringInstitute(SEI),215

softwareindustry,rewardsin

atKeane,Inc.,214221

atTheMathWorks,Inc.,1521

SouthwestAirlines,2936

cultureat,3132

growth/developmentof,2931

profitsharingat,33

recognitionat,3436

rewardsystemat,3236

seniormanagers/executivesat,33

stockoptionsat,33,34

 Page313

SPC,seestatisticalprocesscontrols

specialachievementpoints,4244

SPIRITprogram(ColonyCommunications,Inc.),97102

StakeholderProgram(MathWorks,Inc.),1621

stakeintheenterprise,creating,4985

atBooneCountyNationalBank,6674

atCiscoSystems,Inc.,7985

atTheCocaColaCompany,5459

atDuPontCorporation,5054

atIdeaScopeAssociates,Inc.,7478

atSaturnCorporation,6066

StarbucksCoffeeCompany,111116

culture/valuesat,112114

futureof,116

growth/developmentof,111112

rewardsystemat,114115

stockoptionprogramat,113

statisticalprocesscontrols(SPC),231,237

stockoptions,employee

atAlliedSignal,229

atAmazon.com,13

atAvidTechnology,Inc.,164165

atCiscoSystems,Inc.,8385

atTheCocaColaCompany,57

atDuPontCorporation,5054

atGenzymeCorporation,279280

atIdeaScopeAssociates,Inc.,78

atKeane,Inc.,219

atK/PCorporation,142

atSouthwestAirlines,33,34

atStarbucksCoffeeCompany,113

atWilsonGroup,Inc.,43

Stop/Lossinsurance,186188

stories,impactof,45

StrataCom,81

strategies,changing,261292

atGenzymeCorporation,276280

atHarvardPilgrimHealthCare,262269

atKeyPrivateBank,280287

atLeviStrauss&Co.,287292

atSears,RoebuckandCompany,157158

atW.W.Grainger,Inc.,270275

Strauss,Levi,288

SunLifeofCanada,184189

andchangedmarketplace,186

profitsharingat,187189

andriskmanagement,184185

scopeof,185

teamincentiveplanat,186189

talent,retainingcritical,190221

atCIGNAHealthCare,196203

atFleetFinancialGroup,Inc.,191196

atHealthServicesMedicalCorporation,203214

atKeane,Inc.,214221

Taylor,Bill,139

team,workingas,117153

atBaptistHealthSystem,Inc.,143153

atBlanchardTraining&Development,Inc.,129134

atCommunityHealthPlan,247249

atCorningIncorporated,240241,243

atCumminsEngine,123129

atDuPontCorporation,118123

atKeyPrivateBank,282283

atK/PCorporation,134143

atSunLifeofCanada,186189

 Page314

team,workingas(continued)

atTechneglas,Inc.,232238

atW.W.Grainger,Inc.,271274

TEAM(TogetherEveryoneAchievesMore),68

Techneglas,Inc.,230238

futureof,238

managersat,236237

marketpressureson,231

PRIDE+programat,232238

scopeof,230,231

telecommunicationindustry,rewardsin,96102

telecommuting,149

Ticona,LLC,2129

businessalignmentat,23

futureof,2829

growth/developmentof,2122

organizationalstructureof,2223

salescompensationprogramat,2329

TogetherEveryoneAchievesMore(TEAM),68

TotalPerformanceIndicators(TPI),159

TheTraining&DevelopmentCenter,168

UAW,seeUnitedAutoWorkersunions

atBaptistHealthSystem,Inc.,145

atCorningIncorporated,240

atCumminsEngine,124,125

atSaturnCorporation,6465

UnitedAutoWorkers(UAW),60,61,64,124,125

USWest,81

values

atK/PCorporation,135136

atLeviStrauss&Co.,288289

atStarbucksCoffeeCompany,112114

atWilsonGroup,Inc.,4547

W.W.Grainger,Inc.(Grainger),270275

Wilson,Ellen,206

WilsonGroup,Inc.,3648

corevaluesat,4547

founderof,37

futureof,4748

incentiveplanat,4142

marketplacecontextof,3839

missionof,3738

paysystemat,41

recognitionat,45

rewardsystemat,3947

specialachievementpointsat,4244

stockoptionsat,43

WinningTogetherprogram(AlliedSignal),225230

Winters,Mitzi,148

Woolard,E.S.,Jr.,50

WorkingSolutions,Inc.,112

WorldWideWeb,10,11

Wright,Kim,137,139,141

Year2000compliance,191196