Paying for performance in a TQM environment - total quality management

PQ Corp. redesigned its compensation system to reward high performance and support continuous improvement efforts.

The compensation system was one of the first systems to be redesigned when Valley Forge, Pa.-based PQ Corp., a chemical manufacturer, adopted total quality management (TQM) as the underlying philosophy for its business. The new pay system addresses many problems of traditional systems and supports a TQM culture--PQ calls it continuous quality improvement--by linking pay to improved performance. The system stresses long-term performance, individual contributions and team goals.

Redesign process

The work of redesigning the compensation system was accomplished by three multifunctional, multidivisional project teams. The teams based their redesign of the new base-pay system on information from its customers--the employees and management of PQ Corp. Once that design was approved, it was worked and reworked, based on feedback from focus-group sessions and from early test applications. PQ's executive group was intimately involved with the entire process.

The team asked both employees and supervisors in the organization for opinions on the compensation system: "How is the current system working for you?" "Where are you experiencing problems?" and "What are your recommendations for improvement?" With the feedback it received, the team constructed a flow diagram representing the current compensation system and identified four areas that needed improvement:

* Base pay, including job evaluation and performance pay.

* Performance appraisal.

* Recognition for a job well done.

* Communications and training systems.

Using this data, we were able to identify seven of the major problems:

Multiple systems. No single job-evaluation system was used to establish the competitive midpoint for salaried positions within PQ's North American operations. In fact, we were using at least five different systems in our various operating units. This left challenging internal inequities in pay. In some cases, jobs had not been evaluated in years. The inconsistency of systems presented barriers to inter-company transfers, compressed salaries and stoked employee dissatisfaction.

Inconsistent salary administration. Many managers did not understand the appropriate use of a base-pay system, and as a result, salary increases and promotions were handled differently between departments.

Managers were playing the "zero sum" game. Once a unit's merit-increase budget had been set, managers were required to stay within that budget. If they wanted to give an employee a larger increase than planned, it had to be at the expense of the salary increase intended for another employee in the unit. Because of this, most managers opted to give all employees the same percentage merit increase. That increase was usually the pay-structure adjustment for the year.

Employees' performance irrelevant. The position of a person's pay in a job's pay range was considered more a reflection of time in grade than of performance. Many managers used the merit increase as a signal that the employee was doing a "good" job or a "poor" job based on the percentage increase, rather than changing an employees position within a pay range.

A waste of time. The performance appraisal system was seen as destructive and as a waste of time. In fact, we found that most employees had not had a formal performance review in years.

Lack of feedback. There was little feedback on performance beyond the merit increase given each year.

Lack of training. Managers were not trained to use the compensation system. Little information was available on how the system was intended to operate.

Lack of credibility. Overall, the compensation system lacked credibility and was poorly supported.

The design solution

Base pay at PQ is now determined by two things: The competitive, outside value of the position and the value of an employee's overall performance.

A custom-designed job-evaluation system was used to establish the competitive midpoint for all salaried positions in North America. A mathematical computer model sets the market rate for all positions based on salaries paid for comparable positions in other corporations in the chemical industry. It is an externally focused, market-derived process. Every position at PQ was evaluated using this new job evaluation system and assigned a new midpoint.

Each job now has a market range with a minimum and maximum plus two control points. One control point is the midpoint of the range. That midpoint represents the competitive salary paid to a fully qualified employee who has performed the full scope of job responsibilities in a competent manner through a process of continuous quality improvement. The second control point is a 67 percent penetration into the market range. Pay in this portion of the range represents the competitive salary paid to an employee who clearly excels at his or her job by going beyond the level of skills and responsibilities required for the position. This means that the employee is also contributing to the results of PQ Corp. through continuous improvement, creativity, initiative and resourcefulness.

Performance pay

It is possible for two people holding the same job to receive different pay. Both people can be in the same pay range, but one could be under the market-rate midpoint and the other at midpoint or well above it. Where individual pay falls is determined by overall performance.

The factors that make up overall performance are of equal weight and importance and incorporate the values expressed in PQ's mission, vision and guiding principles. When base pay is determined, all factors are regarded separately, but each factor complements the others. As an employee's performance improves, his or her pay within the market range grows.

Comparing the pay position in the market range this year to the pay position in the market range last year helps an employee understand his or her performance level. How fast pay grows depends on both performance and the position of the salary within the range.

The fastest growth in pay occurs for those employees whose performance merits movement toward a considerably higher position in the range. On the other hand, a top performer who is receiving a top salary will simply maintain that already high-range position as long as high performance is sustained. As the market range itself is adjusted periodically, most employees enjoy salary growth throughout their years with the company.

Each year, employees set individual and joint goals. Joint goals offer everyone the opportunity to participate in the process of identifying what steps need to be taken to realize PQ Corp.'s business strategies. To set individual and joint goals, supervisors and employees identify the major components and processes of a job. For each process, employees identify the customers, the product or service. Then employees look at how they can improve what they are delivering and set individual and joint goals to accomplish that improvement. Employees who improve overall performance can reach a higher pay position within the range. Individual and joint goals are acceptable as long as people are given the resources and opportunity to reach those goals.

By focusing on joint goals we hope to transform our corporate culture from one of "My job is to please my boss" to a system that supports "My job is to please my customers--all of them."

Customer review. Once the new base-pay system had been decided, the compensation task force began to address the issues associated with performance feedback within the organization.

To provide added support to the principle of pleasing customers first, we redesigned PQ's performance appraisal system to include evaluations by employees' "internal" customers as well as those of supervisors. We now ask supervisors to interview their employees' customers, suppliers, peers and, when appropriate, subordinates to gather a fuller impression of that employee's performance. That information becomes a factor in determining whether an individual's performance is "improving, sustaining or declining." A rating based on those factors will, in turn, determine the employee's pay position within the market range for a particular job.

We now define performance to include not just the completion of individual and joint goals; we also look at an individual's skills and how those skills are developed, improved and used. An employee's cooperation as a team player and contributions to maximizing corporate results before the results of individual operating units are also considered. A final factor is the employee's use of continuous quality improvement principles.

When employees first enter new positions, we expect their performance to improve as they gain knowledge and experience. That improvement, however, must move beyond grasp of the basic job requirements. We look for continuous improvement as long as employees remain in a position. Employees' performance is "improving" if they continue to improve systems, meet individual and joint goals and participate in team accomplishments. Their position in the market pay range will increase accordingly.

When an individual's performance level doesn't change for a year or longer, performance is "sustained." In that situation, an employee will remain in relatively the same position in the market pay range.

"Declining" performance signifies that an employee has the required skills and abilities but is no longer using them to improve systems, meet individual or joint goals or participate on teams as well as in the past. Any employee whose performance level is declining is strongly encouraged to correct matters.

Communicating performance

Under PQ's old compensation system, managers often used base-pay increases as an incentive for improved performance. The percent adjustment was a signal that an employee was doing a "good" or "poor" job. This created a problem, however, because employees equated the size of their percentage increase with overall performance, even though the merit-pay system was not designed for this use.

Like many corporations, PQ had relied on a performance appraisal system to provide feedback to employees. When employees were preparing to develop a new compensation plan, the teams found that performance appraisals did not meet the majority of company needs. Many employees, however, did express a need for interaction with and feedback from supervisors.

If performance appraisals were not an answer, what form should feedback take? The survey provides many suggestions from employees:

* Managers should be coaching and counseling, not evaluating and judging.

* Focus on quality not quantity measures.

* Rely more on data and less on the supervisor's perceptions.

* Incorporate information from customers, suppliers, peers and subordinates when appraising performance.

* Hold informal performance discussions as frequently as needed throughout the year.

* Hold formal discussions at least once a year.

In response to the survey's findings, we eliminated the performance appraisal system. Instead, we unbundled the activities usually associated with a performance appraisal. At PQ, supervisors and employees now meet formally on two separate occasions during the year for a performance improvement and skill enhancement planning discussion and for compensation notification.

Performance improvement discussions

We encourage managers to use performance improvement discussions (PID) to help employees use their skills and abilities more effectively. In the first step, the supervisor and employee identify five to seven individuals to be interviewed as part of the PID process. These are people with whom the employee interacts frequently--customers, suppliers, peers or subordinates. Through open-ended questions, the supervisor gathers information on areas in which an employee can improve and areas in which he or she is doing well. The supervisor looks for trends or patterns in the comments of those who are interviewed.

When the supervisor and employee meet to discuss this data, the supervisor acts as coach and counselor, not as judge and evaluator. He or she identifies behaviors that are positive and those that need change and distinguishes between problems arising from processes and systems that are out of an individual's control.

The final step in this process is an agreement between the employee and supervisor on what actions should be taken, in particular, the areas in which the employee needs to improve skills. Skills enhancement planning builds on an individual's talents and provides a map for the future by addressing skills related to a current job as well as to future positions.

Formal performance discussions are carried out annually. Informal discussions address both systems and individual improvements whenever needed during a year.

Compensation notification

A performance improvement discussion precedes notification of a change in compensation by at least three to five months. This separation helps to keep the focus on improvement rather than on compensation.

A supervisor weighs several factors to determine an employee's salary: information documenting the employee's overall performance, job responsibilities, skill level and actual performance, and how well the employee's performance meets the criteria of the market midpoint value for the position.

There are two critical points to note concerning compensation. First, the pay position is influenced by information gathered from the employee's customers, suppliers, peers and subordinates. Second, performance must be viewed on a long-term basis. Common-cause performance variation must be considered--there are years when everything goes right and years when few things fall right despite the employee's best efforts.

Implementation and learning

PQ's new pay system has been in effect since January 1, 1992. Using groups of employees to market test the system was of critical importance. Employees pointed out many things that did not make sense or were unclear to them. We are also convinced that there would have been far slower acceptance of the system if it had been brought off the shelf or put together by staff alone.

Finally, we learned that you cannot underestimate the amount of training needed to implement a new pay system successfully. All employees have been through at least one training session, and managers have been trained in administering the new pay system. Training will be offered each year to reinforce the proper use of the new system. We will continue to review the system and incorporate changes to enhance its effectiveness.

Jeanne C. Poole, human resource manager, William F. Rathgeber III, manager, organization development and continuous quality improvement, and Stanley W. Silverman, executive vice president and COO, are with PQ Corp., Valley Forge, Pa.

COPYRIGHT 1993 Society for Human Resource Management
COPYRIGHT 2004 Gale Group