Proceed with caution when paying teams - includes related article on team compensation techniques

Designing compensation plans is like working with electricity, says Phil Reagan, a principal in the Seven Pines Consulting Group in Cazenovia, N.Y. "You have to be very, very careful."

"Companies know that changing their pay and compensation structure to support a team-based system is important," Reagan explains. But, he says they often fail to realize that changing the compensation structure has to be an evolutionary process, "something that occurs as the organization's cultural change matures." Reagan, who has a doctorate in organizational development, has reached that conclusion during 23 years working with training and team-based change for clients including Carrier Corp., Lockheed Martin, 3M, Chrysler, General Motors and K-mart.

HR professionals know teams are here to stay, even if they are not always sure of the best way to use them. According to one recent estimate, 35 percent of companies and more than two-thirds of Fortune 1,000 companies are using self-directed work teams. In 1996, 73 percent of all U.S. organizations had some form of teams.

This rush to a musketeer model is driven by more than the camaraderie of an all-for-one-and-one-for-all approach - teamwork adds to the bottom line. The University of Southern California surveyed work practices of the Fortune 1,000 and found significant differences in key financial measurements between companies with different levels of employee involvement, including percentages of return on equity, investment, sales and assets.

However, the use of team-based pay systems has lagged. In its 1996 Team-Based Pay Survey, the HayGroup notes, "Management continues to be more positive about the use of teams (87 percent) than about how they pay for teams (41 percent). The 1996 satisfaction levels for team pay are lower than those in 1994, suggesting that team-based pay programs are not as effective or as fully developed as management would hope."

STRATEGIES FOR TEAM PAY

There are two common team-oriented compensation strategies: skill-based pay and gainsharing systems.

Skill-based pay. In skill-based pay, compensation is linked to both individual and team growth, with incremental increases in base pay as new skills are learned and applied. Typically, those skills include areas such as business knowledge, communication, teamwork and safety.

At Tennessee Eastman Division, the largest unit of Eastman Chemical Co. and a 1993 Malcolm Baldrige Award winner, teams demonstrate their maturity by being proficient in technical, social and business knowledge skills, as those skills are defined by a cross-functional compensation policy team. Teams can then participate in a pay-for-applied-skills-and-knowledge (PASK) plan, with six levels spanning technical skills (mixing, refining, finishing), business skills (safety and computer use), and team interaction skills.

Team members move from macro skills to micro skills, specializing in career paths such as operations, laboratory, maintenance or training. The teams themselves authorize the training choices of their members, so that the group's overall proficiencies expand. Leadership roles are stressed, and feedback is frequent. Individual compensation is based on the employee's level in the PASK system. But this type of system has two drawbacks - complexity and the difficulty of correlating skill acquisition to bottom-line gains.

Gainsharing systems. Gainsharing systems provide a way to reward members of all teams based on goals attained by the entire organization. In most gainsharing plans, bonuses are based on improvements (or gains) over a previous performance baseline. For example, Westinghouse measures improvements in quality, cost and productivity and then gives each plant employee equal lump-sum payments.

Libbey Inc., a leading glass and china manufacturer based in Toledo, Ohio, lets cross-functional teams at each of its five manufacturing facilities set plant-specific goals within corporate guidelines. Those goals establish 60 percent of the plant's gainsharing target. The remaining 40 percent is pegged to overall improvement in corporate income from operations. Though goals may include improvements in yields, productivity, customer service, safety and profitability, they must collectively result in measurable financial gain.

Gainsharing encourages teamwork throughout the organization and allows for variable compensation based on performance. But this approach can easily disappoint workers if business conditions outside the plant's or team's control prevent a payout. And some high-performing teams or individuals may believe their contributions should be recognized at a higher level.

Nonmonetary programs are also gaining popularity. Using a recognition program launched in 1987, Wilson Sporting Goods Co. has sparked team-based changes at its Humboldt, Tenn., plant. The plant's 15 job classifications and pay grades have not been supplemented or changed; instead team achievements are celebrated with plaques, T-shirts, posters, and recognition lunches and dinners.

Gift certificates to the plant's on-site sporting goods store are the only tangible bonuses team members receive. Their real motivation is helping improve the plant's competitive position and its future.

How do organizations know the time is right to change their compensation structure to support the new team model? "There is no standard answer to that question," Reagan observes. "Some companies will be ready for the compensation change in nine months, while others may take considerably longer."

He usually advises waiting two to three years after changing to team-based operations to begin changing to a team-based pay system. The delay allows time for employees to gain confidence in teams and see tangible results. And some businesses just need time to feel comfortable working in teams.

TWO STEPS FORWARD, ONE STEP BACK

John Powenski was with International Paper before joining Frito Lay as the HR manager at its 800-employee Kirkwood, N.Y., facility about three years ago. A strong advocate of team-based operations, Powenski helped orchestrate a remarkable performance and productivity improvement in Kirkwood. "Changing the compensation strategy is second," he notes. "First, change the culture."

For Powenski, modeling team performance meant starting at the top. The Kirkwood plant's Leadership Team is composed of manufacturing, distribution, planning, technical and HR managers. "We lived and breathed the team message," Powenski says.

The Leadership Team developed a vision around the simple phrase "Kirkwood Excellence." A three-pronged mission challenged the plant to become customer-focused, team-based and owner-driven, then to communicate that message throughout the organization. "We had a lot of 'renters,'" Powenski notes, "when what we wanted to develop was a workforce of owners."

The team concept was initially well-received. Teams trained together, held meetings to discuss production plans, and gave each other constant 360-degree feedback. Milestones or accomplishments were celebrated with pizza parties or other recognition. However, the transition hit a brick wall when the Leadership Team announced a change in the compensation structure away from the longstanding policy that had given all employees the same pay increases.

"All hell broke loose when we linked pay to performance," Powenski says. It was a radical departure, and employees had not been included in development of the new compensation structure. "They didn't like a peer affecting their pay and had concerns about the integrity of the whole system," Powenski notes. "We had not included the technicians in the pay restructuring, and that was a big mistake." Recognizing that the change had not been accepted, the Leadership Team returned to the previous system.

"We're still a couple of years from linking pay to performance," says Powenski, "but all our 800 technicians receive a performance review and three follow-up reviews every year with their managers. That builds confidence in the changes we're making. Our experience taught us to change the culture first, then the compensation." The process is still effective. Last year, the Kirkwood plant won Frito Lay's National Service Award, topping 21 other plant service areas nationwide.

TEAMING UP FOR AN EDGE

Companies continue to organize and promote teams because collective efforts, experience and drive produce results superior to those of even the most capable individual. In markets that demand flexible, dynamic and enterprising action, the companies employing team-based solutions are winning. But there is a catch.

"Team implementations and team compensation strategies do not translate well from one company to another," Powenski notes. "You can't go to a team-based company and say, 'We'll do what you're doing because it works.' Instead, you have to find your own vision, develop it on-site, work through the doubts. You can't import culture."

HR professionals who encourage an honest, candid organizational analysis of team-based change-including compensation - will be giving their companies a real-world advantage.

RELATED ARTICLE: PAY CHECKS

Strategies for Team Compensation

1. Change the culture first, then the compensation structure.

2. Involve all levels of the organization in discussions about compensation changes.

3. Research other companies' successes, but don't expect to import them.

4. Obtain expert advice in designing team pay strategies.

C. James Novak is head of human resources for Syracuse China Co., a unit of Libbey Inc., in Syracuse, N.Y.

COPYRIGHT 1997 Society for Human Resource Management
COPYRIGHT 2004 Gale Group