Incentive Pay Has Pitfalls but It Can Work
Never complain, never explain. When Lee Iacocca was asked recently to explain the $20 million-plus he was paid as Chrysler’s chairman last year, he said, “That’s the American way,” and suggested himself as a role model for kids. It was not only how much he made that set an example, he said, but how he made it--from stock options earned as a reward for his part in Chrysler’s rescue.
Shareholders have seen Chrysler stock go from $2 a share to $40 in the six years since Iacocca--with government help--started it on the road back. In voting him the options, Iacocca is saying, they are paying him for performance.
You’d like to be paid that way, you say? Well, be patient, and you may be. Not that you’re likely to make $20 million, but part of your pay may soon be based on your output or the achievement of goals set by mutual agreement between you and your employer.
Incentive, Not Routine
That’s because more and more U.S. companies are studying ways to substitute profit sharing or gains from cost savings for pay raises or bonuses. When the American Productivity Center in Houston sent out a survey last year on “non-traditional reward systems,” it got back a healthy 1,598 responses.
The trend is “a response to the pressure to improve productivity,” explains Jill Kanin-Lovers, a vice president at the compensation consulting firm of Towers, Perrin, Forster & Crosby. And it’s also “an attempt to make future pay raises an incentive rather than a routine.” More bang for the merit raise buck, in other words.
A good idea? Sure. If such schemes are administered well, they stand to enrich the job and the workers at the same time. At Motorola outside Chicago, for example, employees can add between 14% and 40% to their paychecks by meeting group performance targets that they help to set themselves. And all employees, not only managers, are involved.
There are many other examples. Organizations as different as office furniture manufacturer Steelcase Inc., of Grand Rapids, Mich., and Pittsburgh’s Western Pennsylvania Hospital use incentive pay systems. And Democratic Party politicians are reported to be so enthusiastic over pay for performance that they plan to make it an economic plank in the 1988 campaign.
Meanwhile, few people are mentioning the pitfalls. But they are there. For one thing, though it may sound up to date, basing pay on output or performance recalls piecework, and that’s a very old and discredited method of determining compensation. Piecework is still in use in some parts of the tire business and, says Stanley J. Mihelick, executive vice president of Goodyear, it always ends up in a non-productive argument over how long it takes to make a tire. “Incentive pay very quickly gets legalistic,” he says.
Yardsticks Get Stale
Another drawback, says General Electric Chairman John F. Welch Jr., is that the yardsticks get stale. The business moves on, new methods are found, but the old performance measurements remain, distorting compensation. “How do you keep it contemporary?” asks Welch rhetorically.
Or demonstrably fair. General Motors set a horrible example earlier this year when it announced that 1986 profits were too low to allow a profit-sharing payment to the rank and file but then turned around and paid performance bonuses to its executives. The outcry over that blunder was so great that GM management did away with the executive bonus program last month.
A basic problem, before you get to performance, is that pay itself is not a simple matter. What you get paid is determined by many factors--some of them merely accidental. There’s a general rate of pay for your job--whether you work in a union shop or not. Experience plays a part, and what both your supervisor and your subordinates are paid does too. Geography counts--pay and costs are higher in New York and Los Angeles than in St. Louis and Atlanta--and so does competition for employees. “Determining pay,” says compensation specialist Kanin-Lovers, “is still more subjective than scientific.”
You get the point. In a litigious society already arguing such questions as comparable worth and equal opportunity, pay for performance is likely to provide even more employment for lawyers.
Still, demurrers aside, the promise makes it a worthwhile goal. If handled correctly, an incentive system that allowed everyone to count on a little extra for a job done better might well spark a rise in U.S. productivity, and at the very least, it should give every employee a sense of greater independence and control. “That’s the American way,” as Iacocca says.
