Bonuses Increasingly Emphasize Teamwork Over Personal Effort

Each December, offices in corporate America have traditionally been abuzz with news of annual bonuses, with rumors flying as to which workers were favored with the biggest payouts.

But this year, many workers may well turn away from the news down the hall to the news about the company as a whole. In a trend that may help to increase American productivity and profitability, compensation packages for managers are increasingly emphasizing teamwork over personal performance.

This marks a sea change in corporate America’s approach to motivating its work force. For most of the last 25 years, American firms have been occupied with organizing their employees into small profit-loss centers that became known as “strategic business units.” Many of today’s corporate leaders are now questioning if there was anything very “strategic” about these groups.

Under the old rules, even individual employees were occasionally considered separate profit-loss centers by their corporations. A few of the largest American companies consisted of literally thousands of such groups--which resulted in nightmares for accounting staffs, who at times spent more effort reallocating money within the corporation than keeping track of new orders from customers.

Today, as American companies compete across the nation--and consolidate positions internationally--corporate divisions are more interdependent than ever. This is partly driven by customers, especially industrial customers, who want integrated solutions rather than component parts that they then have to stitch together themselves. Companies increasingly are asking their workers to see the big picture--and using the carrot of financial incentives to emphasize the new philosophy.

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A good example of this is IBM, where bonuses for executives are essentially 50% based on overall company performance, 25% based on unit performance and only 25% based on individual performance. This new bonus evaluation process has been in place for two years at IBM, where bonuses used to be based on those ubiquitous profit-and-loss statements for the myriad business units. Managers now talk plainly about the difference between “blue money” (internally reallocated funds) and “green money” (funds from actual customers).

It’s no longer acceptable for managers at American firms like IBM simply to outsell or outperform other managers down the hall to be handsomely rewarded. Today, many high-tech companies are using this type of bonus structure, because it gets workers to think beyond their own small units and helps promote the integrated solutions that today’s customers crave.

Making bonuses contingent on overall corporate performance also provides an incentive to managers to share good ideas--and keeps pressure on their peers.

These are dynamics that Nucor Steel recognized 20 years ago. At Nucor, a plant manager’s bonus is not just a function of his or her plant’s performance; it is a function of the performance of all plants. Within this structure, plant managers with proven ideas have an incentive to share them with other plant managers.

Becton, Dickinson & Co., the medical supply and instrument concern in New Jersey with $2.5 billion in annual revenue, once had 10 separate product divisions, each competing as a profit-loss center. But in recent years, powerful health maintenance organizations began demanding simplified purchasing methods and billing procedures. In response, Becton Dickinson’s former chairman, Raymond Gilmartin, created one supply division, knowing that his customers needed an integrated response. In perhaps the ultimate vindication of the value of such approaches, Merck & Co., which has about $15 billion in annual sales, last year recruited Gilmartin to be its president and CEO.

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The new corporate philosophy and bonus structure require a major change in attitude on the part of employees. One plant manager at a major meat-processing company, told bonuses would be based on performance of all plants, said: “That sounds like socialism!” Indeed, the traditional American culture is one of individualism and personal accountability--not collectivism and group accountability. The change, however, is not driven by a political dogma, but by business logic.

Today, companies like General Motors and Citicorp deliver products and services all over the world. Not only do they place integrated-solution demands on suppliers such as EDS Corp., the computer-services company, but they also require these solutions to be implemented across their worldwide operations. Thus, companies like EDS have moved away from profit-loss centers based on nation or region. Those managers who can’t make the philosophical switch will undoubtedly lose power--and perhaps their jobs.

The new bonus structure is not without risk, however, because companies must find new ways to make workers feel they are valuable both as individuals and as contributors to the global bottom line. But corporate leaders increasingly see that international competition requires a substantive change in orientation. Managers need to move from simply maximizing the resources they control to cooperating--and ensuring that their units add value in meeting customer needs.

Beyond providing a new incentive to workers, U.S. companies are also seeing bonuses in a new light: as a tool for management to prepare for downticks in the business cycle. Companies are beginning to keep managerial salaries flatter while increasing variable pay such as bonuses. In bad times, this arrangement will allow corporations to keep the salary portion of operating expenses reasonable without reverting immediately to layoffs as a way to trim personnel expenses.

This December, these changes in compensation could help bring the ultimate bonus--higher profits and higher stock prices--back to the owners of American industry.