Michael Dunaway found that a pay hike every two weeks motivated his workers more than the standard annual raise.
When Constance Dennis opens her envelope, she can only guess what she will find. But she knows this much: Whether by a couple of dollars or a couple hundred dollars, the figure on that check will always be higher than the one on the check she got two weeks earlier. The only way her income can level off is if her job performance ceases to satisfy her employer, Perfusion Services Inc. of Brighton, Mich., a $15-million company that provides hospitals nationwide with the equipment and technicians (perfusionists) needed to assist doctors in open-heart surgery. "Now that's what I call positive reinforcement," says Dennis, a district manager based in the Akron area. "I sure like watching those little numbers go up all the time."
The numbers go up because PSI's 115 employees get their raises continuously -- not just at 6- or 12-month intervals. In each of 26 pay periods, the average worker can expect a small hike in salary that, by the end of the year, amounts to a 5% increase. And PSI occasionally tosses in merit increases that generally amount to another 5%. Top performers frequently do much better through bonuses.
Chief executive officer Michael Dunaway calls the package his "constant-reward" pay structure. "I'm a perfusionist myself, and I know that I work better if I see the fruits of my efforts -- if my salary is going up continuously. That's where the idea for this system comes from."
Dunaway spent two years in operating rooms, running heart-lung machines, before realizing in 1968 that he was stuck in a dead-end job. Only by forming an independent contracting group such as PSI could he create career ladders -- not only for himself, but for other perfusionists as well. He says the cast-in-concrete pay policies he had known as a hospital employee played no small role in the decision. "It seemed that no matter how hard you worked, somebody was always telling you, 'Sorry, you've achieved the maximum.' It was frustrating."
So, from the outset, Dunaway declared that there would be no such thing as a maximum salary at PSI. What is more, he says he intends to make that promise stick -- as long as the company, ranked #395 on INC.'s 1983 list of the fastest growing private companies in America, continues its sales growth at a compound annual rate of 60% per year and turns an aftertax profit of more than 7%. Dunaway has reason to hope that the pace continues for a goodly length of time, too, because he has grown convinced that his constant-reward pay structure is more than incidentally related to his ability to maintain a competent, productive staff.
Many of his employees agree. "Perfusionists have a need for instant gratification," says PSI's perfusionist-trainer, Harry Hoerr. "If they don't see the money and the advancement right up front, they'll go someplace else." The demand for perfusionists increases with the nation's cardiac caseload, and many observers now estimate that the number of qualified applicants entering the field isn't enough to fill even a third of the positions lost to attrition, much less those created by the establishment of new surgical units. Like computer programmers, engineers, and others in high-demand occupations, Hoerr says, perfusionists have come to see themselves as valuable commodities, available to the highest bidder.
PSI's system of contirtuous salary increases may not make anyone rich, Hoerr says, and he doubts that it does much to motivate employees to work harder -- at least not by itself. A special incentive program that pays PSI's perfusionists a flat fee for each procedure or operation tends to have at least as great an impact on productivity, he says, by encouraging perfusionists to seek out unscheduled opportunities to assist in the operating room. Such enterprise is rewarded in a separate paycheck, at a rate of anywhere from $5 to $20 per case, depending on seniority. With this so-called "p-pay" (perfusion pay), yet another $1,000 to $3,000 can be added to a perfusionist's annual gross. "But the one thing the constant-reward system is definitely good at," Hoerr says, "is keeping people here. You know you've got a future. There's no wondering if you're going to get a raise."
The degree of acceptance the system has received somewhat mystifies PSI's president, John Schumann. The initial 5% raise, the portion that is distributed over 26 paychecks, "is really just a cost-of-living allowance, given at a time when costs are relatively stable," and one whose impact is eroded by time, at that. It is not that he doesn't believe the constant-reward system works -- he does. He just thinks its advantage is mainly psychological. "It can't be the money," Schumann says. "Salaries creep up with employees hardly knowing it. You don't see a significant change of lifestyle when the raise comes in the form of a couple of bucks every two weeks." An employee earning $27,000 per year, he points out, doesn't see the 5% as a $1,350 bump, or even as an extra $52 in gross pay per check. It shows up as a net increase of $1.70 per paycheck, after deductions.
Dunaway agrees -- from paycheck to paycheck, it is not the money. "It's the element of surprise, and the feeling that we care enough to recognize good work continuously." But as for the financial impact of the system over months and years -- well, that is a more controversial topic at PSI.
"Mike and I have had a running battle over who takes home more -- the employee under the constant-reward system, or the employee under the more traditional compensation methods," Schumann says. After running the data through a computer, the two find themselves at a standoff. A new employee, under a conventional salary-administration program -- starting at $30,000, and receiving 5% increases at 6 months, at 12 months, and again at 24 months -- comes out ahead of a counterpart under Dunaway's system for a brief period in the first year, then falls farther and farther behind. "The difference is never more than a couple hundred bucks," Schumann says, "but, for a number of reasons, I'd prefer that we use the old annual-review-and-merit-increase system."
Schumann believes that sitting down with an employee, discussing his or her progress, and then passing a check across the desk allows a manager to "better modify behavior." It is not that he is afraid employees have come to see the raises as a given; he and Dunaway agree that is unlikely for two reasons. The size of the regular pay hikes has been known to be reduced for punitive purposes, and, as Schumann puts it, "We don't think the average employee understands the particulars of the system well enough to take it for granted." Rather, Schumann simply sees merit in the ritual of the annual review and the opportunity it affords for reflection on past performance.
But Dunaway rejects the annual-review process as both impractical and unfair. "I don't have a plant I can walk into; my people are scattered across 14 states. Besides, what if I'm having a bad day when I do somebody's review? This way I'm always counteracting that problem, by adjusting people's pay in relation to one another." To understand that, he says, you have to know more about the constant-reward system's methodology.
PSI's employees are evaluated by their immediate superiors every six months. The conclusions reached on those written forms guide Dunaway in determining whether the continual pay hikes should be increased to, say, 6%, decreased to perhaps 3%, or left alone -- at the 5% average. A particularly good evaluation is often cause for an additional merit increase -- which works to boost the employee's annual base salary -- or a one-time bonus. Either way, the sum could amount to hundreds, or occasionally thousands, of dollars. Dunaway says he sits down before a computerized spreadsheet at least once a pay period and enters what changes he deems necessary. In the process, he watches for inequities -- the veteran employee whose salary is not sufficiently higher than the amount paid to newcomers, for example, or the employee whose salary is not keeping pace with his or her responsibilities.
Figuring up a 115-employee payroll, in other words, is a task that Dunaway still reserves for himself. Director of finance Thomas Zech sees no real problem with that; in fact, he and Schumann agree it never hurts to keep the CEO in touch with the company's financial facts of life -- so long as the task doesn't become too unwieldy and time-consuming. That isn't likely to happen soon, Dunaway says. "It only takes me an hour or two each pay period to run through the columns and plug in the information. That's a lot less time than I'd spend conducting performance reviews face to face."
But all of these men recognize that, in time, the size of the company may dictate substantial change in the compensation system PSI has tailor-made for itself. Schumann, a Johnson & Johnson veteran who was hired by Dunaway to prod his boss into accepting a more structured managerial approach, is urging that some of Dunaway's payroll and performance-appraisal duties be ceded to the company's regional and district managers. "As we decentralize, we're going to have to give the regional level more power, and part of that power has to be the ability to use salary administration as an effective managerial tool," he says. Dunaway agrees with Schumann on that point and, as a first step, he has given his regional managers a discretionary budget of $500 per year per employee with which to additionally reward productive workers. Unfortunately, the CEO says of his managers, "they forget they've got it, and I've still got to remind them to use it."
But only severe financial hardship will ever be enough to convince Dunaway to abandon the constant-reward system altogether. Just because PSI may have to reevaluate the way it administers the system, he says, does not mean the system itself will have outlasted its usefulness. "If we continue to demand the excellence and hard work we get out of our staff -- and we will -- we are still going to have to find a way to make sure our people see the fruits of our success on a continuous basis. A year is an interminably long period of time between raises, especially for short-term-oriented people like ours. Make them wait that long, and their eyes glaze over." Besides, he says, he has learned from experience that regular raises -- even small ones -- are reassuring to most employees. When he discontinued the constant-reward system for several months, at Schumann's suggestion, Dunaway says he heard nothing but dismay. Asked to elaborate, he turns toward the open door.
"Terri," Dunaway calls to a woman in the hallway, "how did you feel when you didn't see the raises for awhile?"
"I missed them," replies secretary Terri Waldorf. "It wasn't so much the money, though. I just felt like, oh, I must not be doing a good job anymore."