Why you may have to keep changing your bonus system
A well-designed bonus plan can make a huge difference in how smoothly a business works. But for some reason, a lot of well-intentioned managers miss the boat. They assume that the program they just installed is the right one -- or at least they hope it is. And if not, they're reluctant to move too fast on making any changes.
But the record shows that even the best bonus systems need revamping from time to time -- some sooner than others. The needs of a business shift. Unforeseen events occur. So somewhere along the line you have a decision to make: do you maintain the system as it is, or do you adjust it?
The managers of Solar Press Inc., based in Naperville, Ill., have confronted this question more than once in the past few years. In fact, as their direct-mail printing and packaging company has grown and added people, they've decided to junk an old plan and start all over again three times since 1984. At various times along the way, they've thought they had it all figured out -- but never for very long. Which only goes to show how tricky it can be to come up with a program that stands the test of time.
Back in the 1970s, when Solar Press was a young, family-owned business, the attitude toward bonuses was casual, even a bit paternalistic. The company had fewer than 20 employees, and, as long as it was making money, founder John F. Hudetz was perfectly happy to pass it around. At the end of most months, he'd hand out checks -- usually for $20 to $60. Everyone got the same amount. No one knew how it was calculated -- or why it was more (or less) than the previous month. But none complained. "It was seen as manna from heaven," notes Joe Hudetz, one of the six sons at the 375-employee company.
When the business was small, it didn't bother the owners that some employees were taking the bonuses for granted. But during the early 1980s, when sales passed the $2-million mark and more new people were being hired, it seemed a good time to try something that was more carefully defined. To accommodate growth, the Hudetzes wanted to get employees focused on production. So, working with a computer spreadsheet, they came up with a promising new bonus plan for the company's 75-person mail room. Employees were assigned to specific machines and divided into work teams of four or five members; the more a team produced during a given month, the bigger the bonus for each member. And teams would compete for additional dollars.
The incentive system was put in place in the spring of 1984, and it had an immediate effect. The packaging machines ran faster than ever as employees jockeyed for larger and larger payments. In many cases, production rates doubled. "Employees were watching the numbers like dogs," Joe Hudetz recalls. In good months, team members at the top of the heap would see bonuses of about $250, while their counterparts assigned to other teams might receive a quarter of that.
It wasn't long before both managers and employees began to spot problems. Because of the pressure to produce, teams didn't perform regular maintenance on the equipment, so machines broke down more often than before. When people found better or faster ways to do things, some hoarded them from fellow employees for fear of reducing the amount of their own payments. Others grumbled that work assignments weren't fairly distributed, that some jobs demanded more work than others. They did, but the system didn't take this into account.
The managers of Solar Press didn't pretend it was a perfect system, but they did feel they could tame the worst abuses. They started monitoring things more closely and made some adjustments, such as fairer distribution of the hard work. After the mail-room plan had been in place for a year, the company went ahead and introduced a similar system in other parts of the business. Printing-press operators, for example, were given incentives to work faster, and so were employees in the pre-press department and the bindery.
In 1985, Solar Press's revenues grew 51%, to $18.5 million. Thanks to the incentives, the plant was cranking out record volume and making lots of money. It should have been an upbeat place to work, but in reality it was a pressure cooker. "The system totally dismantled any feeling of teamwork or companywide spirit," notes scheduling manager Sue Smith. With the focus on speed, quality suffered, and a significant number of jobs had to be reworked before they left the plant. Each time managers fiddled with the rules, something else got out of whack, and keeping score was a nightmare. Finally, people began recognizing the program for what it was: a hopeful experiment gone awry. "A lot of middle managers came forward and said it wasn't working," recalls Joe Hudetz. He and his brothers readily agreed. So at the end of 1986, they scrapped the incentive system altogether.
It's one thing to pull the plug on a program that doesn't work. But where does a company go from there? For nine months, Solar Press went back to its original bonus plan -- the one in which employees were treated equally (except managers, who got a bit more). Without the production incentives, the pace slowed down. "Mostly," Joe Hudetz says, "it was a way to cool our heels." In the meantime, he, his brothers, and the other managers did postmortems on their recent fiasco and talked about what they hoped to achieve with a new system. At about the same time, the company installed an employee stock ownership plan, so they wanted the new incentive plan to be compatible with the ESOP.
One thing the managers agreed on was that internal competition had hurt the company more than it had helped. Because of the way work flowed from one department to another, they wanted to be sure that, in the future, all employees saw themselves as on the same team; they also wanted a system that was easy to calculate and to explain. "If it meant providing a little less incentive for an individual to work at the maximum rate," Joe Hudetz explains, "we were willing to make that choice. Overall, we wanted a smoother operation.'
Solar Press's new bonus program, installed in October 1987, doesn't encourage people to screech around the corners the way the old one did. Instead, it rewards everyone for bottom-line results according to a clear-cut formula: every quarter, management sets a target for profitability based on what it thinks is within reach. Asssuming the company meets the goal -- and the numbers are openly discussed within the company -- 25% of the incremental earnings go into a bonus pool. The pool is then divided in relation to a person's earnings during the previous quarter. If, for example, an employee earned 0.5% of the total payroll, he or she is entitled to 0.5% of the bonus pool, modified by two factors: it takes two years to become fully vested in the program; and unexcused absences or tardiness can deflate the size of a check.
The decision to tie bonuses to companywide results (as opposed to individual efforts) doesn't mean that there are no longer opportunities to personalize motivation at Solar Press. For one thing, there are midyear and year-end performance reviews. "When people do a good job, we recognize them with pay increases," notes Mike Hudetz, vice-president of manufacturing. Employees know that the bigger their raises, the larger the base on which to earn bonuses. The company also tries to personalize the manner in which the bonus plan is communicated. Each quarter, employees receive a customized statement that lays out the numbers. It tells them how well the company did in sales, costs, and profits; what it means to employees as a group; and what it means to the individual. The statement, which is distributed within two weeks of the end of a quarter, is accompanied by a letter explaining the numbers. And if performance is up to snuff, employees get their checks.
The system has been in place for more than a year and a half now. So how is it working? Well, most people at the $37-million company feel that, overall, it's a big improvement. "People now know that if the company does well, they'll get a share of it," says Chuck Ortinau, plant supervisor in the packaging and mailing department. Employees also know that the bonus checks aren't guaranteed. In fact, during 1988, employees received bonuses in the first two quarters, but not in the third and fourth. Naturally, few were thrilled about that, but at least there was an explanation, which they accepted. A memo from management told of how a series of cost increases for paper and higher-than-expected overtime expenses had cut profitability below the target.
Joe Hudetz and other managers are optimistic that the company's profit picture will improve significantly in the months ahead. If they're right, employees will be reaping the rewards in their quarterly bonuses. But even after all their experience with incentive schemes, nobody is willing to say that this is the bonus plan to beat all bonus plans. Joe Hudetz anticipates some adjustments, although he isn't sure what they'll be. "You have to be willing to face up to what's wrong with a system, and I think our employees appreciate that," he says. "The greatest mistakes in history have been made by people who refused to change."
STEP BY STEP
The evolution of Solar Press Inc.'s incentive program
* Informal bonuses, companywide (1977-84)
Upside: No promises; easy to administer
Downside: Employees didn't know what they were being rewarded for; no motivational effect
* Production bonuses, by team (1984-86)
Upside: Stimulated output and creativity
Downside: Sets off rivalries among departments and individuals; created equipment and quality problems; administrative nightmare
* Profit-sharing bonuses, companywide (1987-present)
Upside: Simple to understand; emphasizes teamwork and interdepartment coordination
Downside: More difficult for individuals to influence