HR MAGAZINE JAN.2003 VOL.48 ISS.1 PG30 Top Pay for Best Performance Presented by: Kacheyta McClellan Mark Reeder

Corning Inc. Stock price recently dipped to just over $1  1% of its value 3 years ago  Slashed 16,000 jobs in two years and frozen remaining salaries Will give bonuses to employees next month (Feb 2003) who meet their goals  Increase productivity  Secure dominance in potentially lucrative market

Paying for Performance in a Down Economy Companies have a smaller pot of money to allocate for compensation Some organizations are giving salary increases, bonuses, or both in varying amounts  With the most going to best performers and most essential employees  Alternative to giving everyone equal but minimal increase

Performance Assessment Can be based on  Individual or team contribution  Business unit results  Corporate profit or share price Can be rewarded through  Traditional salary adjustments  Variable pay techniques  One-time or recurring bonuses

Creativity in Compensation Brad Hill, Senior Consultant with the Hay Group in Chicago  A firm gives each worker a 5% salary increase each year for 10 years  Reduced to 3.5% per year (b/c the firm is not compounding the larger raises year after year)  Can give each employee an annual bonus of 7.2% of their salary  For the same budgeted payout as 5% for 10 years

Watson Wyatt Survey 40% of top-performing employees believe they receive moderately of significantly better pay than average-performing employees  Including pay raises, annual bonuses, or total pay Companies providing variable pay to best workers are 68% more likely to report outstanding financial performance

Thoughts of… Jay Schuster—Schuster Zingheim and Associates John Bremen—Watson Wyatt Worldwide Russell Miller— Mercer Human Resource Consulting Monica Barron—AMR Ken Abosch—Hewitt Associates David Balkin—University of Colorado Mike Lieberman--Synygy

Thoughts of… Schuster—in the 1990’s, we were throwing money at talent, now companies are more careful who they award incentive pay to Bremen—on paying for performance  it takes 7%-8% compensation increase to effect employee effort  The best way for an organization to communicate with its employees

Thoughts of… Miller—Employees will share in the fruits of business success, but also share the risk of belt- tightening Barron—should make your best performers role models communicating “do this to get these checks” Abosch—there may be fear of unsatisfied employees  We’re trying to improve performance, not satisfaction  Sometimes we need a healthy dose of tough love

Thoughts of… Balkin—involving employees in the design of a performance pay system  Half the time, they come up with the same plan I would have Lieberman—performance pay systems is a sales-oriented concept, easiest to measure is sales

The Role of HR HR is viewed as essentially managing the biggest cost center that most organizations have. HR sees performance pay as the best opportunity for them to take a closer look at what they are doing and to challenge the entitlement mentality. This new thinking gives HR the opportunity to demonstrate its value to the organization and to create a whole new generation of HR professionals.

Goalsharing at Corning Rewarding employees for meeting important goals, whether or not the company is raking in lots of money, is the heart of the “goalsharing” program at Corning Inc. This system was developed by the employees and is reviewed and adjusted annually by committees which include workers, managers and union representatives. The bonus is split into two different parts. o One-fourth of the bonus is based on earnings per share of company stock for the preceding year. o The rest depends on how well the worker has met job performance goals established for their unit over the year.

Goalsharing cont. “One of the basic premises of goalsharing is that every employee would have line of sight” to the corporate goal. Individual performance standards “ are set with the idea that each employee can somehow contribute to meeting that goal.” Larry Lukefahr, manager of variable pay programs.

Compensation Criticisms One of the criticisms of compensation systems is that they fail to adequately distinguish between the best and worst performers. A second criticism is that some compensation systems don’t take full advantage of bonus pay and focus instead on increasing base pay – a strategy that can compound payroll obligations over time and limit an organization’s options for rewarding its best employees.

When to Tinker or Start Over According to compensation experts, roughly one-third of performance pay plans fail. Some don’t get set up properly, and some don’t work as well in a poor economy as in a strong one. Even the best pay systems need regular check-ups. However changes should be consistent, if an organization is tweaking the system back and forth it reaches the point where it is better to start over. The goal is to establish a system that makes sense in bad economic times as well as good ones, and not to undermine it by rewarding employees who have not produced.

B – YEAROffers poor performers a salary increase of 3% C - POOR PERFORMERSOffers average performers a salary increase of 4% D - AVERAGE PERFORMERSOffers top performers a salary increase of 5% E - TOP PERFORMERSOffers no bonus A B C D E Starting salary $50,000 $50,000 $50,000 plus merit increase 1998 $51,500 $52,000 $52,500 % bonus $0 $0 $0 salary plus merit increase 1999 $53,045 $54,080 $55,125 % bonus $0 $0 $0 salary plus merit increase 2000 $54,636 $56,243 $57,881 % bonus $0 $0 $0 salary plus merit increase 2001 $56,275 $58,493 $60,775 % bonus $0 $0 $0 salary plus merit increase 2002 $57,964 $60,833 $63,814 % bonus $0 $0 $0 TOTAL FIVE-YEAR COMPENSATION BUDGET $218,670,632 COMPENSATION IN 5TH YEAR Poor performer $57,964Average performer $60,833Top performer $63,814

B – YEAROffers poor performers a salary increase of 2%, no bonus C - POOR PERFORMERSOffers average performers a salary increase of 4%, bonus of 3% D - AVERAGE PERFORMERSOffers top performers a salary increase of 6%, bonus of 7% E - TOP PERFORMERS A B C D E Starting salary $50,000 $50,000 $50,000 plus merit increase 1998 $50,500 $51,500 $52,500 % bonus $0 $1,545 $3,675 salary plus merit increase 1999 $51,005 $53,045 $55,125 % bonus $0 $1,591 $3,859 salary plus merit increase 2000 $51,515 $54,636 $57,881 % bonus $0 $1,639 $4,052 salary plus merit increase 2001 $52,030 $56,275 $60,775 % bonus $0 $1,688 $4,254 salary plus merit increase 2002 $52,551 $57,964 $63,814 % bonus $0 $1,739 $4,467 TOTAL FIVE-YEAR COMPENSATION BUDGET $282,098,796 COMPENSATION IN 5TH YEAR Poor performer $52,551 Average performer $59,703 Top performer $68,281