Retooling Pay

By Marquez, Jessica; Kiger, Patrick J. | Workforce Management, November 7, 2005 | Go to article overview

Retooling Pay

Marquez, Jessica, Kiger, Patrick J., Workforce Management

Unable to sustain high wages and rich benefits amid global competition, old-guard employers may need to turn to performance-based compensation and incentives to attract and retain workers

Delphi's decision to file for bankruptcy and last month's events at General Motors signal drastic changes for how employers in old-line businesses will have to think about workforce management. Global competition has made it impossible for these companies to rely on high wages, employer-sponsored health care and pension benefits to attract and retain workers.

The new Delphi contract will cause all hourly workers' wages to decline, auto industry analyst Mary-ann Keller says. Traditionally, when an automotive company opens a plant in a region, it increases the wages of that area for all employers. But if Delphi becomes a low-cost supplier, other employers, both within and outside the industry, will follow.

Jim Gillette, director of supplier analysis at CSM Worldwide, predicts that for the auto supplier market, average wages could drop about 15 percent from a range of $25 to $30 an hour, with benefits, to $21 to $26 an hour.

And as wages spiral downward, more employers will need to turn to performance-based compensation and other incentives to retain skilled workers, keep them motivated and attract the next generation of younger workers to the industry, says David Gregory, a labor law professor at St. John's University in New York.

If companies don't find effective incentives, they risk losing prospects to the likes of Wal-Mart, says Sean McAlinden, vice president of research at the Center for Automotive Research in Ann Arbor, Michigan. After negotiations are through, the hourly wages in the auto manufacturing sector will be about the same as at the discount retailer, he says, "but at least at Wal-Mart they know the work is easier."

Executives can look at the performance-based compensation models implemented at Metaldyne, an auto supply manufacturer in Plymouth, Michigan, and Nucor, a Charlotte, North Carolina, steel manufacturer, to see what has been effective in spurring productivity and retaining skilled workers. Nucor has zero percent turnover and has been profitable for the past 130 quarters, says Jim Coblin, vice president of human resources. "That's a huge feat in an industry as cyclical as ours is," he says.

Even companies in bankruptcy, such as United Airlines, have developed programs that reward workers who meet certain metrics. Through its Success Sharing program, launched in 2004, United employees can receive bonuses based on specified goals.

"Employers are moving from high-fixed-cost models where they bear all the risk to performance-based compensation models that are variable costs tied into company performance," says Ravin Jesuthasan, managing principal at Towers Perrin, which worked with United on its performance-based incentives.


Delphi chairman and CEO Robert S. Miller says the company has to drastically cut workers' benefits and pay to stay in business. "We are paying triple or more for hourly labor compared to what prevails in the marketplace, and no business can survive that," he says.

Creating performance-based incentives, however, provides an option for employers to continue to reward hardworking employees while reaping the rewards of increased productivity, says Kim Kovac, vice president of human resources at Metaldyne.

"Resources are tighter than ever, but companies can still do a good job if they have the right people," she says.

To remain competitive in recruiting and retaining workers, Metaldyne created a performance-based bonus plan two years ago for the 4,300 hourly employees in its 30 U.S. plants, Kovac says. Under the program, the company sets certain target metrics in a variety of areas, such as efficiency of production or scrap reduction for the quarter or the month, depending on the plant.

If the plant's employees reach their target, they all receive bonuses, which range from 35 cents to $1. …

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