Proceed with caution when paying teams - includes related article on team compensation techniques

HR Magazine, April, 1997 by C. James Novak

Designing compensation plans is like working with electricity, says Phil Reagan, a principal in the Seven Pines Consulting Group in Cazenovia, N.Y. "You have to be very, very careful."

"Companies know that changing their pay and compensation structure to support a team-based system is important," Reagan explains. But, he says they often fail to realize that changing the compensation structure has to be an evolutionary process, "something that occurs as the organization's cultural change matures." Reagan, who has a doctorate in organizational development, has reached that conclusion during 23 years working with training and team-based change for clients including Carrier Corp., Lockheed Martin, 3M, Chrysler, General Motors and K-mart.

HR professionals know teams are here to stay, even if they are not always sure of the best way to use them. According to one recent estimate, 35 percent of companies and more than two-thirds of Fortune 1,000 companies are using self-directed work teams. In 1996, 73 percent of all U.S. organizations had some form of teams.

This rush to a musketeer model is driven by more than the camaraderie of an all-for-one-and-one-for-all approach - teamwork adds to the bottom line. The University of Southern California surveyed work practices of the Fortune 1,000 and found significant differences in key financial measurements between companies with different levels of employee involvement, including percentages of return on equity, investment, sales and assets.

However, the use of team-based pay systems has lagged. In its 1996 Team-Based Pay Survey, the HayGroup notes, "Management continues to be more positive about the use of teams (87 percent) than about how they pay for teams (41 percent). The 1996 satisfaction levels for team pay are lower than those in 1994, suggesting that team-based pay programs are not as effective or as fully developed as management would hope."

STRATEGIES FOR TEAM PAY

There are two common team-oriented compensation strategies: skill-based pay and gainsharing systems.

Skill-based pay. In skill-based pay, compensation is linked to both individual and team growth, with incremental increases in base pay as new skills are learned and applied. Typically, those skills include areas such as business knowledge, communication, teamwork and safety.

At Tennessee Eastman Division, the largest unit of Eastman Chemical Co. and a 1993 Malcolm Baldrige Award winner, teams demonstrate their maturity by being proficient in technical, social and business knowledge skills, as those skills are defined by a cross-functional compensation policy team. Teams can then participate in a pay-for-applied-skills-and-knowledge (PASK) plan, with six levels spanning technical skills (mixing, refining, finishing), business skills (safety and computer use), and team interaction skills.

Team members move from macro skills to micro skills, specializing in career paths such as operations, laboratory, maintenance or training. The teams themselves authorize the training choices of their members, so that the group's overall proficiencies expand. Leadership roles are stressed, and feedback is frequent. Individual compensation is based on the employee's level in the PASK system. But this type of system has two drawbacks - complexity and the difficulty of correlating skill acquisition to bottom-line gains.

Gainsharing systems. Gainsharing systems provide a way to reward members of all teams based on goals attained by the entire organization. In most gainsharing plans, bonuses are based on improvements (or gains) over a previous performance baseline. For example, Westinghouse measures improvements in quality, cost and productivity and then gives each plant employee equal lump-sum payments.

Libbey Inc., a leading glass and china manufacturer based in Toledo, Ohio, lets cross-functional teams at each of its five manufacturing facilities set plant-specific goals within corporate guidelines. Those goals establish 60 percent of the plant's gainsharing target. The remaining 40 percent is pegged to overall improvement in corporate income from operations. Though goals may include improvements in yields, productivity, customer service, safety and profitability, they must collectively result in measurable financial gain.

Gainsharing encourages teamwork throughout the organization and allows for variable compensation based on performance. But this approach can easily disappoint workers if business conditions outside the plant's or team's control prevent a payout. And some high-performing teams or individuals may believe their contributions should be recognized at a higher level.

Nonmonetary programs are also gaining popularity. Using a recognition program launched in 1987, Wilson Sporting Goods Co. has sparked team-based changes at its Humboldt, Tenn., plant. The plant's 15 job classifications and pay grades have not been supplemented or changed; instead team achievements are celebrated with plaques, T-shirts, posters, and recognition lunches and dinners.