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The production floor at Honeywell’s Commercial Aviation Systems division in Phoenix is the kind of place you’d expect to hear employees chatting about their families, last weekend’s golf game or the latest Batman flick.

Nowadays, however, these assembly-line workers can be heard discussing such weighty matters as operating profit, economic value added and working capital. They chat easily about business goals and financial performance. In fact, all employees at the division have business objectives top of mind like never before.

The change in focus is due to the creation of an incentive compensation plan that links incentive pay with business results. Now, for the first time in the division’s history, a percentage of each employee’s yearly pay is based on the achievement of annual company objectives. If results fall short of expectations, so do employees’ paychecks.

Normally when companies implement this kind of risk-sharing plan employees are skeptical. Money is an emotional topic, after all. But Honeywell’s incentive program met with little resistance because it was the employees themselves, through a group of volunteers called the Participative Pay Team, who decided how the plan would work. In 1994, the first year of the incentive program’s existence, the division beat its profit expectations by more than 10%. The program continued focusing employees on business goals in 1995—so successfully, they hit what Honeywell calls “the maximum performance range.”

Employee involvement is crucial.
Honeywell’s Commercial Aviation Systems division employs 5,500 people in the design and manufacture of state-of-the-art avionics systems.

In an effort to boost division performance, Honeywell also has spent a great deal of time defining and measuring the behaviors and outcomes expected from individual employees. In the process of making these changes, Honeywell’s leadership realized the compensation plan was also in need of an overhaul. The old way of rewarding people was simply no longer working.

“There was a mismatch of messages,” explains Eileen N. Ward, senior human resources consultant. On one hand, division heads were telling employees to focus on cost reduction and measurable productivity improvements—to perform, perform, perform, in other words. Yet the company still was granting pay raises based not on performance, but on an employee’s progression in a job range. The longer employees stayed with the company, the more they were paid, regardless of whether they achieved company objectives. For the new performance-based strategy to work, the incentive compensation system would have to get in line.

Upon deciding to remodel compensation, Honeywell’s HR professionals could have sat down and devised a new incentive strategy on their own. But that too would have been out of sync with the division’s new participative management style. The only acceptable way to fix the incentive plan was to let employees do it.

In 1993, the Participative Pay Team was formed, and employees eagerly responded to HR’s call for volunteers. Twenty-five employees, both exempt and nonexempt, were chosen to serve on the team. There were secretaries and machine shop workers, as well as engineers and department managers.

What motivated so many employees to volunteer for the effort? Team member Greg Wilkins, a nonexempt employee who has worked in a variety of jobs for Honeywell over the last 11 years, put it this way: “It got my interest because they were going to be doing something to my pay.”

The first order of business was for HR to educate members of the pay team about the ins and outs of compensation and why incentive pay needed to be aligned with company goals. All team members attended a 2 1/2-day training session that covered the basics of compensation, including an overview of compensation trends at Honeywell, in the electronics industry and at other companies.

Armed with this basic knowledge, the team members then were assigned to additional research on their own. Some team members attended conferences hosted by the American Compensation Association. Others conducted literature searches for current articles on compensation trends or reported on books about new pay systems. Many team members also were involved in telephone- and site-based benchmarking efforts with companies both inside and outside their industry. Furthermore, to get even more worker input, team members also conducted regular employee focus groups.

Team members spent about six months getting up to speed on compensation issues, devoting approximately 20 hours a month to the effort. Because the time spent took away from workers’ regular job duties, the company leadership saw to it that their individual managers understood the importance of the participative pay program and supported the employee’s involvement.

The new participative pay program is “risky.”
Upon its formation, the team was charged with determining who would participate in the incentive program, how the plan would work, how it would be funded and how incentive pay would link with overall business goals and the executive compensation plan. The HR department provided no guidelines as to how the plan should work. Instead, it was up to team members to make recommendations to the company’s executive leadership.

The team’s only ongoing link with the HR department was Ward, who served as team leader. Although John Hillins, vice president of benefits, compensation and employee information systems at the company’s corporate headquarters in Minneapolis, provided some of the initial training, the corporate HR department also took a hands-off approach. “They called us when they needed us,” he says.

The end result of the team effort was a self-funded gainsharing program introduced in 1994. It has two prongs: First, the program places a percentage of each employee’s pay at risk pending the achievement of business goals linked to Honeywell’s profitability. Second, employees also have the opportunity to earn more than their annual salary when the company has an exceptionally good year. Both payouts are made annually based on overall performance of the division.

Here’s how the plan works: As a self-funded plan, a portion of the available merit budget used for pay raises is set aside each year to fund the risk-sharing amount. While most of the money is still used for merit raises, a percentage is put “at risk” based on business performance. If the amount available for merit spending is 3.5% of the salary budget, for example, 1% is set aside for the risk pool. If the division meets at least 80% of its annual financial objectives, then employees will receive 1% of their base pay in a lump-sum payout. If the division fails to meet objectives, nobody receives a payout, and the money remains in the risk pool. The amount set aside for risk-sharing will peak at 3.5% of an employee’s salary at risk.

Under the new incentive plan, employees also can receive an additional sum called a success-sharing amount. This is awarded to all employees when the division exceeds its business goals. In 1998, when the program is completely phased in, employees will have the potential to receive 5% more than their base pay by exceeding business goals by 20% or more. The 5% success share, combined with the 3.5% risk-sharing amount, means that in a good year, employees can receive up to 8.5% more than their base salary.

The program is linked to the executive compensation program so that employees and executives are working toward comparable targets, with each receiving rewards based on achieving them. According to Ward, the incentive program was designed this way in order to:

• Emphasize the direct stake all employees have in the continued success of the business
• Emphasize the importance of executives and employees working toward similar business goals
• Recognize and reward employees’ impact on major improvement opportunities
• Improve employee understanding of the division’s financial performance
• Support the culture of teamwork, employee involvement and participation.

Team members are key in communication.
Because the concept of participative pay was new to Honeywell, when the company launched the program, a lot of employee communication had to take place—not only about the incentive plan, but about overall organizational goals and how employees could have an impact on them. Here again, the Participative Pay Team took a lead role.

Members conducted two-hour orientation courses for employees to provide an overview of the participative pay program and the measurements needed to receive a payout.

The communication effort was supported by the HR department, which produced two publications about the new plan. According to Ward, one was a comic book that showed two employees having a dialogue about the new pay system, and the other was a typical HR document explaining the incentive pay structure. These were distributed in the orien tation course.

Because the incentive program uses high-level financial measurements, Honeywell also has had to educate its workforce on business fundamentals. It developed a course called Business Basics to provide general information on business goals and objectives, as well as specific information on how to calculate the three measures used to determine company performance: profit, working capital and economic value added (post-tax operating profit reduced by cost of capital multiplied by the division’s investment). Conducted by Participative Pay Team members, the course also helps participants understand how their individual jobs impact company performance.

The biggest challenge in explaining the program to employees was communicating the concept of risk sharing. “Employees didn’t like the risk-share piece,” she explains. “We defended it by saying that they couldn’t very well share in the success of the company if they didn’t also share some of the risks. It underscores the partnership message.” The other challenge was breaking the entitlement mentality of employees who were accustomed to receiving a standard raise every year.

The fact that the program was designed by employees for employees went a long way toward overcoming both challenges and creating the buy-in necessary to make the program a success. As team member Wilkins explains: “We had to have some reasonable justification for every decision we made because we had to face the people we work with every day.”

Two years into the program, it appears the incentive pay plan is doing what it’s supposed to – focusing employees on bottom-line business objectives. Although it’s difficult to isolate the pay program from some of the company’s other quality initiatives, Donald Schwanz, vice president and general manager of the Air Transport Systems unit, says he believes employees have much more knowledge about the business from a financial standpoint. “The pay program has focused employees on business goals,” he says. “They see a distinct tie between what they do and the health of the business in general, and they’re making better decisions as a result.”

In 1994, the first full year the program was in place, goals for profit and economic value added were exceeded by 10%. In 1995, the workforce reached all its goals—employees received the full 3.5% of their salaries from the risk pool. That’s $1,225 for an employee earning $35,000 a year.

To what does Honeywell attribute its success? Several things, Ward says, including extensive employee education and leadership support. But most critical was the employee involvement. “The team members not only gave the program good visibility in the workplace, they provided a richness of input that HR couldn’t have obtained on its own.”

Now that the plan has been in place for two years, the focus of the Participative Pay Team has shifted. Today, the team’s primary role is to work with the finance department to monitor the books. They also attend monthly progress reports, conducted by the executive leadership for the entire workforce, to ensure what the leaders tell employees is in line with the financial statements. “The crux of their role is to provide a ‘trust’ message to the workforce,” Ward explains. “In other words, to look at the books and validate what’s being reported by management.”

The team also continues to search for ways to get a better line of sight between individual jobs and overall company performance—because in the end, the participative pay plan is not really about money. As Vice President Hillins explains: “This isn’t really a compensation program. It’s a communication program.” Honeywell just uses the paycheck to get everyone’s attention.

Paradox: A seemingly contradictory statement that may nonetheless be true.

Corporate America is living in an age of paradox, born from hanging on to old ideas in new times. It’s an age in which the desire for teamwork conflicts with the need for individual accountability; in which short-term measurements interfere with long-term objectives; and in which entrepreneurial thinking is thwarted by the need for management approval.

Bombarded by conflicting messages, many employees have become like deer caught in the headlights: uncertain, scared and immobilized. Afraid any steps they take will be penalized, they choose to take none at all, giving the illusion that they lack commitment to both their jobs and their companies. In reality, they just don’t know what to do. “It’s almost as if they’re caught in laboratory cages, getting electric shocks no matter what they do,” says Peter Scott-Morgan, director of Arthur D. Little, a business consulting firm located in Cambridge, Massachusetts, and author of “The Unwritten Rules of the Game” ((c)1994, McGraw Hill Inc.).

Far from what many people believe, however, these contradictions aren’t something constructed by hypocritical executives for the sole purpose of causing employee pain. These are the result of very real, rapid and phenomenal changes under way in the workplace.

If we’re to overcome the seeming inconsistencies in our management practices, we must acknowledge changes, discard the human resources policies that no longer fit and help employees understand the new world of work.

New times, old processes.
Indeed, the American workplace is moving from an industrial-age, assembly-line model for which standardization in products, procedures and jobs was the norm, to a workplace that’s designed to encourage flexibility and adaptability.

To meet the demands of new consumers, new markets and new competitors, our companies, our jobs, and the relationship between the two, must constantly be reinvented. The paradoxes we’re facing have appeared because we’re in the middle of this change. The old systems and management principles no longer apply, but we’ve yet to develop corporate infrastructures that support the new model. Thus, while management may be genuinely saying one thing, our HR systems are still reinforcing something from the past. To employees, it appears as if management is speaking from both sides of the mouth.

Take teamwork for instance. We want employees to break out of their independent, autonomous mindsets and work closely with their colleagues. We want joint decision making, esprit de corp and group accountability. But for the most part, our compensation and reward systems still support individual achievement. A recent survey by the American Compensation Association, based in Scottsdale, Arizona, found that less than 45% of organizations offer recognition and rewards for team performance, and even fewer have cash incentives. This, despite the fact 92% of these companies expect to expand the use of teams. How can team members be expected to be focused on the team when they’re paid based on individual accomplishments?

Then there’s the whole notion of innovation. We push the idea of empowerment and entrepreneurial thinking, but give department managers the final word on all decisions. We want people to take more risks, but systematic layoffs reinforce the idea of employees playing it safe. We want employees to think like independent contractors, but continue to hire, pay, promote and manage people as if they were still in traditional cradle-to-grave job slots.

The essential nature of the dilemmas faced by companies today is what Hubert Saint-Onge, vice president, leadership development, for Toronto-based Canadian Imperial Bank of Commerce (CIBC), calls “empowerment vs. alignment.” After conducting 1 1/2-hour one-on-one interviews with CIBC’s 27 most senior executives, he uncovered nine predominant organizational dilemmas, including independence vs. interdependence, discipline vs. creativity, and productivity vs. work/ life balance. All of these dilemmas, he says, are reflective of the tension that comes from trying to empower people and align them with today’s corporate objectives. The only way we can achieve empowerment and alignment is through HR systems. When HR is out of whack with corporate goals, paradox occurs.

The disconnections in today’s workplace aren’t surprising, and no one is to blame. Changes in markets, products, competitors, technology and workplace structures have come upon American companies very rapidly. It wasn’t clear at the start of all this upheaval that HR systems would also need changing. After all, the complex web of policies, procedures and practices that we call human resources has worked extremely well for generations of workers.

But today, where we need to go is very different from where we’ve been. We’re not putting out the same products in the same way against the same competitors every year. We’re designing new products, entering new markets and facing new and surprising competitors. Who would’ve thought the biggest competitor of Federal Express would come in the form of a fax machine?

To successfully compete in today’s environment, we’ve taught workers to think differently about their jobs. Yet, our policies and procedures reinforce the status quo. Left unchecked, these inconsistencies can damage the bottom line.

Look, listen and act.
What can HR professionals do to root out and rectify the major workplace conflicts? First, hold up a mirror to the organization and recognize the most glaring inconsistencies. Don’t rely on intuition. Talk to employees at all levels of an organization to find out where paradox exists. “It’s easy for managers not to recognize hypocrisy because many of them try to take account of things intuitively,” says Scott-Morgan. But that intuition is based on past experience. As we now know, it only takes one major shift in the economy, in technology or among competitors to radically change what feels like the sensible way to behave. “At a time of rapid change, relying on outdated intuition is too unprofessional,” he says.

When talking to employees, look for the major gaps between corporate values and corporate systems. Are you promoting teamwork, but rewarding individual accomplishment? Are you planning for long-term growth, but evaluating managers based on the achievement of quarterly numbers? Do you reward cost-cutting measures, but hold revenue growth as the highest goal? Do you seek change and innovation, but recruit people who’ve done the same work for years?

Once you understand the nature of paradox in your organization, you can begin to align the conflicting factors. As David Axson, vice president and co-founder of the consulting firm Hackett Group, located in Hudson, Ohio, explains: “It’s a linkage issue. You have to build the infrastructure to support your corporate goals.”

Another role for HR professionals in this time of change is helping employees understand the harsh realities of today’s business climate. Sometimes things may appear paradoxical simply because people don’t have all the right information.

A recent HR study by the American Management Association, based in New York City, may provide some insight as to why employees are so paralyzed by today’s workplace paradoxes. According to the survey, a scant 2% of HR professionals gave “the new employer-employee relationship” top priority as an organizational strategy. Customer satisfaction, total quality and reengineering came out way ahead. While these initiatives are vital to the success of our companies, they’re bound to fail unless employees understand why the workplace around them is changing so drastically. Caught in the headlights of corporate change, today’s anxious workers are desperate for meaning.

Besides just making sense of the dilemmas for employees, HR professionals must also help employees learn to live with them—because in some form or another, paradox probably is here to stay.

Although there always have been paradoxes in the workplace, the rate of change was slow enough for them to be worked out over time. If the reward system didn’t support new corporate initiatives, for example, new measurements could be put into place. The difficulty of managing today’s paradoxes is exacerbated because we’re trying to change into organizations that will keep changing. We’re not moving from one steady state to another steady state where we can realign and relax a little bit. We’re leaping onto a treadmill.

To get comfortable with change we have to get comfortable with paradox, the side effect of change. We can do this by learning how to stop thinking about management strategies as “either-or” decisions, and by getting comfortable with the idea of them being “both-and,” decisions, says Wynne W. Miller, a management consultant based in Newton, Massachusetts. We can encourage both teamwork and individual accountability, for example. We can push for greater productivity and give employees more flexibility for their personal needs. Not all these initiatives are mutually exclusive.

Becky Albrecht, vice president of HR for Hutchinson Technology Inc., in Hutchinson, Minnesota, agrees. “To be competitive, we have to be able to operate with these paradoxes,” she says. “What we’re seeing in HR is not all that different from what manufacturing managers have recognized for years—business has to continually change to operate in a competitive environment. We have to get used to the conflict.”

Right now, the gap between what management is saying and what HR is doing is probably at its widest point. As we begin to address the inconsistencies, the gap will narrow, but it probably won’t disappear. If change is to be constant, then HR professionals will increasingly find themselves in the middle of what was and what will be.