High-performance rewards present challenges for energy industry

Dec. 11, 2000
Until recently, energy-producing companies have not directed enough attention to the effectiveness of their workforce pay and rewards structure.

Until recently, energy-producing companies have not directed enough attention to the effectiveness of their workforce pay and rewards structure.

Traditionally, the energy industry carefully nurtured executive pay but not necessarily the compensation of others in the company. Personnel pay, while costly, can represent a relatively small cost of doing business in the energy industry compared with other costs in such a capital-intensive industry.

This old thinking about pay is faulty, and recently more progressive energy company leaders have focused more on reward systems for their entire workforces. While pay and reward costs may not, themselves, be a major balance-sheet item, pay communicates key messages to the workforce, and what people do based on this information leverages millions in other asset costs-either effectively or ineffectively.

Positive rewards, benefits

Examples of positive reward change are notable. One global energy company has become an icon in the industry for its progressive views on human resource management and a "best place to work" view of pay and benefits.

At the end of the last decade, this company conducted a major, critical evaluation of its potential future business direction. This assessment involved major segments of the company's global workforce.

The organization needed to both change its size and become more effective. Its reorganization resulted in dislocations and changes in the role many people would play in the future. But by spending the time to analyze fully its future direction and implement changes accordingly, the company avoided a potentially negative situation that could easily have been labeled "downsizing" or "delayering"-the unsuccessful type of change many businesses undertook during the 1980s and 1990s. Most of these negative "reengineering" efforts failed to meet the stated goal of improving shareholder value, and many actually caused the value of the business to diminish once all the dust had settled. In addition, these actions often forever disenfranchised the company workforce that remained after the "killing field" change effort was completed.

While pay and rewards were not a leading element in the aforementioned company's change, they did play a role in the change process. The company used the change opportunity to move more closely to a reward solution that better reflected the new, more performance-focused organizational design.

The new emphasis was on adding opportunities to improve development and training that would create new employee skills and refine old ones. The company also placed even more focus on creating a vision for a global workforce that viewed the company as one of the top firms in the world for which to work. This vision was designed to ensure that leadership continues to provide a positive opportunity to work with supportive people and total pay (base pay, incentives, benefits, recognition, and celebration) that supports the entire business change.

Soft vs. 'hot' initiatives

Many companies in the energy industry believe they already provide a rewarding environment for their personnel, but recent Schuster-Zingheim & Associates Inc. research indicated that only the federal and state governments were able to provide fewer "world-class" total reward examples than the energy industry provides.

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While there has recently been some restraint from pursuing a "commodity" view of rewards, it is clear that a groundswell toward "total pay" and "total rewards" is not under way with energy companies (Table 1). Although an important opportunity exists to gain workforce alignment, many in this industry are missing the chance to "brand" their reward solution and reap the advantages.

The mere liberalization of pay and benefits-just paying more money and increasing benefit provisions-misses an opportunity for a much more advantageous company reward solution.

Rewarding and paying strategically employs the use of considerable communications power that pay and rewards can have to support key business initiatives and make stakeholders of the workforce.

Energy companies may too often focus primarily on the softer, safer, or "colder" change items, such as new recruitment, selection solutions, or better succession-planning processes. These approaches to change are popular because they either impact people who have not yet joined the company or because they have such long-term consequences that they do not get the immediate attention of the workforce.

But pay and rewards are "hot" change items; they get everybody's attention and do so now. One CEO said recently, "You can mess with anything but my pay and my kids." So energy companies often avoid making necessary pay and reward changes because, no matter how much care is taken in designing a new pay and reward system, some workforce "noise" results. This hinders decision-making, because many oil and gas companies hate workforce noise, even if it is justified by a strong business case for change-and even when the opportunity exists to change negative noise to positive attitudes as the reward transformation unfolds.

Viable business processes

To effect a successful reward and pay system, all energy companies should do the following:

  • Develop a total reward strategy that makes sense relative to their specific business strategy. The goal is to use pay and rewards as a communications tool for getting people to understand and willingly assume the roles they must play to make their organization a success.
  • Make total rewards or total pay solutions the instruments of communication, and use all the elements of pay and rewards to achieve this result. People work for more than pay; therefore, it is essential to customize rewards to match company and workforce needs.
  • Convert pay and rewards into a positive force for change. Put the very best people in roles that influence the way rewards are designed and delivered. Make reward design an open process by encouraging input and workforce involvement.

Some examples of positive and negative reward and pay mechanisms-and their performance outcomes-follow. The objective is to provide some suggestions for establishing effective rewards systems.

Positive results

A few years ago, a tanker traveling from Valdez, Alas., to Cherry Point, Wash., was the focus of a study on reward incentives for tanker masters. The Exxon Valdez tanker oil spill in March 1989 had focused considerable attention on issues of safety and the environment.

At the time, the master of an oil tanker had the most responsible leadership position on the vessel, for the salary paid. A team of masters was collaborating on the measures and goals that should be used to determine master pay.

A company's success involving oil carriers depends on more than a focus on measures of cost and speed, which, of course, are essential elements in getting the most from major capital investments such as crude oil production and the tankers that transport the production.

The goal of the study, however, was to align the masters' rewards with the key measures of success that the company believed were equally essential to profitability-safety and environmental protection.

The job of an oil tanker master is one of the most accountable that exists, for the pay received. Piloting a huge craft in fragile waters is difficult, and the implications that less-than-excellent performance can bring are obvious.

To obtain the best in asset performance, company leadership selected, as first in order of importance, measures other than those that normally would be tied to financial realization as it relates to the master's performance.

The team of masters developed a work product having as its first priority incentives based on measures of safety and environmental impact, thus communicating the company's key priorities to people through its pay and rewards design.

The lesson this example imparts is one of making rewards a positive communicator of change and direction. It is a case of the company "putting its money where its principles are."

Pay is a powerful communicator of the company's directions and values, as this example shows. The reward alignment selected is a barometer for determining how any company can address this type of issue. It is specific and tactical-not a remote concept hard to understand.

Negative results

When one major gas company was investigating possible pay and reward design changes, its interest was drawn to an infrastructure item known as "broadbanding."

Broadbanding is essentially the creation of "fat" salary ranges-combining many narrow salary ranges into single, broader "salary bands."

This concept has created considerable interest, based on suggestions that the method provides a more agile and flexible pay solution. The goal is to flatten the pay solution, putting more control into the hands of the manager and permitting workers more mobility in job growth in terms of vertical and horizontal opportunities. The details are generally available.

The company's CEO had read an article praising broadbanding as a better pay system, so the chief human resources executive of the company was charged with implementing the program.

Questions wise leaders should ask when contemplating changes to pay and rewards are:

  • What is the business case for making this change?
  • How will the company and workforce benefit from a this type of change?
  • What return on investment will the business gain from a move such as this?
  • Will the new system communicate something of advantage to the workforce about their role in the company and its success?

In implementing its broadbanding program, the company may not have addressed these and other pertinent questions. The result was that they got broadbanding, but 18 months later, base pay costs had inflated by over 18%, yet performance had not improved correspondingly. The move to broad pay ranges without additional changes addressing core business goals communicated to the workforce only that their base pay could now move to the top of these wider ranges.

The real need of the company was for a pay progression solution that allocated available pay-increase dollars to what the company wanted to pay for in terms of skill deployment and performance outcomes.

Within 2 years, the human resource professional and chief executive were gone, and the experience ended any further initiatives, as it related to pay and reward changes, as "too dangerous" to undertake. But it was not the pay and reward change that was dangerous; it was the incomplete implementation of that change.

Simple solutions preferred

One medium-sized oil exploration enterprise realized that, for it to proceed effectively, it was necessary for small teams of exploration professionals to collaborate effectively in the search for resources.

The team, which shared goals, objectives, and a "shared fate," consisted of people who had different but complementary skills and competencies. No one individual could do the job effectively alone, and working together was critical to success. Other companies facing this type of challenge have reached similar conclusions.

Pay and rewards in this company were highly traditional. The base pay relied on individual merit for determining eligibility for any base pay increases.

In addition, the company had a retrospective individual bonus plan: team members were considered for lump-sum cash awards at the end of the year based on the results they generated as individuals.

The dislocation in this scenario is that the key measures of success and performance are shared measures and goals-shared with all team members. Individual team members could not succeed individually, because all of the real indicators of business success were team-based and not individual in nature.

Pay and rewards had to change. The merit system was merely spreading pay-increase dollars around based on length of service. The retrospective bonus was granted, not only for mysterious reasons unrelated to pre-established goals and performance expectations, but they had nothing to do with the successful progress of the exploration professionals as an effective team.

The prescription was to apportion a certain amount of future pay and bonus dollars to three or four shared team goals. If the team met or exceeded certain milestone goals and measures, each member would be awarded a lump-sum cash award at the end of the year. A part of any potential base pay adjustment was based on achievement of the same team goals.

These simple solutions made sense and communicated a "we are in this together" message that everyone in the teams understood. The team members and the champion of the reward change, the responsible executive, all liked it. They knew it would take time to adjust, but everyone felt it was worth some pain during the transition period.

When higher-level line and human resources sponsorship was requested, the business case for the reward change presented by the project champion and team members was powerful. Research evidence, as well as practical experience with team rewards, suggests that members of teams that have a portion of their rewards based on shared team measures and goals outperform teams that have rewards based only on individual team member performance.

The solution would create some noise as the teams changed from individual to team rewards, and a number of measurement and other challenges had to be addressed, but the business case was worth it. And because of the business the company was in, the company clearly needed all the focus on desired results they could get.

The company had a centralized pay and reward solution-actually a point system that evaluated the worth of jobs people had, based on the internal value of these jobs. Jobs on the exploration teams were compared with those in accounting and finance, and these jobs were assigned to salary grades that provided a high degree of internal consistency throughout the enterprise.

The program was a vestige of oil and gas companies' tendency to copy each other's human resources practices. Once the landslide to implement point plans in the 1950s hit, there was no stopping it. Business cases for other solutions were pushed aside.

There were some problems. While the central executives and human resources personnel realized the power of the business case, they also feared some inconsistency. After all, everyone in the company could not be a member of a team and have team rewards. It was "unfair" and gave something to some that could not be given to others. Other incentive bonuses had to be developed for those who fell outside the team frameworks.

Changing pay, rewards

When companies adapt to meet new business needs and opportunities, most of their changes involve modifying organization design. These subsequently influence the people doing the work and how they perform it.

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Table 2 contains key questions company personnel should ask about the business case for changes before they determine changes to pay structure. Pay solutions developed as recently as 5 years ago did not take such current business challenges into consideration.

Companies in the throes of change, those taking on new business priorities, businesses involved in mergers and acquisitions, companies "going global," and those placing new requirements on their workforce should pay close attention to whether their pay continues to meet the needs of the business.

When these elements are considered, it can make a huge difference in the success of the outcome. For example, one large Midwestern gas producer was merging with a nearby smaller company and recognized that some changes were necessary.

The smaller company had some capabilities and resources the larger company needed, both in terms of their personnel and the hard assets in their delivery area.

The large company had a tradition of one-size-fits-all rewards. Pay and rewards were bureaucratically managed, with little room for flexibility and adaptability. It was "the way it is done here" and had been for many years.

The smaller company had been around for a while too, but it lacked the centralized pay and reward control. Over time, line managers had learned to do a good and basic job of managing pay and rewards.

Accountability for the management of rewards had been delegated, and it was working. The great benefit was that managers gave direct feedback to workforce members and took responsibility for pay and reward decisions. The buck stopped with managers, and there was nobody higher up to blame policy decisions on.

The systems were simple and driven by effective budget management. Managers had pay and reward budgets to manage and were accountable for getting the job done. If they needed more money, the CEO would call the managers together, and the one that needed more money stated the case to the rest of the managers. The other managers were asked to evaluate the presenting manager's budget case. Managers would then decide if they were willing to give this manager some of their pay and reward money to use for the situation described. It worked well.

During the merger of these two different cultures, the larger company was smart. As part of the merger team they formed a sub-team on pay and rewards that included managers from both companies. The team developed an integrated pay-reward solution that both companies could approve. It took the best from each pay and reward solution and generated an approach to total rewards that was better than the sum of the pre-merged companies. Both companies championed it, and pay and rewards served to solidify both companies rather than to create separation and discord.

A merger or acquisition is an excellent time to call on pay and rewards to form the glue with which to meld workforces and leadership teams.

Too often, a larger company will implement its pay and reward solutions unilaterally into the company they are acquiring or have selected as a merger partner. This commonly creates unnecessary discord and disenfranchises the very people the merged company must count on to add value to the joint enterprise.

Whether the ultimate result is some staff reduction or not, it clearly makes more sense to deploy pay and rewards to favor business linkage than to create negativism and human resource problems.

Total rewards

Payrolls are costly, but company profits depend on having good people. Making pay and reward mistakes can seriously impact strategy and the bottom line in a major negative way, especially when talented people are scarce.

Patching together a pay and reward solution to "hold the dike" until reinforcements are available is all too common today. Pouring money into pay solutions that might have worked when more people were chasing fewer jobs will not give the benefit that companies desire today. A new direction is needed.

Table 1 shows balanced total rewards. As mentioned previously, it takes courage to change a company's pay and rewards. It is much easier just to change cold communications vehicles such as training, development, or new recruitment policies.

Energy companies may eventually make the change to total rewards. The emphasis on performance and the need for talent in a tight market will force the issue. The most compelling element driving current hesitation is the fact that few in the energy industry are now getting full value from the dollars expended on pay and rewards because of their poorly developed programs. A successful approach clearly requires courage, careful planning, and "out of the box" thinking that may be too uncomfortable for many people.

The authors

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Patricia K. Zingheim and Jay R. Schuster are partners in Los Angeles-based Schuster-Zingheim and Associates Inc., a pay and rewards consulting firm. They have coauthored two books on pay strategies, Pay People Right! and The New Pay, and more than 100 articles on total rewards, incentive, and other pay solution topics. They speak throughout the world on motivation, organizational effectiveness, and other high-performance workplace solutions. Patricia Zingheim earned her BA from the University of Michigan and an MA and PhD from Ohio State University. Jay Schuster received his BBA and MA from the University of Minnesota and a PhD from the University of Southern California.