Workers: Risks And Rewards

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Would you risk earning less in exchange for the chance to earn more? U.S. companies are putting that question to a growing number of workers these days in hopes of engineering a revolution in the way everyone, from janitor to junior executive, gets paid. The question lies at the heart of far-reaching new programs called pay-for-performance plans, which typically start with reduced base wages and salaries but reward employees with handsome bonuses for hitting production targets or meeting other goals. "This is the hottest area in compensation today," says Steven Gross, a vice president of Hay Management Consultants. "Just about every major company is examining its pay strategy."

While employee-bonus plans have been around since the 1930s, the new programs surged in popularity during the past decade. Faced with a massive loss of business to aggressive global competitors such as Japan and Germany, U.S. companies rushed to control labor costs and raise productivity. The new plans help on both fronts, because firms that adopt them typically pay ! employees bonuses only when they meet production targets or when corporate earnings rise. Moreover, companies often combine the programs with other approaches -- such as encouraging shop-floor teams to plan and carry out projects -- that help give employees a sense of pride and participation in their work.

"Companies are saying, 'I'm tired of paying simply for time,' " notes John Hamm, vice president for compensation and benefits at Aetna Life and Casualty. "Now they are saying, 'I want to pay for production.' " So many are saying it that 35% of the FORTUNE 500 are experimenting with some form of pay- for-performance program, according to the consulting firm Sibson & Co. -- up from 7% 10 years ago.

The roughly 4 million U.S. workers covered by such plans are living by the ancient rule of markets everywhere: risk and reward go together. Unlike corporate chieftains, who often prosper no matter how their companies fare, workers in these programs may suffer painful cuts in income when times are lean. Uncertain pay can create problems when it comes to such mundane matters as applying for mortgages, which usually demand predictable annual income -- to say nothing of the impact of variable wages on one's ability to pay back loans. But the payoff can also be great, allowing productive employees to make far more than their counterparts at other firms. In general, depending on job performance and the plan's details, covered workers may earn as little as 90% of the average salary for comparable jobs -- or as much as 120%.

The 160 workers at a new Corning ceramics plant in Blacksburg, Va., earn bonuses for, among other things, pulling blemished materials from assembly lines before they can go into kilns. While starting workers at the plant make $8.60 an hour, or about 40 cents less than those at Corning facilities with traditional pay plans, the Blacksburg workers made at least an additional 72 cents an hour in bonuses last year. Three-quarters of that gain reflected the fact that workers met their production targets, and the rest was pegged to improvement in the company's financial results.