Bureau of Business Research College and Graduate School of Business, University of Texas at Austin OF T~~~SN/AVTERASITY June 1996

UST!OC

Compensation Strategies at Work

Do compensation policies of employers affect productivity? There is some evidence nationally and in Texas connecting compensation policies­in this case, profit sharing and gainsharing-and productivity. There is even some evidence that such incentives may influence retirement savings policies.

Profit sharing and gainsharing are variable and contingent compensation strategies tied to organi­zational success (or failure) in the marketplace. Cash profit sharing plans pay annual bonuses to workers when the value of their output is greater than their base wage. All of the factors (labor, capital cost, and materials) that lead to financial productivity come together in profit sharing. It can be an important part of a compensation strategy for attracting, motivating, and retaining a competitive workforce.

Unlike profit sharing, which tends to reflect financial measures of productivity, traditional gainsharing plans pay their bonuses out of cost savings. Say the labor cost of producing a prod­uct is $0.35 of each total cost dollar. If employees can bring labor cost down to $0.30 of each dollar, then half of the savings is placed in a bonus pool for distribution. Most gainsharing companies pay bonuses monthly.

Incentives in Action

Donald F. Hasting, CEO of Lincoln Electric Co. in Cleveland, Ohio, believes that significant profit sharing percentages and a dedicated workforce make his company competitive. To

"- "" l . lY96

GENERAL: LIBRAR . retain its most valuable resource, Ricoln Electric guarantees full employment to regular workers in bad times. Full employment is operationalized as thirty hours of work per week at base pay. Base rates, however, trail the average manufacturing wage in the Cleveland area. Lincoln's average hourly worker earned $16.54 an hour in 1995 (wages, incentives, and profit sharing), a com­bined rate of pay that is significantly higher than the average manufacturing rate for Cleveland, which is $14.25. More significantly, the average profit sharing bonus was 56 percent of paid wages. While this percentage may seem high, it has been much higher in the past.

In Garland, Texas, De Soto Corp operated with a gainsharing plan for nineteen years before a hostile takeover forced the sale of this plant. During those nineteen years, De Soto averaged 8.8 percent bonuses for all employees at the Garland plant. The bonus is calculated on paid earnings: after monthly earned hours or salary is paid, the bonus percentage times pay equals an individual's bonus check. Bonuses ranged from 2.5 percent in 1971, when De Soto implemented gainsharing, to a high of almost 23 percent in 1976, with an approximately 9 percent average for the nineteen-year period. Total labor costs decreased during this period as wages and bonuses increased because productivity, as measured by gallons of paint, went up over 78 percent.

The culture of participation at De Soto can be measured, in part, by the productivity-related suggestions made during this period. An average of 150 suggestions were made per year or roughly one per worker per year (some workers make no suggestions while many make numerous suggestions). Seventy percent of these sugges-

Ldilllll ll llllllllllllllllllllllllllllllllllllllllllll llllllllllllllllllllllllllllDr tions were implemented, and, according to management estimates, the total value of imple­mented suggestions, in terms of cost reductions and improved quality, was in the millions of dollars.

Other Texas branches of national corporations (American Darling Valve in Beaumont, Butler Mfg in San Marcos, Dana in Waco, Wheeling Corrugating in Houston, to name a few) have had gainsharing plans for many years with varying amounts of success. Because they value em­ployee contributions to labor productivity, most gainsharing companies try to avoid layoffs. Productivity and stability are organizational goals.

Comparing Plans

Most successful gainsharing plans are imple­mented by small to medium-sized companies, where a "shared economic fate" is more tangible than in larger organizations. A culture of partici­pation and information sharing is adopted be­cause employees believe that they can influence productivity through their efforts. Employees in larger, more complex organizations are less likely to believe that they can influence output.

Adoption of profit sharing is associated with significant productivity increases over time and with firms with multiple programs for high performance and employment stability. Perhaps the best regional example of a profit sharing company is Southwest Airlines. Their total compensation is competitive for a workforce that is 85 percent unionized, but a high percentage of this total comes from organizational incentives, such as cash profit sharing, rather than from a high base wage rate. As long as the company does well, total compensation is competitive.

The productivity evidence on gainsharing is stronger, but more limited. Unlike profit sharing plans, gainsharing plans need not be reported to the Internal Revenue Service, so the exact num­ber of these plans is unknown. Experts believe the number is growing rapidly, but the total is probably less than 10,000 nationally. Case stud­ies, such as the De Soto case, however, are especially impressive because they span a num­ber of years. More than half of the gainsharing companies continue to pay bonuses, which is, itself, a measure of productivity. ·

In Texas, known gainsharing companies have

had many years of successful experience. Would these companies have been just as successful without gainsharing? Probably, but managers indicate that they believe that organizational incentives make them more productive and competitive while offering a buffer to layoffs.

Finally, there is some evidence that organiza­tions that use profit sharing and gainsharing as part of their compensation strategy may be influencing participation in voluntary retirement programs such as the 401(k). Although the timing of disbursements is fixed-profit sharing is disbursed annually; gainsharing, monthly-their amounts are variable and employees tend to view these payments as uncertain and unpredictable. Rather than investing, say, 10 percent of "regu­lar" pay into retirement accounts, employees appear to be investing large lump sums as they are paid from incentive plans. Then too, profit sharing plan distributions can be linked to em­ployer-matched contributions to the 401(k). Employers who value a stable culture usually mount strong educational programs to help their workforce take responsibility for retirement savings.

Incentives alone do not increase productivity. The organizational culture must value group cooperation. A supportive culture fosters two­way communication, encourages suggestions, appreciates quality work, and reinforces those workers who further organizational goals while ostracizing those who don't. When group incen­tives become institutionalized within the organi­zational culture, they act as economic reminders: employees are rewarded if and when the organi­zation meets its goals.

Brian Graham-Moore Professor, Management University of Texas at Austin

References Graham-Moore, Brian, and Timothy Ross. 1995. Gainsharing and Employee Involvement, 2nd ed. BNA Books, Washington, D.C.

Kruse, Donald L. 1993. Profit Sharing: Does It Make a Difference? W.E. Upjohn Institute, Kalamazoo, Michigan.

Ldill ll llll lllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllDr

(

)

~

Jttl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr

Businesses Respond To Crime

Historically, business location decisions have been analyzed and decided on the basis of pre­dominantly economic criteria. That still appears to be the case. Yet increasingly business owners consider crime a factor in relocation decisions. For example, in a recent survey of businesses in the high crime zip codes of Austin, crime was rated as the fourth most important factor in these decisions, after building ownership/rent, facility availability, and location of customers. Crime ranked higher than insurance costs, commuting time, property taxes, zoning, moving costs, and ties to the neighborhood.

This result should not be surprising, given the incidence of crime against businesses in many areas. In the Austin survey, more than two-thirds of owners and managers reported that their businesses had been directly affected by crime, citing burglary (54 percent), bad checks (51 percent), graffiti (47 percent), and vandalism (47 percent) as the most frequent crimes.

Businesses typically respond to increased crime in several ways. New security measures usually are the first step, and that was true for the Austin-based businesses: more than two-thirds spent more on security devices. About 30 percent of businesses said they requested additional police coverage near their business. Some busi­nesses indicated that crime had caused them to alter their prices-some increased prices to off set higher insurance costs and some decreased prices to offset customers' fears about shopping in the area. And while fewer than 10 percent of busi­ness respondents indicated that crime had caused them to consider closing their business entirely, about one-quarter of all businesses had consid­ered the option of relocation.

Because relocations often have short-term negative economic impacts for businesses and lasting effects on the abandoned neighborhood, it is especially important that other options be examined in greater detail. More effective and innovative crime prevention methods for, and by, businesses are providing viable alternatives.

New Approaches: Two Examples from Texas

Among the many new approaches to crime prevention being instituted throughout North America (see sidebar) are two Texas programs. The Austin Police Department (APD), in coop­eration with the Austin Downtown Management Organization and the Austin Convention and Visitors Bureau, created the Austin Downtown Rangers to improve security and bolster commu­nity relations in the downtown area. Rangers are not police officers: they neither carry weapons nor make arrests. They are trained, however, in patrol techniques and use two-way communica­tion equipment that provides constant contact with Police Dispatch and with one another. In this capacity, the Rangers serve as the "eyes and ears" of APD, reporting situations that require law enforcement responses.

The businesses and residents of the City of Fort Worth enacted a half-percent sales tax to fund the Fort Worth Crime Prevention and Improvement District. City officials decided that Fort Worth could not make major strides in economic development until potential employers felt the city was a safe community. The tax, passed by voters in January 1995, became effec­tive October 1, 1995, for a five-year period, and it is expected to raise $21 million in 1995-96. Boundaries for the district are the same as those for the City of Fort Worth.

A variety of crime control and prevention initiatives are being funded by the district tax revenues: additional neighborhood police offi­cers, more school security, gang prevention, replacement of old vehicles, new mobile data terminals, and expansion of D.A.R.E (Drug Abuse Resistance Education). Other municipali­ties near Fort Worth are using the district model: Hurst, Haltom City, and Euless have imple­mented districts and are collecting revenues, and North Richland Hills and white Settlement have passed measures and will soon be collecting revenues. Because of the state enabling legisla­tion, such districts may only be created by coun­ties with at least 130,000 residents and by mu­nicipalities located within counties with a popula­tion in excess of one million.

Jtll 1111 i I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr

llll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr Partners Against Crime

Below are a few examples of crime prevention methods involving businesses throughout North America. Most illustrate new approaches taken by police and sheriffs departments to help businesses; others describe cases in which individual corporations and groups of businesses have joined with law enforcement personnel.

•Radio Crime Watch (Pinellas County, Florida). The Pinellas County Sheriffs Office Crime Prevention Section trains employ­ees of businesses to recognize and report suspicious activity, medical emergencies, or crimes in progress and to use the proper methods for alerting law enforcement via radio equipment. The more than 500 radio-equipped vehicles significantly enhance law enforcement reconnaissance activity in the county.

•Business Owner's Police Academy (Detroit, Michigan). The Academy is an intensive multiday course of instruction on every facet of police work, including precinct patrol procedures and crime prevention techniques. Other topics address issues for business owners: private security services selection, false alarm reduction, and robbery prevention.

• C.A.P.T.A.l.N. (Winnipeg, Manitoba). C.A.P.T.A.I.N. (Com­puter Automated Phone Tracking And Information Network) is a joint initiative between the Winnipeg Police Service and the Downtown Business Improvement Zone. A computerized voice messaging system that can place about 800 phone messages per hour to either businesses or residential telephones, the network notifies business owners in a geographic area about, for example, credit card and check frauds, counterfeiting, shoplifting, and robbery and allows these owners to forward information to one another.

• Riding Shotgun (Charleston, South Carolina). To reduce the incidence of daylight robberies, Charleston police offer to "ride shotgun" for merchants making deposits. To reserve an officer as an escort, merchants need only call the police department ten minutes before leaving for the bank.

•Satellite Station (Pierce County, Washington). In the Tacoma area of the county, the Sheriffs Department established a satellite station within a local business. While this station is not perma­nently staffed, officers working in the area now have a place to write reports, meet victims of crimes, and gain access to the officers' law enforcement computer system. Previously, officers had to leave the area to do follow-up work; now they are more accesssible for calls.

•Commercial Security (Irvine, California).The Irvine Police Department provides security inspections to businesses upon request and reviews all new buildings and major renovations of existing buildings for security weaknesses. Designs that are not up to code or are deficient must be reworked.

•Cellular Watch Citizen Patrol and Home Security Inspections. These two programs represent efforts by businesses to curb crime. In the Portland, Oregon, area, a major telecommunications corporation assists 22 cellular watch citizen patrols. The firm assists in organizing patrols, trains volunteers about properly reporting a crime or suspicious behavior, and provides bright vests for patrol members.

Realtors in Nanaimo, British Columbia, volunteer their time and expertise to provide tips about home security improvements. Prior to the home inspections, the realtors are trained by the Vancouver Island Real Estate Board.

Conclusion

These cases should provide encouragement that partnerships among businesses, business associations, and law enforcement agencies can counter crime. Although most have yet to be subjected to rigorous evaluations, in many cases, the immediate responses have been positive. Further, most of the cited examples began with minimal budgets.

Additional research is needed to know why some businesses are inclined to flee and why some choose to remain in their community. That information, along with better targeting of exist­ing crime prevention resources and perhaps new resources from business and trade associations, should reduce the number of crime-induced relocations. Relocations, in the future, should again be based on economic criteria.

--James E. Jarrett Senior Research Scientist Center for Legal and

Regulatory Studies

and David L. Huff Century Club Professor of

Business Administration Department of Marketing Administration University of Texas at Austin

Note: This research was supported under award #94-IJ-CX-0035 from the National Institute of Justice, Office of Justice Programs, U.S. Department of Justice. Points of view in this article are those of the authors and do not necessarily represent the official position of the U.S. Department of Justice.

The cases featured were identified in a research project on crime-induced business relocations. Another major phase of the research examined broad statistical relationships between crime victimization and business relocations and start-ups by zip codes in the Austin metropolitan region from 1990-1993. The other component was a survey of businesses regarding the impacts from crime, the importance of crime in relocation decisions, the roles and responsibilities of business associations and police depart­ments for crime prevention, and opinions about increased funding for crime prevention efforts.

To obtain more information, please contact the authors at 512-471-6990 or by e-mail: <JarrettJ@msmail.bus.utexas.edu>.

llll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr

ltl I I I I l I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJfr

Statistics from the 1996 Directory of Texas Manufacturers

Manufacturing Plants by Metropolitan Area

Metropolitan area Abilene Amarillo Austin-San Marcos Beaumont-Port Arthur Brazoria Brownsville-Harlingen-San Benito Bryan-College Station Corpus Christi Dallas El Paso Fort Worth-Arlington Galveston-Texas City Houston Killeen-Temple Laredo Longview-Marshall Lubbock McAllen-Edinburg-Mission Odessa-Midland San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls Total metropolitan Total nonmetropolitan Total in directory

Number of plants 115 159

1,070 287 139 157 82

216 3,284

405 1,677

115 3,512

126 48

256 217 155 288

97 954 127 57

161 58

219 124

14,105 2,586

16,691

Manufacturing Plants by Employee Size Group

Employee size group l-lto9 2- lOto 19 3-20to49 4-50 to 99 5-100 to 249 6-250 to 499 7-500 to 999 8 - 1,000 to 4,999 9 - 5,000 and over Not specified

Source: Directory of Texas Manufacturers 1996, Bureau of Business Research.

Number of plants 6,452 2,855 2,986 1,454 1,172

396 192 102

8 1,074

ltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJfr

ltl I ! 111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1111111 l I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I ll&r

Announcement ·

The 1996 Texas Trade and Professional Associations is available from the Bureau. Listing more than 700 associations, the directory provides comprehensive information about state associations, including executive directors, telephone numbers, membership totals, and publication titles and frequency of publication. The price for the new edition is $15.00. For additional information or to order, call 512-471-5179, fax 512-471-1063, e-mail dhardy@mail.utexas.edu, or write to the Bureau at PO Box 7459, Austin, Texas 78713.

Texas Business Review is published six times a year (February, April, June, August, October, , .. and December) by the Bureau of Business Re- ·· ·

i ii

i 11

: .. ii. i '11

~II .. 11 '11'.' ·' I. I I cu t I "l' I ii I 'I "f.' I ' II ii ti 111 I. .

Zd rs

search, Graduate School of Business, University of Texas at Austin. Subscriptions to Texas Business Review are available free upon request, as are back issues.

Research and service activities of the Bureau of Business Research focus on the ways Texas industries can become nationally and globally competitive. The Bureau is policy oriented and dedicated to public service. An integral part of UT Austin's Graduate School of Business, the Bureau is located on the sixth floor of the College of Business Administration building. Our e-mail address is: bbr@uts.cc.utexas.edu.

· Editor: Lois'Glenn Shrout Assistant Edita/ Sally Furgeson

iii

~ :_ . .. · · . ...;_

£: r.::.'.8.::.'. X.l Nl".lSnt::I t.,, r r · r l.Jd uu.sn(::i 1t::i .1..n

S31".":.ft:.:1.~JB.Z--l -lf."183N3:J 31--11 sNor1rsrno2~ s1~Id3s

t:i ~ .. :.., ~-= .. t:~ r ~ 8 .:.:: l J :.1 J (] ·-£: .':l::.':I:: .':I:: ::t:: ;:i:: .11:: .':f::.':I:: .':I:: .':I:: .':I:: ."t: ."t: .':I:: .':I:: :t.: .':I:: .':I:: ::t:: .':I:: .':I:: .':I:: .':I:: .':I:: .':I:: ::t:: .':I:: .':I:: ."t: :t.: ;;..~; :t: i

0£91 'ON l!W.Ia.f Sl!X<).L 'upsny

OIVd 3ll8JSOcf 'S'fl

·mm .LlilOlldNON

II !! I ' 'II ' 'II ' I 'I " 'I 'I "II " 'II

6~vL-£Il8l SIDC:).L 'u9snv 6~vl xog Ud

H~V3:S:n1 SS3:NISna lO nv::i:11na ----.~ ---- -- -~ -- -------------