Date: January 24, 1997: A Tale of Two Compensation Strategies Source: Fortune, January 13, 1997, 77; 135 Headlines: "Can Fisher Focus Kodak?" "Larry Bossidy Won't Stop Pushing" Summary Two unrelated articles in the latest issue of Fortune magazine provide anecdotal but powerful evidence of the value of swift and drastic change in an organization's employee compensation and performance management systems and processes. Eastman Kodak Company After leaving his position as CEO of Motorola 1993, George Fisher assumed the CEO role at Eastman Kodak. Since his appointment, Kodak's stock has appreciated more than 70%. (A spinoff in 1993 prevents meaningful longer-term comparisons.) While this is consistent with overall market gains during this period, it is a sharp improvement from the previous 7 years' performance. The Company has adopted economic value added (EVA) as its financial management system (See Performance Bytes, December 27, 1996). Accompanied by 360-degree reviews for all managers, focus groups soliciting employees' views on creating a high performance company, and establishing a new social contract with employees, Fisher has fundamentally changed the performance management culture at Kodak. To help Kodak compete with high technology companies pursuing the emerging digital photo market, Fisher has introduced radical changes to the compensation system including changing the formula for the all-employee bonus program to require minimum levels of financial performance for payment of the "wage dividend" that had become a virtual entitlement; eliminating guaranteed salary increases and implementing a performance-based system; paying the bonus for the top 900 management employees in stock options; and significantly reducing health and early retirement benefits. AlliedSignal Inc. In Larry Bossidy's 5 years as AlliedSignal's CEO (after leaving his role as second-in-command at General Electric Co.) the stock price has quintupled. Bossidy believes that they must have "everybody in the company own" AlliedSignal stock and he continues to urge resistant collective bargaining units to "choose stock so they can participate in our success going forward." Currently 60% of employees are shareholders. Bossidy's thoughts on gainsharing? "Gainsharing is shorthand for entitlements." On making executive incentive plans work with a team approach and the Company's strategic goals? You can't "have more than 3 (goals) for purposes of incentive compensation." On nonfinancial objectives? "Just as obscure and vacuous as they sound." CPM Observations These two Fortune 100 companies have implemented simple, straightforward, effective approaches to measuring and rewarding employee performance -- methods that are well-documented, widely debated, and all too infrequently implemented in the face of serious performance problems. These articles add to the growing amount of anecdotal evidence, bolstered by limited quantitative data, of relationships among shareholder value creation, financial management systems based on economic value creation, "no excuses" performance cultures, and real performance-based compensation. Yet, many (if not most) companies continue to explore and initiate efforts along these lines, chasing the "fad of the month," only to have these ideas disappear into task forces, committees, memos, and other organizational processes that reward fear of change and tolerate inadequate performance. None of the techniques introduced by Eastman Kodak and AlliedSignal are new. Some have been used for decades; all have been implemented successfully in many companies, large and small, public and private, in every industry in America. Then why is this treated as "news?" Our consulting and research experience indicate that for every company that thoughtfully develops and implements these basic approaches, ten companies, maybe twenty, maybe more, invoke a plethora of excuses why they won't work for them. Kodak and AlliedSignal used to be among the latter, and upon joining the former, have made news. Index: strategy.001 Recently in "Performance Bytes"... August 22, 1997 "Management Pay -- Unintended Consequences" The Economist, August 22, 1997 [strategy.002] March 7, 1997 "Performance Stock Options" Congressional Record, January 21, 1997 [alleeso.004] February 24, 1997 "Most EDS Employees To Get Stock Options..." Wall Street Journal, February 24, 1997 [alleeso.003] January 29, 1997 "American Air Pilots Asked to Agree to Arbitration" Wall Street Journal, January 29, 1997 [union.001] January 24, 1997 "A Tale of Two Compensation Strategies: (Eastman Kodak & AlliedSignal)" Fortune, January 13, 1997 [strategy.001] January 8, 1997 "Small Concerns Are More Likely to Pay Directors in Stock Than Large Firms" Wall Street Journal, January 8, 1997 [bdcomp.001] December 31, 1996 California Qualified Stock Options (CQSOs) State of California, Secretary of State (AB 3194) [alleeso.002] December 27, 1996 "All about EVA" CFO Magazine, November, 1996 [perfmeas.001] December 18, 1996 "Stock Options to Be Given to 69,000 Staff Members" (Chase Manhattan Corp.) Wall Street Journal, December 18, 1996 [alleeso.001]