2007 Professional Development Workshop: Felt-Fair-Pay - Compensation Session 2

Speaker A I was just before about some of the practices that Glacier actually used in terms of.

Speaker B Pay.

Speaker A And this would be game back I suppose in 1960s. But I thought that it what they did for every individual. They had a sheet of these progression curves. It's the modal curves that developed by Jackson curves would be age. And what they did in terms of an individual they would first of all say that the new individual would join the company about whether individual was in right role for that. And they find out if they age and then they do two points of finding out which estimation obviously they find out from this approach the individual and then they start plotting for the.

Speaker B Actual.

Speaker C Pay.

Speaker A Increases came through, a couple of which probably just for inflation go through. So where they increase vertical vertical. Otherwise you might need to reprint the thing every time that we do and they and they individual on the basis if he if he performs form factor increase, which he was on. If the person hadn't, they may pull them down. Down in terms of biggest, biggest scale like this? Yeah. Not so we're going to hold here and if it and others will increase the performance of people. It's interesting once you once understand the right people's people on it also the progression. Progression planning. Because you could see where the individual was promoted to the next grade. You could also work that they may be involved in use that capability in other ways. Often obviously these people with as we know people who had more capability than the job required became shop stewards and got involved in representative systems. So there's it were soaked up their extra capability in that way. And this was the rule that was applied every every employee in the company had one of these sheets. They were updated each year by the personnel function in conjunction with the manager. This is where pay increases were going through. So had a situation which was unusual even today behind every individual in the company having merit based pay systems, certainly in the unionized environment. Glacier I think it was something quite extraordinary for that. Anyway they asked me to talk about it and that's a brief overview.

Speaker D That was one of the things that's so wonderful about historical perspective.

Speaker C Understand.

Speaker D Exactly.

Speaker C I'm not sure whether this is broken again on it or okay.

Speaker B And.

Speaker C If you can use this place.

Speaker A This will go this way.

Speaker C Ready? I want to describe for you the journey that Roche Canada took to requisite compensation. Roche Canada was the Canadian affiliate of F Hoffman Larouche Limited, which is one of the leading research and development pharmaceutical companies. The Ro implementation at Roche occurred. Time has passed. It's been almost 14 years since I've worked with Elliot Nancy, over about a year and a half to implement organization. The implementation was very, very comprehensive. Our goal was to ensure that the organization had the capabilities to succeed in what had become a rapidly increasing and rapidly changing and increasingly complex business environment. We undertook an overview of compensation fairly early on in the project. In terms of base salary, as Nancy defined it earlier, we were approaching requisite. But in terms of our incentive, these incentives were undermining managerial leadership, integrity, trust, and also precipitating employee behaviors outside of acceptable standards. Roche managers, probably like most managers and their compensation consultants, believed very, very strongly in the redemptive value of bonuses. So it literally took us about a year and a half of debate and analysis before a decision was made that we were going to get rid of bonuses at least below the vice presidential level. The it was, it was well accepted by our employees and I'll go into those details as I get into the program. Another comment that I wanted to make is that after we had gone requisite, we realized that we had a pretty strong managerial system and we didn't want to do anything that would compromise that system. Therefore, we decided to make this change. The project itself had been fully, fully supported, the whole implementation fully supported by two consecutive presidents. It was the second president who agreed we should get rid of bonuses. That lasted probably for about a year and a half. And unfortunately, when a third president came in, it was something that was changed. However, the new approach had been in place long enough for us to start to collect some data on whether or not eliminating bonuses was a good idea. Okay, the next three or four slides I'm not going to cover in detail. What it does is it gives you some of the specifics of the issues occurring in the pharmaceutical industry starting in the early 1990s and what drove us to take an interest in Requisite organization anyway on the compensation journey. Starting out as Nancy has already described, we first needed to set up a requisite organization and we had gone through again time spanning from the top of the organization to the bottom to determine the number of levels of complexity of work that we needed. In addition to that, we had also taken a look at, this was occurring shortly after a merger and an acquisition. So we took a strong look at the lineup of our mainstream operational functions and the strategic support functions. The third piece of course, was the staffing of that structure. So we had actually gone through an initial or our first round of talent pool assessment in order to ensure that there was good lineup between capability and levels of complexity of work. Another piece of course, once we had what we felt was an optimal structure given our directions for the future, once we had an optimal structure in place, then of course a major concern became aligning all of those critical HR management systems with the principles of requisite organizations. We paid particular attention to our personal effectiveness appraisal system and made appropriate changes there. I'll talk a bit about those as we go through talent pool assessment and role evaluation and compensation, both base and bonus is what we looked at. One of the things that I guess Roche Canada was very, very proud of is that Elliot told us that we were probably one of the most requisite organizations that he had ever worked in. Coming through the door, we had issues, we had some distance to go, but we were quite requisite. We wanted to make sure that as we moved down this path, that we took with us all the things that we were doing right and left behind those that weren't quite as effective anyway in terms of compensation, roche had some pretty strong, and I think practical kind of philosophies around compensation. Talked to any of our senior executives and asked them, what should they pay people for? Didn't always turn out this way in actual practice, but they would say, we pay them to solve problems that can be interpreted in a number of ways. We pay them for innovation. We pay them for moving the organization ahead anyway. There was a strong belief that when it came to compensation, we certainly wanted a fair exchange between the company and its employees. The employees exchanged their time and their talent, not just for compensation, but for a whole package. Okay, what did they expect? We assumed that clarity of accountability, authority, good role relationships, particularly that relationship with your immediate manager, and challenging assignments. It was also necessary to have, in addition to compensation, consistent requisite management practices and also trust inducing corporate culture and values. Employees also wanted challenging and interesting assignments, again, work equal to their capability, as that capability was growing and advancing over time, appropriate advancement opportunities in modern equipment and technology. An employee is looking for an exchange of a package in return. What did the company expect? Company expected employees to bring their best endeavors in working to achieve and working toward the achievement of their Qqtrs. Also collateral and cooperative behaviors and work behaviors that would be within the boundaries of Roche's values. When the exchange is fair for both parties, it's good for the organization. The organization can achieve its goals and the employee achieves job satisfaction, recognition and income to meet their personal needs. We had always encouraged managers to understand that compensation was managed not as an isolated program, but in the context of the total business, that it should reflect the company's strategic plans and values. And it was just one of the tools used to attract, retain and develop staff. People might leave because they're unhappy with salary, but solely because you fix the salary. And clearly it's important. I mean, the debate rages on today about what is fair pay and how do you achieve it from the CEO level to entry level employees. Once that's done, there are these other things that people want. If there's a problem with your compensation and you fix it. Now you've moved your employees in terms of their satisfaction, probably from a sub zero position to zero. All right? If you want to get above zero, then you're looking at adding or making sure that these other factors are features of your work environment. Overall, the company's compensation goals were none of this. I don't believe that any of this is inconsistent with the Requisite organization approach. The company's compensation goals were to ensure that there was internal equity, and that was the time spanning piece and determining the levels that we were externally competitive and Roche used. There was a major survey for the 54 pharmaceutical companies. We didn't use data from all 54 companies, but those that were similar to us in size, operation, et cetera. That was the way we established external competitiveness. Program had to be affordable, obviously judicious use of the company's resources, that it would responsibly, safeguard resources, that it would also be legal and defensible, or meet those criteria and understandable to employees.

Speaker D Let me ask you a question. How did you work with the consultants to get them to understand your job matches compared to the job matches of some of the comparator companies? What did you do?

Speaker C We did have a very good, I think, practical group. We work with Hewitt Associates. And because one of the things we found out as we went through this process, there was kind of a one to one correspondence between our organization levels and the job grades that we had set up right from the start. In working with the consultants, we put a lot of emphasis on the problem solving factor rather than emphasis on education. And many of the other factors that are used, such as latitude of action, number of people supervised, et cetera. So we heavily focused on the job content and by choosing certain companies, there were about 13 companies of the 54 that we wanted to compare ourselves with. Because we were comfortable without actually going in and doing an analysis, we were comfortable that this would provide the external competitiveness that we needed. Okay, again, program needs to be efficient to administer. And that's certainly one of the advantages of moving to the requisite approach, is now all of a sudden, you start to realize that while compensation is absolutely crucial, and if it goes off the rails, it can really damage your organization if it's done right. It can also be very simple, easy to administer, capable of being reshaped for the future. And reshaping really means moving the salary structure ahead and also appropriate for all of your business functions. At Roche, we had three very different businesses at the time, so there were lots of concerns about whether we should have three different salary structures or would everybody work within the same structure? We ended up with everyone working within the same structure. Just a very brief review then, of how do we get to a requisite compensation structure. Number one, again, back to Nancy's points. Aligning the levels of complexity of work with the organization levels was absolutely critical. Making sure that every role was placed at the right level and also in the right function. But every employee had a manager who is one level above in capability and level of complexity of work. Thought that that condition was obviously critical to not only effective managerial practices, but particularly in the area of performance management and compensation. Uemphasizing that managers were accountable for the outputs and results of their teams. That got a few squinches initially. When we introduced this concept, managers said, well, if I'm accountable for their outputs, then what are they accountable for? Well, they are accountable for bringing their best endeavors to work toward accomplishing those outputs. The Qqtrs are there as a target, but you the manager because you have the authority to veto an individual who you feel is not able to do the job. You grant the employee the resources that they need to do the job, you define the task and of course, an effective manager will do that in a two way fashion, not one way down. And you also initiate removal from role. Since you've got all of that authority, it makes sense that you be accountable for the outputs of your staff. That was kind of not totally new principle at Roche, but it certainly put some laser focus on clarifying accountabilities. And authorities mentioned earlier, direct reports are accountable for what are they accountable for working to achieve the outputs. Clearly, requisite compensation is based upon having these requisite managerial practices and not just in the area of performance management compensation and talent pool assessment. But of course, there's the whole area of setting context and two way planning meetings, et cetera. Compensation is the back end of all those other processes. The requisite approach started to provide some payoffs immediately for us. It tended to reduce there were managers tend to have major concerns about who's tougher than whom in setting objectives and how do the objectives I've set for my staff compare to those set for yours? By moving to requisite and people understanding the level of complexity of work and getting a feel for the size of a job and where an individual should be performing in that role. What does performance look like if they're at the top end, the middle, or the bottom end removed? A lot of the concerns that we had about is there equity in terms of the setting and assignment of objectives across the organization, there were fewer concerns about equity and fairness and performance assessments. I'll talk later about we got rid of performance management assessments or the labels such as outstanding above expectations, et cetera. There's always questions about outstanding in who's mine above expectations and who's mine. And as managers and employees moved to a place where they understood the complexity of the work and they were able to talk in meaningful terms about what the work was. Then again, greater fairness and equity in performance assessments were coming about consistency and reliability amongst managers in judging performance. And again the very important role of the mor in looking at and we're equilibrating those various judgments. Those were again the philosophies that we were following, how we went about setting up the organization and getting ready for requisite compensation. Big changes occurred. Not so much in base salary again, but with the bonuses, with our base salaries. Found out that we had basically twelve grades, physicians beneath the VP levels were graded and again good correspondence between those grades, our managerial strata, and then the pay bands and progressions within each of the strata. We one of the things that we didn't do on the base salary side is we didn't actually move to requisite compensation ranges. This is a chart that Elliot had put together for us and we certainly took a look at. The most important thing about this chart is where was our operative pay? Where were we actually paying people when we looked at that against the salary range, the green bar, we saw that there was far less overlap in actual salaries than we had in the salary ranges. So despite the fact that we had broad ranges, this is a good indication that I think is a good indication that managers were making some sound judgments about where to pay people based on their level of complexity of work and based on their performance. A major concern about getting rid of overlapping salary ranges or reducing ranges was the perception that one's opportunities for salary increases would have been depressed or constrained. So this is something we thought we can move to requisite ranges over time, but in terms of actual pay, we're not too far off the mark. Let's keep focused on where that actual pay is moving.

Speaker D So Charlote, is the X between 80 and 90? I'm seeing kind of far is that 2070 this year's dollars?

Speaker C That's been updated. I've taken an old chart that Elliot had put together for us probably back in 1993 or 1994. Don't get too hung up on the numbers here because the real message is in looking at the salary progression and the fact that we were far more requisite than we thought. Obviously we had some problem areas. We had just come through a merger and acquisition at this point too, but we felt that this is not too bad and over time we could work towards setting up those actual requisite ranges.

Speaker B What you're suggesting is your natural hay brakes that were seemed to be there already seem to somewhat find set of differential curve without being too much out of whack.

Speaker C Yes, and again, I think it's a testament to the good managerial judgments about performance and also levels of complexity of work. We've always said that we needed these wide ranges for sort of administrative purposes. Right. They're almost there to handle the outliers or the exception situations. But as I said, making a change immediately in those ranges probably would have caused a bit of a morale problem at a time when we didn't need additional challenges. Our goal was to within if this is the top to the bottom, here is a stratum. There was an operative pay range, and that's where our salaries were actually being paid. We went back to the salary range. There might be a piece below where somebody would be paid before they were fully established or ready to come into the role. And also there was an area that we considered a red, circling, or premium pay area.

Speaker B Did those figures include physicians involved in clinical research?

Speaker C Yes.

Speaker B They fell within the range of the role.

Speaker C Yes. With clinical research? Yeah. There have been times in the pharmaceutical industries that was the position, that was the scarce position. Very difficult to find, particularly senior people, and often well, not often most of the time in the pharmaceutical industry for the senior roles, they want licensed doctors. So this again adds to the pay pressure, because I'm doing this with Novartis.

Speaker B Oncology right now, and they're 40% over what the other physicians would requisitely be a comparable stratum.

Speaker C I've been out of the industry, of course, for about 14 years now. That comment relative to 14 years ago is unusual. As I said, there was always a scarcity of clinical research people. Certainly the higher levels, let's say stratum three and above, but I don't remember other than four licensed docs having to pay that kind of premium for research folks. Okay. This is probably another version, or perhaps a less complicated version of the chart we were looking at earlier, just to again show where the pay differential is from stratum to stratum. Here in Canada, the pay probably starting at the boundary between level four and level five, is going to be compressed relative to the US. Okay. You're going to see that compression, I think, below or at stratum one, the pay is basically the same between Canada and the US. Stratum two is not bad, but once you get to the four or five boundary, then you're going to see that that ratio, that doubling for every level starts to slow down. This was data now that we used from a very large local surveyor, and we did go through and time span roles on the basis of information that was provided in the survey. Okay. We didn't actually go out and do time span. The key point there is that from country to country, or perhaps culture to culture, you are going to find some differences in that pay equity multiplier. But still, here in Canada, we're in a little better shape when we get to the higher levels of the salary structure, and that the CEO's multiple of pay is not as quite as out of line as it is in the US. I'd mentioned earlier that in terms of the performance management or judging personal effectiveness. We got rid of labels in our system such as outstanding above expectations, meets expectations, and literally went to talking about let's look at the role and determine, again, managerial judgment where an individual is performing within that role and literally use those positions to describe performance. One of the advantages or a great advantage in doing this is that all of a sudden, we did find that managers and direct reports could now start to have more meaningful discussions about performance, found they were both talking about the same things. But what you see here are for a pay band, one of the three bands within a strata, it's divided into the six steps. The six pay steps. Again, depending on what's going on in your industry, et cetera, these pay steps could run anywhere from 2% up to about 6% for a step.

Speaker E Person salary increase typically be step to step.

Speaker C It might be greater than that. Again, back to managerial judgment. Based on how well the individual is performing, where should they be paid within the role? So an individual might go a couple of steps within an annual assessment.

Speaker E Could they go half of a step within the step? I'm paid 114 600, and I'd like to get a raise to 115 800.

Speaker C Yeah. Perhaps in reality, there's a point beyond which you don't want to break it down. You can get too fine. And we felt that, again, the six steps within a salary ban was probably more than adequate to ensure that people were being paid for level of performance as well as the complexity of the role. The six steps seemed to work that we didn't need more than that or fewer.

Speaker B Elliot used to talk about research in the field of psychology and perception that if you're asking people to make judgments on a continuum of zero to 100, the research shows that when you try to differentiate below 15%, it's awash, and that essentially comes out to six deaths. And I found that very real in practical terms as well.

Speaker C Great. Yeah. Thank you. In practice, managers seemed to be very comfortable with these six steps, far more comfortable than they had been previously with simply a label on level of performance. But how do I position the person in the role? Where is outstanding? Where is above expectations in terms of salary positioning within a pay ben, in terms of the personal effectiveness rating scale? Again, in many ways these systems became far more efficient, easier to administer, as well as far more effective in trying to judge performance. We were encouraging managers to ask themselves and their employees this simple question where is the individual exercising their capability? Is it consistent with that necessary for the role? Is it above what's required for this role, or is it below what's required for the role? If they're exercising a level of capability that's consistent with role requirements, then you stop to consider again where they're performing within the role once you've determined where they are relative to the role overall. Now we go inside of the role and determine whether you're in the top half or the bottom half, either of those halves divided into three steps for your total of six steps. This was the new rating scale. And of course, employees had lots of fun with the new acronyms of I'm a T and a Ma and a BA. But it worked. As I mentioned, we eliminated these terms which had always I don't know, what your experience for those of you who have well, whether you're a consultant or whether you're an internal line manager, these kinds of labels just caused untold grief over the years. Referring to someone as outstanding, above expectations, et cetera. Nancy mentioned earlier that one of the key roles, of course, of the manager's manager is to take a look at or equilibrate the performance appraisal assessments or personal effectiveness assessments. And again, not because you're questioning any particular review, but you're looking for patterns which managers seem to be very stringent in rating, which managers may be more generous. Everybody in Manager A's department gets the top salary increase, whereas in Lewis's department you've got a spread or there seems to be some compression. So it was looking at those ratings to determine whether or not they made sense. Of course, in this process, employees did have the opportunity or the authority to appeal and discuss their performance appraisal and salary results with their mor.

Speaker F It's possible to explain more detailed fashion. What is exactly manager was removing migration. How will you do that exactly?

Speaker C It could end up looking very much like this screen, which is a chart that is put together that lines up all of your employees. Within this is a stratum from the bottom to the top, and within the stratum you have your three pay bands. And within the pay bands, of course, your six steps, an individual's position based on performance. We had forms that had been designed, and these forms would go to the manager once removed to review and for final sign off before that information was passed on to HR and into pay stubs for your employees.

Speaker F My question is, this form goes to the manager to fill it by the manager?

Speaker C Yes, it's completed by the manager and.

Speaker F The manager smooth it, then makes a new evaluation about this form. Just feel it.

Speaker C Yeah. And not so much a new evaluation. I made the point earlier that the manager once removed, isn't so much questioning each individual assessment result. They're looking for patterns. Okay, here's an opportunity to get some sense of how effective your managers are in assessing their staff and how judiciously are they using the compensation dollars. And here might be an opportunity for some coaching and mentoring from the manager's manager to immediate managers around comp and performance management. Does that help? No, it didn't sound like it.

Speaker E So would the management system have the performance appraisal of employees staged or time so that it could occur all in one lump sum? So that the manager, once removed, would be able to get all of this gate and this data gathered in one time frame and be able to apply that assessment, that analysis of their supporting managers?

Speaker C Yeah, very good point. We had or Roche at the time had a common anniversary date. So yes, salary actions, performance appraisals all occurred at one time during the year. So regardless to when an individual came into the organization or into a role, you would be bought out and moved forward to a common anniversary date. Little more difficult for the mor to keep an overview on what's going on if you're operating on anniversary dates rather than a common review date. But we had a common review date.

Speaker D Another part of what we do is in human resources, all of the performance appraisals in the mid years come to HR, and we try to add another level to that to kind of review the assessments kind of side by side, particularly if managers are rating people above expectations, and we still use that terminology or below. We try to try to judge as well if there's fairness across the board as to why somebody's being recommended higher or lower, is it consistent in the organization? And then the president also will look at those to try to add another level of equilibrium.

Speaker E Are the ordinary managers across the organization using the same rationale to say, this is developing towards expectations versus meeting expectations, but we don't do it only in terms of we do it actually as a part of the salary setting process. So the manager, once removed, would actually have to approve those salary recommendations, and if he saw there was something that wasn't fair in his judgment, the change wouldn't be approved.

Speaker B Okay, Jerry, we found, and actually, I kind of picked this up in working with La back in the early 90s, that this gearing process actually has to be real time, starting at the top and cascading down. Because otherwise what happens is managers have made their judgments, they send it up, they now are invested in defending those judgments as against having experienced from their common manager in the discussion in real time how that common manager views the standards. And so our process, we've got software to project the whole thing on the wall begins with the CEO and her immediate subordinate, executives evaluating the effectiveness of all of their subordinates. Sorry, beginning with a benchmark of one or two of each of their subordinates. Then they go back to their office on their desktop. They then collaborate this with the same software. Then they come back into the room and they now reevaluate all of those assessments together. The reason we do some benchmarking ahead of time is to avoid people the embarrassment of having to come back. And say, oh, I had a different standard than you did. And then once those managers have gone through the equilibrium process or the hearing process together, and the CEO has said, I now bless these, the CEO, then the final thing he says or she says to each of them as they leave, now HR is going to be sitting with you. You're going to be playing my role with your team, going through exactly the same process. So it goes down in this equilibration. And the CEO also says, at the end of this, I'm going to sit down with you again and take samples three or four levels down to see if you maintain the integrity of the standard. And it's very powerful. I mean, that's how you'll get alignment.

Speaker D Can you share what kind of software you use for that?

Speaker B Yeah, I have it on my desk.

Speaker D Yes, I'd like to see it later.

Speaker C Great. Thank you for that, Jerry. That was very rich. Any other ken, before you go on.

Speaker B You said something interesting. General principle of appeal. Right, of appeal. In your experience at Roche, was that frequent? Hardly ever. What was that like?

Speaker C Hardly ever. But our concerns were obviously around. Why hardly ever? We like to believe it was because we had a good program in place, and certainly through feedback from employee relations surveys, et cetera, said that our employees were satisfied with the Pay program and also their manager's judgment of their performance. Okay. So it was very infrequently used. And again, a lot of those situations can be headed off because you don't want to put an employee in an uncomfortable position. A lot of those kinds of situations can be headed off by HR or the MRR, taking certain proactive kinds of steps.

Speaker F There is any kind of research or asking for feedback about this system. For example, did you do research for researching? What are the feeling of the employees about the Pay system as a whole and what was the results?

Speaker C Yeah, Roche used an employee relations survey probably once every two years, and certainly compensation was one of the areas that was assessed. As a matter of fact, when we started down this path and developed a new program, it was the employees who said, aren't we going to get rid of those bonuses now? Bonuses cause so many problems. So they were coming to us with the kind of suggestions you might only expect to come from management. But yes, we did okay. We considered that to be an important area that should be looked at periodically. How do people feel about the Pay program? Give them an opportunity to talk or express their feelings openly, not worried about what the manager will think or the manager once removed will think. We had very good results. It was a large North American based survey, and I forget what the actual percentile score was now, but it was extremely high relative to other organizations. Yeah, of course, Terry Howes back there was with Roche at the time. So, Terry, keep me honest here. Am I telling the truth?

Speaker G Company when I joined them in 1987. So there wasn't as many issues in the company that I've seen in other companies that we made. When Charles was with the company, she really ran HR very effectively. I had mentioned to my colleagues at my current company, I have never had respect for any HR department in 72 different companies that I work for, because HR people are just nice, warm, fuzzy people that really don't add a lot of value.

Speaker C All they do is tell you, did you?

Speaker G And when I joined Charlote Had in HR at the time, it was like, wow, these people actually are worth talking to. Value. When you're concerned about something going on in your department or your departmental functions pounding their chest and saying, they're better than I am because I ran the It organization, charlote or her team sort of come and sort the problems out by just asking a lot of questions and having the management team finally realize what they were doing inappropriately.

Speaker C And I did not pay her to say that. Okay. But if I had, I would have made sure that it was appropriate to the level of complexity. Yeah, absolutely. Thanks, Derry.

Speaker B Our experience has been the first time employees sit down with their managers to get the feedback about their effectiveness appraisal, which is the first honest feedback they've ever had. The place feels like it has been bombed for about three, four weeks because people who have always been told, oh, you're great, or you walk on water are now being told, look, you got a rating of two out of six, which is not bad. You've got a rating of three out of six, you're holding up the role, and it's a terrible blow to people's self esteem. After about three or four weeks, the place gets busy as hell because now people understand what the expectations are and the standards start and what they need to achieve. So when we began working with Elgoma Steel the day Dennis Turcott took over, about six months later, we had the first effectiveness appraisal, and the place was just like it was bombed. A year later, the next effectiveness appraisal, you could begin to see some energy, and they were not losing money. The next year when the effectiveness appraisal and people were getting we were now starting to see some people evaluated in the top half. Then people were very excited. So I would not say that this is a pleasant process the first time out, if you really do it right. Yeah, I just wanted to disavow you. But people trust the integrity of it, and that's the point you were making. But they're not happy with what they hear.

Speaker C There's transparency with what we've heard, and.

Speaker G Especially when, I mean, I was talking to Charlote running the HR organization, and what it did. That was before she brought Elliot Junks and Nancy and the rest of the team into the organization. And when she did that, whoa, we weren't so sure we liked her anymore.

Speaker C They didn't.

Speaker G It took a while to say, oh, this is even better. Because it did sort out some challenges between some of the powerhouses in the company that sales and marketing walked on water because we were a marketing organization. And in support groups, whether it was It or finance, well, you're just fluff every now and then. You get in the way. And by the way, we always just did everything wrong.

Speaker B To put in perspective the challenge in my country, cyprus.

Speaker C Yes.

Speaker B They did a survey. Entire city of service and 98% of the civil service received the highest possible performance rating.

Speaker D If the senior staff is also being.

Speaker B Rated, I forgot to mention that before the CEO sits down with his immediate staff to help them set the benchmarks for their staff, he sits down with them individually to give them the bad news of how he's evaluated them for.

Speaker D The year, because then people will trust it. Because one of the things that we struggled with for years is that also everybody was performing at or above in the whole company, in the staff. And we started rating ourselves honestly. And I actually gave myself below expectations on something. And I think that was good because I think if I hadn't found something bad, I would have, because really, none of us are perfect. And once you can show your team that, look, I'm not perfect. I didn't do as good a job on this recruiting effort as I should have, so I got it below expectations, then it's not so bad. It's not the end of the world. Doesn't mean that I'm a bad person, doesn't mean that I'm not good, and doesn't mean that I'm not effective. It just means that I'm trying to get better and better at what I do.

Speaker C Yeah, justifying those ratings are important. I mean, is that performance management system linked back to your operational and strategic planning? And what about the ways in which you measure effectiveness quantitatively as well as qualitatively on an organizational basis, functional basis, departmental basis? I would certainly there have been times when I rated my entire group at a high end, but I knew that I better be able to explain that in terms of what were you thinking of by Grave when you did this? So, again, this whole notion, thank goodness Roche never used the forced normal curve or forced rankings, but we did expect managers to justify what they were talking about. And yeah, this particular approach brings a lot of clarity, a lot of transparency. There are some very clear principles that can be thought about, and do they make sense? And derived from those principles are these sound practices, and you reach over time, a place where people are starting to rate the compensation and performance management system very, very highly. You're out of this. I think that performance management and compensation systems are two programs. They get worked and reworked and reworked. We expect magic from them every time there's a significant change, perhaps in company strategies or there's been a new major initiative. Somebody says performance management and compensation is not working. If we can only fix those, we get better results. Well, no. Okay. Any other comments? I'm a little bit focused on time here.

Speaker E Okay, just one question related to implementation of the sync. The first time this can be done, it's like a bond in an organization. Is it done in the sequence that at some time before that people's expectations were explained to them at their tasks?

Speaker B The effectiveness appraisal process and the first feedback is the first time people understand that accountability is real. You can talk about accountability till you're blue in the face. Until you understand that you're accountable for keeping your word, no surprises, and earning your keep, which is effectiveness, and until you understand just how well your manager in the organization believes you have earned your keep. Accountability is an abstract concept. It doesn't become real and visceral. So you have to begin at the moment that you declare we're going to become a requisite organization. And managers have been trained to set the context and assign Qqtrs in this process. They are told that these are the.

Speaker D Standards against which we're going to evaluate your effectiveness.

Speaker G Then I want to take a 15 minutes break in the second and then.

Speaker C We'Ll go to one.

Speaker B There should be no surprises.

Speaker C Sorry about that. Nancy and I were taking care of some housekeeping items and I know that that was very rich and very important. Little concerned about time. I'm going to move on okay, very quickly. Overall, some of the other enhancements to our program were we ended up with one salary structure rather than, I think we had initially three or four, one for administrative assistants and sales folks, et cetera. But this allowed us again, after having time span properly the roles and do the right thing and set on pay ranges, et cetera, we could come out with one salary structure and feel comfortable that people were being receiving Equitable differential compensation, making the mor accountable for equilibration. Not that they weren't previously, but clarifying the scope of those accountabilities and authorities was a great advantage. Again, salary increases based on increases in personal effectiveness. This was a little bit of a new concept in getting employees to understand that if your performance is good but it's just flat, that won't get you a maximum salary increase. There needs to be this differential in performance to match the increase. Salary increases were not related. We no longer used a midpoint as a control point. Again, it's back to performance against the role. The salary controls were actually the minimum and the maximum of the salary range we didn't want people paid below minimum unless there was an exceptional or good reason for it. And same thing with Red circling. There had to be a good reason. Again, we never did use the normal distribution curve or force rankings, which literally just politicizes your whole system on bonuses. This was the radical piece and unfortunately didn't last as long as well, it wasn't permanent. It was in place for about two years. But a third president came in and simply he just believed so strongly in bonuses and had different philosophies, people, management philosophies. So this was overturned in a way, actually employees were happy because when we initially did this, we took the bonus and rolled it into salary. Had a tremendous impact, obviously, on all the salary related benefits. But long term a pension plan was the most or the largest impact because we had a defined benefit pension plan. But the Swiss believe in very good pensions, so we had a significant surplus and we could use that surplus to handle this particular change. Anyway, when it came to the bonus we got rid of, first of all, there were several floating around the place. We got rid of a length of service bonus, which again was due to exceptional performance on the part of the company back in the 60s when they developed Valium and the money was pouring through the door. And like all good employers, they said, let's share it with the people who helped us earn it. So employees at Roche for a long time were paid 13 months of salary rather than twelve, and it was solely length of service base. Got rid of that sales incentive bonus, took them about a year of debate and analysis and the three business divisions, particularly the pharmaceutical division, came back and said, yes, we think we should get rid of these big bonuses. Okay? They were causing untold grief. Every year at bonus award time, there was always somebody who was extremely unhappy and always somewhere a major morale problem.

Speaker D I just have to ask you about that because if they have predefined goals on what their targets are, why were they unhappy? How were the bonuses applied that they were so unhappy?

Speaker C Well, one of the things with bonuses predictive criteria based bonuses or results based bonuses, you're attempting up front to determine or to predict the conditions under which the individual is going to work. And neither you nor the employee are going to know in advance exactly what those conditions are, right? So if you set up a bonus with certain kinds of features and people are working toward accomplishing those particular goals and objectives, you might find you're going all of a sudden in the wrong direction because something has changed on you. Bonuses, one of the reasons they are a problem is just that you cannot predict. You get paid for anticipating problems, overcoming obstacles over time on your way to accomplishing the goal, right? But it's hard to know. Certainly at the higher levels of the organization where the work is more complex, it's far more difficult to understand what's going to happen. That's one of the reasons that bonuses don't that's why they don't work well.

Speaker D They work in our organization. Katrina hits, it's nobody's fault. You can't sell products that you can't make or that you can't deliver, but then you make allowances and adjustments for that. That's all a part of what the.

Speaker C Key events review is all important. I hear what you're saying, but one of the important messages that Elliot left with us was he would you know, you give them a base salary and then they also get a bonus. So what's the base salary for? Are you literally telling people that you do not expect them to bring their best endeavors and their full commitment to the role? That there's this other piece that you will give them called the bonus if they do their best? We would often mean when we had the length of service bonus, I would have employees come to me because they're totally confused. First of all, because we used that bonus in all kinds of funny ways. John might come in and ask for an increase. And we'd say, well, I can't do anything about base salary until next year, but we could fix the bonus for you because there was a vesting scale. Took about five years of service before you earned the full month, but I might be able to move that up to give you the salary you felt you deserved. But the issue is I think the fundamental issue is yeah, what is the base salary for? Are you literally saying that you pay people not to do their best?

Speaker D No, I think there are situations in our case where you have a mature product that salespeople have been selling for years, and they go into the door and it basically sells itself. The customers have to have that product. And then we're trying to grow and diversify the company into other products. Well, we need them to be focused now because that other product is going to basically do what it needs to do. But now you've got to be going and introducing a whole value proposition to the customers to get them to understand that we do other think. And we talked to Elliot about this, nancy, you were around when we talked about this, and he basically tell mom to share that with us. Well, I think we can't go into maybe we can talk about incentives later.

Speaker G At the end if we want to.

Speaker C Okay.

Speaker D And I also covered in great detail in the article that I handed out, eight hour discussion that Elliot had on.

Speaker G Incentives with the bank in Omaha, the financial services company.

Speaker D So that is almost verbatim what Elliot.

Speaker G Said in North Indian Alice, and it's in here too.

Speaker C Okay.

Speaker B I think Elliot is dead on right about it. The problem is it is such a different paradigm. It is such a different paradigm. But I think he's dead on. Right. But it is the hardest thing I find in the states to change.

Speaker D Yes.

Speaker B Because there is just an expectation that the company is going to hedge its bets and that's what bonuses are. The company is going to say I'm not going to risk having a bad year and that's what bonuses are about and it's the biggest obstacle I believe to introducing requisite compensation.

Speaker C Position. Okay. We had just gone through a merger and acquisition. There was all kinds of change going on in the industry. Therefore there was a readiness for change, readiness to examine everything we were doing. And both the first and second president who supported the implementation of this system were high capability people who believed in really thinking outside of the box and being experimental. So that made it possible for us. But I would agree with you that outside of Roche I wouldn't even talk seriously to most clients about getting rid of bonuses.

Speaker D We could talk more about bonuses at the end of the presentation.

Speaker C Okay, I'm going to skip over the next couple of slides very rapidly. It's just that once we got looking for bonuses at Roche they were kind of all over the know. It's amazing how employees go into the president or into their boss and get these one off kind of deals. I felt like Dick Tracy digging up all of these special bonuses. We know that they were causing poor morale. Again catalyst to employee behaviors outside of acceptable boundaries. We had three of our top sales reps that we were about to terminate. We knew that all reps did a little bit of back end know you go to your favorite customers at the end of the year and they'll know more business with you because I really want to help Jerry get that trip to Hawaii. And then I returned the goods. We knew that that sort of stuff went on. But one year it got very blatant and it was that situation and the amount of management time in looking into and discussing the situation that said, hey, it's time to get rid of these bonuses. Okay. There was lack of fairness in judging personal effectiveness. Employees felt that managers used the bonus to manipulate relationship between managers and direct reports can collapse under the weight of incentives. Relationships and cooperation among employees are often casualties of the scramble for awards. You tell me that we're team members and you want us to operate as a team. Yet I know that if I get the bonus then Kate doesn't or if she gets it then I don't. So how much cooperation is there going to be? Okay. Performance impact of bonuses. This was from, I think, a Harvard Business Review article. There had been these studies done in 1986 measured the impact of financial incentives on performance and it revealed that 16 or 15 or 57% found a positive impact on performance. However, the performance measures were quantitative in nature and a good job consisted of doing more of something or just doing it faster. Okay. Only five of the studies looked at quality of performance and none of those five showed any benefits from incentives. I remember when President number three decided to reverse this bonus thing we had done. Managers said to him, I was really quite pleased that the VPs, the head of each function, said to him, do you really think that by giving us a bonus that's going to impact our commitment and the quality of performance in general? The more cognitive, sophistication, open ended thinking required, the worse people performed when working for a reward. They tend to be complex and ineffective where work is sorry. They tend to be ineffective where the work is complex. I've heard people say that the gain sharing plans tend to work well, certainly at entry levels in the organization. If they do. I think one of the reasons, for example, at Stratum one where work is proceduralized and you can tell the individual how to get the job done, you can predict the kind of problems they're going to come up and how you get around those problems. Then maybe in those situations, bonuses might appear to have a positive impact, at least in the short term. But I think in the long term, even there they cause problems. These schemes make no allowance for performance conditions. This is what I talked about earlier. Sabrina doesn't allow for conditions that vary significantly from predicted conditions. And we all know of the employee who says, you know, boss, you give me all the tough jobs because I'm one of the best on the team. Therefore my numbers don't look as good as so and so's numbers and they're getting a big bonus, but I'm not. We found that what bonuses do is they motivate people to get the bonus. These programs focus and reward employees for, as I said, achieving quantitative results. They tend to create a workplace in which people feel controlled, not an environment that's conducive to learning, exploration, risk taking and trust. One of the quickest ways to destroy cooperation and therefore organizational excellence is to force people to compete for rewards and recognitions, cause managers to appear manipulative and colleagues to appear obstacles to each other's success rather than team members. Okay, I'll leave it up to you to read those slides in between, just a few more details about bonuses. But here's what we found. Another question, and we're a unionized country.

Speaker E So in implementing a reward program like.

Speaker F This, do you need to negotiate with the children?

Speaker E If so, what's their position?

Speaker C I've not worked in unionizing environment. Catherine, would you have any comments? I know that Elliot worked with.

Speaker G Many of the organizations. It's a three year contract, so you've got to start preparing your relationship with union officers and stewards to actually engage all of the employees in what the company is doing in order to have the trust. If you don't do that, get prepared for that, the next step will be okay, but you'll probably go through two contract periods in order to be able to take it down. That brings up a point just stated quickly, if you are trying to work inside this company, or you are an external person, if you do not engage, talk down with all of the people in the organization about what you're doing. You get what you deserve and it'll be pushed back.

Speaker C Yeah. Anybody who's worked through a comprehensive implementation of Ro from the top to the bottom, knows that there's communication, communication. Communication is so critical. Okay, how many levels are unionized?

Speaker B If it's just the bottom level, you can implement a requisite structure all the way down, but the union will fight tooth and nail until the membership agrees. As Catherine was saying, that they really trust management because it essentially reduces the power of the union leaders to allow managers to provide differential pay.

Speaker G What CRA did and what Ontario Hydro is to actually do calcul analysis of the most capable people who were union members, part of the workforce supposedly at Strat One, but in fact, that they were holding other jobs, work in was actually then to offer them roles outside of union contract. Someone who strategy four.

Speaker C Okay, great. I'm going to wrap up with benefits of requisite compensation. As we heard from Nancy earlier this morning, and has come out during the last hour or so, it's not an easy transition. There is a lot of work involved, but I think that there are some major positive payoffs. If what you're after is creating that accountable, high performing, trust inducing organization, you now have employees pay that's in line with the complexity of work and their roles, their performance, and their capability. That's the ideal state that you're shooting for. Employees feel treated with consistency and fairness in compensation matters. It allows employees to focus on accomplishing tasks and doing the right thing rather than earning a bonus. Not held accountable solely for quantitative results, but using their best judgment and discretion to achieve high quality results, not penalized for difficult tasks under difficult conditions. Okay. Administratively, we found it more efficient, easier to maintain, therefore more cost effective. We weren't into revising. As I said, the performance management and compensation program, as much as we had previously, increases openness trust and cooperation, increases effective teamwork, effective individual performance, which leads to the organizational excellence that you want. Thank you very much for hanging in there with me to get through that. Thanks.

Speaker D This is my suggestion. There's a very nice collection of food down the end of the hall here. Why don't we take a food break now, a little food break, and then have one more presentation for lunch, and have lunch at one? Is that all right with the group? Because I think there's there's always much more energy before lunch. But I think you need a good stretch break. Some coffee, some food, and then.