Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 32

"Still Better Off Than Most"
For the most part, 2008 was a pretty good year for Nucor, the country's largest steelmaker. In fact, net earnings hit a record $1.83 billion; net sales also set a record-$23.6 billion, up 43 percent over 2007. Unfortunately, despite such record-setting year-end numbers, the fourth quarter of 2008 was a disaster. Net earnings for the last three months of the year came to $105.9 million-down a whopping 71 percent from $364.8 million for the fourth quarter of fiscal 2007. "The record sales and earnings achieved by Nucor in 2008," said chairman and CEO Daniel R. DiMicco, "were accomplished in spite of the unprecedented economic and steel-market conditions that we experienced in the fourth quarter."
Referring again to "the unprecedented speed and magnitude of the global economy's decline," DiMicco went on to forecast an equally dismal first quarter-and beyond-for fiscal 2009. In January, with the capacity of its mills down from 95 percent to 50 percent and its stock down by more than 10 percent, Nucor management passed out one-time bonuses of $1,000 to $2,000 to all of the firm's workers, at a total cost to the company of $40 million. In March, management distributed another $270 million in profit sharing. Things had gotten bad and were looking worse, but "we're making money. We've got jobs," explained one veteran executive.
Indeed, Nucor still had all its jobs. Hit by a 50-percent plunge in output that had begun in September 2008, the U.S. steel industry had laid off some 10,000 workers by January 2009, and the United Steelworkers union was expecting the number to double before the recession came to an end. As of the end of March 2009, however, Nucor had refused to follow suit in laying anyone off. At its 11 U.S. facilities, Nucor employees are rewriting safety manuals, getting a head start on maintenance jobs, mowing the lawns, and cleaning the bathrooms-but they're still drawing paychecks. "Financially," says one employee at the company's facility in Crawfordsville, Indiana, "Nucor workers are still better off than most."
As far as DiMicco is concerned, the company's ability to survive the current economic crisis will depend on several factors, "most importantly, our employees and the Nucor culture." What's that culture like? It originated in the 1960s as the result of policies established by Ken Iverson, who brought a radical perspective on how to manage a company's human resources to the job of CEO. Iverson figured that workers would be much more productive if an employer went out of its way to share authority with them, respect what they accomplished, and compensate them as handsomely as possible. Today, the basics of the company's HR model are summed up in its "Employee Relations Principles":
1. Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity.
2. Employees should feel confident that if they do their jobs properly, they will have a job tomorrow.
3. Employees have the right to be treated fairly and must believe that they will be.
4. Employees must have an avenue of appeal when they believe they are being treated unfairly.
The Iverson approach is based on motivation, and the key to that approach is a highly original pay system. Step 1, which calls for base pay below the industry average, probably doesn't seem like a promising start, but the Nucor compensation plan is designed to get better as the results of the work get better. If a shift, for example, can turn out a defect-free batch of steel, every worker is entitled to a bonus that's paid weekly and that can potentially triple his or her take-home pay. In addition, there are one-time annual bonuses and profit-sharing payouts. In 2005, for instance, Nucor had an especially good year: It shipped more steel than any other U.S. producer, and net income hit $1.3 billion, up from $311 million in 2000. The average steelworker took home $79,000 in base pay and weekly bonuses, plus a $2,000 year-end bonus and an average of $18,000 in profit-sharing money.
The system, however, cuts both ways. Take that defect-free batch of steel, for example. If there's a problem with a batch, workers on the shift obviously don't get any weekly bonus. And that's if they catch the problem before the batch leaves the plant. If it reaches the customer, they may lose up to three times what they would have received as a bonus. "In average-to-bad years," adds HR vice president James M. Coblin, "we earn less than our peers in other companies. That's supposed to teach us that we don't want to be average or bad. We want to be good." For the first quarter of fiscal 2009, total pay at Nucor was down by about 40 percent.
Everybody in the company, from janitors to the CEO, is covered by some form of incentive plan tied to various goals and targets. We've just described the Production Incentive Plan, which covers operating and maintenance workers and supervisors and which may boost base salaries by 80 percent to 150 percent. Bonuses for department managers are based on a return-on-assets formula tied to divisional performance, as are bonuses under the Non-Production and Non-Department-Manager Plan, which covers everyone, except senior officers, not included in either of the first two plans; bonuses under both manager plans may increase base pay by 75 percent to 90 percent. Senior officers don't work under contracts or get pension or retirement plans, and their base salaries are below industry average. In a world in which the typical CEO makes more than 400 times what a factory worker makes, Nucor CEO DiMicco makes considerably less. In the banner year of 2005, for example, his combined salary and bonus (about $2.3 million) came to 23 times the total taken home by the average Nucor factory worker. His bonus and those of other top managers are based on a ratio of net income to stockholder's equity.
Nucor needs just four incentive plans because of an unusually flat organizational structure-another Iverson innovation. There are just four layers of personnel between a janitor and senior management: general managers, department managers, line supervisors, and hourly personnel. Most operating decisions are made at the divisional level or lower, and the company is known for its tolerance of honest mistakes made in the line of decision-making duty. The Nucor website quotes an unnamed executive as saying, "Workers excel here because they are allowed to fail," and goes on to explain that the occasional misstep is considered a good trade-off for the benefits of initiative and idea sharing: "Nucor managers at all levels encourage their employees to try out their new ideas. Sometimes the ideas work out, sometimes they don't. But this freedom to try helps give Nucor one of the most creative, get-it-done work forces in the world."
The Nucor system works not only because employees share financial risks and benefits but because, in sharing risks and benefits, they're a lot like owners. And people who think like owners are a lot more likely to take the initiative when decisions have to be made or problems solved. What's more, Nucor has found that teamwork is a good incubator for initiative as well as idea sharing. John J. Ferriola, who managed the Nucor mill in Hickman, Arkansas, before becoming chief operating officer, remembers an afternoon in March 2006 when the electrical grid at his facility went down. His electricians got on the phone to three other company electricians, one in Alabama and two in North Carolina, who dropped what they were doing and went straight to Arkansas. Working 20-hour shifts, the joint team had the plant up and running again in three days (as opposed to an anticipated full week). There was nothing in it (at least financially) for the visiting electricians, but they knew that maintenance personnel get no bonuses when equipment in their facility isn't operating. "At Nucor," says one frontline supervisor, "we're not 'you guys' and 'us guys.' It's all of us guys. Wherever the bottleneck is, we go there, and everyone works on it."
Nucor also likes to see teamwork-cooperation and idea sharing-combined with a little productive competition. Plant managers often set up contests between shifts to improve efficiency, output, or safety, but sometimes the effort of a work group to give itself a competitive edge can be taken to another level. In 2002, the Nucor plant in Crawfordsville, Indiana, was a pioneer in the development of an innovative process called thin-strip steel casting, and as of 2008, it was still setting records for continuous output from the process. The facility, however, isn't located near any major waterway and is thus at a disadvantage when it comes to transportation costs, especially when fuel prices are high. So General Manager Ron Dickerson and his employees collaborated on a plan not only to get around the problem but to increase profitability at the same time. Because it was too expensive for them to ship sheet steel as wide as that regularly made by competitors (including other Nucor-owned plants), Crawfordsville management and workers campaigned for the opportunity to shift the plant's focus to other types of steel.
It was a risky proposition, but today Crawfordsville turns out 160 different grades of steel. Some of them present manufacturing difficulties that employees have had to solve over time, but making the new processes work meant more orders for the plant and more hours for its employees. By the first quarter of 2008, the plant was setting production and shipment records. "We're continually expanding product ranges and the types of steel we make," says Dickerson, who continues to look forward, particularly to the opportunity to apply the Nucor brand of employee initiative to new technologies. "Nucor has a couple of other things going on," he notes, "and it's not yet decided where they'll make an investment. [But] Crawfordsville is known for successful startups, so I'm hoping we get some of these new technologies."
Identify the incentives-both financial and nonfinancial-that Nucor uses to motivate employees.