performance strategy

Performance-based Reward System as Nucor Steel Recipe of Productivity

There are just a few big steel companies left in the US, and Nucor Steel is just one of them achieving $4.5 billion in sales. The enterprise is a job site for over 7 thousand non-union workers. To stay in business while being highly competitive, Nucor has set two major goals:

  • build new steel plants as economically as it is only possible; and
  • run manufacturing facilities as productively as they only could.

Such approach required 1) rethinking philosophy of management, 2) cutting administrative costs, and 3) reconsidering compensation packages for every employee.

Rethinking Business to Stay on Top

On the first issue, the decentralization of management was implemented allowing each facility to function as a separate business unit.

In relation to the second issue, the management layers were cut down to only four between these groups:

  • President, Vice Chairman, and Chairman;
  • General Manager-Vice President;
  • Managers of Departments;
  • supervisors;
  • employees.

Also, the number of employees who work in the company’s headquarters had been reduced to just 22, which includes 8 managers plus 14 supportive workers.

Finally, as for the benefits plan and compensation packages – they are the same for every employee in the company, be it a janitor or the CEO. No corporate cars or jets for senior executives; no separate dining rooms or personal parking slots for anybody regardless of the position held.

This corporate style follows from Nucor’s very unequivocal concept of attitude toward employees:

  • Productivity is the main criterion for the level of employees’ earnings.
  • If a worker does the job sufficiently and effectively, he or she should feel confident about having the job in future. Remarkably, Nucor has not ousted workers for almost 30 years!
  • There is a well-tuned feedback and follow-up system in the company built with the only aim to listen and hear what employees have to say. To that end, regular entire team and separate departments meetings are held, special surveys are conducted, as well as informal sessions and dinners are organized with the involvement of employees and managers. All this contributes to securing workers’ right for fair treatment.
  • If an employee thinks that he or she had been treated unjustly, they have the opportunity to appeal directly to the company’s President.

Give More Control to People So They Can Control Selves’ and Company’s Future

The Nucor’s distinctive peculiarities also include a rare in the industry compensation system based on each worker’s performance. Up to 1/4 of employees’ salary is calculated based on their plant’s Return on Assets (ROA) while the standard hourly rate is considerably lower than industry’s average. This basically means that the individual productivity is the key factor for how much workers earn: the better you perform and exceed set productivity quotas, the more you get paid. Yes, that simple.

For instance, in other companies, a worker is expected to smelt 6 tons of steel every hour. Nucor’s minimum for such employee would be 4 tons per hour. At the same time, every ton of smelted steel over that rate brings a worker +5% bonus. Guess what: the average volume achieved by Nucor’s employees is… 20-25 tons per hour! The rewarding method proved highly effective as the absenteeism rate doesn’t go above 1,5%.

Of course, under such approach, pains and penalties are quite severe as well. It’s very easy to lose your daily or weekly bonuses: in the former case, you just get late to work; and in the latter case, you miss a whole working day without a legitimate reason.

The same approach is applied to department managers. Their base salaries are reduced compared to what their counterparts have on other steel plants. But based on Return on Assets annual marker, they qualify for a bonus of up to 82% of the base salary. Additional 100-200% bonuses can be gained on a weekly basis and depend on their team’s production rates.

Senior executives’ salaries do not match industry averages, too. And they only receive annual bonus paid partly in cash (40%) and in stock (60%). Its size depends on how much of shareholders’ equity returns above predetermined minimum rate. Thanks to such system, rewards can increase multi-fold in relation to the base salary.

Eventually, Nucor’s compensation scheme makes all employees – from entry-level worker to higher executives – clearly understand that numbers in their paychecks are directly due to how productively they work. For the company in general, it results in increased performance and higher revenues.