Rewards That Work™
The Newsletter for Clients and Friends of the Wilson Group, Inc.
Vol. 1, #2
Blending Two Worlds
How Genzyme Attracts Experienced Scientists
Adapted from Rewards That Drive High Performance: Success Stories From Leading Organizations, by Thomas B. Wilson, published by AMACOM, 1999. Genzyme is a Wilson Group client.
Large, well-established pharmaceutical companies can afford to pay their scientists well. Biotechnology companies cannot. Instead, they typically offer moderate pay coupled with stock options that promise large future payouts if the company succeeds. So how does a biotechnology company like Genzyme Corporation attract the experienced scientists it needs for the company to achieve long-term success?
Genzyme's compensation challenge has been to straddle the compensation styles of the biotechnology and pharmaceutical industries - to create programs to attract experienced scientists from the pharmaceutical industry, without losing its existing personnel to other biotechnology companies.
Genzyme itself straddles both industries. Started in 1981, Genzyme was one of the first biotechnology companies to bring a product to market. It has since evolved into a diversified healthcare products company, with 3,500 employees worldwide, and a stream of potential products in the pipeline.
Adding a "J-Curve"
Genzyme began to address its compensation challenge in 1994 with an in-depth review of the base compensation of the pharmaceutical and biotechnology industries. An analysis of the data revealed an important discovery - that the midpoint line of biotech salaries did not contain the pronounced "J-curve" that can be found in pharmaceutical industry salaries. The "J-curve" is a dramatic rise in compensation beyond a certain level in an organization.
Based on this discovery, Genzyme's first step was to reposition its midpoint line to more closely resemble the steeper curve found in the pharmaceutical industry. Midpoints for middle managers moved up as much as 15%.
The second step was to develop a cash compensation strategy that blended biotechnology and pharmaceutical industry rates. For positions where Genzyme could obtain data from both industries, salaries were calculated by combining 60% of the pharmaceutical market rate and 40% of the biotechnology market rate. This acknowledged that Genzyme was evolving beyond a pure biotechnology company, and competing in a diverse labor market.
Addressing Stock Options
The third step was to address equity compensation, which presented a clash between cultural philosophy and shareholder needs. Genzyme promotes "a culture of allowing employees to influence and participate in the success of the company," so senior management was emphatic that all employees have stock in the company. However, the extensive use of equity compensation results in overhang, or a large number of outstanding stock options. Shareholders dislike overhang, because it can dilute value per share.
Shareholders typically will accept having stock options account for up to 15% of outstanding shares. In the biotechnology industry, it is not unusual for options to approach 20% of outstanding shares, as they did at Genzyme.
To design a workable solution, Genzyme studied the use of equity compensation in the pharmaceutical and biotechnology industries, including eligibility requirements, the value of options granted at various salary levels, and the extent of distribution to the eligible population. The study showed that Genzyme's annual distribution was exceptionally generous, due not only to the value of options granted, but to the extent of participation.
The most expedient way to reduce dilution was to reduce the number of options, but that would be counter to the corporate philosophy. Instead, Genzyme calculated the number of shares needed to give all eligible employees options proportionate in value to their salaries. The market line used values from pharmaceutical and biotechnology industry competitors and the 60/40 weighting used for the base salary program.
Remarkably, the number of shares required was about half of the average distribution for each of the previous three years. The number assumed that everyone would receive Genzyme's most commonly used performance rating and that all raises for the reminder of the year would be at the company average.
Adopting the concept of an annual option pool funded as a set percentage of shares outstanding, compensation managers projected a significant reduction in usage and better control over distribution. The option pool allowed Genzyme to reduce the cost of its option program, sustain a competitive program and continue Genzyme's cultural commitment to company-wide equity ownership.
Applications
Developing Reward Strategies:
Alignment + Capabilities + Commitment = High Performance
A company can create a sustainable competitive advantage if it can motivate its workforce to perform at a high level consistently.
This goal can be achieved when the rewards your company provides its people are aligned with the key success factors of your business. When they are designed properly, reward systems redefine the employer-employee relationship, and create a mechanism for sharing in the company's success.
Shaping Reward Strategies
Reward systems are not merely compensation or recognition programs. They may include salary programs, bonuses, stock options or phantom long-term incentives, or various types of formal recognition.
But there are common elements. All reward systems define how people will be encouraged to take action and how their performance will be reinforced. The closer the alignment between employer goals and employee rewards, the more successful the reward systems are likely to be.
There is no simple formula for creating a reward strategy. Reward strategies must be shaped to each organization's unique culture and business requirements. Reward strategies should be considered from the following perspectives:
- The competitive context. A radical new basis for competing is emerging. Reward systems play an integral role in aligning the organization to compete more effectively.
- Strategy and key success factors. This determines how the organization will create a competitive advantage and build the culture needed for long-term success.
- The human resource context. HR programs are created to ensure that the best people are hired, that they develop to their full potential, and that they are managed effectively and in a manner that is consistent with the organization's needs.
Designing Reward Systems
While reward systems differ from organization to organization, they are typically designed using the following approach:
- Articulate the organization's strategy, key success factors and people strategy.
- Assess existing programs and practices. The degree to which they support the core strategy.
- Identify critical gaps. Assess how important filling these gaps will be to the organization.
- Establish a strategy. Fit the programs to the unique requirements of the organization.
- Develop plans. Address priorities that are long-term focused and short-term specific.
- Implement the plans. Communicate your strategy to gain the support of key leaders, track performance to provide feedback, and train key people so that results can be sustained long-term.
- Measure results. A reward system is an investment that should provide returns to everyone involved.
For reward strategies to succeed, senior managers, line managers, employees and human resource managers must be involved in the development process. This enhances the quality of the strategy and the buy-in to the needed changes. The programs and the actions are adjusted so they are aligned with the key drivers of the organization. This achieves the primary elements of high performance: alignment and commitment. It's just that simple. And that important.
Up Close
Jack Dolmat-Connell, Vice President and Managing Director
Hobbies: Cooking, collecting wine, reading, watching his children play sports.
Quote: "Far better to dare mighty things, to win glorious triumphs, even though checked by failure, than to take rank with those poor spirits who neither enjoy much, nor suffer much, because they live in the gray twilight that knows not victory nor defeat."
Theodore Roosevelt
Favorite practical joke: Giving Tom Wilson a fake resignation letter on April Fool's Day.
Role models: Dogbert the consultant and Catbert the evil HR director.
Scariest moment: Taking a helicopter ride in the Smoky Mountains when he was 12 and hitting air pockets.
Favorite tradition: Christmas Eve dinner with his family on his birthday.
Jack Dolmat-Connell expected to pursue a career in corporate finance or investment banking, but changed direction after taking human resource courses with Dave Ulrich and Noel Tichy at the University of Michigan.
"I took a few upper-level finance courses and found that I hated finance, but loved my HR classes," he said. By focusing on compensation, he was able to combine his knowledge of finance and his fascination with human resource issues.
A native of Warren, Mich., Jack took an internship at General Motors Corporation while pursuing his master's in business administration at Michigan, and quickly found that he disliked working for a large, bureaucratic company.
While at Michigan, he met a Vice President of Human Resources from Data General Corporation who "came to an interview dressed in blue jeans and an earring." Attracted by DG's looser structure, he took a position there as a compensation analyst after graduating in 1984. After three years at DG, he went to Digital Equipment Corporation, where he worked for Bob Palmer, one of the few outside VPs hired by DEC. Palmer later became president of DEC.
Feeling stifled by the bureaucracy of a large company, he moved on after three years to Stratus Computer Company, where he served as Director of Human Resource Operations. After three years with Stratus, Jack founded his own company, Solutions At Work, offering HR and compensation consulting services primarily to high-tech companies.
Starting His Own Business
"The high-tech companies I worked for were fast paced, chaotic and characterized by wild swings in performance," he said. "I've had an opportunity to work with a bright group of people, but the high-tech organizations I worked with for the most part haven't paid enough attention to HR. They're migrating more toward HR now, because they've found that it requires their attention."
Two years after starting his business, Jack was offered an HR position at Avid Technology, which was then an incredibly rapid-growing company. "The first year was incredible," he said. "The company was red hot. But a year later, the bottom fell out."
Having previously interviewed with Tom Wilson while Tom was at Aubrey Daniels & Associates, the two stayed in touch. As Avid imploded, Tom suggested that Jack reconsider consulting. He did, joining Wilson Group in January 1998.
"I was bored working in a corporate environment," he said. "Wilson Group allows me to combine the best elements of my corporate background with my experience running my own business. It's the best job I've ever had."
Compensation Factoids
- The Hay Report: Compensation Strategies for 1999 and Beyond finds that incentive pay is still an important part of total compensation. Total cash compensation is increasing faster than base pay, and already 58% of professional-level employees and 94% of executives are eligible for incentive payments.
- Two thirds of U.S. subsidiaries of non-U.S. companies have U.S. style executive compensation plans, according to a survey of 109 large multinational companies by Watson Wyatt. The most common programs are long-term incentive (42%) and performance unit/cash (27%) programs. British, French and Dutch-owned companies are the most likely to offer long-term incentives.
- Pay increases in the IT world may be slowing down. According to Computerworld magazine's "12th Annual Salary Survey," annual pay increases may decrease from 11% to 4%.
- According to Rainmaker Thinking, the non-financial rewards most important to the "workforce of the future" are: control over one's schedule, training opportunities, exposure to decision makers, personal credit for tangible results achieved, increased responsibility, and opportunities for creative expression. For an online copy of RainMaker's GenX newsletter, visit www.rainmakerthinking.com.
- The gap between men and women's pay remains large. Even in states where the gap is narrowest, women are paid 20% less than men, according to a study of U.S. Census and Bureau of Labor Statistics Data by the AFL-CIO and the Institute for Women's Policy Research.
