I support giving production employees the same "bonus" program (AIP / Annual Incentive Plan) that 3M implemented for salaried people many years ago. We aspire to be an inclusive company, so maybe we should apply the same compensation principles to all of our valued employees.
First of all, hourly employees need to understand that AIP is not a payment bump above and beyond what the employee's job has historically paid. (Sorry if you were expecting a big raise, but that's not how AIP works.) If 3M has a job opening where the market rate of compensation is $100,000, they don't offer the person a $100,000 fixed salary plus variable pay of $7,000 (7%). Instead, they would offer a $93,457 fixed salary plus target variable pay of $6,543 for a total planned compensation of $100k. Note the $6,543 variable pay target is 7% of the $93,457 fixed salary not 7% of the $100,000 total. This percentage isn't 7% for every salaried employee - it varies by job grade. This is common at other companies as well.
There is no free lunch from 3M out of the goodness of their heart. They call it an Incentive Plan, but I don't know many employees who actually feel incentivized by it. It is mainly a way for the company to manage cash flow. In a year when sales and profits are down, 3M pays out less in AIP and that makes the books look better than they otherwise would. When sales and profits are above forecast, they can afford to pay out a little more in AIP and still meet the Wall Street estimates.
So would you rather get paid a fixed $15 an hour or get $14 plus a $1 lottery ticket for every hour you work?
Here's how AIP could apply in production:
- Seven percent of your pay will become variable pay within the AIP. For example, if you are currently making $22.00 per hour, your new wage will be $20.56 per hour ($1.44 / hr pay cut). It may seem like a lot, but 3M would likely advise you that if you put a little effort into budgeting and stop buying things you don't really need you can get by on less until the bonus payment is made the following year. 3M even offers complimentary access to an Ernst and Young financial planner if you need help adjusting to a smaller paycheck.
(To ease the pain, the company could reduce hourly pay by 4% the first year and then instead of giving a 3% pay raise in the second year they would just put that money into the AIP variable pay bucket so it totals 7% of pay. Or maybe just not give out any hourly pay raises over the next 3 years until 7% of pay is in the AIP. Either way, you aren't getting a pay bump this year just because you join the AIP "bonus" program.)
- Each March, 3M will compare your Big B's actual sales and operating income against the plan (goal) for the previous year. If sales and operating income exactly meet the goals, you will get a check for the number of hours worked during the plan year times the $1.44 per hour pay cut that you took. If actual sales and operating income are below the goal, you will get a smaller payment. If results are significantly below the goal, you won't get anything. Only if actual business unit results exceed the goal will you get back more than the $1.44 per hour that they took away from you.
So let's say your AIP business unit had $500 million of sales and generated $100 million of operating income during 2022. When the executives put on their rose colored glasses and made plans for 2023, they decided the plan / goal should be an 8% increase in both numbers (i.e. $540 million of sales and $108 million of operating income in 2023). At the end of the year, the actual numbers come in at $530 million and $106 million (a 6% year over year improvement in both numbers). Unfortunately, that 6% increase is less than the 8% goal that was set for the year. So you will be getting less than the $1.44 per hour bonus payment that you were anticipating even though the corporation made 6% more in profits.
But what if the economy is booming and sales and operating income both come in 10% higher than last year. 10% is bigger than the 8% goal, so now you're finally bringing home a bigger bonus check than planned - at least for this year. But the fact that 10% gains were so easily achieved is not lost on the executive team so next year the goal will be another 10% growth (or maybe more). "We've proven we can do 10%, so let's all raise the bar and dig a little deeper to deliver 12% next year!" An old, slow-moving conglomerate like 3M just can't deliver the kind of growth year after year that our optimistic executives and the Wall Street boys dream about.
- The AIP payment is made based on the performance of your Big B (made up of thousands of employees). It is not based on your personal productivity or the performance of your department. Even if your entire plant meets all of it's quality, customer service, productivity, yield, safety, energy reduction, and other goals, it does not mean the entire Big B will meet its' goals and therefore you are not guaranteed to get more than the expected $1.44 per hour of bonus pay just because you worked hard.
- Let's say you run your process 10% faster than the other crews that operate the same machine, have less waste than they do, and work through your breaks to make sure orders get completed and shipped to the customer on time. Meanwhile, your counterpart who runs the machine on a different shift walks around the plant talking to people 2 hours per day, runs the machine as slow as it will go, has higher waste, and never misses the opportunity to take an extended break. If you're both the same job grade and clock in for the same number of hours during the year, you will both get the same bonus payment next March. Exactly the kind of incentive system that motivates us all to work harder! :)
- If you quit or get fired anytime before the end of the year, you lose your entire AIP payment for the year. Let's say your supervisor comes out on Dec 15 and tells you "Sales are way down this quarter so we don't need you anymore. Turn in your badge before you leave today." It doesn't matter how hard you worked during the past 11.5 months - you still won't be getting a bonus check for the year. Perhaps you need to quit your job mid-year to take care of an aging parent or a sick child? Don't expect a prorated AIP payment for working part of the year because there's no such thing. (Note that if you are retirement eligible and retire part way through the year, your AIP will be prorated based on the portion of the year that you worked.)
- Let's say you work in a department where sales for the products you make skyrocket due to the addition of new customers. The entire team is working overtime to keep up with demand. You're changing the way you do things to drive productivity and yield improvements. These improvements lead to a huge increase in operating income for the particular products that you make. But the overall economy isn't doing as well and slips into a recession for the rest of the year. Sales for the majority of 3M products drop way below what the executives projected for the year and operating income plummets. Your plant manager comes out to personally thank you and your coworkers for your hard work to keep up with skyrocketing customer demand for your products. But even though there was nothing you or your coworkers could do to keep the world economy from going into a recession, all AIP participants will be getting a smaller AIP payment than they were expecting for the year (or maybe nothing at all) because the Big B results were below plan. Maybe you were counting on that AIP money to help with your son's college tuition or to pay for your daughter's braces. If you were still making a guaranteed $22.00 per hour these expenses might be less stressful for you. But now that you're in the AIP program, you can't count on getting any bonus money until after the year is over and the results are calculated.
As a salaried employee who has 7% of my annual pay in the AIP, I will tell you that I have received less than the advertised 7% of pay in 3 of the last 5 years. My 5 year average is 85.3% of plan meaning I only received about 5.97% of pay instead of the target 7%. Basically I've averaged a 1% pay cut over the last five years. I'm not starving and I'm able to pay all my bills, but I'd rather donate that 1% to a food shelf or charity of my choice instead of giving it to 3M. If 3M would give me the option to go back to 100% fixed salary instead of 93% fixed plus whatever portion of the 7% they feel they can afford to give me I would do it in a heartbeat.
If any hourly employees still want to give up a fixed hourly wage to get in on this lucrative "bonus" program called AIP, then by all means rally your coworkers and go see the HR manager to demand your fair share. Just be prepared to be disappointed by the actual payout you receive.
Bumped from @4qzm+1m8zcSIk.