EXCEL ENERGY PAYS FOR EMPLOYEES WHO EXCEL

CASE: XCEL ENERGY PAYS FOR EMPLOYEES WHO EXCEL

The management ofXcei Energy,an electricity and natural gas utility based in Minneapolis and serving eight states, believes in linking rewards to performance. For example, an incentive plan called Xpress Ideas pays employees an immediate bonus for submitting beneficial suggestions. The company's employees loved the idea; in one year alone, they submitted 6,133 suggestions, and most of them were implemented-and rewarded. The downside of this plan is that Xcel Energy hadn't set up a system for measuring whether the rewards were worth the money-more than $427,000 for the 6,133 ideas. So the company is trying to tie future rewards more closely to its strategy by focusing more on merit bonuses paid for a combination of individual, group, and corporate performance. The company's strategy is to be a top utility by "continuously improving our operations to be the lowest cost, most reliable and most environmentally sound energy provider."IfXcei can excel at its merit'pay program, it will be far ahead of the average company. Typically, corporations try to keep everyone satisfied by spreading a rather small pool of merit pay fairly evenly across all employees. Recently, the average share of the payroll budget devoted to merit pay was just 4 percent. With a budget that size, at many companies, a top performer might get a bonus that is just 2 percentage points higher than that of an average worker. The average and poor workers might be happy, but the best people might actually be annoyed. One way Xcel is addressing this challenge is to channel more of the merit'pay budget to nonmanagement employees. Managers' merit increases are limited to 2 percent, freeing more money for everyone else. Then it is urging managers to give bigger raises and bonuses to the best employees. Chief financial officer Ben Fowke says this arrangement is intended to "send a signal about how you can be rewarded if you're a performer."

Xcel is also considering a long, term incentive plan for nonmanagement employees. Managers already can earn bonuses in the form of stock shares. The company may extend the stock plan to employees who are not managers. As Xcel develops these programs, it is keeping issues of fairness in mind. An unfair compensation arrangement will fail as an incentive for good performance. One out, come is that when rising health care costs forced Xcel to begin deducting more for health insurance from employees' paychecks, the company also cut some perks for its executives, including medical coverage without a deductible, free financial planning, and home security systems.

Michael Connelly, Xcel's vice president of human resources, explains the decision this way: "Employees understand that executives are going to be paid more, but they also respond well when they see a company being consistent in its actions."

SOURCE: Roy Harri5, "Just Rewanh,» CFO, February 2007, pp. 71-74; and
Xeel Energy, "About Us," Xeel Web 5ite, www.xeelenergy.eom, aeees.~ed
February 25, 2008.

Questions

1. Based on the information given, do you agree with management's conclusion that merit pay can support
Xcel's strategy better than paying for suggestions?
Why or why not?
2. How might Xcel continue to encourage suggestions as it aligns incentive pay more closely with its strat;
egy? How do you think employees might react to these changes?
3. Imagine that Xcd has asked you to be a consultant advising on how to improve its merit pay system.
Make three suggestions for ensuring that merit pay at Xcel is effective as an incentive.