Nucor: Building a Performance-Based Culture

Employees at all levels of Nucor are motivated by performance-based pay structure and high productivity goals

 

October, 2009
By Kevin Belt

In the late 1980s, former Nucor CEO F. Kenneth Iverson decided to embrace the idea that employees, “even hourly clock punchers,” will perform better when given incentives.(Byrnes & Arndt, 2006) Through practices still viewed today as innovative, Iverson developed a unique and egalitarian culture at Nucor. Many of these changes involved empowering employees and treating them with respect. The firm opened factories in poor farming communities—boosting the average income and reducing the unemployment rate in those areas. (Hopkins, 2003) New hires were often sent to existing plants and encouraged  to contribute fresh ideas for improvement to existing operations or given responsibilities (such as ordering new parts) previously assigned exclusively to supervisors. (Byrnes & Arndt, 2006)

Nucor’s employee pay structure is another tangible and striking departure from typical management practice. In terms of base salaries, the average Nucor steelworker makes $10 per hour, as opposed to $16 to $21 an hour for workers at comparable firms. The base pay of Nucor’s department managers is likewise only 75% to 90% of the market average. The base pay structure, however, is situated within a larger compensation strategy designed to foster motivation and productivity throughout the company. Sixty-six percent of a steelworker’s weekly pay is tied to performance. Up to 20% of this total comes from Nucor’s profit sharing program, which takes 10% of operating profits and divides them among all employees (excluding senior officers). This program led to an average 2005 salary of $99,000 for Nucor steelworkers—after a $2,000 bonus given to all employees due to record profits and $18,000 in profit-sharing. In comparison, the average steelworker at U.S. Steel had only 20% of his salary tied to performance and earned only $70,000 in 2005.(Byrnes & Arndt, 2006) This company-wide emphasis on performance is reflected in a miniscule absenteeism rate of 1.0% per year.(Smith, 2001)

Iverson’s success in embracing a performance-based culture has prompted further study of the trend. Eileen AppelbaumThomas BaileyPeter Berg; and Arne L. Kalleberg conducted surveys in three manufacturing industries: steel, apparel, and medical electronics and imaging plants; they concluded that, “with some variance within these industries, workplace practices that promoted coherent work systems produced benefits such as increased productivity, better financial performance, higher target wages for workers, as well as reduced inventory, space requirements, and excess labor costs.” In their book Manufacturing Advantage: Why High-Performance Work Systems Pay Off, they indicate companies are indeed more successful when managers share knowledge and power with workers and when workers assume increased responsibility and discretion. Workers in high-performance systems also tend to bring home higher wages because performance is tied to their earnings.


Similarly, the salary structure for top management reflects the same performance-based philosophy and principles. Senior officers earn slightly less per year in base salary than their peers, but with a heavier percentage of their salary tied to financial goals, the senior officers end up earning more than their peers in the long run. With a base salary of about $700,000, CEO Dan DiMicco makes 25% less than the CEO at U.S. Steel but makes over $800,000 more in the long run, assuming the company meets its financial goals.  (Byrnes & Arndt, 2006) (Lunan, 2004)

Therefore, the wellbeing of Nucor executives is relatively dependent upon the productivity of their workers. If productivity declines and workers’ salaries suffer, the CEO’s salary and benefits decline as well. The workers know that the same factors impacting their income also impact C-suite executives, providing for a shared sense of fortunes—with regard to both risks and rewards—throughout the firm. (Byrnes & Arndt, 2006)

This ‘pay-by-performance’ strategy seems to have benefited not only employee satisfaction, but also the performance of the company. A year after Nucor purchased an Alabama plant from another firm with no substantial capital investment and fewer workers, the plant’s production actually rose by 14%. This productivity is reflected throughout the company, hitting a peak in 2005, when Nucor produced and shipped more steel in the United States than any other domestic company. (Byrnes & Arndt, 2006) Increased profits have followed increased productivity, leading Nucor to be named one of the Top 30 performers in the S&P 500 from 1972 to 2002, by Money Magazine. (Birger, 2002) Consequently, BusinessWeek has ranked them on the BusinessWeek 50 as number 1 in 2005 and number 4 in 2007. Such rankings are based on the rate of return on investment and sales growth over a three year period. The BusinessWeek 50 has been published annually since 1997, recognizing the magazine’s top performers in each of the sectors that make up the S&P 500.

To create a successful performance-based culture an organization must focus on all employees: hourly as well as management level and all those in between. By rewarding productivity rather than job title or higher-level degrees, organizations are able to empower every employee to work as hard as he or she possibly can. Risks and rewards alike are shared, and ultimately all stakeholders benefit.

Sources:

E. Appelbaum, T. Bailey, P. Berg, & A. L. Kalleberg, Manufacturing Advantage: Why High Performance Work Systems Pay Off, (Ithaca, NY: Cornell University Press, 2000).

J. Birger, “The 30 Best Stocks; from 1972 to 2002. Who outperformed these past 30 years? (Hint: General Electric and IBM aren’t on our list.) And How did they do it? Herewith, the seven habits of highly effective companies,”Money Magazine, (27 September 2002): 88.

N. Byrnes & M. Arndt, “The Art of Motivation; What you can learn from a company that treats workers like owners. Inside the surprising performance culture of steelmaker Nucor,” BusinessWeek (1 May 2006).

S. M. Hopkins, “Lives Changed in Hertford County, N.C., by arrival of Steel Mill,” The Charlotte Observer, (15 June 2003).

C. Lunan, “35% raise still leaves salary of Nucor CEO below his peers,” The Charlotte Observer, (23 March 2004).

“Nucor pays $200m in bonuses to employees.” Steel Business Briefing, (16 December 2005).

Nucor Steel: Career Benefits, Nucor Steel Web Site: http://www.nucor.com (Accessed September 17, 2007).

P. G. Smith, “Performance award makes absenteeism obsolete at Nucor Steel,” Alaska Journal of Commerce, (27 August 2001).

Keywords: egalitarian culture, management practice, C-suite executives, performance-based culture

Organizations: NucorU.S. Steel

People: F. Kenneth Iverson, Former Nucor CEO; Dan DiMicco, Nucor CEO; Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University; Thomas Bailey, George and Abby O’Neill Professor of Economics and Education and Director of the Community College Research Center at Columbia University; Peter Berg, Associate Professor at the School of Labor and Industrial Relations at Michigan State University; Arne L. Kalleberg, Kenan Distinguished Professor and Senior Associate Dean for Social Sciences at the College of Arts and Sciences at the University of North Carolina