A clean slate at Owens-Corning.

If your employees take their benefits for granted, perhaps it's time for a make-over. Read how Owens-Corning scrapped its entire program and started over, freeing up much-needed cash in the bargain.

There's nothing like a healthy dose of self-interest to motivate employees. And there's nothing like a direct link between compensation and the bottom line to improve morale, increase performance and lower current costs. That's the philosophy behind Owens-Corning's new variable compensation and flexible benefits program - Rewards and Resources. The program is being rolled out this year to 3,500 salaried employees in the United States, and plans are already in the works for future company-wide expansion.

Adopting a "clean slate" approach, Owens-Corning overhauled every existing benefit plan and added a new global stock plan funded with stock and stock options. On January 1, 1996, variable incentive awards began gradually becoming a greater portion of total cash compensation. The result: a program that ties employee rewards - and company costs - to corporate performance. It saves considerable cash while supporting the human resources strategy and overall business plan.

CATALYST FOR CHANGE

Owens-Corning, formed nearly 60 years ago as a joint venture between Owens-Illinois and Corning Glass, has been an independent publicly traded company since 1952. In addition to manufacturing and selling building supplies, its 17,000 employees around the world develop technologically advanced materials for home and industry.

In 1992, CEO Glen Hiner inherited a company with stalled sales and negative net worth. Employment levels, morale, and research and development were depressed, while the balance sheet was burdened with debt from restructuring and an enormous reserve for asbestos litigation, even though Owens-Corning stopped making products containing asbestos in 1972. "The company had a great deal of potential," Hiner says. "However, it clearly had some problems we had to address to motivate employees and free up the cash we needed to grow the business."

By late 1994, the transformation was underway, with business processes enhanced and productivity being maximized. A new senior human resources executive, Greg Thomson, developed a strategy to retool the corporate culture, change employee attitudes and meet difficult financial goals.

The existing benefits program wasn't compatible with the new strategy, nor did it reflect the company's core values. On the contrary, the various benefits plans represented a large fixed expense to the company and did nothing to motivate employees. There wasn't even a pretense of a total compensation strategy. In general, benefits were inflexible and entitlement-oriented. The welfare benefits (medical, dental, life, long-term disability, etc.) were "one-size-fits-all," offering, for example, only a single point-of-service health care option, while the retirement benefits accrued independent of company profits. Further, required cash contributions to the plans were escalating at a time when cash was critical to the health and growth of the company.

"The first step in turning the company around was to encourage and empower employees to think and act like owners so they'd be willing to take calculated business risks," Thomson explains. "The next step was to overhaul the compensation and benefit structures to bring them in line with the rest of the strategic plan."

ENTER THE LINK

It took about a year for Owens-Corning to redesign its entire compensation and benefits program. The new program gives employees an ownership stake that reinforces the entrepreneurial messages they were already hearing. It also links company expense to performance and preserves cash. Employees are guaranteed less - but stand to earn more, if the company performs well. Here are the new components Rewards and Resources brings to employees.

Global stock plan. This plan combines a stock bonus with nonqualified stock options. Each employee receives an annual bonus in company stock ranging from 0 percent to 8 percent of pay, depending on company performance. At target performance, the bonus is 4 percent of pay. Employees also receive annual grants of options to buy company stock worth 4 percent of pay, regardless of company performance. (Of course, the ultimate value of those options will depend on company performance as reflected in the stock price.)

Savings and profit sharing plan. This plan offers a reduced company match (35 percent of employee contributions, up to 10 percent of pay, down from 50 percent under the previous plan), but with an added profit-sharing element ranging from 0 percent to 4 percent of pay, contingent on company performance. Profit sharing is earned by all employees and doesn't depend on an individual's rate of contribution to the plan. The account is fully vested after three years.

Cash balance plan. The cash balance plan replaces the old final average pay pension plan with individual portable accounts. Employee accounts are credited with 2 percent of pay plus an additional 2 percent of pay in excess of $30,000. Transition credits are granted to employees meeting certain age and service criteria. Finally, a five-year guarantee was added to protect those employees close to retirement. This account is also fully vested after three years.

Choicemaking. This is a flexible benefits plan that provides each employee with credits used to purchase appropriate of coverage under various programs. Employees have considerable choices under the plan, including four health care options, plus a catastrophic plan and a coverage waiver credit. Needs-based subsidies were reduced or eliminated, reflecting the company's view that employees should be rewarded on the basis of individual contributions alone.

Since Rewards and Resources is performance-related, the company established performance targets to determine the level of reward for each year. To create common goals for employees, Owens-Corning used overall corporate performance measurements to determine reward levels under the global stock and profit-sharing programs. (Individual performance is factored into individual incentive compensation awards.) For added credibility, the company adopted the same performance standards as those used to determine awards under the executive incentive program. Those standards, in fact, are a weighted average of three financial parameters: earnings per share, sales growth and cash flow. Target performance represents the expected performance as measured by this weighted average.

WHAT'S IN A NAME?

The company also abandoned the terms "compensation" and "benefits" for the new "rewards" and "resources" to help sever the connections with the past. Beyond being merely a change in terminology, Rewards and Resources connotes the concepts of shared prosperity and opportunities for maximum individual flexibility.

At Owens-Corning, rewards are all elements of remuneration employees receive for their services, including salary, incentive and benefits. Resources are the various company-sponsored programs - both qualified and non-qualified through which employees can spend or accumulate their rewards. They represent opportunities for employees to purchase wealth and income protection (choicemaking), or invest in personal wealth building (global stock, savings and profit sharing and cash balance). Of course, employees still have the flexibility to convert most of their rewards into immediate cash.

Employees earn rewards in three forms: cash, credit and stock. For example, cash rewards include salary, incentive and profit-sharing allocations; credits include additions to the cash balance account and credits provided under the choicemaking plan; and company matching contributions and awards under the stock plan are provided in company stock. The characteristics of these rewards vary: They can be fixed (guaranteed) or variable, qualified or nonqualified, discretionary (as to how they are used by the employee) or nondiscretionary, etc. However, they're all cash equivalents - that is, they're each defined and expressed in terms of actual dollar value. Thus, the aggregate of all rewards an employee receives in a given year is his true total compensation.

For employees, Rewards and Resources is a dramatic change from the old. The guaranteed levels under the old pension and savings plans have been scaled back, while performance-related components have been added to fill the void. Employees are now stakeholders and shareholders with a vested interest in seeing their company grow and prosper. Employees earn less than before, if the company doesn't meet threshold performance. However, at target performance, employees generally will be better off than before. At maximum performance, they'll be much better off.

And for the company, the new structure has direct favorable financial consequences. Since reward levels are tied to corporate performance, company compensation expense will vary with performance. Over the next five years, the expense associated with fixed reward levels (excluding cash compensation) is projected to be lower under the new program by about 40 percent (or $61 million). This also represents the total expense that would be incurred if the company performance is below threshold during that time. Over the same period at target performance, total program expense (fixed plus variable) is expected to be higher by about 15 percent (or $23 million). This intentional result is consistent with the greater level of rewards earned by employees at target.

It's important to realize, however, that under all performance scenarios, the company's cash expenditures are lower under the new program. In large part, the use of company stock makes this happen. Cash requirements for the pension and savings plan have been substantially lowered by the conversion to cash balance and reduction in guaranteed match. In fact, pension contributions have been wiped out over the next five years. The associated benefit reductions have been replaced with upside potential funded mostly through stock.

While the global stock plan generates current P&L expense (and some stock dilution), there's no associated cash cost. In fact, the company receives a tax deduction for the stock bonus, which in turn strengthens its cash position still further. A similar cash benefit occurs when options are exercised under the option plan. Thus precious cash is kept available for further investment in the business.

The financial benefits to Owens-Corning of Rewards and Resources are real. "We strongly believe in the philosophy behind the program and its ability to influence employee behavior," Hiner explains. "We intend to roll out a comparable version for employees around the world as soon as practicable. Although the program will be modified where necessary to accommodate local laws and customs, an immutable part of the company's vision is the need to make the stock plan a truly global plan. Our goal is to link all employees worldwide through ownership and a common interest in overall corporate performance."

Similarly, plans are in the works for extending the program to hourly employees through the collective bargaining process. Owens-Corning expects the program's appeal of flexible, portable compensation with valuable upside potential will overcome any aversion bargaining employees may have to sweeping change. The positive reaction of salaried employees could help. Since the salaried employees in the United States have been enthusiastic so far, they may well be ambassadors for change elsewhere.

THE PERILS AND PITFALLS

Yes, there are risks. The aggressive use of company stock in employee benefits programs will surely backfire if the stock itself isn't an attractive currency. Owens-Corning is fortunate to have a stock that has performed well over the past two years, probably due to recent initiatives. However, there's potential for dilution if treasury stock is being used.

Another risk is that employees will perceive a program that advertises significant variable rewards based on unrealistic performance standards as a takeaway. By adopting the same performance measurements for the broad program that were already in place for executives, Owens-Corning went a long way toward pre-empting any negative employee perceptions regarding fairness. In short, credibility is essential.

"It's impossible to know the full impact that a change of this magnitude will have for Owens-Corning," Thomson notes. "Employees seem to have accepted the challenge given to them so far. One important lesson we learned from this process is that when you recast the entire benefits program in a single grand stroke, employees are able to focus on the larger message being conveyed, not the many overwhelming details. We believe this will enhance the likelihood for success."

If 1996 turns out to be a target year, or better, for Owens-Corning, a respectable level of variable rewards in year one would certainly help legitimize the new program. But even if it isn't, at least the company is somewhat insulated against fixed expense levels on its income statement and will have preserved cash. And since employee fortunes - including their continued employment - are more closely tied to the company than ever, this is good news for them too. The real success of the program, however, can be measured only in terms of company performance over the longer haul.

RELATED ARTICLE: IT ALL ADDS UP

John Smith, a hypothetical Owens-Corning employee, earns a base salary of $50,000, with bonus potential of 5%. Here's what his total compensation might look like under the company's new plan, which ties compensation and benefits to the company's performance. This table assumes the company meets (but not exceeds) its performance targets.

                                Fixed         Variable       Total

Salary                         $50,000        Not appl.     $50,000
Bonus (5% of pay)              Not appl.      $ 2,500       $ 2,500
Savings plan match (3.5%)      $ 1,750        Not appl.     $ 1,750
Profit sharing (1%)            Not appl.      $   500       $   500
Cash balance (2%/4%)           $ 1,400        Not appl.     $ 1,400
Global stock (4%)              Not appl.      $ 2,000       $ 2,000

Total                          $53,150        $ 5,000       $58,150

Mr. Vair is director of Rewards and Resources for Owens-Corning in Toledo, Ohio. You can reach him at [phone]. Mr. Cornwell is a principal at Kwasha Lipton in Fort Lee, N.J. His phone number is [phone].