Lantech's Revolving Pay Plans: Case Study

Lantech's Revolving Pay Plans

I. Background

In Louisville, Kentucky, a company named Lantech manufactures stretch-wrap machinery, which is used to apply stretch wrap over pallets of products. Lantech is a privately held family-owned business founded in 1972, which experimented with two types of team-based compensation, but later chose a non-team-based pay strategy after both systems turned out to be counterproductive between employee behavior and the company's goals.

A team-based concept was first used in early ‘80s to which small teams were built along work-group lines such as a group of welders or a group of field service engineers. According to Jean Cunningham, vice president of company services and chief financial officer, they were exploring whether employees, grouped in small teams and with understanding of the company mission could make good decisions about who is the best to lead that team and who is making the best contribution. However, they began to observe negative behaviors from employees. The structure showed that some employees tried to get their friends or relatives on the same team to exert more influence on decisions concerning raises. The idea was later set aside.

Lantech tried another team-based compensation structure in late ‘80s, one based on its three strategic business units. By this time, employees' compensation consisted of three parts: base salary, an individual discretionary bonus based on performance and a team-based bonus based on the profitability of the business unit. Again, the system also didn't work out. "It was not compensating the right behaviors," Cunningham says. One time, she encouraged an employee to pursue a good job opportunity in another business unit, but he told her that he was hesitant because the other unit's bonus program was not as successful as his current unit's. "This would have been a good career move for the individual. But because of the system they had, it was a barrier to good decisions made," she says.

Competition also seemed to matter a lot among each unit. And because Lantech's units buy equipments from each other, pricing disputes often occur and the company's controller would be called in to resolve them.

In the early ‘90s, Lantech was alarmed when their balance sheet overall was in the red. But one of the company's business units was profitable; therefore they were paid out bonuses. The management then realized that the team-based compensation system was not sending the right message or supporting the company's efforts to focus on customers' satisfaction. "It wasn't focusing on the external world." says Cunningham.

The company scrapped the system, but not without "great pains. Any time you change compensation systems,