Analysis: Caterpillar plan illustrates risk of variable pay plans

Sun Sep 1, 2013 8:05am EDT
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By James B. Kelleher

PEORIA, Ill (Reuters) - Caterpillar Inc (CAT.N: Quote) has put workers on notice that its short-term incentive plan, the centerpiece of a performance-based, profit-sharing program, will make its smallest payout since the recession when the payments go out next March.

Like a lot of companies, the world's largest maker of mining and construction equipment has adopted what is known as a "pay-at-risk" compensation system, which ties a percentage of nearly every non-union employee's income to Caterpillar's financial performance.

In updates to the plan's roughly 60,000 participants, and in quarterly disclosures to investors, Caterpillar said it expects outlays related to the program to be down as much as 40 percent from last year, reflecting sharply reduced payments to employees.

As U.S. workers pause this weekend to mark Labor Day, more of them than ever before are being required to participate in these alternative pay systems. The plans enable companies to have their labor costs more closely track the ups and downs of business cycles - but they also expose employees to those fluctuations.

"Where I think we stand on Labor Day in 2013 is that workers are bearing more risks in their employment relationship than they have at any time in the last quarter century," said Donald Lewin, a compensation and reward expert at the UCLA Anderson School of Management.

Ninety percent of companies now require employees to participate in variable pay plans, up from about 50 percent two decades ago, according to a survey of 1,100 U.S. companies by human resources consulting firm Aon Hewitt.

The dollars tied up in the plans, meanwhile, have quadrupled, from about 4 percent of payrolls in the early 1990s to about 12 percent of payrolls today, according to Aon Hewitt

Advocates of the plans say they allow employees to participate in the prosperity of their employers. Caterpillar, for instance, has issued checks worth nearly $2.8 billion over the last three years.   Continued...

The Caterpillar logo is seen on a tractor in Gilbert, Arizona October 20, 2009. REUTERS/Joshua Lott