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Empowering Employees

Long a technological leader in the steel industry, Nucor is employing a commercially untested process which may catapult the $1 billion “mini-mill” into becoming the seventh largest U.S. steelmaker. Its real secret weapon, however, isn’t the technology.

In recent years, U.S. steelmakers have been enjoying a boomlet, but none more so than the so-called mini-mills, companies that make steel from scrap using electric furnaces. (Integrated steel producers make virgin steel from iron ore.) The oldest and most consistently profitable of the mini-mills, Nucor Corp., pursues a nontraditional strategy using the latest continuous casting technology, employing non-union labor, regional marketing limited overhead (only 17 people from CEO to receptionist at its Charlotte, NC. headquarters) and until recently, a limited selection of products.

It operates, ive steel mills with a new one under construction in Crawfordsville, Indiana that incorporates a new West German thin-slab, steel-casting process from SMS-Concast to make flat-rolled steel. This revolutionary process, which has, until now, been used only in a pilot operation in West Germany, effectively leapfrogs Nucor into the arena where integrated steelmakers compete. Assuming the plant works and most analysts and industry observers do, Nucor could make a ton of sheet steel for about 20 percent less or $65 cheaper a ton than the integrated producers.

Nucor is a productivity machine. Its labor edge is two man-hours per ton versus four to five at major companies. A non-unionized workforce helps, but it’s organizational simplicity that makes the difference. It uses only four layers of management in an industry that, until recently, had eleven. (The U.S. Army has nine.) This helps facilitate communication, which at Nucor goes up as well as down. “Good managers can make bad decisions,” says CEO Ken Iverson, 63, the Illinois-born CEO who has taken to North Carolina like a duck to water. (In fact, he keeps geese and black swans on his private pond behind his Charlotte home.) A good manager, he believes, makes 60 percent good decisions and that it’s the employee’s responsibility to let him know when a decision is among the 40 percent that aren’t. Over the years, Nucor workers have never hesitated to do just that.

A recipe for anarchy? Iverson doesn’t think so. There are two ways to treat employees: Tell them everything or tell them nothing. Unless it’s proprietary, or a competitive secret, Iverson prefers to tell them everything. The company’s incentive pay scheme is another spur to higher productivity. Nucor sets standards of quality and outputfor groups of 25 to 30 people who are responsible for completing a task such as making good billet tons, roll tons, or finish tons. If the employee exceeds the standard he is paid a bonus weekly, so he clearly sees the connection between effort and reward. Even a five-minute absence may result in the forfeit of a bonus for the week. Few are absent.

It isn’t unusual for bonuses to run 120 percent of base pay. (Base pay is considerably less than that of steel industry standards.)

A metallurgist by training, Iverson is something of an anomaly for a Fortune 1000 CEO. Headquarters are plain to the point of anonymity. There’s no company jet. His own pay is subject to sharp downward swings, as he relates here about his experience during the 1982 recession. A fancy lunch (a liverwurst sandwich is a favorite) is apt to be conducted with president Hugh Aycock or CFO Sam Siegel at Phil’s Deli, otherwise known as the “executive dining room.” Since 1965, when he became president, Nucor has never had a loss quarter. Iverson’s predecessor resigned because the company defaulted on two bank loans. He jokes that he got the job by default because he happened to be the head of the only division making money at the time. Maybe so, but return on stockholders’ equity has averaged close to 20 percent during most of his watch. “He understands the day-to-day blocking and tackling in a way that most top executives don’t,” observes ladder Peabody’s Robert A. Hageman. “Iverson can build and run steel plants cheaper than anyone else,” says Merrill Lynch’s James Bradford. “Nucor’s total cost of hot-rolled coils, for example, is below Korea’s Kwangyang the newest integrated plant in the world”

Will becoming a major force in traditional steelmaking jeopardize Nucor’s operating strengths? “I saw a Bethlehem [Steel] report on our Crawfordsville plant that claimed we can’t pull it off, ” smiles Iverson. ‘As long as they underestimate us, we can’t help but succeed.”

How would you describe your incentive plan?

Most important is the production-incentive bonus. We take groups of 25 to 35 people who are performing a task from start to finish such as producing good billet tons per hour. In rolling, it would be good roll tons per hour, and in finishing and shipping it would be good finishing ship times. If you take the three shifts in each steel mill we then have about nine bonus groups. We actually have more than 75 bonus groups of that type and also have them in the joist plants, and other steel-products areas, as well. In the steel mills, the bonuses today run into 120 to 150 percent for base pay, receiving it with their base pay the following week.

First time we had to go over a hundred percent I thought, “We’ve created a monster.” But it’s not true because all that we’re doing is passing on the labor savings that results from the added production and what we’re getting out of it.

Does your cost-per-ton include this bonus?

Yes. It does. The average hourly worker last year earned more than $32,000. That is more than the average unionized steel worker. Our total cost, including fringe benefits, is about $60 per ton of steel compared to appproximately $125 or $130 for the average integrated producer. We pay more, but they produce more. It’s a peer pressure situation because the foreman is part of the bonus group.

How does that work?

If one in the group does not perform, they either train him to perform at a satisfactory level or they get rid of him. We also have what we call four forgiveness days a year, for such things as, for example, if your wife has a baby, or you’re closing on a house, and so forth. We have people in the company who have not used a single one for five years.

There is another part to our bonus system whereby foremen and managers get paid on the basis of return division contributions as a percentage of return on assets employed. We expect a division to return 25 percent a year in division contributions. (Division contribution is defined as the earnings before income tax, federal taxes, corporate expenses, interest and profit sharing.) We have taken out everything that he can’t control, and based it on the things that everyone can control. We just don’t believe in a big corporate allocation of overhead.

The bonus starts at about 18 percent, and peaks when the division return-on-assets-employed is over 59 percent-the maximum being 73 percent. They also get a little kicker from corporate, allowing them to climb to 82 percent. It’s surprising that almost every year, one or several divisions will max out and all the department heads will then get a 70-80 percent bonus.

Does Nucor preselect its workers by previewing and profiling “ideal” personalities-the same way Japanese firms do when operating in this country?

We have not done that for the average employee, although we try to do the best job we can. When we first start up an operation, we’ll have an immense turnover-100-200 percent in the first year, because it appeals to the goal-oriented individual. Most goal-oriented individuals like to be rewarded upon completion of a project, and our reward is money. There are those people who don’t want to work that hard so they leave, or are driven off by the group. Although, once our turnover becomes small, we don’t even measure it.

How did this system evolve, and how does it work?

The policies and the practices of this company evolved at the general managers’ meetings that we have three times a year-our May meeting is being devoted entirely to employee practices and policies.

One of our most unusual benefits is our scholarship program providing $1,800 a year for four years of college or four years of vocational training for the children of our employees. This is because of an accident that occurred at the Darlington mill in 1974. It was a tragic occurrence, leaving 12 to 15 children fatherless. We had decided to set up scholarships for all of those children so they could have the opportunity to go to college.

Is that considered a big benefit by your workers?

Yes. I think it is.

How are you able to get workers to suggest productivity improvements well before upper management brings them up?

Obviously, the group is very interested with what it can do to improve productivity. So, the team players come up with ideas that they then present to the foreman or department head. The department head will then take it to the general manager.

Everyone in the plant who is not a department head, a general manager or in a production group, also gets a bonus based on the division return-on-assets-employed. It goes up to about 20 percent of their base pay, which is not as high as the department head. But then, on top of all that we take 10 percent of all the pretax earnings, and turn it over to the employees in the form of profit sharing every year. The officers don’t participate in that either, although we have hourly employees that have well over $100,000 in their profit sharing, which is not unusual.

How were you able to do this?

We had a good year. We got five thousand employees, and, within thirty minutes, spent $2.5 million on that bonus but we’ll still come out with a record year. I really believe we have an obligation to the company’s success, and to share that success with the employees.

Because the company has been successful for a number of years, what would be the company reaction if you miss a quarter?

If, for example, we have a poor economic year like we had in 1982, and there is less work for the employees, we then pay our people less-which, of course, is certainly justifiable. Profit sharing goes down, but officer compensation also goes down, about 60 to 70 percent.

Including you?

Including me. My total salary plus bonus in 1980 was close to $400,000. In 1982, it dropped to a total of $107,000. And that’s the way it should be. I never get a question going through a plant as to “Why do you earn so much and I earn so little?” This safeguard provides a cushion that enables stockholders and our company to continue to earn money and it is because of this that we have not had a single loss quarter since 1965.

Are the people in Crawfordsville, who are facing a number of challenges because they’ve gotten a new system, new technology, and are producing new products for the company, in the same pay incentive and bonus scheme?

We’ll modify that bonus for the first two years based upon the start-up of that plant, so as not to put them under any pressure. Their bonus will start out at 75 or 100 percent and then we’ll make an agreement that as we come up in production that bonus just starts to drop off after three to six months, and then they are on their own.

How much of what you have done, do you feel, is applicable to other companies who are interested in motivating their employees?

They don’t have to do it in the same way that we do. But every company can do something to allow their employees to increase production and earn more money. You can’t do profit sharing once a year, give it to the employee and then say nothing about it. They do it every quarter which makes their employees very conscious of the profitability of the company. We’re a bit different in that we’re able to link it so that the indiwe can. When we first start up an operation, we’ll have an immense turnover-100-200 percent in the first year, because it appeals to the goal-oriented individual. Most goal-oriented individuals like to be rewarded upon completion of a project, and our reward is money. There are those people who don’t want to work that hard so they leave, or are driven off by the group. Although, once our turnover becomes small, we don’t even measure it.

How did this system evolve, and how does it work?

The policies and the practices of this company evolved at the general managers’ meetings that we have three times a year-our May meeting is being devoted entirely to employee practices and policies.

One of our most unusual benefits is our scholarship program providing $1,800 a year for four years of college or four years of vocational training for the children of our employees. This is because of an accident that occurred at the Darlington mill in 1974. It was a tragic occurrence, leaving 12 to 15 children fatherless. We had decided to set up scholarships for all of those children so they could have the opportunity to go to college.

Is that considered a big benefit by your workers?

Yes. I think it is.

How are you able to get workers to suggest productivity improvements well before upper management brings them up?

Obviously, the group is very interested with what it can do to improve productivity. So, the team players come up with ideas that they then present to the foreman or department head. The department head will then take it to the general manager.

Everyone in the plant who is not a department head, a general manager or in a production group, also gets a bonus based on the division return-on-assets-employed. It goes up to about 20 percent of their base pay, which is not as high as the department head. But then, on top of all that we take 10 percent of all the pretax earnings, and turn it over to the employees in the form of profit sharing every year. The officers don’t participate in that either, although we have hourly employees that have well over $100,000 in their profit sharing, which is not unusual.

How were you able to do this?

We had a good year. We got five thousand employees, and, within thirty minutes, spent $2.5 million on that bonus but we’ll still come out with a record year. I really believe we have an obligation to the company’s success, and to share that success with the employees.

Because the company has been successful for a number of years, what would be the company reaction if you miss a quarter?

If, for example, we have a poor economic year like we had in 1982, and there is less work for the employees, we then pay our people less-which, of course, is certainly justifiable. Profit sharing goes down, but officer compensation also goes down, about 60 to 70 percent.

Including you?

Including me. My total salary plus bonus in 1980 was close to $400,000. In 1982, it dropped to a total of $107,000. And that’s the way it should be. I never get a question going through a plant as to “Why do you earn so much and I earn so little?” This safeguard provides a cushion that enables stockholders and our company to continue to earn money and it is because of this that we have not had a single loss quarter since 1965.

Are the people in Crawfordsville, who are facing a number of challenges because they’ve gotten a new system, new technology, and are producing new products for the company, in the same pay incentive and bonus scheme?

We’ll modify that bonus for the first two years based upon the start-up of that plant, so as not to put them under any pressure.Their bonus will start out at 75 or 100 percent and then we’ll make an agreement that as we come up in production that bonus just starts to drop off after three to six months, and then they are on their own.

How much of what you have done, do you feel, is applicable to other companies who are interested in motivating their employees?

They don’t have to do it in the same way that we do. But every company can do something to allow their employees to increase production and earn more money. You can’t do profit sharing once a year, give it to the employee and then say nothing about it. They do it every quarter which makes their employees very conscious of the profitability of the company. We’re a bit different in that we’re able to link it so that the individual, through his own efforts, can see the increase in production and then relate it back to the increase in dollars-that’s the best way to do it.

Now that you’re entering a segment of the steel business that requires higher quality, will you be able to meet those standards?

That is a good point. Over the years, we have always bought our supplies based on quality. People must produce good billet tons and good roll tons in order to get the bonus. We still have not placed enough emphasis on the quality that we’re going to need in the new operation. We must adjust our standards accordingly.

What is the purpose of Nucor’s employee survey and how do you use the results?

We hire an outside person to ask our employees a wide range of questions. It takes approximately an hour of the employee’s time. Our survey person will ask questions like, “Do you want to see the president more? How do you like your hospitalization? What do you think of the vacations, your pay, your job, and so forth?”

One year, we asked about our health insurance and it became very obvious that the employees would like an option. Some said “I am willing to pay more, but I want a better program.” It took us exactly three months to design a better program. Over 60 percent of the employees took the better program, though they still had an option.

Often, our employees will go to their foreman with questions about the company-how the firm’s doing, where it’s going and how it expects to get there. It is because of this that over the years we have given our foremen a great deal of training in human relations and in communications. What’s surprising is that the employee is still hungry for information.

What does he want to know that you’re not telling him?

I don’t know. Maybe he wants to know more about his opportunity with the company and wants to participate actively in decisions related to his workplace and his job. Also, he probably wants more information about the company in general, and you can’t do this with a newsletter-it’s got to be on a one-to-one basis.

How do you actually get foremen to do this?

If you were to take the department heads that we have terminated, in 90 percent of the cases it’s because of their lack of communication skills. Because there is no one between the department head, the foreman, and the people under the foreman, therefore, the department head has to have the skill, ability, and the willingness to communicate directly to the employees.

We won’t allow layers of management.

Is that why you are willing to hire a steelworker, but not a steel manager from an integrated mill?

No. We have hired management, and have added department heads from integrated steel mills. We will generally shy away from a department manager in an integrated steel mill who has been there for 30 years, is in his late forties or early fifties, and, because he is so deeply ingrained in that culture, is very difficult to change.

Where else is your philosophy of simplicity-in-management evident in your business strategy?

It is evident in our bonus system, because it is something that everybody can understand. The production bonus is posted daily so that every worker understands exactly the basis for it and how it works. The problem with many incentive systems in corporate America is the fact that they are so complex that the worker can neither understand nor relate to it. It’s very important that your bonus system is simple enough for people to understand.

Our policy book and general rules are also fairly simple. Even our employee handbooks are pretty clean, and I think that’s important. Our annual report is written by our executive vice president, Sam Siegel. I’ll join him over a weekend and we’ll write the whole annual report in two days. In some cases we are just changing the figures. We try to keep things simple.

It’s expressed in our rather detailed planning which includes an operation report which describes the cost in numerous areas. It’s not an accounting figure. It’s the operation report that is an analysis that the manager manages with. We look at the same figures he manages with. In many corporations, that is a problem because the plant manager is managing with one set of figures and the executive is looking at a different set of accounting figures. That won’t work over the long run. I also hate the pie-inthe-sky budgets where a company expects 25 percent growth in profits and earnings each year. That’s ridiculous! These are pearls-cast-before-swine budgets.

What are your principle concerns for the future?

My principle concern is to get our new mills started successfully, without abnormal cash strain on the company. In Crawfordsville, we expect a $25 million start-up cost. Everything has got to work at close to a hundred percent efficiency.

You didn’t mention rising scrap prices. Doesn’t that concern you?

Yes, it does. In the past, though, I’ve never been very concerned about rising scrap prices. Whenever you have a demand for scrap and scrap prices increase, you’re able to pass on that increase. Our scrap price has gone from $80 to approximately $120.

There are some basic changes in the price of scrap that are irreversible. It’s not going to go back.

Isn’t it harder to get the quality scrap you want?

That’s true. If we make quality products and the cost of the low-residual scrap is too high, we can bring in reduced iron from offshore.

In the next three or four years, there will be about a billion tons of scrap generated from Venezuela. Some of it will be used internally, but a substantial part of it will be in the market for sale, preferably in the U.S. And, eventually, we could put in our own unit to produce a directly reduced iron (DRI) of some type, probably by not using natural gas, but perhaps by using coal, which is developing all over the world.

You’ve been running the company, more or less, for the past 27 years…

Yes. That’s interesting, because if you remember what Townsend wrote in “Up the Organization”: Kick the rascal out after he has been CEO for five years.

What have you learned about human nature as it relates to management and employee relations?

The average employee in the United States is one hell of a lot smarter than most corporate executives will give him credit for being. If they really want to find some of the answers to productivity or product improvement, ask the guy who’s doing it-it’s that simple. They continually amaze me with their loyalty to the company and their efforts to come up with ideas that will help the firm be a better place.

You think it’s a mistake for U.S. steel company executives, or others for that matter, to blame high unionized wages for America’s competition predicament?

Absolutely. There was a lot of publicity by integrated steel companies that the steel worker earned much more than the manufacturing worker. Well, in every industrialized country throughout the world, the steel worker makes more than the average manufacturing worker. In Japan it’s over 50 percent. It’s still hot, dirty, dangerous, skilled work and there is not much you can do about that. That’s just the way it is.

If you had one piece of advice to offer on this subject for your fellow executives, what would it be?

Really be a part of your company. If you give your employees the responsibility they deserve, they will reward you ten times.

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