CASE STUDY 7

Read the CASE: XCEL ENERGY PAYS FOR EMPLOYEES WHO EXCEL at the end of Chapter 12. Answer the three questions at the end of the case in a 2 page paper. Follow the project guidelines below.

Project Requirements:
1.Complete a 2 page paper APA format, not including the title page and reference page
2.Include at least two references from your reading assignments or other academic source to reinforce and support your own thoughts, ideas, and statements

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CASE: XCEL ENERGY PAYS FOR EMPLOYEES WHO EXCEL
The management of Xcel Energy, an electricity and naturalgas
utility based in Minneapolis and serving eight states,
believes in linking rewards to performance. For example,
an incentive plan called Xpress Ideas pays employees an
immediate bonus for submitting beneficial suggestions.
The company’s employees loved the idea; in one year
alone, they submitted 6,133 suggestions, and most of
them were implemented—and rewarded.
The downside of this plan is that Xcel Energy hadn’t
set up a system for measuring whether the rewards were
worth the money—more than $427,000 for the 6,133
ideas. So the company is trying to tie future rewards more
closely to its strategy by focusing more on merit bonuses
paid for a combination of individual, group, and corporate
performance. The company’s strategy is to be a top
utility by “continuously improving our operations to be
the lowest cost, most reliable and most environmentally
sound energy provider.”
If Xcel can excel at its merit-pay program, it will be far
ahead of the average company. Typically, corporations try
to keep everyone satisfied by spreading a rather small pool
of merit pay fairly evenly across all employees. Recently,
the average share of the payroll budget devoted to merit
pay was just 4 percent. With a budget that size, at many
companies, a top performer might get a bonus that is just
2 percentage points higher than that of an average worker.
The average and poor workers might be happy, but the
best people might actually be annoyed.
One way Xcel is addressing this challenge is to channel
more of the merit-pay budget to nonmanagement employees.
Managers’ merit increases are limited to 2 percent,
freeing more money for everyone else. Then it is urging
managers to give bigger raises and bonuses to the best
employees. Chief financial officer Ben Fowke says this
arrangement is intended to “send a signal about how you
can be rewarded if you’re a performer.”
Xcel is also considering a long-term incentive plan for
nonmanagement employees. Managers already can earn
bonuses in the form of stock shares. The company may extend
the stock plan to employees who are not managers.
362 PART 4 Compensating Human Resources
As Xcel develops these programs, it is keeping issues of
fairness in mind. An unfair compensation arrangement
will fail as an incentive for good performance. One outcome
is that when rising health care costs forced Xcel to
begin deducting more for health insurance from employees’
paychecks, the company also cut some perks for its
executives, including medical coverage without a deductible,
free financial planning, and home security systems.
Michael Connelly, Xcel’s vice president of human resources,
explains the decision this way: “Employees understand
that executives are going to be paid more, but
they also respond well when they see a company being
consistent in its actions.”
SOURCE : Roy Harris, “Just Rewards,” CFO, February 2007, pp. 71–74; and
Xcel Energy, “About Us,” Xcel Web site, www.xcelenergy.com , accessed
February 25, 2008.
Questions
1. Based on the information given, do you agree with
management’s conclusion that merit pay can support
Xcel’s strategy better than paying for suggestions?
Why or why not?
2. How might Xcel continue to encourage suggestions
as it aligns incentive pay more closely with its strategy?
How do you think employees might react to
these changes?
3. Imagine that Xcel has asked you to be a consultant
advising on how to improve its merit pay system.
Make three suggestions for ensuring that merit pay at
Xcel is effective as an incentive.

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