Self-Management Pioneers Series: Nucor
Excerpted from the book BEYOND EMPOWERMENT: THE AGE OF THE SELF-MANAGED ORGANIZATION, by Doug Kirkpatrick, JetLaunch, 2017
At first blush, a steel company would not seem to be a natural candidate for organizational self-management: Tightly defined, discrete functions must be highly focused and coordinated in a unified, well-managed process. The end product must be stored, sold, and shipped as soon as possible at the highest possible price. Is there room for self-management?
On a sunny late September day, the friendly Vice President of Human Resources, Jim Coblin, greeted a colleague and me with a firm handshake at the modest and comfortable Charlotte, North Carolina headquarters of Nucor. We soon learned that Nucor knows the low end of the commodity steel market better than anyone. We learned that they really know how to build teams of committed, motivated, and self-organizing people. We also learned that Nucor is a high-performance self-management engine with an ultra-thin coating of traditional structure.
Jim told us about the Nucor team concept, where Nucor forms teams around functions like casting, rolling, straightening, melting, and shipping. Team members start at relatively low base wages in the $8 to $10 per hour range (unionized competitor U.S. Steel pays $18 to $19 per hour).
Very high weekly performance bonuses drive performance. Nucor bases the weekly performance bonuses on productivity — Quality Tons of Steel Produced Per Week (by functional team). The bonuses — initially opposed by the finance department as too risky — are unrelated to profit. Jim explained that the Production Incentive Plan covers 80% of the Nucor workforce and that bonuses can be 100% of the base wage, with no stipulated maximum. Nucor pays its maintenance personnel the average bonus of teams served during the week. Not surprisingly, everyone tracks the metric of Quality Tons of Steel Per Week, but plant managers and other leaders are expected to track a lot more than that.
Simplicity and brilliant clarity are the hallmarks of the Nucor production bonus plan. Every Nucor employee can explain the bonus program, follow the production numbers as they update, and predict their own bonus amounts. There are no politics in the system since all bonuses are 100% non-discretionary, based entirely on performance.
Production targets — set at about 80% of equipment capacity — remain constant and are not raised by increasing throughput. A major goal is for everyone to engage with the bonus plan. A typical bonus is 5% of a worker’s base wage for each ton of steel over 8 tons/hour, so long as product quality is acceptable. A worker straightening 30 tons per hour of steel, on equipment designed to straighten 10 tons per hour, can receive $24 per hour during overtime on an $8 per hour base wage (paid at time-and-a-half). Working overtime can really pay off since overtime is paid on the bonus rate, not the base. Changes in the cost of living generally guide any annual base pay adjustments for production workers.
Nucor does have managers, although very few layers. The managers are of the mindset that they are there to help the people performing the actual work, not to boss them around. Hourly workers are heartily encouraged to tell managers what resources they need to get the job done and what obstacles to performance need to be removed.
Nucor nurtures its unique culture carefully, intentionally seeding new teams with experienced hands. Only when team members have fully absorbed the necessary knowledge and skill to perform at a high level is the team cut loose to do its job.
The culture has key attributes and tacit understandings that guide performance. There are very clear rules in the workplace: If you’re tardy, you lose your bonus for the day. If you’re absent, you lose your bonus for the week. As might be expected, the incidence of absenteeism and tardiness trends toward zero, giving Nucor a huge competitive advantage in its largely unionized industry. The clarity of the rules inhibits politics, which Nucor employees appreciate.
Nucor’s excursion into the swirling rapids of self-management is guided by their invisible yet rigorous “unofficial justice system.” Why have layers of management, when colleagues themselves police each other and maintain the performance culture? Peer accountability (or peer pressure), is a powerful influencing factor driving performance at Nucor. Jim noted that sometimes workers have literally chased lazy colleagues off the jobsite. And why not? To allow a Nucor colleague to slide is a direct personal financial hit. Nucor allows no fill-ins; when someone is absent, the remaining team members pick up the slack. While Nucor colleagues often refer friends and relatives, they tend not to refer those who would slack off — costing bonus money. Factory employees, however, are not directly involved in the selection process.
Nucor must be doing something right. It enjoys a harmonious marriage of the lowest per-ton labor cost in the industry with the highest-paid steel workforce in the world. Because the world appreciates what the company produces, Nucor has never needed to lay anyone off; a great economic benefit to the semi-rural areas where Nucor locates its mini-mills. It also does not hurt workforce loyalty to employ high school graduates who earn $75,000 to $80,000 per year, have the right to buy Nucor stock at a discount, and participate in a 401k.
While remaining non-union, due process prevails at Nucor. Employees are allowed to file grievances and to appeal the outcomes. Nucor employees don’t necessarily like the rotating shifts demanded by round-the-clock production, but the pay and benefits, coupled with the supportive culture, still make Nucor an attractive place to work.
Philosophically, Nucor doesn’t treat its general administration and salespeople differently from the workers on the factory floor — a significant cultural marker. A department manager might have base pay that is 20–25% below market but receive an annual bonus based on return on assets for his or her particular factory, averaging 75% of the base. Other professionals receive a wage or salary relative to the overall labor market (it would be hard to find a secretary willing to work for 75% of the labor market rate) but can receive up to 30% of base pay relative to the return on assets for their plant. Headquarters personnel receive a bonus based on the ROA of all Nucor plants combined.
Like W. L. Gore & Associates, Nucor plants are basically standalone entities, each one led by a Plant Manager with VP/corporate officer status. Individual plants handle their own payroll, sales, purchasing, and legal affairs. The most critical responsibilities to the mission include human resources management, energy procurement, and raw material procurement. Executive pay, including pay for plant managers, is usually based on the return on shareholder equity for the entire corporation, which encourages collaboration and cross-fertilization of ideas among plants. Smart managers know when to ask for help — a key attribute of effective self-management. Managerial failure is usually traceable to a lack of interpersonal skills.
The old school culture at Nucor said that plant managers and vice presidents needed to develop their own careers. The new, enlightened philosophy is that Nucor will help them become leaders. An internal trainer/coach now travels to all Nucor plants, engaging colleagues in what is called “NU Performance” training. As jobs change, the training helps workers keep current. Tools include training in the tried and tested Be-Know-Do (BKD) model of leadership development, expectations clarification, and a “Dollars and Tons” Monopoly-style game exercise designed to teach the economics of the steel business in an entertaining way. New managers are trained to be like deacons in a church: to be like servants, to not issue edicts, to not waste time in meetings, to not create task forces, to listen, to be accountable, to be out on the floor, and to encourage all employees to ask them questions.
Implicitly embracing the concept of competere (seeking together), each plant has its own set of books, including a profit and loss statement. What better way to encourage enlightened competition among plants than by comparing them with the ultimate financial metric? Teams watch the bonus amounts of sister plants and try to identify what factors account for good performance there. Nucor, taking full advantage of employee initiative and self-management, will pay for employees to fly out to inspect best practices at other plants, where they engage in serious competitive benchmarking.
All Nucor employees anonymously participate in a yearly Mercer survey, consisting of about fifty questions. Generally rating Nucor highly, employees usually give high marks for pay and bonuses and lower marks for promotion (there isn’t much room to move up in the organization). The final survey question is: “If you could change one thing at Nucor, what would it be?” This crucial question yields rich data every year, turning up situations requiring immediate investigation and action.
Nucor tends to have the fewest accidents when production throughput is high, and the factories are really humming. The company enjoys a superb quality safety culture, driven in part by the fact that injuries slow production, which costs bonus money.
Nucor does not conduct performance appraisals — they are considered a costly waste of time. As one manager put it: “I’ll know if you’re doing a good job by what other people say about you.” Appraisals can even be counterproductive; a history of good appraisals combined with a lack of promotion breeds frustration. Corporate HR colleagues serve as valued consultants to the plants. They ensure, for example, that plant managers hire and fire for the right reasons. Local administrators run the day-to-day human resource function at each plant.
Nucor internally posts all jobs from the supervisorial level and up. Each plant manager hires his or her respective department managers with assistance from headquarters, using a homegrown, validated, psychological template that is highly predictive of leadership success. Nucor needs leaders that listen, are not overly judgmental or hot-tempered, think things through, and are willing to admit mistakes. They are trained to say “yes” to workers whenever they can since they will need to say “no” frequently. Nucor strives to have a few crystal clear policies and very little documentation (although world markets are driving the need for more documentation, through initiatives like ISO 9000). Are employees free to speak up? At one facility, the workforce drafted and adopted its own hardhat policy — an example of self-management in action.
Another force binding employees to Nucor is the benefits package. One big hit: Nucor’s employee scholarship program. The average education of Nucor employees is thirteen years. Nucor pays $3,000 per year for each college-age child of an employee, up to four years in college. The company recently had 790 children participating.[1] Nucor considers the foundation-run program its contribution to the future of America.
Other than its scholarship program, the standard benefits program is quite basic (think Chevrolet rather than Mercedes-Benz). Nucor offers eight holidays, two weeks of vacation (three weeks after ten years), and a decent catastrophic PPO medical plan with no frills. Nucor shares its profits by investing 10% of the company’s pre-tax earnings in an employee trust, with all employees below the VP level receiving a slice (based on the amount of their W-2 earnings as a percentage of all W-2s). The average payout in the last year (our interview took place in 2006) was $17,000 per employee. (It can be much less, especially when earnings fall.) Employees participating in the Nucor 401(k) plan can receive an employer match of between 5% and 25% employer match based on their individual contribution level.
While not totally flat, Nucor does strive to obliterate the class distinctions that infect other companies — for example, putting the names of all 7,000 employees in its annual report, and communicating that leadership authority comes from people accepting you as a natural leader, not from title or position.[2]
Nucor exhibits several characteristics of self-management. It has a powerful unofficial justice system that massively leverages the leadership capabilities of its people, enabling them to be consultants, mentors, and servants. It also has a strong performance culture driven by simple yet elegant feedback systems. The performance metrics (especially Quality Tons of Steel Per Week) fulfill the dual roles of driving throughput while reinforcing the justice system for employee accountability. Nucor has shown itself to be an excellent laboratory for organizational innovation.
[1] Jim Collins relates the story of the Nucor employee with nine children who cried upon learning that the company would pay for four years of schooling for each of them. Collins, Jim Good to Great. Harper Business, 2001. 137.
[2] Collins, Jim Good to Great. Harper Business, 2001.
