When American Airlines launched its Annual Incentive Program for employees in 2003, it overlooked a crucial factor: bad weather.
The airline had gone through a painful restructuring, and — as a way to make up for painful pay cuts — decided to reward each of its 72,000 rank-and-file employees with up to an extra $80 a month if they could improve customer service and on-time performance. American was eager to boost its reputation for service, and creating bonus opportunities for all workers on the front line made good sense; some of these folks deal directly with customers, and many, from ticketing agents to baggage handlers, can affect whether a plane makes it in and out of the gate on time. So American dangled a carrot to boost morale and make people work harder.
Only it didn’t quite work that way. When it came to on-time performance, employees found themselves in the tail wind of things beyond their control. Specifically, the government data that is used to measure an airline’s on-time performance factors in weather and air traffic troubles, elements workers are obviously powerless over. As a result, workers became frustrated, and a well-intended bonus system backfired.
“There are a lot of things our employees control to give customers a great experience at the airport and in the air,” says Mark Mitchell, who managed American’s operations in Los Angeles and in New York City for several years. “Mother Nature is not one of them.”
Mitchell stepped in to try to figure out ways to improve the system and help morale. In 2007, the airline tapped him to run a newly created Customer Experience Team. His group began tying specific metrics to the incentive plan to make it, in a sense, more scientific. On the customer-service front, adding clear-cut metrics helped make the monthly bonuses less subjective. The staff was given certain requirements: greeting first-class passengers by name, for example. Bonuses varied depending on the marks the team received in customer-satisfaction surveys.
Conquering the problems with on-time performance took Mitchell longer. In fact, by early 2008 American had one of the worst on-time records in the industry, ranking last out of 19 big carriers, with only 63.4 percent of its flights arriving on time, according to the U.S. Department of Transportation.
No one is claiming the bonus system was entirely to blame — cuts made during the restructuring had affected routes and scheduling, after all — but the often-unattainable carrot didn’t help. Despite the incentive plan, the pilot union’s secretary-treasurer said last year, “We have not improved one bit.”
Based on feedback from workers, Mitchell successfully lobbied to overhaul the way American measured on-time performance, and the airline stripped weather and air-traffic issues from its metric. It took years for decision-makers to realize that the change had to be made. But once made, it led to a fairer incentive plan, which both restored morale and boosted performance.
In the first six months of this year, American’s on-time rate soared to 78 percent, an improvement of more than 14 percentage points over 2008. Here, too, several factors came into play, such as a change in flight schedules. But all those involved agree that fixing the bonus plan helped. “Employees now feel directly empowered, for the boarding process, the loading of baggage and cargo, the upkeep of the aircraft,” says Mitchell. “We’ve made it more real. So they can say, ‘I know what I can do.’ It’s smaller bites of an apple, and thus it’s more effective for everyone.”
The benefits became clear in June. Thunderstorms across the country wreaked havoc on air travel. Overall industry on-time performance averaged just 68 percent that month — the worst since wintery December — and American scored a disappointing 60 percent by government standards. However, under its employee-specific metric, American clocked 77 percent, just three points shy of its target of 80 percent. Sure, the workers didn’t get their full bonus for July, but at least they couldn’t blame the unfairness of the system.
In the compensation world, American’s pay-for-performance method is known as line-of-sight incentive; it gives workers concrete goals they can see and achieve. A big benefit of line-of-sight, argues Jim Kochanski, a national compensation expert with Sibson Consulting, is that it fosters positive peer pressure.
“People are like, ‘Hey don’t screw up our bonus. You need to show up tomorrow so we get these planes out of here on time,’” Kochanski says. And that, he argues, is a lot more effective than tying bonuses of workers in the field to, say, the company’s quarterly earnings performance. “That just feels too remote,” he says.
This story has been updated since its original posting.
More on BNET: