A Penny for Your Actions

A Texaco bonus plan stirs controversy by rewarding minority hiring and promotions.

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There is little question that Texaco Inc. reacted seriously to the scandal that erupted last year, when an audiotape was released of its finance-department executives making racially biased comments and plotting to destroy documents related to a 1994 discrimination lawsuit.

Beyond the public apologies by chairman and CEO Peter Bijur, Texaco paid $119 million in back salaries, damages, and raises to settle the suit, which had been filed by salaried African-American employees. The company designated another $35 million for a task force overseeing all the company’s hiring, evaluation, pay, and promotion policies. It adopted a comprehensive “diversity management plan,” with dozens of initiatives intended to create opportunities for minorities and women. And a separate agreement it signed with the Equal Employment Opportunity Commission requires Texaco to report on its progress every year for the next five years.

But one element of Texaco’s plan pushes its efforts beyond earnestness, and into personal earnings. For its 400 top managers and executives, 20 percent of annual cash bonuses are now linked to increasing workplace diversity. Specifically, that slice of compensation granted under the “incentive bonus plan” reflects progress in the hiring and promotion of minorities and women, and high scores on a seven-point employee “respect” survey (along with improving worker safety).

IS IT DISCRIMINATORY?

Make no mistake; with top-executive bonuses that can run into the six figures, 20 percent can be a big piece of change. And Cyrus Mehri, a Washington, D.C.-based attorney for the plaintiffs in the lawsuit, calls the company’s willingness to link pay to minority hiring and promotion “a unique feature” among corporate diversity plans that should serve as a model for other companies. “We feel it’s critical, because it uses the corporate culture–pay for performance– to achieve diversity ends,” says Mehri. (Actually, other companies, such as Polaroid, Allstate Insurance, and General Mills, have also installed some type of incentive compensation for managers who meet diversity goals.)

But the link between pay and achieving diversity goals stirs controversy among workplace experts, some of whom fear negative consequences.

“Giving a manager a bonus or making a bonus contingent upon the hiring and promotion of women and minorities to meet specific race or gender goals is wrong,” says Sondra Thiederman, who has led diversity management planning and training programs for nearly 20 years. “It is discriminatory, and it’s going to cause any company that does it problems in the long-term.” If less-qualified candidates get accepted for jobs, she notes, it can be bad for a company. “Texaco had better make it extremely clear that standards can’t be lowered.”

Dick Brenner, president of the human resources division and a Texaco vice president, insists that the company is doing just that: hiring and promoting minorities without any compromise in qualifications. Corporatewide employment and promotion goals over the five- year length of the program are reasonable, he says, noting that the $33 billion, White Plains, New York, company has lagged its oil- industry peers–and large corporations in general. Texaco intends to raise the overall minority percentage from today’s 23 percent to 29 percent in 2000, with the African-American percentage increasing from 9 percent to 13 percent. Before the settlement, minorities accounted for 11 percent of the highest- ranking Texaco jobs; the new goal is to increase that to 15 percent.

Even if the goals are achieved without lowering standards, though, experts see the pay-for-progress approach as creating other worries. Companies that link hiring and promotion performance to bonuses could “end up getting behavioral changes without corresponding changes in attitudes, because people learn how to play the game to get their reward,” says Ken Boughrum, Atlanta-based lead consultant with Towers Perrin’s diversity practice. “Companies can easily end up with diversity in the numbers, without changes in the mental models with which people view each other.”

R. Roosevelt Thomas Jr., the founder of the American Institute for Management of Diversity Inc., in Atlanta, and one of the creators of “diversity management” theory, has similar concerns. “Holding managers accountable for diversity is difficult,” he says. “If it’s only about the numbers, essentially affirmative action and inclusion, you end up with inclusion without addressing or managing issues of diversity. Managers appropriate the language of diversity without understanding the essence of it, and are really only talking about inclusion.” To be successful, he adds, it “often requires changing the root structure and assumptions of the organization.”

Such root change is what Texaco says it wants. “To be competitive and successful, we need to consider the perspectives of all people, around the world,” says James Metzger, general manager of the corporate planning and economics department and a vice president at Texaco, who reports to CFO Patrick Lynch. “That’s going to require cultural change and flexibility here at Texaco. What works in Tulsa isn’t going to work in Kazahkstan.” And the need to drive that thinking throughout the Texaco organization was part of the reasoning behind creating diversity-building incentives for top managers, he says.

DIVERSITY AND VALUE

In Texaco’s case, setting diversity goals has clearly helped the company reduce the drain on shareholder value brought about by negative publicity and litigation threats. Within two days after the finance-department tapes were publicized last November, the $100 trading price of the company’s stock slid 4 percent, slicing $1.2 billion from Texaco’s market value. “We didn’t have to do any formal analysis of the damage,” says Metzger. “It was obvious to us that our stock and our brand were being hurt. We decided quickly that we needed to settle the matter and start the healing process.” Even before the crisis, he maintains, chairman Bijur knew “instinctively that to close the gap on our competitors and maximize shareholder returns, it was going to take a change in the way people work together here.” Says Metzger: “We have 29,000 people worldwide, and 20,000 here in the U.S. We need every one of those people giving everything they have, being as creative as possible, in order to be competitive.” From the dip to $94 during the scandal last year, Texaco’s share price has since climbed back to highs of around $115 this summer.

In general, though, it is all but impossible to gauge how diversity-oriented hiring, promotion, and training programs–even if apparently successful within the company– contribute to shareholder value. Corporations make logical assumptions to support their strategies: If you manage a diverse work force well and thus improve employee satisfaction, the reasoning goes, workers will be more productive and creative in solving problems and meeting customer needs, and the stock price will inevitably rise. Still, Texaco itself concedes that no studies have conclusively shown that either worker satisfaction or increased diversity enhance creativity or lead to stock-value gains.

“There’s an intuitive connection between good diversity management and business success,” says Boughrum of diversity programs in general. “But hard, quantifiable information on results is scarce.”

AVOIDING BACKLASH

Some efforts to modify employee behavior have a counterproductive effect, although it’s too early to say if this will be the case with Texaco’s most recent program.

Especially damaging, says Frederick Lynch, professor of government and public policy at Claremont McKenna College in California, were early diversity-training programs that led to work-force divisions and backlash. “The way diversity training has been done up until recently at many companies has fostered separatism, exaggerated grievances, and hurt the morale of average workers and managers,” says Lynch. “But most people, and especially social scientists, have been afraid to question the practices until recently, for fear of being labeled racist, sexist, or whatever.” Adds Sondra Thiederman, some programs “made the mistake of denigrating and stereotyping white males, rather than emphasizing differences in all people and the need for mutual accommodation by everyone in the workplace.”

Such backlash was evident at Texaco three years ago, when the infamous audiotape was made. The tape included disparaging comments about the African-American holiday Kwanza and an historical “Negro National Anthem,” both of which had been part of Texaco’s initial diversity training efforts. And the peculiar reference to “black jellybeans” on the tape, in fact, twisted a positive metaphor that diversity expert Thomas had used in a presentation attended by Texaco managers– comparing a multiracial work force to multicolored jellybeans in a jar.

So far in its latest diversity drive, Texaco seems to be more sensitive to the potential for negative employee relations. All domestic employees will now attend a new two-day training that addresses diversity not as a purely racial or gender issue, but instead as one that includes the acceptance of international, cultural, and educational differences. “Diversity means respect for the individual, and each individual’s unique background, talents, and situation,” says Metzger, and “not arbitrarily ruling people or their ideas out because they are different.” He discounts the possibility that the financial rewards being given to executives for hiring and promoting minorities could subject those executives, and Texaco, to a new backlash.

Of course, along with the carrot of pay incentives, Texaco continues to wave the age- old stick for coercing employee behavior: fear of firing or other penalties. “Our chairman has made clear that changes are needed, and that there will be no tolerance of intolerance at our company,” says Dick Brenner. Of the four executives on the tape, one was fired: David Keogh, then CFO of Texaco’s Heddington Insurance subsidiary. Robert Ulrich, Texaco’s treasurer at the time, since retired, had all discretionary benefits canceled–the same penalty levied on Richard Lundwall, a senior coordinator of personnel for the finance department, since laid off. (Both Ulrich and Lundwall have now been indicted.) Peter Meade, currently serving as assistant general manager for Texaco Fuel and Marine’s marketing department, was suspended without pay for two weeks.

As for the role of individual compensation incentives tied to diversity-and-respect goals, it’s too early to say whether they will have a permanent, positive effect on the company. The first annual payouts linked to these goals will reflect activity through the end of 1997. Certainly, senior managers know now that the bonuses and other diversity programs must be supported by sustained leadership if they are to achieve real cultural change.

By the numbers, so far, Texaco appears to be getting some results under the pay-for- performance system. In the first quarter, 36 percent of new hires were minorities (and 49 percent women), and 20 percent of promotions went to minorities (with 47 percent to women). In addition, Texaco implemented a new alternative-dispute-resolution program, an ombudsperson program, and a mentoring program– each designed to support Texaco’s diversity goals and resolve fairness issues quickly.

“FORCING” THE ISSUE

How much power did Texaco cede in setting up its fairness panel?

A major element in settling Texaco’s lawsuit was its creation of an Equality and Fairness Task Force, with companywide approval authority over all executive hiring, evaluation, promotion, and pay policies.

Leading Texaco’s task force is Deval Patrick, a partner with Day, Berry & Howard, in Boston, and former head of the Justice Department’s civil rights division under President Clinton. Other members are John Gibbons, a retired federal appeals court chief judge; Jeffalyn Johnson, president and CEO of Integrated Quality Solutions; Allen Krowe, Texaco’s former vice chairman; Mari Matsuda, professor of law at Georgetown University; Luis Nogales, president of Nogales Partners; and Thomas Williamson Jr. of law firm Covington & Burling. Texaco and the plaintiffs each picked three members, with Patrick’s appointment agreed to by both sides.

The panel was important, says Cyrus Mehri, attorney for the plaintiffs, to ensure that both the spirit and the letter of the five- year settlement were carried out. “We were not going to be so presumptive as to tell Texaco exactly what it had to do for the next five years, and put it down in writing,” Mehri says. “Some things may work, some may not. The task force will have the room and the responsibility to be flexible to determine what works best.”

Some observers, however, are concerned by the extreme level of power the task force seems to have over management decisions.

“Giving a task force broad decision-making power not only abdicates senior executives’ authority, it can create a feeling among middle managers that there is no ownership of the programs decided on,” says diversity expert Sondra Thiederman. She suggests that other companies think long and hard before jumping on the task-force bandwagon–even if it is designed so that recommendations, unlike those of Texaco’s panel, are not binding.

To counter the perception that senior executives have surrendered control to the task force, Texaco has implemented early pieces of the plan aggressively, thus establishing it as the company’s own program. And while conceding the legal authority of the task force, Dick Brenner, president of the human resources division and a Texaco vice president, also says that the new body “does not have the power to approve or disapprove actions initiated by Texaco.”

However one interprets the settlement, though, Texaco has agreed to a bold sharing of power for determining how to create real equal opportunity. And that means less authority for Texaco’s chiefs over the next five years.

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