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


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, , accessed

February 25, 2008.


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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