When a new CEO arrives at a financially strapped American manufacturer in the thick of a nasty recession, paying factory workers better is usually not one of the boss’s first priorities.
But it was one of the first things Ron Kaplan did after taking over Trex Co. (TREX), the big maker of composite decking, in early 2008, as the company struggled with a brutal economic downturn and self-inflicted financial difficulties.
In June of that year, Kaplan and the management team he recruited met with production employees and handed out special cash bonuses worth a few hundred dollars each, and told them it could become a regular monthly occurrence under a new incentive-bonus program based on production goals.
In addition to competitive hourly wages, which were maintained, the company set monthly targets for producing its wood-and-plastic decking materials at lower cost per pound while maintaining quality and safety standards. Since 2008, Trex has paid bonuses “the vast majority of months,” says chief financial officer James Cline. The average payout has been $325 per employee per month.
Regular payouts, strong bottom line
Kaplan, a veteran of industrial turnarounds, didn’t embark on this generous compensation plan simply out of altruism or abstract ethical principles, of course. He saw that workers were being paid based on production measures that did not fit well with the company’s financial performance. By linking extra pay to the very cost-efficiency standards that help the company improve profit margins and remain competitive on product prices, Kaplan was strengthening the bottom line and investor returns at the same time.
Since 2008, Trex’s profit margin has climbed from 13.6% to 18.5%, annual earnings have more than doubled, its stock price has burst higher by an astonishing 800% — and employee turnover has plunged.
The process of producing the lumber alternative decking is fairly sophisticated, requiring a good deal of know-how among employees, who must adjust for the particular mix of recovered plastic used to make consistent, durable composite boards. This means grooming, motivating and keeping good employees is an important corporate priority.
Trex, whose revenue is on track to approach $400 million this year, also happens to enjoy an advantage over other manufacturers: Labor expenses are not a dominant component of its total product cost, so it can afford to be a bit more generous without upending its profit goals. In addition to the cash bonus program, Trex offers its employees full medical coverage with a few plan options, dental and life insurance, tuition reimbursement and a 401(k) plan that matches worker contributions up to 6% of annual earnings.
This employee-friendly approach earned Trex a spot in June on the Washington Post’s annual Top Workplaces list, which also cited the company’s efforts to recruit former military personnel and charitable commitments.
Trex’s corporate headquarters and main manufacturing facility are in Winchester, Va., about 75 miles northwest of Washington, D.C. Founded 20 years ago and publicly traded since 1999, Trex was a pioneer in making decking and railings from a composite of wood waste and recycled plastic. It has the most recognized brand name in manufactured decking, but its largest competition comes from wood, the material used in the vast majority of decks in the country.
Cultivating a strong relationship with workers is a big help when Trex management challenges it to maintain quality standards and push new product initiatives. In the years before Kaplan arrived, a defective run of Trex decking was already out in the market when painful quality claims forced the company to set aside a $45 million reserve in 2007 to rectify the issues. Kaplan asked the research department to improve the formulation of the decking product enough to offer a 25-year limited warranty against fading and staining. It succeeded.
The company has also just launched an entirely new product effort, refining the kind of waste plastic it already uses as raw material into pellets for sale to other companies that turn them into shopping bags for the likes of Macy’s.
For such a steady corporate citizen, Trex is a surprisingly controversial name on Wall Street, with an unusually mercurial stock. The shares are up 156% in the past two years, giving Trex a stock-market value of $1.2 billion, yet they’re twice as volatile on average as the broad market, with lots of spurts and tumbles along the way.
A significant number of traders bet against the stock by selling it short, apparently assuming Trex’s fortunes are closely linked to the volatile and uncertain housing market. In fact, very few decks are built on newly constructed homes. Demand for decks rises and falls with home remodeling activity and consumer confidence. A plunge in lumber prices can be a challenge for Trex by making the composite decking less attractive in terms of cost. But lately lumber prices have been holding up well, so this isn’t an immediate threat.
The shares are somewhat pricey compared to Trex's reported earnings, but are in line with the valuations of other smaller consumer growth companies.
In recent quarters, the naysayers have been humbled by Trex’s strong growth momentum, meaning Trex’s investors have joined its employees in profiting from the company's comeback.