JAGER FACES BIG OVERHAUL WHEN HE TAKES P&G HELM: CATEGORY SETUP, COMPENSATION ARE KEY FACTORS IN PLAN TO BOOST SLUGGISH SALES

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When Durk Jager succeeds John Pepper as CEO of Procter & Gamble Co. on Jan. 1, his first order of business will be implementing Organization 2005, which will reorganize P&G along global category lines and overhaul the company's compensation system.

The goal: to jump-start sluggish sales to the 8% to 9% annual increases needed to reach P&G's goal of $70 billion in sales by 2005. He'll also be working to counter skepticism by investors, who sent P&G stock tumbling 13% by last Thursday amid projections of flat unit volume worldwide in the current quarter.

TAKING A HARD LINE

The reorganization -- which includes higher bonus incentive hurdles internally -- and the speed with which it was implemented also could signal P&G taking a swifter and harder-than-expected line in shifting its agency compensation.

P&G is currently exploring replacing its commission-based agency compensation with a combination of fees and performance incentives.

Under the new organizational structure, ranking just below Mr. Jager will be seven executives overseeing P&G's global business units, which will have full profit-and-loss responsibility (AA, June 22). The global units will set strategy and budgets, position brands and oversee the development of new products and marketing initiatives.

Eight geographically arranged market-development organizations also will have leaders who report directly to Mr. Jager though without profit/loss responsibility.

Those units will focus on tactical aspects of business, including sales and public relations, and work with global executives to develop local brand marketing plans.

The new system also includes a global business services unit, which includes the current worldwide marketing support operation, headed by Robert L. Wehling, whose new title is global marketing, marketing research and government relations officer.

"We've been prototyping this new [global management] approach in our diaper business for the past couple of years, and the results have been substantial," Mr. Jager said in a conference call with analysts last week.

He credited the global approach, which he likened to the structure of high-tech companies, with cutting the time between major new diaper-product initiatives from 18 to nine months and adding about half a percentage point to P&G's global diaper market share last year.

BUDGET POWER SHARED

One key to the new system, Mr. Jager said, is giving global units budget power for the first time.

"If a GBU . . . has a major initiative that could impact our business in every country where we compete, then the GBU could have that priority call," he said.

"In the current system, the initiative would have to be matched with the profit forecast of the [region], so you would have a priority-setting system that actually slows us down," Mr. Jager said.

A tougher compensation system for P&G managers also aims to encourage speed and innovation. P&G's current bonus system is based on sales targets negotiated during annual budget reviews.

MEETING GOALS

Though managers have long had so-called "stretch" goals aimed at rapid growth, they earned automatic bonuses for meeting closer-in goals.

The new system will instead base bonuses on yearend reviews of how close managers get to their stretch goals, though effects of economic and other market conditions will be considered, a spokesman said.

"It will allow us to recognize performance as it's occurred in light of situations, challenges and opportunities that existed in the market," Mr. Pepper said.

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