(FORTUNE Magazine) – AT A TIME when corporate managers are doggedly driving out every excess cost, some executives still view workers' compensation as an intractable cost of doing business. But an increasing number are discovering the truth: Workers' comp is a manageable expense. Managing it well can spare your company millions of dollars in needless outlays and, more important, spare your employees needless pain and injury. Act now, because the government will be weighing in soon with new demands for workplace safety. The Labor Department wants to increase criminal penalties for safety violations. At the same time, the Occupational Safety and Health Administration is preparing tough new ergonomic standards that may force some employers to modify their tools, machinery, and office furniture. The object is to curb the rise of cumulative trauma disorders, or CTDs, such as the notorious carpal tunnel syndrome. CTDs, which commonly affect a worker's wrists and hands, are the fastest-growing kind of comp claim. Comp is a state-mandated program. Employers are required to pay all the medical bills and a portion of lost wages to workers hurt on the job. Large employers that self-insure pay these claims out of the corporate kitty, while smaller concerns typically purchase insurance, with premiums based in part on their claims experience. After nearly doubling in the late 1980s, the direct cost of this program to U.S. business has been flat over the past couple of years, at around $70 billion. But an analysis by Edwin Freedman, who runs the comp consulting practice for insurance broker Alexander & Alexander in Lyndhurst, New Jersey, suggests that such stability masks huge differences in the experience of individual companies. Freedman looked at the change in workers' comp expenses for two dozen comparable FORTUNE 500 employers during the period from 1988 to 1992. He found that while some companies saw their comp bill soar by up to 152%, others shrank it by as much as 26%, a swing that translates into millions of dollars either way. Conclusion: There's nothing inevitable about workers' comp. Managers can choose to wrestle this beast to the ground, or let it stomp all over them. Employers that have successfully taken control of comp have done so with a formal, companywide initiative that runs through the organization from top to bottom. Says David A. North, head of risk control services for insurance broker Johnson & Higgins: "There are no Band-aids in comp. You have to address the whole process." The place to start is safety. OshKosh B'Gosh, the Wisconsin-based manufacturer best known for outfitting the toddler set in bib overalls, got this message in 1990, after a routine visit from OSHA inspectors resulted in a not so friendly citation. Conditions at the company's main plant in Oshkosh were causing a rash of CTDs. In retrospect, says OshKosh's safety director, Pat Hirschberg, the directive from OSHA to fix the problem "was the best thing that could have happened to us." Hirschberg formed a task force to inspect every aspect of production and uncover the sources of injury. It found that most of the workers' problems arose from small, awkward motions that required force and were highly repetitious. For example, examiners, who check finished garments, had to manually test the snap crotch of each pair of pants, pinching six snaps per pair -- over 100 pairs an hour. This overtaxed their fingers, creating numbness and tendinitis. Operators who maneuver fabric through the sewing machines were developing CTDs from all the twisting and turning of heavy garments. Says Pauline Potratz, the risk manager who handles insurance issues for OshKosh: "These are wrist movements that nature never intended." Neither the chairs nor the worktables on the shop floor were adjustable, so operators had to lean and reach in order to manipulate different-size garments. This prevented the big muscles in the shoulder from shouldering part of the work and placed more stress on the hands. ! Armed with this analysis, OshKosh's safety team approached senior management about making a major investment in new equipment and training. One priority: padded, adjustable chairs. The task force held several meetings with top brass to discuss this and other expenditures. For the last five-hour session, the executives were asked to park themselves on the workers' steel sewing chairs. That did the trick. The safety team was authorized to buy a new chair for each person on the production line, 7,000 in all, at $100 each. The company made other changes on the shop floor, in some cases devising its own equipment. OshKosh engineers, for instance, developed an air-driven, automatic crotch-snapper. At some workstations, mechanical "feed dogs," whose metal teeth dig into fabric and pull it through the sewing machines, were installed to reduce the amount of force required from workers' wrists. For "felling," a seaming operation that forces a worker to keep her arms suspended away from her body, the company installed a pulley system with slings attached, allowing the operator to sew with her arms at rest. Everyone on staff was trained in how to adjust equipment, as well as in proper work posture. Examiners, for instance, were taught to raise their chairs and bring larger garments toward their bodies so they would no longer have to stretch across the worktable. This training is reviewed four times a year as workstations are broken down and reassembled for the new season's production. (Yes, even OshKosh has a "fall line." ) Now employees are encouraged to come forward with minor aches or concerns about their work setup so that adjustments can be made and more serious injuries avoided. Says risk manager Potratz: "We're trying to educate people that early intervention is less costly." OshKosh is also rotating workers through different jobs within the plants, so that different parts of their bodies can get a rest. "It used to be that about 70% of the workers did just one operation," says Paul Kraemer, manager of the company's main Wisconsin factory. "Now almost everybody does more than one."

YOU MIGHT THINK that whipping up so much concern over the hazards of sewing would only generate more claims from OshKosh workers. That was the case at first. The number of claims jumped by a third when the program was introduced, as people began to pay attention to symptoms they might previously have ignored. But because these ailments were caught in the early stages, they never became costly or severe. Claims eventually retreated as the company's prevention strategy took effect. Last year comp costs for the firm were down from 1992 by a third, or $2.7 million. That sum alone more than covers the cost of the company's long-term safety investment, says Potratz. The keys to sustaining this type of performance are getting employees involved and keeping managers accountable. At LSG/Sky Chefs, an in-flight caterer based in Arlington, Texas, safety had deteriorated to such an extent in the late 1980s that the company, which employed 8,000 people, was logging 1,000 injuries a year and losing more than 18,000 workdays. The main culprit was back strain, the most common workplace ailment, which can cost about $25,000 per claim. In the Sky Chefs kitchens, people are lifting all day, hefting food supplies, carrying stacks of trays, hauling boxes of silverware and dishes. When Michael Kay arrived from a hospital chain as president and chief operating officer in 1991, he was aghast at the comp situation and launched a program called Care to improve lifting techniques and increase safety awareness in general. In group meetings over the following year, each employee was taught the basics of good lifting. Because 30 to 40 nationalities, and as many dialects, are represented in the company's kitchens, trainers gave demonstrations, rather than handing out manuals, to illustrate the correct way to pick up something heavy: Bend at the knees, keep your waist and back straight, gather the object in toward you, and then stand straight up. Turn with the whole body, don't twist at the waist. Now the company is expanding the safety training to address more specific topics, such as handling knives, avoiding slips and falls, and working in refrigerated rooms. Says Dianne Prestridge, the company's safety manager: "We have about 50 subjects right now, and we'll be getting more as the employees suggest them." Employees are taking charge of the training in some parts of the company. In the El Paso kitchen, for example, each shift gets a weekly five-minute "safety short" led by one of a select group of hourly workers known as the Care crew. This practice will soon be in place throughout the company. Sky Chefs has also set up a rewards program to reinforce safe behavior. Supervisors and Care crew members hand out stamps, 30 of which earn a $20 Sears gift certificate, to employees who lift or cut in an exemplary way or who take the initiative to clean up a spill. Lost workdays declined to 8,500 last year, and Kay expects fewer than 5,000 this year. "Our old approach was called the Stop program," he says. "It was designed to catch employees doing something wrong. This one's had a remarkably better effect." SUPERVISORS HAVE an incentive plan as well. A quarter of their bonus depends on their unit's safety record; the rest is based on customer satisfaction and the unit's financial performance. Tying a supervisor's paycheck to the injuries that occur on his watch is probably the best way of letting him know that senior management is concerned about safety. Says Freedman of Alexander & Alexander: "Managers get a lot thrown at them. They need to know from a higher authority that safety is up there in importance with quality and cost." When workers are hurt, management's communication efforts can have a big impact on the future course of the claims. Many employees have only the haziest idea how workers' comp functions. They may not know, for example, that their medical care will be paid in full. If a supervisor does not call the laid-up employee at home to explain the system and express concern, the worker may linger anxiously on the couch, easy prey for the trial lawyer ads on daytime TV. Once your employee is represented by an attorney, she's apt to be out much longer and the final claim cost is apt to be higher. The lawyer is usually gunning for a percentage of the settlement, and the best way to drive up the settlement is to prolong the employee's time away from work. As soon as they know of an accident, Oshkosh supervisors call an 800 number provided by the company's claims handler, Travelers. A Travelers rep then calls the worker within 24 hours to explain the comp system and checks in with the doctor to inquire about the treatment plan. Before this system was put in place in January 1992, 30 days might have passed before the paperwork was completed and the claim was reported to the insurance company. Nancy Wood, a workers' comp consultant with Lockton, an insurance broker in Kansas City, Missouri, suggests that every factory or office designate one person as claims coordinator, the liaison to all injured staffers, calling them frequently and making sure they are receiving their checks. The object of this dose of warm fuzzies is to let employees know the company misses them and is eager to see them return.

KEEPING TABS on an employee's medical care may require a little more of the bad-cop approach. For many years medical spending in workers' comp has been rising faster than in the health care system generally. A recent study by the National Council on Compensation Insurance showed that workers' comp patients receive more medical services than patients with similar ailments in a group health system. Employers need to identify local doctors with a track record of more conservative treatment and then try to nudge workers toward them. The object isn't only to avoid those doctors who might overprescribe tests and treatments but also to find those interested in returning people to the job. Says Mike Costigan, head of workers' comp claims at Travelers: "Occupational medicine isn't just about getting the person 100% well, it's about getting the person back to work as soon as possible, and for that they don't need to be 100%." Perhaps someone recovering from a back strain may not be able to do any heavy lifting, but he may be fully up to some other parts of his job. The Clinton health plan and some of the other reform proposals before Congress may make it more difficult for employers to steer people to a preferred doctor. But for now, in about half the states the company can specify whom employees will see for occupational care. Many companies have started inviting local physicians in for a plant tour, hoping that doing so will help them make a more informed decision about returning employees to work. Once a year, for instance, Pillsbury stages Doctor Day, in which the white coats are shown around the factory floor so they can see the physical demands that come with the different jobs and note what kind of safety measures are in place. Says risk manager Andrea Trimble: "The idea is to make them our partners and help them understand the nature of the work." If companies are to get their hands back to work quickly, they must be ready with lighter-duty jobs to accommodate those who aren't fully recovered. At OshKosh, each supervisor is required to come up with suggestions. The employee might be temporarily assigned to take inventory in the supply room or sew pockets instead of side seams. Says Lockton's Nancy Wood: "You have to get creative." At a Colgate-Palmolive plant in Morristown, New Jersey, workers on the mend pack gift boxes. The company limits the stint to no more than six months so that it remains only a transition back to the employee's regular job. Such a policy helps win support from union leaders, who are sometimes suspicious that light duty is an attempt to get around seniority rules. Return-to-work programs benefit the employees and the bottom line. Your injured worker will feel that his contribution is still valued, even if he's not yet fully mended, and the company will get productive labor from someone who would otherwise collect two-thirds of his wages for staying at home watching Oprah. This is the essence of sound workers' comp management: Do right by your employees, and save big bucks too.

CHART: NOT AVAILABLE CREDIT: R. KLEIN FOR FORTUNE/SOURCE: BUREAU OF LABOR STATISTICS CAPTION: A RISING TOLL OF WORKDAYS LOST TO INJURY