Paying for the extra mile

I remember being informed, when I first entered the consulting industry, that the company had an excellent incentive scheme. “If you deliver the goods, you get to keep your job”, I was told. Some incentive. Of course, I wasn’t about to complain, since I was highly ambitious at the time, was enjoying what I was doing, and earning more than I believed I was capable of justifying. In my case, the incentive was one with which I was well satisfied, because the company was delivering employee value greater than my expectations. When I left a few years later, it was not because of the money; they had failed to deliver in respect of two other areas – those of personal development and work stimulation. There was no longer incentive for me to stay.

It is almost impossible to be economically active without coming into contact with the chronic conflict that surrounds incentive schemes. It seems there is no system existing that satisfies all of the stakeholders, much less one that is seen as equitable from both the shareholder perspective and the employee perspective.

Perhaps it would be better to adopt a “Zero Base” approach to the problem, in order to gain understanding of the variables impacting on this sensitive issue:

1. Why do we implement incentive schemes? What is it that we hope to gain?

2. How can we determine whether the projected benefits are occurring?

3. How do we measure the respective contributions to those benefits?

1. The reason why

Any initiative must have an intention. The purpose of promising an incentive bonus to employees is not merely to reward employees, since the remuneration they have been offered and that they have accepted already takes care of that. An incentive is necessarily something additional; ‘above and beyond the call of duty’, so to speak. It is designed to influence the behaviour of employees in such a way that their contribution to the organisation is improved.

Are we talking about a once-off improvement, or constant ongoing improvement? If once-off, then the incentive will be related to a specific initiative, and the bonus will be linked to that initiative’s outcome. This necessitates the creation of new incentive schemes for every change that an organisation goes through, and the determination of a benefit measurement for each initiative.

The next question that should be asked is whether the focus of the initiative is subsystem(e.g. a department or resource) or total system. Suppose an organisation implements a call centre, which can only be construed as a subsystem. There must have been a sound rationale for such an initiative, an intention to reduce or obviate an organisational limiting factor. In such a case, the effects of the limiting factor should be known, and therefore the intended effect of the initiative should also be known. In many cases, the root cause of current problems being experienced has not been identified; a solution has been sought for which the problem has not clearly been identified. If these things aren’t known, the initiative hasn’t been thought through; creating an incentive scheme will merely compound the problem. If you don’t have one good reason for doing something, you have one good reason for not doing it…

If continuous improvement is the object of the exercise, then a whole organisation focus is the only one that will be satisfactory, since any improvement in a single process, function or department is useful if and only if it improves the organisation from either a customer service or profitability perspective. The nature of such improvement is dependent on many variables, most of which lie beyond the scope of individual employees – they are the result of collaboration between diverse functional disciplines. This calls into question whether employees can be held responsible for improvement if they are not given the opportunity to effect change in the organisation. If change is driven ‘top-down’, and employees are not included in process improvement strategy, then it is illogical to assume that they can be held even partly responsible for ongoing improvement.

At the same time, if we are talking about improvement of the whole, then such improvement would have to exceed that of the current budget, which includes basic remuneration. We are clearly talking about performance over and above that envisaged, since it has to justify the payment of the extra bonus. And since the organisation does not want to borrow money in order to make this payment, the performance should have a real cash flow benefit.

2. The parts or the whole?

Historically, ‘productivity’ has been used as a measure and driver of organisational ‘improvement’. In most cases, ‘productivity’ has referred to the measurement of the outputs of single resources, departments or processes and added up to reflect a measure of organisational efficiency. This cannot be construed, however, as Organisational Productivity, since in order to affect the whole organisation, Productivity must not only be valid for a subsystem but must also be true for the whole. It should also be real rather than theoretical, i.e. should not be purely the result of a formula, but have an obvious positive effect on the objectives of the organisation.

In addition, there is the danger that the measurement of a subsystem in isolation may lead to one of two possible consequences: the benefits achieved in the subsystem have no effect on the organisation as a whole, or the subsystem, because it is measured in terms of its own potential rather than its ability to contribute to the whole organisation, is driven towards maximising its own potential, thereby causing problems for the total system. A typical example is the measurement of resources in isolation in a manufacturing environment, giving each resource good reason to maximise its own utilisation, thereby increasing lead times for the whole factory and increasing Work In Progress.

The problem of isolation also appears in the case of the attempt to determine the respective contributions of all of the resources that impact on a specific outcome. Measuring the contribution of a single resource finitely would require so much measurement that the measurement team would be the same size as the process team, since they would have to measure finitely each resources’ allocation of time to each outcome and the degree to which that resources’ efforts added or destroyed value (a matter of opinion anyway).

If we regard productivity as a Total System measure, however, then we obviate the need for all of this micromeasurement myopia. Productivity is really the degree to which the organisation successfully achieves its objectives – anything less than that is merely a departmental or resource goal that shouldn’t be regarded in isolation, but as part of a systemic whole. In any complex system, the degree to which a subsystem conforms to a productivity standard is less important than how well that subsystem coordinates with other subsystems in order to optimise the whole. Any gains in ‘local’ productivity can be offset and undone by a lack of coordination – the nett effect of the improvement in one department can be negated completely if a department that is dependent on that process is not kept informed.

Productivity is a “Big Picture” concept. I have seen countless examples where subsystems have been measured independently, achieved improvements against their own potential, had bonuses paid to them by virtue of those improvements, and the benefits failed to drop to the bottom line. Why? Because there was a limiting factor elsewhere that prevented the improvement in the subsystem affecting the organisation as a whole. Manufacturing more is only productivity if you can sell the extra items – otherwise all you’re doing is increasing inventories. Handling calls faster in a call centre is only useful if the customer’s primary requirement is speed; as soon as quality enters the criteria set, speed of process becomes secondary.

There is a need to create measurements that measure subsystem contributions to the total system, i.e. the organisation, so that any improvement in the subsystem is automatically an improvement for its supersystem. That way, when benefits are achieved, the payment of the incentive can be justified – the initiative has ‘paid for itself’.

3. Adding Value

Many workers prefer being measured according to their own potential. The measurement is a clear reflection of their personal productivity. The organisation, however, is less interested in worker’s individual productivity than in the way in which the worker’s combined efforts get the organisation to its goals. Rewarding the individual by focusing on the individual’s ability to maximise their own potential has the consequence that the teamwork ethic becomes less important, and organisational optimisation is sacrificed on the altar of personal ambition.

The war between Production and Sales is alive and well because of the (misguided, I believe) notion that Salespeople should earn commissions while Production people should earn a fixed income. Can salespeople, on their own, deliver customer value? The answer is clearly no. Can production people deliver customer value without salespeople? The two functional disciplines are clearly interdependent – yet we continue to treat ‘sales’ as if it is the more important process. If customer retention is an important strategy in ensuring future profitability, than production people, who deliver the products and services, are at the very least equal in importance to sales. Why then do only salespeople earn the incentive bonus called ‘commission’?

The moment you pay a resource for their work independently, you in effect separate them from the system – and since they are part of a complex whole, they can’t be separated. Only the measurement you have adopted does so.

Perhaps it is time to revisit our measuring assumptions – consider the following logic:

In order to achieve… (System Objective: Delivered measurable)

We must motivate… (Required behaviour from process)

In order to motivate… (Required behaviour from process)

We must offer… (Incentive bonus)

If we complete this process for each of the key variables of the organisation’s mission, then we can compare them in respect of measurements, cross-functional requirements, and key interdependencies so that they can be aligned in order to ensure total organisation benefit.

Degrees of Responsibility

Every resource in an organisation, from the tea-lady to the CEO or from the purchasing department to the call centre, can have their function described in respect of three perspectives:

1. Their Area of Expertise: those duties and outcomes for which the party is wholly and singly accountable, because they have no interaction with any outside party for the achievement of these outcomes. In any organisation, since an organisation is a complex system, this is usually a very small area.

2. Their Area of Responsibility, i.e. those duties and outcomes for which the party takes part responsibility because there is necessarily interaction with other resources both with respect to process outcomes and with respect to decision-making. This forms the mainstream of any entity’s function, since any complex system is necessarily interdependent. This means that most key results feature joint responsibility from a number of resources.

3. Their Area of Influence, i.e. those duties and outcomes for which the party can not be held responsible because they cannot control or interactively effect outcomes but can influence them through discussion and open forum communication.

With this in mind, a means of ascertaining the required contribution from each resource is available: an equitable and logical method is established. Key dependencies between the contributing resources must be clarified, on a customer-supplier basis, as well as the impact of non-delivery on any customer by any supplier.

Summary

This approach to incentives requires an abandonment of the mindset that any single entity can be viewed in isolation, and that the organisation would want to do so in any case. Synergy results when there is improved collaboration and coordination between discrete but connected functional disciplines. Trying to achieve separate accountability is a zero-sum game – rather give the parts incentive to behave in the interests of the whole.

D (just call me D)

justd@justd.ws