Part 2: The problem of changing from ‘this’ (Control) to ‘that’ (Autonomy)

This post discusses a ‘how’ and follows on from a discussion of the ‘what and why’ in Part 1: Autonomy – Autonomy Support – Autonomy Enabling (a Dec ’21 post – it only took me 7 months!)

I’ll assume you know that the ‘how’ I am writing about is with respect to an approach to moving a large people-centred system:

  • from (attempted) control
  • to autonomy (and its enablement).

Please (re)read ‘part 1’ if you need to (including what is meant by people-centred)

 Oh for the luxury of a ‘Green field’!

You could be fortunate to start in a relatively ‘green field’ situation (i.e. with very little already in place).

This is what Jos de Blok did in 2006 when he founded the community healthcare provider Buurtzorg in the Netherlands. He started with a few like-minded colleagues to form a self-managed team (i.e. an autonomous unit), and when it reached a defined size (which, in their model, is a team of 12), it ‘calved off’ another autonomous unit.

Buurtzorg carried on doing this until, 10 years later, there were 850 highly effective self-managing teams (autonomous units) in towns and villages all over the country.

In doing this, the autonomous units evolved the desire to have some (very limited) support functions, that would enable (and most definitely not attempt to control) them.

Sounds wonderful.

But many (most) of us don’t have this green field scenario.

We are starting with huge organisations, with thousands of workers within an existing set of highly defined (and usually inflexible) structures. The local, regional and (usually large and deeply functionalised) central model exist in the ‘here and now’.

So, the Buurtzoorg example (whilst recognised as a brilliant social system) is limited.

Rather, we would do well to look to an organisation that successfully changed itself after it had become a big control system. And Handelsbanken is, for me, a highly valuable organisation to study in this regard.

 

Some context on Handelsbanken

I recall writing about Handelsbanken and their forward-thinking CEO Jan Wallander some time back…and, after searching around, found a couple of articles that I wrote five years ago (how time flies!). A reminder if you are interested:

I’ve added some historical context1 in a footnote at the bottom of this post, but the upshot is that the results have been hugely impressive, such that they have been written into management case studies and books. Wallander successfully transformed the organisation, for the long term. It is now an International bank (across 6 countries) and turned 150 years old in 2021. It continually wins awards for customer satisfaction, financial safety, and sustainability.

I should deal with a likely critique before I go any further:

“But it’s a bank Steve!!!” Over the last few years, my area of interest has become the social sector (rather than ‘for profit’ organisations)…and, if you’ve noticed this, you may be questioning my use of a bank for this ‘Part 2’ post.

I’d respond that much of Jan Wallander’s thinking fits incredibly well for organisational design within the social sector. He saw that the answer was ‘about the long-term client journey’ (people-centred), within a community and NOT about pushing ‘products and services’.

 

An introduction to the ‘how’

I’ll break up my explanation into:

  • Some key ‘up-front’ points;
  • How Wallander achieved the transformation; and
  • The core of Wallander’s organisational design

 

Some key ‘up front’ points

“As a rule, it is large and complex systems and structures that have to be changed if a real change is to take place.” [Wallander]

  • There is no magic ‘let’s do another change programme’ silver bullet. It is a change in organisational paradigm
  • It will take time and, above all, leadership (in the true meaning of the word)
  • Most important for the ‘leadership’ bit is that those leading ‘get the why’. Constancy of purpose can only come from this

 

How Wallander achieved the transformation

Saying and doing are quite different things. I expect that I could have lots of agreeable conversations with people throughout an organisation (and particularly with those at its ‘centre’) about ‘autonomy at the front line, with enablement from the centre’and yet nothing would change.

The following quote interests me greatly:

“The reason why [such an ‘autonomy and enabling’ system] is so rare and so difficult to achieve is quite simply that people who have power…are unwilling to hand part of it over to anyone else – a very human reaction. So, if one is to succeed, one needs a firm and clear goal and one has to begin at the top…with oneself.” [Wallander]

Which leads on to…

Wallander’s head office problem

“The staff working at the head office saw themselves as smarter, better educated and ‘more up-to-date’ than the great mass of practical men and women out in the field. They also felt superior because they were in close contact with the highest authority [i.e. the members of the senior management team].

A steady stream of instructions…poured out from the head office departments…amounting to several hundred a month. Even if a branch manager was critical of these instructions and recommendations, he did not feel he had any possibility of questioning them.” [Wallander]

Wallander saw things very differently to this:

“The new policy…aimed at turning the pyramid upside down and making the branch office2 the primary units.

In the old organisation there was a clear hierarchy: at the bottom of the scale were the branch offices, and on the next step up the [regional] centres. [‘Success’ was] a move up to a post at the head office.

In the new organisation, it was service at the branch offices that would be the primary merit…[because] it was the branch offices that gave the bank its income [i.e. delivered value to clients, towards their purpose]

In the new organisation:

    • the branch offices were the buyers of [enabling services]; and
    • the [central] departments the sellers who needed to cover their costs.”

It’s one thing saying this. It’s quite another achieving it. So how did Wallander do it?

Put simply, he stopped ‘push to’ the front line and enabled ‘pull by’ the front line.

Initially, he wanted to ‘stop the train’:

“[Head office] Departments were forbidden to send out any more memos to the branch offices apart from those that were necessary for daily work and reports to the authorities [e.g. regulators].

[All the head office] committees and working groups engaged in various development projects…were told to stop their work at once and the secretaries were asked to submit a report on not more than one A4 page describing what the work had resulting in so far.”

Then he wanted to change the direction:

“An important tool in the change process was the creation of a central planning committee that had a majority of members representing the branch offices.

This committee summoned the managers of the various head office departments, who had to report on what they were planning to do… and how much it would cost the branch offices [i.e. what value would be derived].

The committee could then decide [what was of use to their clients] and [where they considered it was not] the departmental managers were sent back to do their homework again.

In short, those delivering to clients (the branch offices) were given ‘right of veto’ over those from elsewhere proposing changes to this.

This had a dramatic effect. If you are a central department and you don’t want to be wasting your time on unwanted stuff (and who does?), then you’d better (regularly) get out to the front line, observe what’s happening, understand what’s required and/or getting in the way, and then collaborate on helping to resolve.

Further, if (after doing this) a central department develops something that the branches don’t want to use, then the next step turns into dialogue (leading to deeper understanding and valuable pivots in direction), not enforcement.

…which would create adult – adult interactions (rather than parent – child).

 

The core of the organisational design

I’m going to set out a bunch of inter-related points that need to be taken together for their effect to take hold. Here goes:

1. The local team ‘owns’ the client (relationship):

A client isn’t split up into lots of ‘bits’ and referred ‘all over the place’. Rather, the local team owns the client, as a whole person, throughout their journey. This provides: the client with direct access to the people responsible for helping them; and the local team with meaningful work.

“If you want people motivated to do a good job, give them a good job to do.” (Hertzberg)

2. The local team functions as a semi-autonomous self-managing unit, and is the primary unit of importance:

They are fully responsible for their local cohort of clients and, where they need to, pulling expertise to them (rather than pushing them off to other places).

3. The local team manager is a hugely important role:

This is because they are the linchpin (the vital link). They are responsible for:

  • the meaningful and sustained help provided to their local cohort of clients;
  • the development and wellbeing of the local team helping clients; AND
  • ensuring that the necessary support is being pulled from (and being provided by) the enabling centre.

They are NOT the enforcers of the centre’s rules. Rather they are the stewards of their local community (clients and employees).  This is a big responsibility…which means turning the ‘local team manager’ into a highly desirable role and promoting highly capable people into it.

In a reversal of thinking:

  • the old way was that you ran a local site in the hope of one day moving ‘up’ to head office
  • the new way is that a job at the centre might be a stepping-stone to being appointed as one of the highly respected local team managers

4. The capability of the local team employees is paramount:

If the local team are to truly help clients, then focused, ongoing time and effort needs to go into developing their capability to do this.

They are no longer merely ‘front line order takers’…so they need help to develop and grow (‘on the job’, ‘in the moment’).

5. Local team employees must receive a reasonable salary:

If we want people to develop and grow such that they deliver outstanding help to their clients, then we need to pay them accordingly. This is not ‘unskilled’ work (whatever that means nowadays).

 

Putting points 1 through to 5 together creates a virtuous circle: meaningful work, self-direction, relatedness, growth, wellbeing…and back around to meaningful work.

 

We now turn to some enabling principles:

6. The centre’s job is to enable (and NOT control) the local team:

Basically, re-read (if you need to) what I’ve written above about Wallander’s head office problem and how to transform this.

THE core principle here is that the local teams (via representation) have right of veto over central ideas for change.  After all, YOU (the centre) are impacting upon THEIR clients.

For those of you ‘in the centre’ who are thinking “but this is Bullsh!t, the problem is that the local team just don’t get why [my brilliant change] is necessary!” then

  • either they know something you don’t…and so you’d better get learning
  • and/or you know something they don’t…and so you’d better get into a productive dialogue with them

…and whichever it is, a dose of experiential learning (at the Gemba) is likely to be the route out of any impasse.

In short: If the local team don’t ‘get it’ or don’t ‘want it’ then the centre has more work to do!

7. All employees (local team and centre) need clarity of purpose and a set of guiding principles:

Whilst we want each and every local team ‘thinking for itself’, we need them all to be going in the same direction. For this to occur, they need a simple, clear (client centred) purpose and principles, to use as their anchor for everything they do…and with this they can amaze us!

Which leads to one of my all-time favourite quotes:

“Simple, clear purpose and principles give rise to complex and intelligent behaviour.

Complex rules and regulations give rise to simple and stupid behaviour.” (Dee Hock)

We also need the ‘centre’ (and most definitely senior management) to live and breathe the purpose and principles*. Without this it’s just ‘happy talk’.

* Note: This list of nine points (and the context around them) is a good start on a core set of principles.

8. There needs to be transparency across local teams as to the outcomes being achieved (towards purpose):

A key role for the centre is simply to make transparent that which is being achieved, so that this is clear to all…and then resist dictating ‘answers’.

This means that each local team can see their outcomes and those of all the other local teams…and can therefore gain feedback, which creates curiosity, stimulates collaboration, generates innovation, and produces learning towards purpose…

…we are then on the way to a purpose-seeking organisation.

Once outcomes are transparent, then if the centre is demonstrably able to help, it is highly likely that local teams will pull for it.

 Clarification: Transparency of systemic outcomes towards purpose, NOT activities and outputs (i.e. how many ‘widgets’ were shoved from ‘a’ to ‘b’ and how quickly!)

 

and last, but by no means least…

9. The budget process needs to be replaced with something better:

I’m not going to write anything detailed on this, as I’ve written about this before. You are welcome to explore this point if you wish: ‘The Great Budget God in the Sky’.

In short, the conventional budget process is also a HUGE problem for a system in meeting its client defined purpose.

 Right, I’m one point short of ‘The Ten Commandments’…so I’ll stop there. This isn’t a religion 🙂

 

To close

The above might seem unpalatable, even frightening, to the current ‘Head Office machine’ but there’s still seriously important work for ‘the centre’ to do…but just different to how you do it now.

In fact, if those in the centre really thought about it (and looked at the copious evidence), how much of what the head office machine currently does provides truly meaningful and inspiring work for you? Perhaps not so much.

Sure, we tell ourselves that we’ve ‘delivered’ what we said we would, according to a budget and timescale…but how are those clients going? Are things (really) getting better for them, or are they stuck and perhaps even going backwards?

How would you know? I expect the local team could tell you!

 

Footnotes:

1. Historical context: Handelsbanken was, back at the end of the 1960s, a large historic Swedish bank that had got itself into an existential crisis

It was run in the typical functionalised, centralised command-and-control manner, according to the dominant management ideas emanating from American management schools (and which still leave a heavy mark on so many organisations today)

The Handelsbanken Board decided to headhunt a new CEO in an attempt to turn things around (i.e. ‘transform’ in the proper use of the word)

Dr. Jan Wallander was an academic who, through years of research and experience, had arrived at a systemic human-centred management philosophy. To test his thinking, he had taken up the role of CEO at a small Swedish bank (which was becoming an increasingly successful competitor of Handelsbanken)

The Handelsbanken Board were struck with the highly successful outcomes that Wallander had achieved, and they wanted him to rescue them from their crisis.

In 1970 he said yes to their request…but with strings attached: They had to allow him the time and space to put his ideas into practice.

2. ‘Local team’, ‘Branch’, ….: Organisations choose various words to refer to their local presence, be it office, site, shop, outlet, etc. What matters most is the decentralised thinking, not the word chosen or even how the ‘localness’ manifests itself.

I’ve used the generic phrase ‘local team’ in this blog because it implies (to me) a distinct group of people looking after their clients. You’ll note that Jan Wallander refers to the ‘Branch’ in this respect (which fits with his banking world). You can substitute any word you wish so long as it retains the point.

3. The detail for this post comes mainly from Jan Wallander’s book ‘Decentralisation – Why and How to make it work: The Handelsbanken Way’. It is an interesting (and relatively short) read.

I found this book a bit hard to get hold of. I got mine shipped from Sweden…though I had a little mishap of accidently procuring the Swedish language version – sadly, not much use to me and my limited linguistic skills. I happily amended my order to the English version.

4. ‘Within a community’: The conventional public sector model is to have a huge number of branches within a given community – one for each central government department, one for each separate NGO, etc. etc. They are (virtually always) at cross purposes with each other, causing vulnerable clients to have to adopt the inappropriate (and unacceptable) position of trying to ‘project manage’ themselves through the malaise.

The need is to replace this controlling central-ness (lots of central Octopuses with overlapping local tentacles) with meaningful local teams. This is a huge subject in itself, and worthy of another post (or a series of).

Chapter 4: What possible ‘defences’ exist against the harm of ‘Money Power’?

So I’ve:

  • set out Ford’s explanation of Dead vs. Live money (Chapter 1);
  • ‘shot at’ organisations that claim they get this –as in “see, here’s my purpose!” (Chapter 2);
  • explained why shareholders are probably the last people you’d want as guardians for an organisation’s successful longevity; and
  • put forward a logic as to why executives behave as they do (including the recent Mylan example to consider) (Chapter 3).

light-bulb…and at this point you may reasonably ask “so what can be done about this situation?”

Thankfully not everywhere is the same…and we can look around for ideas.

Ha-Joon Chang writes that “most rich countries outside the Anglo-American world have tried to reduce the influence of free-floating shareholders and maintain (or even create) a group of long-term stakeholders (including some shareholders) through various formal or informal means.”

These include:

  • government ownership (either direct or indirect) of a sizeable share to act as stable shareholders (examples in France, Germany, Korea);
  • differential voting rights for different classes of shares e.g. for founders and their families to retain significant control (Sweden);
  • formal representation by the workers on the company supervisory board (Germany);
  • minimising influence of floating shareholders through cross-shareholdings amongst friendly companies (Japan)

“Being heavily influenced, if not totally controlled, by longer-term stakeholders, companies in these countries do not as easily sack workers, squeeze suppliers, neglect investment and use profits for dividends and share buybacks…all this means that in the long run they may be more viable…

Running companies in the interests of floating shareholders is not only inequitable but also inefficient, not just for the national economy but also for the company itself.”

(Of course, I should reflect that there are lots of other ownership models ‘out there’, such as State Owned Enterprises, Mutuals and Co-operatives…and I have read many a good-news story about what can be achieved with the latter.

If you already have one of these ownership models, please stay as you are! What follows is aimed squarely at the Dead Money corporations).

Exploring the employee option:

proft-sharing-quoteI’m a big fan of the ‘employees as long-term owners’ method.

Now, many a ‘large corporate’ would respond that their people can buy shares in their company and, further, that they encourage this by administering some form of ‘employee share buying scheme’.

So how’s this different to share ownership through profit sharing (as in the Oktogonen Foundation)?

Well, if we consider a typical ‘employee share buying scheme’:

  • You are asking employees to put up their own money as risk, rather than rewarding them for their ‘blood, sweat and tears’;
  • Only a limited number of employees will buy shares (for a variety of reasons – the most obvious being their level of affluence and their attitude to risk);
  • The minority that do buy a small ‘side salad’ of shares have simply been added to the vast pool of floating shareholders…worried about short-term profits and dividends.

In contrast:

The power in ‘share ownership through profit sharing’ is that EVERYBODY in the organisation becomes an owner, and thereby connected with the same aim.

The power in setting up a foundation specifically for this purpose is that the employees as a GROUP obtain a significant voice, creating representation on the board.

The power in defining a long-term method of payment (say, at pensionable age) is that employees (past and present) care deeply about the LONG TERM success of the organisation…which will produce a genuine focus on the CUSTOMER (and society).

Now these words might cause the following reaction from existing shareholders and executives: “Whoa…I don’t like the sound of ‘worker power’ – this is Trade Unionism by the back door…and look at where that always ends up!”

Here’s why it is the exact opposite:

The birth, and historic basis, of the Trade Union movement was to protect the workers from the power of the owners. In response to Trade Union power, the owners would regularly claim that the employees were ‘biting the hand that feeds them’…and thus a hugely adversarial battle became the norm1 (usually with the customer, and consequently the organisation, suffering in the cross fire).

But, rather than employee ownership through profit sharing stoking the ‘worker – owner’ flames, it actually dissolves the problem! Everyone is pointing in the same direction.

Even better, a foundational base is set to enable the business to become so much more efficient and effective because all those commanding and controlling ‘management instruments of torture’ can be torn down – that would be incentives and Performance Management2 for a start!

….just think how easy it would become to engage with the workers – or should we call them ‘long term guardians’ now?

“Just close your eyes and imagine…”

imagineI have often found myself in company presentations with management eulogising about the next ‘cost cutting’ initiative. A usual candidate is the travel and expenses budget (and the associated rules to be complied with)…and they always use the same logic:

“Imagine it as your own money!”

Ponder upon this for a minute: management ‘get’ that it isn’t our money, and that this will alter how we think about it…but they want us to play a game of ‘pretend’. Hmmm – they’re missing something there.

But what if THEY (management) altered their thinking such that it IS the employees’ money. They can dispense with those silly games, and potentially all those wasteful cost cutting initiatives. Imagine that!

“But it’s not their money!!”

Now, there may be a backlash of comments from shareholders with a view that the company would be giving away their money.

Some thoughts on this:

  • The organisation doesn’t need to raise capital to do this! It just needs to STOP the offering, and paying, of contingent rewards. There’s plenty of money right there;
  • For those shareholders that don’t realise this…there is loads of cost spent in administering the performance management/ incentives lark…and a great deal of harm caused that is unmeasurable! This is no longer required;
  • But, fundamentally, a long term ownership interest (Live Money) will change the way that employees think…for the good of the customer and therefore the organisation…and, as a result, to the benefit of those that invest.

A start to the journey

silver-bullet‘Necessary but not sufficient’: I’d like to be clear that, whilst profit sharing could be game changing, it’s not a silver bullet….but it is a hugely sound foundation from which the right type of business can be successfully built and sustained.

It can act as a catalyst for all those things that you’ve been saying, but not been able to do. Why? Well, because it fundamentally changes the employee – company relationship.

It brings Live Money onto the scene and, if done well, brings Service Power back to the fore.

(Note: I’ve written this whole serialised post because – after many years of pondering – I came to the conclusion that you can understand and passionately want to change your ‘culture’ BUT you won’t (meaningfully or sustainable) achieve this if you don’t address your ownership structure…and this relates to Money Power).

To close: A comment on the current ‘side show’

The current ‘large corporates’ hymn is all about diversity….and that this will ensure the future of an organisation – all those different people, with all those different perspectives and ideas! What’s not to like?!

Now, I’m all for diversity. I believe in respect, equality and fairness for all.

However, you can be as diverse as you like, but if you don’t change the system (of management and ownership) then you’ll simply get more of the same.

To repeat my regular John Seddon quote (I have it ringing in my head most days!):

“People’s behaviour is a product of their system. It is only by changing [the system] that we can expect a change in behaviour.”

Or, to a Deming pearl of wisdom: “A bad system will beat a good person every time”

Stop trying to change people and, instead, perform a paradigm3 shift so that they change for themselves.

I should add that the diversity thing will be so much easier to achieve when all employees want to collaborate together (profit sharing) rather than competing with each other for ratings, rankings and contingent rewards. i.e. If you really want diversity, and what it can offer, then change the system first.


Okay, so I’ve argued that employee ownership through long-term profit sharing is a bloody good way to go…but there’s a few people that I really need to convince first. That would be a) the existing shareholders and b) the CEO. And that is the subject of my next, and final, chapter 🙂

Update: Link forwards to Chapter 5

Footnotes:

1. Owners vs. Unions: As usual, Henry had something useful to say on the matter:

“Business does not exist to earn money for the capitalist or for the wage-earner. The narrow capitalist and the narrow trades unionist have exactly the same view of business – they differ only on who is to have the loot.” (Ford)

2. On the merit system (i.e the rating and rewarding of people’s performance): Here’s a nice Deming exchange in a Q & A part of one of his famous lectures:

Question from the audience: “What do you propose to replace the merit system with?”

Deming: “Replace it? What, you want something to destroy people better than that does?!

Replacement means another method to do the same thing. [Do] you know of anything more effective in the destruction of people?

Question rephrased: “But is there any way to change the merit system?”

Deming: “Change it? Abolish it! Look at what it’s done to us.”

3. Paradigm: I usually hate using the ‘p’ word – it seems so ‘management consultancy’ to me…but in this case it is spot on!

4. So…what if you don’t (yet) want Live Money: If you don’t want to do the profit sharing thing (even though you’ll be seriously missing out) then STILL GET RID OF THE INCENTIVES!

Back to that ‘Profit Sharing’ Nirvana

cakeMy last post set out why profit sharing beats incentives by a country mile but I also laid out a note of caution on one aspect, short-termism:

I wrote that “A key consideration for anyone designing a profit share method is to avoid short-termism. Alternative thinking on how to achieve this might be to consider payment in shares that can’t be sold for a certain period, or payments into a person’s pension scheme, or [some other way of thinking outside the box]”

I have been keeping my eye open for a ‘for profit’ organisation out there that has been demonstrably successful in operating a profit sharing method that fits, and doing so for a reasonable (i.e. proven) period of time…and I believe that I have found such a thing! A Swedish bank called Handelsbanken.

Here’s the story:

At the end of the 1960s Handelsbanken was in crisis so it searched around for a radical thinker to lead them. They found Jan Wallander – an economist who had metaphorically ‘put his money where his mouth is’ by leaving academia and becoming a director of a rival Swedish Bank…and he was doing rather well whilst challenging conventional wisdom.

WallanderHe took on the role of Handelsbanken’s CEO in 1970 and got stuck in to doing things quite differently! As an example, he was particularly scathing about budgets:

“either a budget will prove roughly right and then it will be trite, or it will be disastrously wrong and in that case it will be dangerous. My conclusion is thus: Scrap it!”

As a result of this, Handelsbanken have now been operating very successfully without budgets for over forty years! (There’s an important ‘Beyond Budgeting’ post coming soon)

….but getting back to the profit-sharing subject:

Jan Wallander believed in a profit-sharing system that:

  • is intended as a reward for everyone’s collective efforts and competitive success (i.e. as against other banks); and conversely
  • should not be an incentive for individuals to pursue financial targets.

“beating the competition…is a far more powerful weapon than financial incentives. Why do people need cash incentives to fulfill their work obligations to colleagues and customers? It is recognition of effort that is important. Managers will only strive to achieve ambitious goals if they know that their ‘best efforts’ will be recognised and not punished if they fail to get all the way.”

Wallander set out an overall goal for the organisation (within its banking purpose): attaining a better return on equity than its (listed) banking competitors. This is rather interesting:

  • it doesn’t tolerate for any ‘resting on their laurels’ in easy market conditions; and conversely
  • it reasonably accommodates what might seem disappointing results (in absolute terms) when the market is tough.

Starting in 1973, the bank has allocated part of its profits to a profit-sharing scheme for employees. The main condition for an allocation to be made is that the ‘return on equity being better than the competition’ goal is achieved for that year.

The funds are paid to a profit-sharing foundation called Oktogonen (which was set up by the bank’s trade union club). In turn, the Oktogonen Foundation places 90% of these funds in Handelsbanken shares, thus giving the employees owner representation on the bank’s board.

The Oktogonen Foundation has become the bank’s largest shareholder, with over 10% of voting power.

Okay, so there’s a big fat fund of money…but how do the employees get at it?

This is the long-term bit, mixed with a healthy dose of equality.

Every year that the bank makes a profit allocation into the foundation (which, as it happens, has been achieved every year since its inception) then each current employee is allocated an equal share of units (i.e. salary level is not relevant to this allocation).

The value of each unit then goes up and down with the value of the foundation’s investments i.e. mainly the price of Handelsbanken’s shares.

Current and past employees can cash up their units from the age of 60 i.e. they cannot access any money until this point. This gives the Oktogonen Foundation the character of a pension fund.

This 2013 financial report shows that, if an employee had worked full time at the bank since the start of the scheme in 1973 (i.e. a 40 year working life), their fund units would be worth SKr 14,000,000…which is US$1.7 million at today’s exchange rate!!!! …that would be my pension pot sorted.

Some thoughts on this:

  • you can see that everyone working for the bank is ‘joined together’ (working as a system), aiming in the exact same direction over the long term…yet they also need to do so with speed so as to release the yearly profit allocations. This harnesses together the desires for efficiency and effectiveness;
  • it removes the need for the whole ‘setting personal objectives – arbitrary targets – judgemental scoring – giving of contingent rewards’ commotion….and the people can use this huge amount of freed-up time and wasted energy to work towards purpose. A bye-product is that people can now ‘get on’ as adults rather than as Parent – child;
  • it removes the batch behaviours associated with annual bonus payments:
    • there isn’t a period before year end where some people ‘hang on’ to get their payment when they’ve already checked out for something/ somewhere else; and
    • there isn’t an exodus of people out the door in the months after the bonus cheque has been cashed…causing a renewed batch of recruitment.

… people leave as and when they want to, which makes for transparency and a clear flow, making the balancing of capacity much easier;

  • it binds the employees and the shareholders together. They now have the same long term interest of building and sustaining a business for the future. Conversely, it will likely dissuade short term investors attracted merely by share price volatility…which isn’t in the best interest of organisational success.

What about some likely criticisms?

Here are four likely retorts to the idea of long-term profit sharing instead of short-term incentives:

1. “But what about ‘poor performers’?”

This is usually the first criticism of the profit-sharing method and rests on the belief* that some people will always ‘work harder’** than others and why should ‘slackers’ benefit at the expense of ‘grafters’.

* it is interesting that most people working in a command-and-control environment appear to have this belief about themselves as compared to others. A bit like everyone thinking that they are a ‘better-than-average’ driver 🙂

** I am only covering the ‘effort’ question here. The ability/ scarcity of resource question is covered within the differing levels of salary that people receive.

Incentive schemes are not the answer to supposed ‘poor performance’ – they are frequently used as a substitute for good management and, as such, are an abdication of management’s responsibilities.

Alfie Kohn writes that “In order to solve problems in the workplace, we must know what caused them….holding out a carrot – ‘Do better and here’s what you’ll get’ – is a pseudo solution; it fails to address the issues that are actually responsible for holding back the organisations and the people who work there.

Incentive schemes are frequently used as a substitute for giving workers what they need to do a good job…much less effort is required to dangle a bonus in front of employees and wait for the results…[however] there is evidence that pay-for-performance plans tend to displace careful management…a compensation system is no substitute for careful management.”

But it’s not just management, it’s also about peers! Here’s Handelsbanken’s response to the ‘poor performers’ fear:

“In a team based organisation driven by peer pressure, free riders are exposed very quickly and replaced by people more willing to commit themselves to real performance challenges.” (Source Book: ‘Beyond Budgeting’)

i.e. rather than gifting ‘free riders’ with easy money, the profit sharing method exposes and deals with them!

On advocating the removal of the ‘incentive-performance management’ system, Deming was once asked by a member of his audience “but what will we do instead?” His response was “Try leadership”.

…it has clearly worked rather well for Handelsbanken!

2. “How do we get people to leave? Won’t people hang around forever?!”

This view fits alongside the concern about ‘poor performers’. Consider though that the supposed ‘poor performance’ may very well evaporate…and we now have hugely experienced AND motivated people.

‘But they will be dinosaurs, unable to change’ I might hear someone reply. Really? Do you think that you couldn’t change even if you wanted to? Consider that “People don’t resist change, they resist being changed” (Scholtes). It’s back to that environment again!

Perhaps those ‘resistant to change’ are suffering from ‘change fatigue’: namely, being tired of their huge knowledge being ignored as the next overly simplistic ‘silver bullet’ change programme is done to them.

An organisation with high employee turn-over allows (and often forces) years of highly skilled knowledge to regularly ‘walk out the door’, only for the learning to start again, almost from scratch by the ‘next batch’. If the experienced workers stay, just think of where they could ‘kick on’ to if they so desired.

…but don’t worry, we haven’t engineered a prison! People can and will leave as they wish…and retain the profit-sharing units already assigned to them.

3. “People like getting a lump sum each year to pay for, say, their holidays”

Yes, I can see this (I do too)…but I would happily trade in the pain of the annual performance process (including the dysfunctional behaviours it causes) and the resultant lump sum payment if it meant that I got a real kick out of work because of the amazing environment that I worked in, with people who are equally energised, and who are ‘all running in the same direction’ and helping each other do so.

This brings to mind the quote “Pay people well and fairly…then put money out of their minds.” (Alfie Kohn)…though I might fondly look ahead every once in a while to that pension pot!

4. “What happens if the organisation goes bust?!”

Yep, you’d lose your investment (or at least be at the back of the creditors’ line)…so you would be very keen to constantly:

  • stay alert: look ahead to see external change coming (rather than ‘sit back and wait’);
  • know what’s happening: keep close to your customers and how their needs are changing…and be sure to deliver value to them;
  • innovate: think differently, look at what others are doing, try things out (experiment), pivot in new directions;
  • collaborate and roll-in meaningful change that demonstrably works for the whole system;
  • seek out, recognise, and directly attend to obvious waste and failure demand.

i.e. constantly improve your capability of meeting your customer’s purpose….just what your shareholders and profit-share foundation unit holders (incl. past employees) would want of you!

…and finally, that’s not the whole story:

Cleary, it wasn’t just a superb profit-sharing scheme that has led to Handelsbanken’s success…but it is seen as an enabler and a foundation for the necessary environment to stimulate and secure long term success. Jan Wallander did lots of things differently – probably the greatest being that he was also a firm believer in empowering people through decentralisation.

There is a clear relationship between decentralisation2 – empowerment – intrinsic motivation – purpose – systemic collaboration – continuous improvement – profit sharing.

Notes:

1. Handelsbanken reference material: The history of Handelsbanken

2. On Decentralization: “What is commonly understood by decentralization originates in the conventional command-and-control paradigm, defined as Decentralization 1.0.

To cope with the world’s exploding complexity, some vanguard companies have evolved to a higher level of organization by adopting a new kind of decentralization originating in the enabling-and-autonomy paradigm – hence the term Decentralization 2.0. This refers to organizations consisting of autonomous groups facilitated by an enabling support organization. To keep these high-trust, spirit-driven organizations together, a new kind of deep leadership is practiced by them.” (Decentralization 2.0)

3. The Oktogonen Foundation: For a very clear explanation, scroll right down to Appendix A at the bottom of the ‘Written evidence from Handelsbanken to the UK Parliamentary Commission on Banking Standards’. (Parliament UK)