Incentives

Memo to ‘Top Management’ – Subject: Engine Technology

giantknave Brain Farts , , , , ,

I’ve just been searching for a post that is hugely relevant to a recent conversation, and have found that it was an old piece that didn’t get published onto this blog…so here it is:

Jet engine“Management thinking affects business performance just as an engine affects the performance of an aircraft. Internal combustion and jet propulsion are two technologies for converting fuel into power to drive an aircraft.

New recipes for internal combustion can improve the performance of a propeller-driven airplane, but jet propulsion technology raises total performance to levels that internal combustion cannot achieve. So it is with management thinking.

Competitive businesses require jet (even rocket!) management principles. Unfortunately, internal combustion principles still power almost all management thinking.” (H. Thomas Johnson)

And so Johnson nicely compares and contrasts the decades old ‘command and control’ management system with a new ‘systems thinking’ way.

Let’s take incentives as an important example:

You report to a manager, who reports to a manager, who…etc. You have ‘negotiated’ some cascaded objectives and you will be rated and then rewarded on your ‘performance’ in meeting them. Sound familiar?

Here are the fundamental problems with this arrangement:

  • Obey and justifyYou will tell your manager what you think he/she wants to hear, and provide tailored evidence that supports this, whilst suppressing that which does not;
  • If you are ‘brave’ and tell your manager something that they might not like, you will do so very very carefully, like ‘walking on eggshells’…and, in so doing, likely de-power (i.e. remove the necessary clout from) the message;
  • You realise that it’s virtually suicidal to ‘go above them’ and tell your manager’s manager the ‘brave’ thing that they should hear…because you fear (with good reason) that this will most likely ‘come back to bite you’ at your judgement time (when the carrots are being handed out);
  • You are locked into a hierarchy that is reliant on a game of ‘Chinese whispers’ up the chain of command, with each whisperer finessing (or blocking) the message to assist in the rating of their own individual performance;
  • Each layer of management is shielded (by their own mechanism) from hearing the raw truth and, as such, they engineer that they ‘hear what they like, and like what they hear’.

…and therefore this system, whilst fully functioning, is perpetually impotent! It has disabled itself from finding out what it really needs to know.

“Hierarchies don’t like bad news…. bad news does not travel easily up organisations” (John Seddon)

If you’ve been in such a system and HAVE broken one of the rules above through your passion to make a real difference for the good of the organisation you work for (or perhaps worked!), then you’ve probably got some scars to show for it.

If you’ve always played it safe, then this is probably because you’ve seen what happens to the others!

The ‘Bottom line’ for ‘Top Management’:

If you want to transform your organisation, change ‘engine technology’! Tinkering with your existing one is simply not going to work.

  • Managers should not be rating the performance of individuals. Rather, they should understand what the system is preventing the individual from achieving…and then work with them to change that system to release their untapped potential;
  • Managers should not be incentivising individuals to comply. Rather, they should be sharing the success of the organisation with them. (These are very different things!)

Neither of these fundamental changes is in the gift of ‘middle management’ – they belong to those that determine the management system.

… and so, if (and this is a big ‘if’) ‘top management’ want to know the raw truth (‘warts and all’) they must constantly remove, and guard against, system conditions (e.g. incentives, performance ratings) that would prevent the truth from easily and quickly becoming lucid and transparent.

Afterthought, to counter a likely retort from ‘Top management’:

I have often (professionally) provided well intended feedback to ‘management’ as to what’s actually ‘happening out there’, particularly when I believe that they may not be aware of this. Many an Executive has derived great worth from this feedback (and thanked me accordingly).

This isn’t saying that I’m always right, or that I know everything. Obviously I’m not, and I don’t. But I do know what I see and hear.

However, there has been a subset of deeply command-and-control executives that confidently respond with “no Steve, you are wrong – that’s not the case at all. My people tell me exactly what’s happening…and there’s no problem here”.

I find this interesting (sometimes amusing, but mostly disappointing).

A manager can never be sure that people are being totally open and honest with them…but they can constantly look for, and understand, what mechanisms and practices would put this desired feedback in doubt or at risk….and then tirelessly work to remove these system conditions, for the good of all.

Footnote: I wrote this post before I wrote ‘Your Money or your Life!’…which considers the question as to whether ‘Top management’ in large corporates CAN change.

Profit sharing vs. Incentives

giantknave Brain Farts , , ,

sharing-is-caringSo I was in a meeting. A colleague spoke up and said that she felt that incentives weren’t a good thing, that they caused much damage and that it would be better to remove their use and replace them with something better.

This was followed by the usual conversation that ‘bad’ objective setting is clearly the actual problem…and implied that the (obvious and only) answer was to continually strive to set ‘good’ objectives (incl. targets and linked incentives).

Finally, it led to a discussion as to how different organisations handle the issue of pay. Two particular comments made of interest to me were that:

  • “most organisations have incentive schemes”, with the implication that therefore this must be right; and
  • some organisations use a ‘profit sharing’ concept and, “really, this is incentives just by a different name… isn’t it?”.

Now, there are (what I believe to be) some important points that I’d like to put out there regarding each of these two comments. Here goes…

Part 1 – The problem being the quality of the objectives

To run a ‘performance related’ incentive scheme, an organisation needs to do four things:

  • set out meaningful (?) personal objectives (which are ‘cascaded’ down from above, hopefully derived from some customer related purpose);
  • set criteria from which to measure a person’s performance against these objectives (i.e. targets);
  • judge a person’s performance against these criteria; and
  • lay out a financial methodology to convert this judgement of performance into a (contingent) monetary reward.

I have already written posts that are highly relevant to each of these points. In particular:

and perhaps most importantly:

  • I have written about the science showing the harm caused by using extrinsic motivators in The chasm and Money as pay. I used the analogy of Don’t feed the animals.
  • …and on the related matter of purpose (from which those cascaded personal objectives theoretically originate), I have written about why this shouldn’t be seen simply as ‘to make profit’. I wrote about this in Oxygen isn’t what life is about

I hope that this gives you plenty of thought to explain my contention that, in Ackoff’s words, we shouldn’t be “trying to make a wrong thing righter”.

The issue is NOT with poorly set personal objectives, criteria, judgements and financials methodology. You can fiddle with these all day long but you won’t remove the fundamental flaw within.

Part 2 – Is Profit sharing the same as incentives?

Firstly, what do I mean by profit sharing as opposed to incentives? Here are definitions for each:

Definition of Profit sharing: All employees share in the success of the organisation.

“Employees receive a variable amount each year (or some other increment of time) where this variable reflects the pre-tax prosperity of the company.” (Scholtes)

Note that such profit sharing can be carried out in a myriad of ways. Some of these are:

  • Same percentage of salary per employee (this is probably the most common method)
  • Same absolute amount per employee i.e. shared equally, from the Contact Centre Agent through to the General Manager. Promoters of this method argue that:
    • People’s salary already caters for the market rate of their skills and experience;
    • We shouldn’t be implying that some people contribute more to a company’s prosperity than others…indeed some would argue that the most important people are the front line staff and they spend much of their time protecting the customer from the decisions made by command and control managers!
  • The use of some seniority factor: i.e. profit share based around tenure – promoters of this method suggest it encourage long-term thinking*
  • some hybrid of the above

* Note: 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]

Definition of Incentives: Extrinsic motivators – the offering of something (usually money) on a contingent basis in order to control how someone acts. ‘Do this to get that’.

At work, such incentives link to the idea of ‘paying for performance/ merit’ i.e. the setting of a challenge and then the judgement as to whether/ how well it has been met and the subsequent release of the contingent reward.

A comparison:

So, with these two definitions, I can now explain, via the following table, why profit sharing (however done) and incentives are very different:

Comparison: Incentives: Profit Sharing:

Purpose

 Optimising the parts of the system, at the expense of the whole: ‘Meet personal objectives’ usurps overall purpose, with departments, and people within, pulling in competing directions.

Personal objectives create:

  • silo’d thinking and competition;
  • barriers to collaboration

Effort: massive time and effort spent in cascading, wording and ‘agreeing’ objectives

Static: Once ‘locked in’ each year, people are constrained by this thinking.

 Optimising the system: Encourages collaboration since everyone (horizontally and vertically) is joined together towards the same purpose.

Encourage people to think about the ‘customer’ and their horizontal flow of value.

Effort: Little effort required. The purpose remains as ‘True North’

Dynamic: People can continually move in new innovative directions towards the one purpose, liberated from personal objectives.
Targets Required as ‘criteria’ for the objectives.

People are only truly interested in their own targets.

 Not required.

People are now interested in measures (NOT targets) in how the system works and whether it is improving.
Judgement Required to ‘score’ people against.

Much time and emotional effort to run the judgement process, and deal with the de-motivating fall out…

…which occurs due to the impossibility of making a fair judgement.

 Not required. 

Can now move to coaching conversations that are divorced from judgements and rewards…likely leading to open-ness, learning and self-development
Motivation Extrinsic People collaborating towards a combined purpose which they now believe in, leading to/ enabling intrinsic motivation

…and for anyone who holds that incentives must be right because everyone else seems to be doing it, you might be interested in my earlier post on Benchmarking.

To end with some thoughts for the way forward:

After very skilfully dealing with the subject of pay and performance in his book ‘The Leaders Handbook’, Scholtes puts forward (what I consider to be) some very useful guidelines when it comes to pay:

  • Employee compensation should be a completely separate process from the employee feedback system;
  • performance issues are one thing. Pay issues are another. Keep them separate. Don’t try to solve performance problems with pay solutions;
  • There should be no merit pay, because it is virtually impossible to differentiate on the basis of merit; (Note: My post titled Outstanding discusses this)
  • All employees should benefit from the success of the company through profit sharing;
  • The greatest sources of motivation are intrinsic. Pay cannot motivate, but pay that is perceived to be unfair can de-motivate.

Have I got a deal for you!

giantknave Brain Farts , , , , , , ,

usedcarsalesmanWhich industry are we really suspicious about, and is the butt of jokes around the world? How about the car salesman?

So why do you think we are so suspicious?

Here’s what we might experience:

  • A rather smooth operator who appears to ask you about what you want but, surprise surprise, “has exactly what you are after”…which, funnily enough, happens to be what he’s got in stock!
  • A personal business card handed over, encouraging you to give him a call whenever you want…but use his direct number: “remember me, my name’s Jim”;
  • Some desperate moves from Jim as you attempt to leave his car yard, saying things like “I can only offer you this fabulous deal today”;
  • …but when you have left the yard, multiple calls from Jim asking how you are getting on and saying that things have changed for the better…so come on by so that we can discuss “…and remember to ask for Jim”;
  • …and if you ring back for Jim but he isn’t available, his ‘colleague’ Bob gladly (yet slyly) takes over the deal, perhaps saying “nah, no need to tell Jim, I can handle it from here!”;
  • Strong attempts to ‘sell you some extras’ like finance, warranty, a tow bar and so on…even when you’ve made clear that you really don’t want them;
  • Assurances that “yes, don’t worry about it – everything works…and if, in the unlikely event you have a problem, just bring it back in and we’ll sort it”;
  • …and if you end up making a purchase, some strange ‘paperwork’ going on to make the deal look a certain way:
    • perhaps trying to bring it forward or put it back (end of the week/ month/ year);
    • perhaps trying to play around with how the figures look

….you might be able to add a whole heap more experiences to the above!

Actually, car salesmen are nothing compared to big financial services business. Let’s move across to the UK Financial sector and have a look at the carnage of the last few decades:

  • the 1988 – 1994 Personal Pension miss-selling scandal in which salespeople on commission persuaded vast numbers of people to trade in generous and safe(r) company pensions for riskier and costlier alternatives. The resultant compensation scheme forced on the industry involved the review of 1.7 million consumers, over 1 million compensation payouts and a total cost to the financial companies involved of £12 billion; (Source of figures here)
  • the 1990s and 2000’s Payment Protection Insurance (PPI) miss-selling scandal in which banks and other financial institutions offered sales incentives to increase the take up of payment protection insurance…which led to a range of miss-selling practises including: putting pressure on customers to buy it in order to secure a loan; failing to make it clear that it was optional; selling to people who were actually ineligible; and even adding it to a loan without the customers consent or knowledge. The resultant compensation scheme forced on the industry (spot the pattern?!) saw the ombudsman receiving “5,000 complaints a week” and payouts being made of more than £15 billion. (Source of figures here)
  • …and on and on (the Endowment Mortgage miss-selling scandal, the Credit Card Protection insurance miss-selling scandal….)

They all shared the same ‘miss-selling’ credentials

  • aggressive, ignorant or incompetent sales tactics,
  • a failure to appropriately advise customers, and
  • deliberate strategies to sell financial services that customers do not need;

So, what’s the common ingredient?

Well, that would be the offering of sales incentives (contingent rewards).

The point is that, if you offer sales incentives, you can virtually guarantee that you will cause dysfunctional behaviour that goes against your (stated) ‘customer’ purpose.

Remember that a valid purpose statement should say something about “helping people…” It does not say “sell what you can to them”. We need to remind ourselves about a system and that ‘sales’ is but one component of it.

If you offer sales incentives, you can expect the system to ‘bite back’ in the form of undesirable discounts and terms given, failure demands from customers contacting you again, cancellations, complaints, debt collection costs, returns and after service costs… all of which will be un-measurable back to your brilliant sales incentive scheme.

You can of course try to put in place ‘compliance’ controls to monitor all these ‘side effects’ but a) you won’t catch the majority of them and b) this is just an additional (and expensive) layer of costs, and waste.

The sobering thing about the UK financial service miss-selling scandals is that the eventual costs dwarfed the original supposed sales benefits! What a huge waste.

If you offer sales incentives, you can expect:

  • people to try to sell what they have in front of them, rather than what the customer wants, or actually needs;
  • a strong desire to ‘get the sale’ and ‘move on’ to the next ‘lead’ meaning that less care is taken explaining the product and what it is and isn’t;
  • ‘dodgy sales’ made, which should never have occurred (i.e. were inappropriate and/or were not desired)

If these incentives are to individuals, you can expect reduced co-operation between ‘colleagues’, who are now in competition for those elusive sales…even leading to sabotage.

Such competition will actually harm, and prevent those many sales that would have occurred because of co-operation between colleagues.

If these incentives are for particular products, you can expect other products to be ignored, and even denigrated in favour of chasing the reward…even if the non-incentivised product was what the customer actually needed.

If you add targets to achieve these incentives, you can expect games to be played:

  • if I am near my target in a given period, I’ll do some creative things to creep over the threshold (perhaps offering discounts and giving things away for free that I shouldn’t be);
  • if I have achieved this period’s target, I might try to defer a sale to my next period, which, again, may not be what the customer wants and clearly distorts information about demand.

And, given that the customer isn’t daft, they ‘feel’ the sales process as opposed to experiencing someone that actually cares about them…providing an awful experience and a massive (yet missed) hit in reputation.

There’s nothing ‘rocket science’ about the above. We all know and recognise it (it happens to us as customers and we hate it!)…yet many of us still work in management systems that think that sales incentives are a good idea.

An important clarification:

If you think that the bad practices described above are only carried out by a handful of ‘bad people’ then you don’t understand human psychology. In fact, the majority of people are having to play a ‘game of survival’ within their incentivised ‘meet target’ management regime and feeling pretty bad about it too…it certainly doesn’t meet their much talked about personal purposes. You’d have to be a pretty strong person to go against the system…and you might not last long in such an organisation if you do!

It’s not a case of ‘bad people’…it’s a case of ‘good people’ having to work in a ‘bad system’….which brings to mind Deming’s quote:

“A bad system will beat a good person every time.”

To close: Going back to our car salesmen opening, most dealers assume that they won’t shift cars without sales incentives. John Seddon, in his latest book ‘The Whitehall Effect’, refers to a Canadian auto dealership client that:

  • studied their system;
  • revealed the tricks used by the salespeople to make sales and gain the incentives; and then
  • understood the resultant negative impacts on the customer.

They removed sales incentives, set out a customer brochure describing all the industry sales tricks and promised that none applied here. Salespeople now co-operate with each other, customer trust improved, sales went up and long term customer relationships were forged.