A Process Of On-Going Improvement (POOGI) - Part 34

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

“Incentives Work, Don’t They?”

Dr. Lisa: “Brad, ever since I’ve known you, you have been interested in the effectiveness of incentives. Tell me why.”

Brad: “It started when I bought my label printing business back in 1991. I wanted to gain the collaboration of my employees. Like many businesses, we had productivity, delivery, and quality issues. Like many owners, I wasn’t at all sure how to manage well enough to get the results I wanted. So, I thought incentives might help motivate employees to do what I didn’t know how to ask them to do. I thought incentives would motivate them to work it through on their own. At the least, I wanted to have employees who wanted what was best for the company. On the other hand, I was very afraid of having unhappy employees.”

Dr. Lisa: “Did it work?”

Brad: “Not so much. Our PDQ (Productivity, Delivery, and Quality incentive) did clarify the company operating goals for our employees. Our incentive plan initially was measured and paid monthly, but that seemed to be too long to affect behavior. When we went to weekly measurement and payouts, we had good weeks that resulted in incentive payments, followed by bad weeks without incentives. Rather than being perceived as a benefit, it seemed that incentives were considered an entitlement. When they weren’t paid, it seemed that some of the employees blamed me.”

Dr. Lisa: “What did you do about that?”

Brad: “The best approach I found was a cumulative year-to-date expectation level compared to year-to-date performance weekly. Any incentive was paid weekly, which was meaningful to employees who told me just to pay them as much as possible every week. I never found that incentives really incented a difference in performance. How we managed the business set up the performance of the company, good or bad. Good employees were good employees whether they were paid an incentive or not.”

Dr. Lisa: “Aubrey Daniels claimed, in his book Bringing Out the Best in People, that most incentive systems are considered by employees as Negative, and based on Future results that are inherently Uncertain. Rather, effective incentives must be Positive, Immediate, and Certain. And they rarely are. At the big companies I’ve work for, the annual bonus seemed very detached from my work.”

Brad: “When I asked him back in 1998, Dr. Eli Goldratt, father of the Theory of Constraints, suggested an annual incentive paid equally to all employees. The pot would be the annual increase in total net profit. Each year the baseline would reset. The reward could be substantial for everyone and anyone that collaborated to achieve the improvement. He referred to a chair manufacturer in Texas as a big success story.”

Dr. Lisa: “Yes, BUT. That doesn’t meet the test for being Immediate and Certain.”

Dr. Lisa: “Eli’s suggested approach has been further developed into what is referred to as the ‘POOGI Bonus’ in a TOC book called Management Dynamics by John Caspari. POOGI stands for Process of Ongoing Improvement. Basically a pot is built up over time and dispensed over time. So that makes it a little more immediate, and if a positive pot is built up, more certain.”

Brad: “When I joined a Vistage (TEC International back then) CEO group in 2003, I immediately put the question of incentives to the other business owners in my group. None had found a really effective plan. I was particularly troubled then because I had just read a book Punished By Rewards that claimed incentives were in fact detrimental. That challenged me because it called into question the very concept of incentives. The author, Alfie Kohn, claimed that the evidence confirmed that people’s interest in what they are doing declines when they are rewarded for doing it. He said Gold Stars, Incentive Plans, A’s, and even praise are ‘Bribes’.”

Dr. Lisa: “How about Open Book Management? That’s been popular.”

Brad: “Yeah, I tried that for a few years, too. My experience is that owners are owners and employees are employees, and education added to incentives still leaves a gap. I call Open Book Management a solution looking for a problem. I was the only one left to dig deep whenever I had a problem meeting payroll. By the way, do you know how difficult it is to transition away from incentive plans? It’s almost as bad as stopping a culture addicted to overtime.”

Dr. Lisa: “So, what do you think, are incentives effective or ineffective?”

Brad: “Ineffective, because finally I found someone that had thought the problem through. Elliott Jacques spent his life researching organizations. He found that the key to determining a person’s performance potential actually is his or her ‘time span of discretion’. That is, how far ahead does someone think? 80% of the population is under a month, and half of those under a week. Only 7% of the population was over a month, and 13% are unemployable, institutionalized, or incarcerated. The correlation between time span and what a person expects as ‘fair felt pay’ was over 90%, and the curve was stable across currencies, cultures, continents, and time.”

Dr. Lisa: “In Requisite Organization, Elliott claims that the basic contract between an employer and employee is for their ‘Best Work’. He further claims that an incentive undermines that. It causes confusion. If instead of the employer expecting and the employee providing Best Work, the employee now is supposed to provide less than best work without an incentive and best work for an incentive.”

Brad: “Jacques did say the exception was some select individuals in sales. The solution was to make them 1099 independent contractors rather than W2 employees.”

Dr. Lisa: “With TOC, we concentrate on measures, not incentives. Policies, Procedures, and Measures drive behavior.”

Brad: “Yes, and I’ve found measures to be much simpler to implement and manage with. Measures are effective and incentives have too many negative side effects. Having a few measures is also consistent with the goal of having secure and satisfied employees. Pay them well, and expect reliable and effective performance. Measures are an immediate feedback mechanism.”

...to be continued.



Here's to maximizing YOUR profits!

Dr Lisa Lang

(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 33

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

If we can compute the impact of any action using T, I, and OE, which are global measures (and part of Throughput Accounting), then we can compute the bottom line financial impact quite easily:
· Throughput minus Operating Expense equals Net Profit (T-OE=NP).
· Throughput divided by Operating Expense is Productivity (T/OE=Productivity).
· Net Profit divided by Inventory is Return on Investment (NP/I=ROI).

We recommend measuring frequently enough to continuously improve. To improve, the causes of the effects must be managed:
· Sales Dollar Days and Inventory Dollar Days should be measured daily.
· Sales, Throughput, Operating Expense, Productivity, and Return on Investment each should be measured daily, weekly, and cumulatively month-to-date and year-to-date. It’s also helpful to track each with a 13 week and/or 12 month trailing average graphically.

For additional reading on measurements, reread “The Goal” and “The Haystack Syndrome” by Dr. Goldratt. And feel free to contact us if you have questions about measurements in your organization.

We’ll discuss why incentive systems don’t work as well as measurements in an upcoming post.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 32

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

To make managing a complex organization easier, we break organizations into pieces. Many of the current measurements have the purpose of measuring local performance, under the erroneous assumption that the overall performance of the organization will be maximized if each department maximizes its performance.

The role of measurements is to induce the parts to do what’s good for the organization as a whole. What’s good for the organization as a whole is achieving the three objectives stated above.

In previous articles, we’ve referred to some of the measurements used by TOC practitioners:

• Throughput (T) is rate at which the system generates money through sales.
• Inventory (I) is the money invested in purchasing things which it intends to sell.
• Operating Expense (OE) is the money the system spends to turn Inventory into Throughput.

To determine Throughput, subtract truly variable costs (TVC) from Sales dollars. Truly variable costs include raw materials, outsourcing, freight, and sales commission. Throughput is most similar to Gross Profit, except that direct labor is considered an Operating Expense in Theory of Constraints (TOC). It’s not that direct labor does not vary, but it is a period expense and does not necessarily need to vary with sales. Dramatic improvements in Net Profit can be gained when Throughput increases without a proportionate increase in Operating Expense.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 31

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Dr. Goldratt proposed that there are just two categories of things that can go wrong. One he calls unreliability and the other ineffectiveness. These two things account for everything, and have no overlap.

Unreliability is not doing things that need to be done. Ineffectiveness is doing things that did not need to be done, but were nevertheless. Stop and think about it, and you’ll realize that ineffectiveness is the major cause of unreliability.

Unreliability is not meeting promises. It is often currently verbalized and measured as “due date performance”. In TOC, in order to measure the duration of lateness as well as the dollar magnitude, we multiply the days an order is late by dollar value of an order (and sum for all orders) to get total “Sales Dollar Days”. A lower number is better, with the objective of achieving and maintaining zero sales dollar days every day.

Ineffectiveness is doing things too early, or that didn’t need to be done. In physical terms, it is work-in-process, or inventory. In TOC, in order to measure the duration of time inventory has accumulated as well as the dollar magnitude, we multiply the days inventory of a part has existed times the dollar value for each part (and sum for all parts) to get total “Inventory Dollar Days”. Again, a lower number is better, but zero is not attainable, so the objective is to continuously improve.

Many of the current measurements used in organizations have the intent of controlling costs. In previous articles, we’ve proposed Throughput Accounting as the preferred alternative to Cost Accounting.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.