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.
