Obedience to authority

LearnerWhat if we set up an experiment to test how human subjects (and therefore we) respond to ‘authority’ ordering them to break their moral code?

What if this experiment went so far as to order the (effective) killing of another human?!

…and, of immense importance, what do we learn from this?

Some of you may be guessing where this is going: This post is about Professor Stanley Milgram’s infamous1 experiments at Yale University (1960 – 63) in which he wanted to test our obedience in the face of orders from an accepted authority that defy our conscience.

My intent in this post is to clearly set out a hugely significant point such that this can be subsequently built upon (by you in pondering what it means in application to your world, and by me in likely future posts).

The grounds for Milgram’s research were the Nuremburg trials, and the consistent defence from those ‘in the dock’ that they were “following orders” which, to most of us, invokes judgement of amoral and/or cowardly people offering excuses, and fills us with disgust.

But this begs the hugely uncomfortable question: ‘So, given the same orders, would you be any different?’ The answer might ‘shock’ you.

I came across Milgram’s psychology experiments many years ago and was fascinated by them…but it was only recently that I read his book (first published in 1974) that vividly chronicles exactly how the experiment (and its various permutations) was created, carried out, de-briefed and concluded upon…and it is one of the most thought provoking books I’ve ever read.

(Note: The experiment has been reproduced many times – across cultures, genders and in modern times – with comparable results)

The Experiment explained

Now, for those of you who don’t know (much) about the experiment, here are the basics

  • An advertisement was placed in the local newspaper asking for people from all walks of life to take part in a study of memory and learning by the psychology department at Yale University. Volunteers would be paid $4 for one hour of participation. It made clear that no special experience was needed, and there would be no further obligations once the study had been performed.

  • Many people came forward. The researchers considered ages, educational levels and occupations to balance participation across all the permutations of the experiment that they would carry out. Over 600 volunteers were used. Each was sent an exclusive allotted time to attend.

  • The experiments were conducted in a laboratory of Yale University so as to make it appear legitimate. As in many psychology experiments on humans, it required confederates* to act certain roles and thus make the volunteer (the person who is unwittingly the subject of the experiment) to believe that they are part of what appears to be something else all together.

* Confederate: An actor who participates in a psychological experiment pretending to be a subject but in actuality working for the researcher.

Here’s how the experiment works:

  • Two people turn up for the experiment at the laboratory as per their invite and are greeted by an experimenter. He is dressed in a grey technician’s coat and will ‘run’ the memory and learning experiment, explaining what is taking place, setting it up and controlling it.

  • The experimenter explains that the study is concerned with better understanding the effect of punishment on learning and, in particular, whether people learn things correctly by being punished for making a mistake (such as smacking a child).

  • TeacherUp-front explanation: The experimenter (E) explains that there are two roles: learner (L) and teacher (T).
    • The teacher will read a set of four word pairs to the learner, and then ask the learner to remember a correct pairing;
    • The learner is to indicate the correct answer by pressing one of four switches;
    • Whenever the learning makes an error, the teacher will administer an electric shock, starting at 15 volts.

  • Role selection: The experimenter asks the two people for any preferences as to which role they take and then suggests they draw for it. In fact, one of the men is an actor (i.e. working with the experimenter) and the draw is rigged so that he is always the learner. Thus, we have set up our one true volunteer (the subject of the study) into the role of teacher.

  • Taking up positions: the learner (our actor – and soon to be ‘victim’) is taken into a side room, strapped into a chair and an electrode is attached to his wrist. The strapping is explained as to prevent excessive movement whilst being shocked”. The experimenter makes sure that the teacher is present and assists (i.e. knows exactly what is happening).

The experimenter and teacher return to sit in designated seats in the main laboratory next door, ready to begin.


  • shock generatorShock generator: On the teacher’s desk is a large piece of apparatus. It has a line of thirty switches, labelled as ranging from 15 to 450 volts, in 15 volt increments. There is also a written scale underneath the switches starting at the left with ‘slight shock’, through ‘moderate’, ‘strong’, ‘very strong’, ‘intense’, ‘extreme intensity’, ‘danger – severe’, and finishing at the 450 volts end simply with ‘XXX’. The experimenter provides the teacher with a sample shock using the 3rd switch (45 volts), making the volunteer strongly believe in the authenticity of the generator through an “owch”!

  • Instructions: The teacher is provided with the memory exercise questions to read out and told to administer a shock to the learner each time he gives a wrong response. The key bit – the teacher is instructed to move one switch higher on the shock generator each time the learner gives a wrong answer and to announce the voltage level to the learner just before applying it.

  • Victim feedback: So, firstly, you’ve probably guessed it by now – our victim isn’t actually going to receive the electric shocks but the teacher (our subject) most definitely believes that he is! Instead, a tape recording has been made of our victim acting out highly believable responses to being shocked, and this is played to the teacher at the appropriate moments.
    • The victim’s responses start with little grunts, rising to shouts of pain.
    • At the 150 volt level, the victim cries out that he doesn’t want to be a part of the experiment anymore.
    • His responses escalate, repetitively asking to be let out such that, by 270 volts, it is an agonising scream.
    • At 300 volts, he refuses to provide any more answers (see below for how this is dealt with).
    • His screams and protests reach a peak and then, from 330 volts, no further noise is heard – utter silence.

  • Experimenter feedback: As you would expect, our subject (the teacher), on hearing the victim’s worsening feedback, is going to increasingly turn to the experimenter for guidance…and, as for our victim, the experimenter’s responses to the teacher are scripted.

They start simply with “please go on” through an increasing sequence of “the experiment requires that you continue”, then “it is absolutely essential that you continue” and then “you have no other choice, you must go on”.

  • Three other specific pieces of feedback are scripted:
    • whenever the teacher asks or protests about the victim being hurt then the experimenter is to respond “Although the shocks may be painful, there is no permanent tissue damage so please go on”;
    • whenever the teacher asks about what to do when the learner doesn’t want to go on, then the experimenter’s response is “Whether the learner likes it or not, you must go on until he has learned all the word pairs correctly”;
    • and, finally, if the teacher asks about what to do when the learner doesn’t reply, then the experimenter’s response is to advise the teacher to allow the learner 5 to 10 seconds and take no response as a wrong answer (i.e. carry on up the shock scale) and continue on to the next question.

Of note: The experimenter uses no force, or threat of force, or threat of any form of retribution for disobedience. He merely uses his position of authority.


What was expected?

So, the true question that the researchers wanted to study: At what point (i.e. level of volts) will the teacher disobey the experimenter and refuse to continue delivering electric shocks?

Milgram did a rather cool thing – he staged a lecture on the topic of ‘obedience to authority’ and invited three different groups of people to attend: middle-class2 adults, college students and psychiatrists. He explained the experiment in detail to his audience without disclosing the results in any way.

shock control panelHe provided each person in his audience with a diagram of the shock generator and asked them to reflect on the experiment as just explained to them, and privately record how they believed they would personally perform if they had been the ‘teacher’ subject i.e. mark at what point on the scale they would disobey the experimenter. He then gathered in their responses.

I guess it’s no surprise that not one single audience member (whether middle-class adult, college student or psychiatrist) said that they would administer the 450 volt shock i.e. they all predicted defiance on their part.

Some indicated that they wouldn’t deliver any shocks at all, and a very few indicated that they would disobey at the 300 volt level, with the rest of the audience falling somewhere in between. The mean predicted ‘point of disobeying’ for the middle-class adults, college students and psychiatrists in the audience was 120 volts, 135 volts and 135 volts respectively i.e. no real difference in their thinking.

Further, Milgram realised that people like to see themselves in a favourable light and therefore the above predictions from the audience could have a vanity bias. He therefore asked the psychiatrists a different question: how do you predict other people would perform? They predicted that most subjects would not go beyond 150 volts and that about one in a thousand (i.e. someone with a psychological disorder) would administer the full 450 volt shock level.

Milgram explains that if the actual results were statistically different to these predictions then there is something very important going on that we should want to study and understand.

So, what actually happened?

Well, the results of the experiment were nothing like people’s predictions, and surprised the researchers!

For the basic version of the experiment (as explained above), 65% of subjects (the teachers) delivered the maximum (i.e. lethal) 450 volt shock to the victim and, of the minority that disobeyed, it took until the 300 volt level before the first one did so. Now that’s troubling! It’s important to note that there was a great deal of stress feedback exhibited by the teachers (i.e. it wasn’t a scene of happy compliance)…but, significantly, this didn’t prevent them from continuing.

If you’d like to get a really good feel for what all of that actually looks like, and understand some of the emotions involved, then here’s a very good ten minute YouTube showing the British “mentalist and illusionist’ Derren Brown accurately re-performing the experiment with unsuspecting people for one of his TV programs4. If you’ve read this far (!) then it really is worth watching.

What’s going on?

Milgram went on to create 17 variations to the experiment, to find out more and his analysis is highly significant. I hope to write some further posts that explore the reasoning, and its application to our world at work.

A basic conclusion for now:

“The social psychology of this century reveals a major lesson: Often it is not so much the kind of person a man is as the kind of situation in which he finds himself that determines how he will act.” (Stanley Milgram)

Notes

  1. The experiment was infamous because it was criticised at the time as being unethical. You should know that every volunteer was thoroughly debriefed afterwards and was followed up later by way of interviews and the sharing of the outcomes.
  1. It seems a bit weird writing ‘middle-class’ but this was Milgram’s categorisation back in the 60’s. Perhaps wording from another age? (or perhaps not?)
  1. Recommendation: So I’ve gone into a fair bit of detail in the above so that you appreciate the experiment…but I’d still thoroughly recommend the book ‘Obedience to Authority’ by Stanley Milgram.
  1. The final comment from the last subject on the YouTube clip (about making ‘more notches on the machine’) is quite amazing!
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Laugh…or scream!!!

screamerSo I was passed a ‘McKinsey Quarterly’* article today by a good colleague of mine. It was titled ‘Ahead of the curve: the future of performance management’.

(*For those of you who haven’t heard of them, McKinsey is a large, well established global firm of Management Consultants)

Reading it made me want to laugh and scream in equal measure!

The glossy journal starts by referring to the “worst kept secrets” in respect of the traditional performance management process i.e. the well known issues with the process that virtually all organisations grapple with.

It then goes on to suggest a number of ‘aha’ insights and then ideas as to what to do about it.

Humble pie please…even a small slice?

humble pieI find it ironic when any consultancy writes such a piece in a style that (in my view):

  • suggests that it is bringing the ‘world of management’ something new and amazing (in a “listen to us, we know what we are talking about!” way);
  • …and yet completely side-steps* that it has likely made huge $$$ out of decades of pushing and propping up the exact thing that they now seemingly criticise;
  • …dressing up what it sets out as ‘key insights’ as apparently new findings, whilst ignoring that these have been championed by ‘giant’ voices all along (McGregor, Herzberg, Deming, Kohn, Scholtes, Seddon, …and on and on); [I seem to be repeating myself! – perhaps this McKinsey article is just late to the ‘performance management is dead’ party?]
  • …and even then, the narrative misses the ‘fundamental point’. It isn’t the people that we should be rating – it is the capability of the systems that they work within (see below).

* Big consultancies have ridden the ‘cascaded objectivesperformance managementincentives’ band-wagon for years. We should be suitably cautious when considering what they now have to say.

I’m all for learning and growth, but I’d like some modest acknowledgment when the supposed teacher is attempting to lecture on something that appears to go against their previous decades of ‘wise counsel’.

“Answers are emerging”

The McKinsey authors declare in their article that “answers are emerging” in respect of how to change the performance management process, and then go on to talk about what some organisations are experimenting with (including the likes of GE, Microsoft, Neflix).

Now, I’m fine with exploring what others are doing, why and what their outcomes are, but why are these labelled as ‘answers’? Just because someone is doing something doesn’t make it an ‘answer’. There will be other organisations doing the opposite.

The basic problem (for me) with the McKinsey article is that it isn’t built around any fundamental consideration of:

  • What a system is, and why this matters;
  • What effects system conditions will have on people (and their supposed performance within that system);
    • in particular the effects of ‘command and control’ management
  • Why the system is far more than the sum of the parts and so it isn’t about individuals, but about the amazing and often unexpected outcomes that arise when unique individuals collaborate across value streams.

Looking at what other supposedly good and successful organisations have done doesn’t provide ‘answers’ (though it might provide ideas to experiment with for yourselves)

Beware the narrative fallacy: “Turning a sequence of events into a story in an attempt to explain the outcome…this is arguably how methodologies are born.” (‘The Lean Enterprise’ referring to Nasim Taleb’s definition).

Correlation does not equal causation. After all, if we looked at successful organisations a decade ago, we might easily construct an ‘answer’ based around performance management and incentives i.e. the exact opposite.

Things that I agree with

It’s not that I dislike what Google, Microsoft and many others are doing. I like a lot of what I hear about. However, I often don’t like how IT organisations, consultancies and what I perceive as their ‘industry bodies’ (e.g. Gartner, Forrester) write about it.

The McKinsey article includes references to the following highly agreeable points:

  • Severing the link between evaluation and compensation, though it doesn’t really explain the clear logic as to why;
  • Moving to frequent informal ‘on the job’ feedback discussions and a coaching style of management, though:
    • it doesn’t consider that those currently in the management hierarchy likely got there using ‘hero management’ and require the necessary skills to coach; and
    • it implies that coaching is about the manager providing feedback and focus (i.e. knowing the answer and imparting this knowledge to the worker). This is NOT coaching – coaching is helping the worker through their own problem solving ‘at the gemba’, not (as Mike Rother often jokes) getting them to successfully “guess what’s in your head”.
  • ‘Finding meaning in your work’ is what people want most* without making any comment of the Management Consulting industry’s role since the 1950’s in moving organisations towards ‘management by the numbers’ and economies of scale specialisation, centralisation, outsourcing, automation…in short: destroying the meaning of work!

(* I must admit to muttering a loud “no sh1t Sherlock!” when I read the bit in the McKinsey article that draws on ‘recent research’ that comes to this unsurprising conclusion)

‘Collecting data on people’

The article turns to “getting data that matters”, where this refers to collecting data about individuals and their ‘performance’. And so it turns to using technology to assist. It puts forward tools that people can use to automate the collection of real-time data on their colleagues, suggesting that this will “free up time and make the information “more credible”.

Aaaargh!

McKinsey app piccieI hope McKinsey won’t mind me reproducing here the‘exhibit’ within their article (McKinsey: if you do then please let me know – I’ll remove it and let the readers know this)

I have a picture in my head of the attendees at every presentation, project meeting, workshop etc. with their heads down, teenager-like, constantly using an ‘app’ to rate aspects of the facilitator’s performance as they arise.

Further, I can almost feel the dysfunctional behaviours occurring: People becoming incredibly careful about what they do and say, so as to get a ‘good score’…and avoid a bad one. It will turn us into performing monkeys, all trying to ‘play it safe’!

Facilitators need to retain the ability to professionally say things that make people uncomfortable, to question the status quo, to challenge conventional thinking…and not fear being immediately marked down for it.

Sod the facilitator’s supposed ‘performance’…I’d rather attendees looked up and collaboratively engaged with what he or she is saying!

“But they are engaging with you Steve, they’re busy rating you and providing valuable feedback 🙂It’s not the facilitator that needs rating, it’s the system that ‘we’ (the facilitator and audience) are trying to improve!

Now, before anyone thinks otherwise, of course I want valid feedback so that I can improve…but I want to work in an environment in which everyone is relaxed and comfortable with each other, and therefore such feedback is naturally volunteered, in a 2-way conversation. I find it funny that we, as society, often lament ‘the youth of today’ seemingly not able to interact with each other…and yet here’s the wider IT industry (the hungry Great White shark) trying to sell us down the same path.

If you want an example of what technology has done to us, look at email…we used to pick up the phone, even walk to people’s desks!!!

Of course technology may assist…but let’s not set this up as ‘the answer’. Let’s ONLY pull it towards us once we understand the underlying problem(s) and work out what we need to do about it.

“Ahead of the curve”

Near the end of the article, the authors eulogise that: “Companies in high-performing sectors, such as technology, finance and media, are ahead of the curve in adapting to the future…it’s no surprise that organisations in these sectors are pioneering the transformation of performance management. More companies will need to follow – quickly. They need to shed old models…and liberate large parts of the workforce…”

This made me belly laugh!

  • What about all those Japanese organisations (from Toyota onwards)?
  • What about all those American and European manufacturers that learned from Deming and Toyota?
  • What about all the Scandinavian organisations (like Handelsbanken) that have been thinking this way for decades?
  • What about the ‘Beyond Budgeting’ round table?
  • What about all those public-sector and health organisations that are embracing Lean Thinking and/ or the Vanguard Method?
  • …and likely many many more groups you could name.

Hardly “ahead of the curve”…more like laggards! It is arguably the likes of GE and Microsoft (often in the service sector and/or often American-centric) playing catch-up in spite of what those big consultancies (and many an MBA programme) have been peddling towards them for all these years.

…and how does the ‘article’ end?

The McKinsey article states that “It’s time to explore tools to crowd source a rich fact base of performance observations.”

Yep, that’s right folks, it would appear to be simply another case of an ‘expert’ consultancy dressing something up to create their next implementation revenue stream.

Let’s not ‘explore tools’. Let’s get rid of ideologies and, instead, get to the theory underneath…and then experiment with a new management system.

Let’s move:

  • from management attempting to control, judge and bribe their people (with whatever the current cool methods and ‘tools’ happen to be);
  • to management working with their people to study, understand, and change the system that (together) they work within and then sharing the results.

To quote Deming:

“95% of the reasons for failure to meet customer expectations are related to deficiencies in the system…rather than the employee…

…the role of management is to change the system rather than badgering individuals to do better.”

…now you understand why I didn’t know whether to laugh or scream. You’ve probably guessed that, on balance, I’m screaming.

To McKinsey: In the seemingly unlikely event that you are reading this:

  • I know that you are no different to all the others (I’m not singling you out); and
  • I recognise that you are a business trying to earn money (and that you aim to do this ethically)

…but I hope that you have the good grace to ponder on my thoughts.

 

“Dad…what do you do at work?”

what do you doSo I had a fabulous conversation with one of my (excellent) colleagues. Let’s call him (or her 🙂 ) ‘Bob’.

His 10 year old son keeps on asking him what he does at work…and Bob keeps on trying to explain!

Just as an aside: For those of you that work in the ‘improvement’ arena (sorry, I know that’s a crap phrase), here’s an excellent comedy sketch showing a father/ son ‘what do you do?’ interaction on the rather painful subject of Six Sigma:

The ‘what does your dad do’ assignment (It’s 6 mins. long)

Now, Bob and I work in the role of ‘Business Consultant’ within a large organisation….or at least that’s what it says on our email signatures.

…and, given that we are trying to educate the organisation away from an ‘implementing tools and techniques’ mentality and towards a ‘change management’s thinking and behaviours’ world, the “what do you do?” question is perhaps even harder!

Here’s Bob’s first attempt at explaining what he does to his son:

Son: “So, Dad, what do you buy/ make/ solve/ ….[insert list of value-adding words that any citizen would recognise]?”

Bob: “Well son, I don’t do any of those things. I try to help people do those things better.”

Son: “So you tell them what to do!”

Bob: “Well, no, I try to help people work out for themselves how they could do things better.”

Son: “Nope, you’ve lost me there – still don’t understand what you do….”

Okay, so he didn’t buy that one, so here’s the following weeks’ conversation:

Son: “…so back to that question”

Bob: “Well, I am called in to help people solve what they perceive to be their problems but I try to get them to see root causes…but they don’t really like this because the root causes are usually outside their control and my advice won’t help them to meet their short term targets around silo’d business objectives.”

Son: “Erm, so they ask for your help…but they don’t like what you say?”

Hmmm, perhaps there’s an element of truth in that. Here’s the 3rd (and final) round between Bob and his son:

Son: “…so then what happens?”

Bob: “…so I try to get them to explore what is behind what I have explained/opened up to them…I try to get them to see (for themselves) the system conditions that are causing them to behave in the ways that they are.”

Son: “…Oh, so you just confuse and frustrate people?!”

And so where did that leave his son? Well, next time Bob heard his son verbalise his work role, here’s what came out:

My dad’s a ‘Business Insultant’

Brilliant!

Now, what’s even better is that I entered ‘Business Insultant’ into Google and, without expecting anything back, came up with an article explaining it as a specific term …which sort of fits with the above…and loosely fits with what I attempt to do/ be.

Who knew! (except Bob’s son of course).

 

‘Beyond Budgeting’: There is a better way!

BudgetSo this post is part 2 of a two-part piece in respect of budgeting.

Part 1 (The Great Budget God in the Sky) introduced the ideas that:

  • creating a detailed budget for the next year and then holding people to it is a very poor way to manage;
  • the budget is part of a wider ‘fixed performance contract’ that understandably causes budget holders and their teams to engage in a set of games that are hugely harmful to the system and its purpose;
  • but there is a better way…which will be discussed in (this) part 2.

If you can’t remember, or haven’t yet read, why part 1 came to these conclusions then please (re)read it…otherwise read on:

So what do you do instead of a budget?

So there’s a short, simple (and insufficient) answer, and then there’s the rest of what needs to be said.

In simple financial process terms, those organisations that no longer use budgets work with rolling forecasts instead. Here are a few explanatory quotes from successful practitioners:

“Rolling forecasts are updated quarterly and look five quarters ahead…and because [they] are separated from any form of performance evaluation and control*, we get far more accurate forecasts than was ever the case with the budgeting system.”

(* a necessary discussion point covered later in this post)

“…this approach has reduced dramatically the amount of time managers now spend in forecasting compared with the previous budgeting process.”

“Forecasts are used in conjunction with actual results to show trends for high level KPIs such as return on capital, profitability, volumes and so forth. These typically show the last eight quarter’s actual results and the next five quarters forecasts.” (i.e. they see, and understand variation rather than making binary comparisons)

“Rolling forecasts…place the CEO in a much stronger position to anticipate financial results.”

Right, so you’ve got the basic idea about rolling forecasts…but I started by stating that this was insufficient:

Necessary…but not sufficient!

Here’s a rather nice animation of a seven-levered lock:

lock mechanism animationI find it mesmerising! And it’s pretty cool seeing how it actually works 🙂

Using the lock as an analogy:

  • The lock is a system. Each of the seven levers (along with the key and accompanying barrel) is a component part;
  • You can uncover the existence of one lever, work out what position it needs to be in, and get this sorted (e.g. moving from budgets to rolling forecasts)…and yet the lock won’t open;
  • Further, the moving of this one lever into the ‘right’ position will very likely upset the positioning of all the other levers;
  • It is only when all of the necessary components work together that the lock opens;
  • Each component is necessary, but not sufficient.

…and so it is the same for any organisation’s stated desire for (what is often termed) ‘Operational Excellence’.

Clarification: The lock system as an analogy is obviously limited because it is a simple ‘digital’ system – it is either locked or unlocked, on or off, black or white, 0 or 1. This doesn’t represent the real world but it is still useful.

The ‘locked – unlocked’ states in my analogy are the difference between:

  • a command and control management system (that will likely be playing with a few levers in the hope of change but which hasn’t unlocked the underlying issues with its ideology); and
  • a truly devolved, adaptive and purpose-seeking system.

The lock is only truly open when all the necessary levers are working together.

What levers?!

Here’s a brief touch on them (with links to further discussions):

Levers1. System-level Clarity:

  • Of purpose: a meaningful ‘why’ for the organisation, and each of its value streams, from the perspective of the customer and society…where profit is an ongoing result, not an excuse;
  • Of philosophy: i.e. how to get there (which incorporates the other four levers)

…where this clarity is instead of, not as well as, a ‘management has the answer for you’ plan.

2. Transparency:

  • Fast, frequent, unadulterated, open-to-all and useful information feedback on what your value streams are achieving over time and if/ how this is changing, NOT activity measures, targets, binary comparisons and management reports
  • Actual trends and rolling forecasts NOT budgets and variance analysis (as explained at the top of this post)

…meaning that the people who do the work gain constant feedback on the capability of their value stream(s) against customer purpose.

3. Front-line Control (Devolution):

  • Ownership of decisions and customers by the value creators: that’s the people working at the front line with the customer and their needs;
  • Freedom to explore, experiment, learn and act:

“Self-managed teams are far more productive than any other form of organising. There is a clear correlation between participation and productivity.” (Margaret Wheatley)

4. Management as Support (NOT control):

  • Provision of enabling technologies and expertise, NOT dictating what these shall be and how they shall be used;
  • Guidance, NOT rules;
  • Farmers, NOT heroes

…in short, value enablers instead of, not as well as, commanders and controllers.

5. Collective Accountability:

You may have noticed that I’ve put this in the centre of my fancy bubbles diagram. That’s because it will be a catalyst for everything else yet, without it, nothing great is likely to be achieved because individualism and extrinsic rewards will act as a highly effective brake.

…can you imagine if you and everyone around you were all truly harnessed together towards the same aim, and how this would change/ enhance your behaviour?!

With these five levers working together then you will get a ‘whole organisation’ that is very clear on what it is trying to achieve, that is laser-focused on their customers, that will constantly innovate and adapt, that is never satisfied with where it’s at, that wants to know who’s doing well (and why) and who’s not (and, importantly, how to help them).

It will also avoid the huge waste inherent within the fixed performance contract (with all the ‘budget setting, target tracking, performance appraising and contingent reward’ paraphernalia dismantled and replaced).

Revisiting those 10 games

In part 1 of this post I set out, and explained, a series of recognisable games that budget holders and their teams play.

However, if you are working on the set of levers explained above, you can expect to create a management system that reverses those games into highly desirable outcomes (for employees, customers and investors). Here are those opposites:

“Always aim to improve upon and beat the competition”

“Never let the team down and be the one that drains the profit-sharing pool”

“Always aim to know and care for customers”

“Always share knowledge and resources with other teams – they are our partners!”

“Never acquire more resources than you need”

“Always aim to challenge (and reduce) costs”

“Always have the ability to understand root causes”

“Always ‘tell it like it is’ and share bad news”

“Always do your best, never fudge the numbers”

“Always challenge conventional wisdom”

Wow, that would be a cool place to work!

‘Beyond Budgeting’: The movement

So, I might well hear you asking “who’s actually doing this mad-as-a-hatter stuff eh Steve?!!” and I would answer that there are loads and loads of organisations (large and small) all around the world who are somewhere along their journey.

If you want to read case studies then there are plenty of places to go to: There’s the Beyond Budgeting Organisation…but there’s also The Lean Enterprise Institute, Theory of Constraints Institute, Kaizen Institute, Vanguard Method …and on and on. Let’s not forget Toyota itself! It’s not about a methodology – the systemic thinking advocated by these different organisations isn’t contradictory.

And, whilst obviously they don’t all agree on exactly everything, they all point towards what has been called by some ‘Management 2.0’ – the realisation that the command and control management system is ‘the problem’ and advocating evolving to a new one (by humbly studying, experimenting and learning).

It’s not a recipe – it’s a philosophy

A recipe has a set of ingredients and related instructions as to how to combine them – it is something that is implemented (being repeatable and reproducible).

A (scientific) philosophy is a theory, based on sound evidence, that acts as a guiding principle for behaviour. It is a direction to follow, where the path is found through experimentation and learning.

This (or any other) post is not meant to prescribe what needs doing. Instead, this whole blog advocates a move away from command-and-control, and towards systemic thinking and adaptive progress towards a meaningful purpose through empowered (which must imply engaged) people.

Caveat: setting out a ‘philosophy’ is absolute twaddle if it isn’t actually believed in, understood and expertly, humbly and continuously practiced by those in leadership.

‘Lipstick on a pig’

lipstickWhat a great phrase! Putting lipstick, some earrings and a blonde wig on a pig doesn’t change what it is…even if you are doing so with good intentions! (Ewe, that’s a weird thought).

There are many organisations out there attempting to command-and-control their way to ‘Operational Excellence’ but this is an oxymoron.

There is a subtle, yet gargantuan, difference between an organisation fumbling (with best intent) with a few of the levers and one that understands the lock.

Note: All quotes, unless specifically stated, come from Hope and Fraser’s book ‘Beyond Budgeting’ (2003) and their associated case studies.  

The Great Budget God in the Sky!

Great truthsSo, I’ve always intensely disliked the ‘budget’ thing. Not the basic idea of thinking ahead, about what might happen, and attempting to do sensible things to cope with this – don’t worry, I’m not about to advocate ‘sticking your head in the sand’ – but the management belief that we can and should carry out a grand planning exercise (usually annually) in which we attempt to predict ‘what will be’ in great detail, and then watch for, and attempt to explain away, any and all deviations from it.

Utter madness…and I believe that, underneath it all, many (most?) of you will likely agree with me – yet we carry on worshipping at the altar of the ‘Great Budget God in the sky’.

So why do I dislike it so? I’ll start with the following quote:

“If you cannot know what your customers will want or your competitors will offer next year – or even who your customers or competitors will be – you cannot develop an effective plan for achieving targeted levels of sales and profits.” (Stephan Haeckel)

Creating a detailed budget for the next year and then holding people to it is nonsense. Now, you might respond with “yeah, it’s not perfect but it is useful.”  I would respond that it does more harm than good, and that there is a better way.

I’ll need to explain my response in 2 parts. This post (part 1) deals with the ‘doing more harm than good’ part. Watch out for ‘there is a better way’ in part 2.

The (painful) grand planning exercise:

Picture the Chief Financial Officer (CFO) at the end of the multi-month annual budget setting exercise sat in his/her executive suite with that warm, fuzzy feeling:  A glorious projected profit figure as the bottom line in a sexy spreadsheet before them, carved out of much toil and pain (and wasted activity). Quick, load it into the accounting system as the ‘baseline’ before it gets away!

So how did that glorious budget come about?

Each manager was likely sent a (really annoying) financial template to fill in that was devoid of operational reality…

…which, after many iterations and re-runs (“because the #@$! numbers won’t save properly!”), was then sent back to Finance and ‘rolled up’ into a single view of ‘exactly what is supposed to happen next year’…

…to which the CFO responded “oh no, THAT won’t do, fiddle with it some more until it says what I want to see”…

and his/her accounting subordinates oblige, ‘rolling down’ their well intentioned meddling back to the unsuspecting ‘budget holders’ to catch and deal with…

…which only becomes transparent to these managers a few months later (i.e. once the year is well under way in a “hey, where did these numbers come from? They’re not what I sent in!” kind a way) and, despite their protests, they can do nothing about because “sorry about that, but it’s ‘locked and loaded’ now”.

And so, the year is off and running. Finance send out the following memo (often weeks after the period close):

“Here are your variances (actual from budget) for Period X.  I need specific reasons (by which I really mean ‘believable stories’) for each deviation from budget and an action plan as to how you are going to get back on track…please provide by return and good luck!”

Each manager then spends hours deciphering the numbers in a desperate attempt to reconcile and ‘explain away’ the differences. And, unsurprisingly, this task becomes more bizarre the further the year progresses as the budget predictions become more divergent from reality.

So, what is a budget?

Here’s a narrow definition, relating to the output of a budgeting process: “An estimate of income and expenditure for a set period of time” (Oxford Dictionary) i.e. a financial plan, usually annual.

However, a budget doesn’t come out of thin air and isn’t for filing away once drawn up. We must see and consider the much broader definition that encompasses what a budget is for, and about i.e. The performance management process that leads to, and executes, a plan.” (Hope & Fraser, ‘Beyond Budgeting’)

This process involves “agreeing upon and co-coordinating targets, rewards, action plans, and resources for the year ahead, and then measuring and controlling performance against that agreement.” (Hope & Fraser)

This has, with good reason, been labelled as the “Fixed Performance Contract” because, once negotiated, it forms a contract between each level of management as to what is required for the year ahead. But such a contract is cumbersome, inflexible and (most obvious to all) gamed.

Command-and-control by another name:

Very early on in my blog writings, I linked the ‘cascade component level objectives – set targets – dangle incentives – judge performance – provide rewards’ as the core components of the command-and-control management system (I often verbally refer to them as the management instruments of torture)…but the budget word hasn’t come up to date.

So it was a nice surprise for me when I read Jeremy Hope and Robin Fraser’s highly regarded book called ‘Beyond Budgeting’ (2003) and found their ‘Fixed Performance Contract’ label. It encompasses much the same meaning/ thinking.

I have always disliked the budget game and seen it as related, but I hadn’t formulated it as being one and the same.

The games being played:

You might think that the fixed performance contract is necessary, and mainly benign…

…but walk your way through the following ‘fixed performance contract’ games that are understandably played by budget holders and their teams (as identified in, and with quotes from, ‘Beyond Budgeting’):

1. “Always negotiate the lowest targets and the highest rewards.” Each manager will attempt to ‘agree’ a target that is inwardly comfortable to them yet appears outwardly difficult to their supervisor.

2. “Always make the bonus, whatever it takes.” Any actions you can take are fair game if they help you reach your maximum bonus – even though they might stuff up another team elsewhere in the organisation (e.g. sell services that you know will likely lead to problems later down the line)

3. “Never put customer care above sales targets.” Everyone wants to satisfy customers… but that’s not how they are rewarded. Let’s ‘persuade’ customers to buy what we want them to.

4. “Never share knowledge or resources with other teams – they are the enemy!” The main competition is not the external market, but every other team who are all trying to obtain a higher share of the central resource pool than you!

5. “Always ask for more resources than you need, expecting to be cut back to what you actually need.” This is simply anticipating the negotiation process that you know will occur….and this can only get worse as time goes by through bluff and double-bluff.

6. “Always spend what’s in the budget.” If you don’t use it, you will lose it because higher management will reason that “if you didn’t need it this month/year then you obviously won’t need it the next!”  Not spending your budget therefore becomes the act of a ‘nutter’ (being either mad or eccentric…or both!)

7. “Always have the ability to explain adverse variances.” Financial variances tell management nothing about real causes. All you need is a ‘believable story’ to get them off your trail…and you should learn to blame plausible causes beyond your control…of which there will always be some.

8. “Never provide accurate forecasts” Don’t share bad news (you will be berated for poor performance) whilst there’s still time in which your fortunes might miraculously reverse. Don’t share good news (you will be expected to sustain higher results going forward) whilst there’s still time for unwanted surprises that might wipe the slate clean. In short, tell your superior what he or she wants to hear.

9. “Always make the numbers, never beat them.” Manage the results: if you are doing better than budget, find some way of holding it back to feed in later in the year when needed.

10. “Never take risks.” If it’s not in the budget, why would you take the risk! No one is expecting it and if it doesn’t work out, your job might be on the line!

Now you might look at the set of games above and cry out that this is a grossly exaggerated picture…and, yes, if every person was playing every game all of the time, we surely wouldn’t have a business! At least not for long…and it would be a hellish place to work in the meantime.

But it’s worth considering that:

  • I have seen every one of these budgeting games being played at some point in my working life so far, many of them openly, repeatedly and regularly …how about you?
  • the vast majority of people are decent human beings and don’t want to play such games…and yet the fixed performance contract induces them (to some degree) to do so – this mental strain is a very unhealthy place for a human to find themselves.

So where do we go from here?

So I’ve written enough on the problem.

‘Part 2’ (coming soon to a blog stall near you) will set out a different philosophy and, by revisiting the budget games played, will show what this ‘new way’ enables.

…over and out for now.

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)

Profit sharing vs. Incentives

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.