A major lever to get people on the critical path is the reward system. But companies often waste the power of this lever by misaligning their rewards, which pushes people off the critical path.
Here’s an example about Eloise, who worked in the collections department of a company that produced encyclopedias. Back in the day, parents would buy a whole set of encyclopedias for their children to use in school. In those days, before Wikipedia and online encyclopedias, few privacy protection regulations existed. The sales people would go to schools in their territory to get the names and addresses of all the students entering first grade. They also visited hospitals to find the same information of all the newborns. They then went door-to-door of the names and addresses collected, pitching the value of encyclopedias for children’s educational development and upward mobility to stay-at-home moms. Often, they would give the first volume free in exchange for a signed commitment to buy the whole expensive set, usually on a monthly payment plan, over 24–36 months.
However, when the “bread winner” returned home from work, the couple would often realize that the investment was more than they wanted to take on. Or, they would make the first few payments and then stop when other, more pressing bills had to be paid. Or, they realized that they just didn’t need encyclopedias for their family.
The job of the encyclopedia company’s collections department was to get those people to honor their purchase. Since more customers stopped paying than continued to pay, the collections department was the major revenue source for the company. With the goal of increasing cash flow, the company rewarded their collectors based on how many customers they contacted each day. The reasoning was that the more calls made, the greater the eventual collections. The company tracked the number of customer calls each collection agent made each day, week, and month, and gave out bonuses and awards accordingly.
Within the collections department, Eloise made the fewest number of calls each day. Her boss pushed her to make more calls, telling her she was spending too much time with each individual call. “Cut to the chase,” he told her. “Play hardball. Be tougher with them. Tell them if they don’t pay, we’ll put a lien on her husband’s wages and ruin their credit scores. Then move on to the next call. It’s all about volume.”
However, while the company measured the number of calls, they only kept track of the department’s overall collections. When the company did eventually conduct a revenue analysis broken down by employee, they discovered that although Eloise made the fewest number of calls, she collected more money than anyone in the department—by a lot. Unlike the hardball approach, she talked to the customers mother-to-mother. She asked them what their hopes were for their children, what aspirations they had. She inquired whether the encyclopedias would help them achieve those aspirations. If yes, then what kind of payment plan made sense? She then suggested that the customer not make a decision now; instead, talk it over with her spouse, since any decisions have to work for the family. She then asked them to call her back tomorrow—which they usually did.
Eloise had the fewest number of calls because her approach was 180 degrees different from the department’s standard practice. She spent time getting to know her customers, not haranguing them. In essence, she was doing the customer-qualifying that the salespeople should have done so that only the right customers and good customers actually bought the set. Also, they were calling her back rather than her hounding them.
Although Eloise was the critical path star of the department, she was neither recognized nor rewarded as such. She never won any of the awards nor received any performance bonuses. She eventually quit.
Eloise’s experience underscores the lessons in Steve Kerr’s classic article, “On the Folly of Rewarding A, while Hoping for B.” He bemoaned reward systems that do not support the critical path. Most reward systems suffer the same problems as the performance evaluation systems that I discussed earlier. They focus on the wrong stuff. Too many organizations reward inputs, such as seniority or education, or, in Eloise’s case, sheer volume of phone calls, as proxies for outputs and outcomes, such as increased revenues, decreased costs, or actual collected dollars.
I was once part of a project for an underground mine looking at productivity and the stress levels of the miners. Mining is dangerous, dirty work all by itself. Doing it underground is even harder. The reality was the deeper the mine, the greater the physical and psychological stress experienced by the miners.
When the miners couldn’t take the pressure any more, they called in sick. Since the miners worked in teams, management assumed that missing team members lowered output accordingly and slowed down the mine’s productivity. To overcome this absenteeism problem, the mine started giving bonuses to miners who showed up for work for 20 consecutive work days, i.e., a whole month without an absence. They also wanted to dock the pay of those who missed work.
In our work, however, we discovered a counter-intuitive finding: the work teams with a team member regularly missing (but not every day of the week, and not the same person each time) had the highest productivity. Turns out that these teams understood the job pressure and that it was hard to do a good job for 20 straight days each month. So, they routinely gave each other “mental health” days. When a team member was missing, the remaining folks worked extra hard to make up for the missing team member, knowing that they would get their day when they needed it.
Instead of trying to fix their perceived absenteeism problem, the mining company should have focused on and REWARDED the miners’ productivity outputs. Instead, they ignored the outputs of the most productive mining teams. Like Eloise, the encyclopedia company’s star, these teams never received the recognition or rewards due to them.
Charlie Munger, Warren Buffett’s long-term investment partner and vice-chair of Berkshire Hathaway, underscores this problem in his famous collection of three speeches put together as The Psychology of Human Misjudgment. In it, he emphasizes the power of incentives to promote either the right or wrong behavior. For example, he cites Federal Express changing their incentive structure to improve the critical path.
“The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the customers if the night work shift can’t accomplish its assignment fast.
“Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And, finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.”
Federal Express, like the encyclopedia and mining companies, learned that identifying the outcomes you want is the important first step on the critical path. Then pay people for that outcome, not proxies that you think are associated with it. Turns out that when you want A, rewarding A works pretty well.
Critical Path Action Items
What are the major critical path outcomes for which the company pays employees? Does this drive the reward system?
What are your critical path outcomes for which the company should pay you?
What non-critical path activities does your company reward?
In Steve Kerr’s model, how does your company reward B, while hoping for A?