Weighting rewards is a balancing act. Employers focused on the critical path will want to tie more rewards to value-added outcomes and less to effort inputs and throughputs. The company’s survival and success are totally dependent on those value-added outcomes. These companies would rather give minimal pay for individual effort and make most compensation contingent on outcomes.
It seems many workers have high security needs because they have families that need supporting and debts that have to be paid. Thus, they want the majority of their compensation based on input and throughput effort, with a small portion dedicated to output results. Most want only a miniscule portion, if any, assigned to value-added outcomes. Their rationale is that they have the most control over their inputs and throughputs, while output results are never guaranteed. So, they don’t want to bet their livelihood on them.
Let’s return to the example of Grace from Chapter 32, tasked with developing a better ovarian-cancer drug. Grace might say that most science research ends in failure and most new drugs never make it to market. So the odds are against her ever seeing any rewards for output results. As for value-added outcomes, even if Grace does develop an FDA-approved drug to treat ovarian cancer, she believes she has almost no influence on how it will do in the marketplace. For that, she will be at the mercy of the company pricing it correctly, sales doing their job well, and insurance companies being willing to include it in their reimbursement schedules. From Grace’s point of view, why risk her income on such uncertain probabilities?
The example of Grace highlights the need for each organization and each worker to determine and negotiate what percent of their total rewards should be allocated to the effort, results, or value-added outcome columns. Similarly, the organization and employee need to reach agreement on how much to apportion to the individual, team and organizational levels.
Consider these guidelines:
The reward weighting system should direct everyone’s attention to the critical path and incentivize their performance to make it better, shorter, faster, smarter, more effective, and more profitable. Create direct links between critical path results/outcomes and the rewards.
Tie rewards primarily to what an employee can affect and impact. A coal miner can influence or control how much coal she or her team produces each day. She cannot control the spot price for coal on the open market, which depends on demand and supply factors. So, tying rewards primarily to production and to the company’s profits makes sense. Tying directly to the fluctuating market price probably does not.
Timing is important. Give rewards as soon as possible after the achievement of the result and outcome to reinforce the link. If you wait too long, the reward’s power diminishes, since other things happen in the interim.
Companies cannot ignore employees’ security needs. People desire to earn a certain standard of living based on their effort inputs and throughputs. Without that, many become anxious and channel that anxiety into trying to game the system. Some university professors do the absolute minimum—use the same notes and slides year after year, do not hold office hours, and do not show up for any committee meetings—all because they believe they are underpaid. They have no incentive to work harder, create new lesson plans, or do additional administrative work.
The benefits gained by reducing rewards tied to individual effort must be substantially higher than what is being given up. For every dollar that is no longer tied to individual effort, the potential gain for achieving certain results/outcomes must be high enough to make the risk worth it to the employee.
Don’t put people in an “out of the money” position. One company set individual and team productivity targets in the factory for the month. If you and/or your team produced above the target every day for a month, you and/or the team received a sizeable bonus. If you or the team fell below the target on any day, then you were out of the running for the bonus. But the company found that when an employee or team fell below the target on a given day, their productivity generally fell below the target every day for the remainder of the month, since there was no reward available. Those teams and individuals were “out of the money,” and felt no incentive to hit the targets. The overall productivity for the factory actually went down as a result of this plan. Good advice? Don’t tie it to the calendar month. Instead, if they perform below target, let them start a new “month” the very next day and begin working toward hitting their targets for the designated number of consecutive days. Individual, team, and factory productivity went up as a result.
The organization should not employ any maximum limit or reducing scale on how much any individual (or team) can make. For example, if employees receive a 10% commission for every successful outcome, e.g., a sale, then it should be paid out for every sale regardless of the number. Some greedy companies cap how much an employee can make, or reduce the commission from 10% to 8% to 4%, etc., as the number of outcomes increases. These methods might save companies money in the short term, but they undercut tomorrow’s critical path.
Here’s a great example. When Ross Perot worked for IBM, he exceeded his annual sales target in the first quarter and reached a salary cap for the year. Although he could sell more computers, he could not make any more money. Instead of selling, he spent the next nine months working on his business plan to start EDS, the first outsourcing firm, which he launched later that year. It became a multi-million-dollar business, eventually being sold to General Motors for $2.5 billion.
The result outputs and value-added outcomes can be challenging, but also must be realistic and achievable. If there is no way that you are going to overtake the market leader this year, then don’t make any rewards contingent on it.
When value-added outcomes are achieved, the organization needs to share the benefits more generously. If the organization gains considerably, then all workers should receive equivalent gains, not just top management and the shareholders.
How people complete the framework matrix tells you much about their risk/reward profile and/or their view of the organization’s probability of success along the critical path.
Now let’s take a look back at the 90% - 10% example in the previous lesson. If it were to be completed by Grace, our pharmaceutical R&D scientist, we could conjecture that she would not have much faith in her or the organization’s ability to achieve value-added outcomes. So, she would make a very conservative gamble by linking her rewards primarily to her individual effort, reducing the risks of the drug not gaining FDA approval or doing poorly in the marketplace.
However, if the 90% - 10% example is what the pharmaceutical company is proposing to Grace, there are two likely explanations. Either the company believes very strongly in Grace’s performance and expects it will be able to profit handsomely from her work—and keep the bulk of the profits.
Or, the company totally misunderstands how to reward employees to motivate them to produce value-added outcomes.
If the company’s executives were thinking along the critical path, they would encourage Grace to share the risks and rewards of her work. Yes, they would acknowledge that the odds against marketplace success are high, which is why Grace might not want the bulk of her family’s livelihood tied to it. But, they would indicate to Grace that they are investing in her because they think she can beat the odds. As a sign of good faith, they would give her considerable rewards for the output of a drug that meets all the criteria, as well as a substantial part of the profit from any value-added outcome in the actual marketplace.
Critical Path Action Items
How does your company weight its rewards to both succeed on the critical path and respond to employees’ self-interest?
Which of the reward guidelines above does your organization include or exclude from its compensation plan?