We weren’t surprised when our team Incentive system improved productivity, though it far exceeded expectations. And we weren’t surprised that a negative incentive for allowing defective goods to land in a customer’s hands improved quality. But we never expected the incentive system to lead to a new set of problems and challenges.
The first problem arrived early on. Of the six employees on the team, one was far superior to the others, and one was hopelessly inept and unable to keep up. Everyone was carrying the laggard, and the outstanding worker—by contributing more than the others—was receiving an insufficient share of the Reward.
We expected to encourage cooperation between employees under the assumption that teamwork as opposed to individual competition would promote efficiency. But we were aware that the team approach was inconsistent with our culture, in which individualism is paramount, reward goes to the winner, and mediocrity is often coddled.
We waited, hoping the team would deal with its own crisis. After a while, the social pressure on the poor performer led to his departure. Because the fewer the members of a team, the greater the reward per member, the remaining members asked that he not be replaced. This worked only to a point. Exhaustion and burnout eventually resulted.
As for the inequity in reward concerning the best worker, we abandoned our traditional policy of paying everyone the same hourly rate for performing the same task. No longer could we ignore the fact that some people do certain things better than other people and should be compensated accordingly. The team members had to recognize that they all benefited from the superior worker’s excellence. They easily accepted his higher hourly pay as a trade-off for the extra earnings they all received from his labor. And he no longer felt that he was pulling more than his own weight.
After a few months, just as the new arrangement seemed to be going smoothly, the team had a few minor accidents in which injuries resulted. We also observed a small decline in the production rate. Clearly the team was exhausting itself, approaching burnout. Should we tell the team, against instinct and every management principle, to slow down?
We solved the problem by means of a liberal vacation policy: one week for one year, two weeks for two years, three weeks for five years, four weeks for fifteen years. We insisted that each worker take off one or two weeks at reasonably spaced intervals through the year. And we encouraged job switching, which necessitated, of course, that each team member know the others’ jobs, a given when we established the program.
The next problem was with ourselves as managers. Though we were paying a substantial bonus each month, the company was still operating either in the red or near breakeven. Paying more when we weren’t making it was hard to take. Wouldn’t it be more appropriate to tie rewards to profits rather than productivity? But it remained that the incentive was providing value. In this instance we had to stop thinking short-term, a view both rational and necessary when things are going badly.
We realized that any incentive related to profit was neither direct nor immediate—two important ingredients in motivating people. Furthermore, how responsible is a worker for a company’s profits? We had to understand that the bottom line was directly the result of management’s actions, not the workers’. Only through management’s policies and by its standards do the workers’ efforts affect profits. Once we perceived this, we were at peace with the creature we had created.
The success of the incentive system, of which the team’s monetary results were posted on the bulletin board each month for all to envy, led to our next problem: every department clamored to be similarly rewarded. But not all functions were measurable or lent themselves to an incentive system. Nevertheless, we investigated the possibility of introducing some kind of reward system for every possible team based on improved performance. We were amazed to discover that no employee needed to be left out.
The productivity of some departments—say shipping and receiving or maintenance—was hard to evaluate. However, the success of these ancillary units was related to the performance of the primary sections. They were symbiotic. The job of maintenance, for instance, was to keep production’s equipment operating smoothly. The job of shipping and receiving was to keep production supplied with raw materials from an orderly inventory and to remove finished goods from the production floor and arrange for prompt shipment to the customer. Why not tie the incentive of such groups to that of the departments they served? It worked: rewarding cooperation among interdependent functions expanded the team spirit.
What about management, which was directly responsible for profits? Of course, when profits are nil or lean, profit sharing is worthless as a motivator. But we found another way to measure management’s effectiveness: return on capital. Though there may be no return during an unprofitable year, the factors contributing to its enhancement, or the opposite, prevail nevertheless.
For example, our purchasing department’s effectiveness was measured by its ability to control raw material inventory. Less inventory required less working capital, resulting in lower interest cost. The purchasing department was also rewarded for minimizing raw material costs, a measure of its bargaining ability. We related the reward of the office staff to a reduction in its use of office supplies and other factors over which it had control, such as the phone bill. The production supervisors’ rewards were related to the combined rewards of the departments under them. And higher management’s bonuses depended strictly on total return on invested capital.
Needless to say, profits followed—even as sales declined during the deepening slowdown. The entire company was on incentive. Our next step was to concern ourselves with the individual within the team. Despite incentives, not everyone was satisfied. And we were reconciled that not everyone would be. So we began preference testing, another successful experiment. (See Defining Incentives and Fitting the Job to the Person.)
