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Quick Intro to Pay Systems

Sam Pratt
Sam Pratt

Implement a pay system based on advanced management theory designed specifically to improve your company's bottom-line.

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Work Focused Improvement®
Management Essentials for
Daily Use and Ongoing Improvement
Quick Intro to Pay Systems
Module 1 of 44

By Sam Pratt
© 1986-2013 Samuel H. Pratt / SHP Consulting Limited
Management Approaches
• The Control Model

Based on the military model, it is
the fastest in terms of decision making, but does not foster
commitment and does not work with today’s workers

• The Commitment Model

Most management gurus
endorse some variation of the Commitment (Team) model which
does not move individuals out of the Entertainment / Entitlement
Zone

• Work Focused Improvement®
• Linear & Nonlinear work is uniquely managed in
consideration of profound differences
• Pay Systems offer real rewards for advancing the
organization’s bottomline
• People choose to excel and move the organization into the
Performance Zone
• Everyone thinks and acts like an owner
© 1997-2013 Samuel H. Pratt / SHP Consulting Limited
Work Focused Improvement
... in a nutshell
• Endorse & understand the underlying premise: When a
group of people work in concert to advance the business, a
by-product of the effort is a better functioning social unit
• Distinguish between the two basic types of work: linear
and non-linear and design all business mechanisms to
match the work
• Focus on the work, performance and results, not on …
• Hygiene: company policy, wages, working
conditions, security, status, supervision, and interpersonal
relationships
• Feelings & Emotions
• Turf, politics, personality, or blame

• Be a student of management and build a profound
understanding of all leadership and management
mechanisms, tactics, and concepts
© 1997-2013 Samuel H. Pratt / SHP Consulting Limited

People
Two Theories
• If you make people happy they will work
hard
• If people choose to work hard, they will be
happy
• Work hard because the work is inherently
interesting and stimulating
• Work hard because in the process of
doing so there is recognition and reward
© 1997-2013 Samuel H. Pratt / SHP Consulting Limited

Work & Jobs
Pay System Gems
• If excellent work is not meaningfully rewarded, there
will be no healthy and open competition. This is
because people who work very hard for no extra
money are under attack ... from other people, and
even from themselves. The notion is: “Why am I
busting my ass to make some owner richer when I
could coast like Bobby, have some fun, and take
home the same pay.”
• Most management gurus today focus on nonrepetitive work. As for repetitive linear work, they
either pretend it doesn't exist, tell you how to get rid
of it, or camouflage it with things like vertical job
enrichment.
© 1997-2013 Samuel H. Pratt / SHP Consulting Limited
Incentive Overview
• Gain Share pays bonuses to individuals for
improvements in bottomline performance of an
organization or team. Gains are generally idea
based and as such are cumulative over time and
tend to be in the nature of two steps forward and
one step back.
• Direct Incentive pays bonuses to Individuals or
small teams for improved performance on
measurable tasks and quality. While on Direct
Incentive, people also get a 20% share of the
applicable Gain Share. Gains are usually
immediate and large.

© 1997-2013 Samuel H. Pratt / SHP Consulting Limited
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Quick Intro to Pay Systems

  • 1. Work Focused Improvement® Management Essentials for Daily Use and Ongoing Improvement Quick Intro to Pay Systems Module 1 of 44 By Sam Pratt © 1986-2013 Samuel H. Pratt / SHP Consulting Limited
  • 2. Management Approaches • The Control Model Based on the military model, it is the fastest in terms of decision making, but does not foster commitment and does not work with today’s workers • The Commitment Model Most management gurus endorse some variation of the Commitment (Team) model which does not move individuals out of the Entertainment / Entitlement Zone • Work Focused Improvement® • Linear & Nonlinear work is uniquely managed in consideration of profound differences • Pay Systems offer real rewards for advancing the organization’s bottomline • People choose to excel and move the organization into the Performance Zone • Everyone thinks and acts like an owner © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 3. Work Focused Improvement ... in a nutshell • Endorse & understand the underlying premise: When a group of people work in concert to advance the business, a by-product of the effort is a better functioning social unit • Distinguish between the two basic types of work: linear and non-linear and design all business mechanisms to match the work • Focus on the work, performance and results, not on … • Hygiene: company policy, wages, working conditions, security, status, supervision, and interpersonal relationships • Feelings & Emotions • Turf, politics, personality, or blame • Be a student of management and build a profound understanding of all leadership and management mechanisms, tactics, and concepts © 1997-2013 Samuel H. Pratt / SHP Consulting Limited People
  • 4. Two Theories • If you make people happy they will work hard • If people choose to work hard, they will be happy • Work hard because the work is inherently interesting and stimulating • Work hard because in the process of doing so there is recognition and reward © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Work & Jobs
  • 5. Pay System Gems • If excellent work is not meaningfully rewarded, there will be no healthy and open competition. This is because people who work very hard for no extra money are under attack ... from other people, and even from themselves. The notion is: “Why am I busting my ass to make some owner richer when I could coast like Bobby, have some fun, and take home the same pay.” • Most management gurus today focus on nonrepetitive work. As for repetitive linear work, they either pretend it doesn't exist, tell you how to get rid of it, or camouflage it with things like vertical job enrichment. © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 6. Incentive Overview • Gain Share pays bonuses to individuals for improvements in bottomline performance of an organization or team. Gains are generally idea based and as such are cumulative over time and tend to be in the nature of two steps forward and one step back. • Direct Incentive pays bonuses to Individuals or small teams for improved performance on measurable tasks and quality. While on Direct Incentive, people also get a 20% share of the applicable Gain Share. Gains are usually immediate and large. © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 7. Two Types of Work Linear Non-linear Routine Tasks Non-routine Tasks Core Workers Coordinators Managers © 1986-2007 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 8. Pay Systems Futuristic Non-linear Work Visioning Gain Share Organization Pay for Periodic Bottom-line Results Gain Share Executives Coordinating Collaborating Team Direct Incentive Direct Incentives Planning Pay for Immediate Work Performed Individual Concentrated Linear Work © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Managers Coaching Supervisors Repetitive Core Workers Measurable elements Pay Systems
  • 9. WFI Pay Systems Core Steps (Items 1 to 6 are essential and occur naturally while 7 is situational) 1. Perform Organizational / Environmental Analysis 2. Develop Key Performance Indicator Matrix and Graphs 3. Follow Work Essentials Process leading to Advancement List 4. Design Pay System 5. Use Scoreboards to make performance visible & elevate its impact 6. Design Communications Program 7. Conduct Leadership Training © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 10. 10+ Pay System Design Steps (Captured in Workbook) Select Design Team – match personnel with roles 1) The Group – who is covered by the plan 2) The Formula – measures that define the gain 3) The Baseline – value of formula that must be exceeded 4) Smoothing Mechanisms – control volatility of payout 5) The Curve – match the pay curve, culture, and stage 6) The Share – how much goes to organization & team 7) Payout Frequency – how often is bonus paid 8) The Split – how are the gains distributed within the team 9) Continuous Improvement Adjustment – keep opportunity fair 10) Capital Investment Adjustment – re-engineering recognition 0) © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 11. Incentive Imperatives (applies to both Gain Share & Direct Incentive) • When individuals receive bonuses, the organization experiences a commensurate gain. Before individuals receive a bonus, their (or their team’s) performance must exceed: • • • • • the stretch the baseline the cost of their earlier bonuses If the above imperatives are not realized in a way that is fair to the organization and fair to individuals, the design must be adjusted. © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 12. Environmental Analysis • Streamlined process • A carefully sequenced questionnaire includes both standard and custom questions to dissect an organization and provide: • Objective scores for culture & business mechanisms • Insights on consistency & flexibility • Knowledge of “if and how” Work Focused Improvement® can make a difference • The process • Is interactive … everyone participates and benefits • Provides information used to design socio-technically correct Incentive Baselines & Sculpted Pay Curves © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 13. Key Performance Indicators • Streamlined Process to identify & organize KPIs • KPIs are measures of performance in all areas of the organization critical to bottomline results • To be useful the indicators must be simple, visible, accurate, meaningful, timely, and objective • Some KPIs are measures of individual and team performance • In Work Focused Improvement®, standardized graphs are used in various ways to intensify gains © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 14. Hygiene then Motivators & Movers “… the factors involved in producing job satisfaction (and motivation) are separate and distinct from the factors that lead to job dissatisfaction.” “… The opposite of job satisfaction is not job dissatisfaction but, rather, no job satisfaction; and similarly, the opposite of job dissatisfaction is not job satisfaction, but no job dissatisfaction.” Frederick Herzberg © 1997-2013 Samuel H. Pratt / SHP Consulting Limited People
  • 15. The American Workforce In the Entertainment / Entitlement Zone – Tend to identify more with their own objectives than those of the organization – Are comfortable saying “My new dog has to get his shots today, so I have to leave at 2:45,” [assume the individual is behind on critical work] – Perform at about 33% to 45% of potential (from various studies) – Focus on personal entitlements regardless of the organization’s performance – Spend a disproportionate amount of time on social and entertainment factors as compared to performance factors and the core work – Especially struggle with linear work © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 16. Direct Incentive Opportunity 130% 120%   100% The sweet spot (best overall result) is when there is 130% actual opportunity (earnings as compared to guaranteed base rate) As opportunity drops below 130%, increasing numbers of linear workers lose interest The only benefits to the company for opportunities above 130%:  Stabilize the work force  Preserve trust by only taking the specified annual Continuous Improvement Adjustment  Very loose incentives have the potential to be counterproductive when workers restrict output to hide the easy opportunity © 1986-20010 Samuel H. Pratt / SHP Consulting Limited Key Systems & Mechanisms
  • 17. Considerations When Setting Baselines Socio-technical Design • Technical capabilities of the team (as determined by studies, data analysis, correction factors) • Culture of the Work Group • Size of the gap between where the team is today and where it technically could be • Volatility of historic performance coupled to an assessment of the reasons for peaks, valleys, and current direction • Opinions and mindset of the team as it relates to the incentive design • Recent initiatives and structural changes © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 18. These are examples many available Pay Curves. Actual Pay Curves extend below 100% for rating purposes. © 1986-2012 Samuel H. Pratt / SHP Consulting Limited
  • 19. Examples When GS is 25% and Direct Incentive is 30% 160.0% When on Direct Incentive, an individual also gets a 20% Share of The Gain Share Bonus. 140.0% 5.0% 120.0% 2.5% 12.5% 30.0% 25.0% 15.0% 100.0% GS while on DI GS Bonus DI Bonus Base Pay An associate will not earn less than his or her base rate. Poor Direct Incentive performance will subtract from Gain Share Bonus, but Gain Share Performance never subtracts from Direct Incentive 80.0% 60.0% 100.0% 100.0% 100.0% Person on Direct Incentive Only Person on Gain Share Only Person with 1/2 of Hours on Each 40.0% 20.0% 0.0% © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 20. Gain Share After Design & Kickoff   A Gain Share System is not crock pot chili that you can make and then walk away It requires stirring, tasting, seasoning, and Personal Attention – Use walkabouts to send the message you care about performance – Post KPIs on Scoreboards to share information and create the Hawthorne Effect [Individual, Team & Organization Performance over time] – Use Work Sampling as an enabling tool – Focus on facts while giving Personal Attention – Lead by example and be a visible, positive force – Give Associates frequent performance data – Pass the message “We can do it!” – Secure all gains of the Advancement Process – Instill everyone with a Continuous Improvement Mindset – Listen, look, and Over-communicate – Track Inventory – Track Direct Incentive to Total Work Hour Ratio – Monitor Tasks to Date Chart © 1986-2007 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 21. Direct Incentive Annual Continuous Improvement Adjustment Continuous Improvement Pay Curve Adjustment 300% 250% 200% % Performance The Annual Year-end Continuous Adjustment is calculated by reducing the opportunity in excess of 130% by 1/3. Example: If the average opportunity is 160% for 2012, it will be reduced to 150% for 2013. The 10% reduction is 1/3 of the 30% excess over 130%. So if it took 22 Quality Widgets per hour in 2012 for 160%, it will take 23.47 in 2013. It is expected that performance improvements would continue so that actual bonuses remain at the higher level. In the process of reviewing all rates, some may actually be increased. 150% 100% 2001 Pay Curve 2002 Pay Curve 50% Average 2001 Adjusted Average Opportunity Start 2002 0% 0 50 100 150 200 250 300 Widgets Per Hour © 1986-2013 Samuel H. Pratt / SHP Consulting Limited Pay Systems
  • 22. Pragmatism, Culture, Reality, Etceteras Summary         Don’t expect rapid changes of culture or values. Never give up on changing culture over the long haul Recognize that attempts to transform the culture overnight can be counterproductive due to reality / perception / expectation gaps [management can look incredibly naive] Use multi-factored pay systems to change short-term conduct and long-term culture Use a wide variety of management tools & techniques to bring about change Manage with facts Push for rapid changes in technology and conduct Assure that culture is moving in the right direction, and worry less about the rate of change © 1997-2013 Samuel H. Pratt / SHP Consulting Limited Organizational Dynamics
  • 23. Over 30% total improvement each year, and a total of 143% improvement in 3 years
  • 24. Megan Patton Items from Article: Over 30% total improvement each year, and a total of 143% improvement in 3 years She earns an incentive bonus every month, and in one recent month, she earned a $2,100 bonus on top of her regular pay. “It’s a fun atmosphere to work in. I don’t mind coming to work every day,” she said. I don’t get stressed out about it.” It’s important to note that she is producing at more than 6 times the team average from one year earlier … and morale is up!
  • 25. Quality Charts Processed per Person 80,000 180 160 70,000 140 60,000 120 50,000 100 40,000 80 Over 30% total improvement 60 each year, and a 40 total of 143% 20 improvement in 3 years 30,000 Charts Billed Employee Count Linear (Employee Count) Linear (Charts Billed) 20,000 10,000 Apr-02 Feb-02 Dec-01 Oct-01 Aug-01 Jun-01 Apr-01 Feb-01 Dec-00 Oct-00 Aug-00 Jun-00 Apr-00 Feb-00 Dec-99 Oct-99 Aug-99 Jun-99 0 Apr-99 0 Three Years of Steady Improvement Under Work Focused Improvement Actual data from a medical billing company
  • 26. Long Term Care Division Close Files [inclusive] Post EOBs [inclusive] Issue Bill ( invoice) [inclusive] Issue PO [inclusive] Verify Order (Order Intake) Verify Medicare # 450.00 400.00 40% Reduction In Force after 9 work days on Pay System 350.00 300.00 250.00 200.00 150.00 100.00 50.00 3/31/2004 3/30/2004 3/29/2004 3/28/2004 3/27/2004 3/26/2004 3/25/2004 3/24/2004 3/23/2004 3/22/2004 3/21/2004 3/20/2004 3/19/2004 3/18/2004 3/17/2004 3/16/2004 3/15/2004 3/14/2004 3/13/2004 3/12/2004 3/11/2004 3/10/2004 3/9/2004 3/8/2004 3/7/2004 3/6/2004 3/5/2004 3/4/2004 3/3/2004 3/2/2004 3/1/2004 0.00
  • 27. Core Logic and Mechanisms for Optimizing Work Focused Improvement® The power of Work Focused Improvement® is captured in tables, lists, and algorithms that use Culture Rating and Stage of WFI to optimize the Pay System with an ongoing process. Examples of design factors that are calibrated include: 1. 2. 3. 4. 5. 6. 7. Workable Stretch range Slope or slopes of low section of pay curve Slope of middle section of pay curve Slope of high section or sections of pay curve Intersection point at bottom and top of middle section Ratios of opportunities between Direct Incentive and Gain Share Culture Rating coupled to the Stage of Work Focused Improvement® (refer to “The 3 Stages of Work Focused Improvement®”) Calibration is verified and ownership transferred by visuals and a list of questions for each design element / decision. There is a narrative outlining the process. Many of the adjustments are counter-intuitive. Those using these tools need high levels of WFI experience and advanced Excel skills. These tools are continuously improved. For example, if an organization has deviated from the prescription, resulting anomalies must be factored into the core logic and optimization. © 1997-2013 Samuel H. Pratt / SHP Consulting Limited
  • 28. Background / Intro page 1 Do your employees work as hard as they possibly could? Do you wish they would? Do you wish they wished they would? It’s likely that your associates do not share your sense of ownership in the company’s future interests. And you can bet they care less about bottom-line performance. In fact, most of them are just focused on the social aspects of the job. Things such as paychecks, bonuses, benefits, vacations and annual raises are viewed as entitlements. So how can management get employees to perform? Work Focused Improvement® (WFI) is the answer. WFI takes all facets of leading management thinking into consideration and applies it to pay system design. In doing so, it uniquely factors in both the social (culture) and technical (scientific) aspects of the workplace to reach effectively and efficiently move your employees to the Performance Zone. Frederick Herzberg, a key influence on current management thinking, provides a good summary statement of his position: “The only way to motivate employees is to give them challenging work in which they can assume responsibility.” Often, in management circles, this is reduced to “money doesn’t motivate.” © 2000-2013 Samuel H. Pratt / SHP Consulting Limited
  • 29. Background / Intro page 2 For those doing purely non-linear work, these concepts are generally valid. However, in many instances they are not enough. Take the example of an engineer who is doing totally creative design work and still sneaks out of work for half a day to prepare his dirt bike for a weekend race, or the ski instructor who plays computer games while he should be updating his student plans. In today’s world, there is always something more interesting to do. Enriching a job with “challenging” work is increasingly difficult. The current smart phones afford more interesting challenges than most jobs, and how are you really going to enrich a job that is, for example, comprised of issuing invoices 80% of the time? Alfie Kohn became popular with Fortune 500 companies in the 1990’s with his own Harvard Business review article “Why Incentives Cannot Work.” Kohn and Herzberg correctly arrive at the same basic conclusion: unconstrained pay raises alone will not motivate people to work harder. © 2000-2013 Samuel H. Pratt / SHP Consulting Limited
  • 30. Background / Intro page 3 Then you must consider Judith M. Bardwick’s thoughts on the matter, from her book Danger in the Comfort Zone: “Entitlement: People are complacent; they get raises, bonuses, and benefits pretty much as a matter of course, so there is no incentive to work hard.” She then makes a compelling argument that for people to perform best, they need to have some fear that there will be consequences for poor performance. At one end of the spectrum is entitlement, with fear on the other end. Earning is in the middle, and it is noteworthy that the optimum earning zone is closer to fear than entitlement. There is the notion that a lack of money can be a bigger motivator than money. Herzberg recognizes this when he writes about humankind’s “built in drive to avoid pain from the environment. For example, hunger, a basic biological drive, makes it necessary to earn money, and then money becomes a specific drive.” So in essence, Herzberg and Bardwick agree that the fear of a lack of money can motivate. © 2000-2013 Samuel H. Pratt / SHP Consulting Limited
  • 31. Background / Intro page 4 Another cornerstone of current management thinking is the late Edwards Deming. He says: “The various segments of the system of profound knowledge proposed here cannot be separated. They interact with each other. Thus, knowledge of psychology is incomplete without knowledge of variation.” Putting all gurus together gets you to the conclusion that while raising salaries does not improve performance, putting significant pay at risk will. Most experienced executives acknowledge the successful use of straight commissions and piece rate incentives. Incentives become problematic when the work is non-linear, meaning that is not measureable through observation. Even for linear work, it is difficult to determine the baseline beyond which incentives will be paid and the pay curve that specifies added bonus for exceptional performance. Frederick Taylor style industrial engineers set baselines through scientific observation and analysis. WFI suggests this will not work. WFI looks at both the social (culture) and technical (scientific) aspects. WFI sets baselines and pay curves by a proven method of objectively rating both culture and technical capabilities of the work group. WFI acknowledges other motivating factors of the job, including: achievement, responsibility, growth, advancement, trust and individual autonomy. WFI is the answer. Nothing else works. © 2000-2013 Samuel H. Pratt / SHP Consulting Limited