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Bye-Bye Management!
Why management is dispensable
and how leadership
for high performance
really works

Gisma, Hannover, 06.02.2012

 Niels Pflaeging
 BBTN Associate & Presidente MetaManagement Group

 Econique – Diálogo CFO
 18/19 de Mayo 2009
Niels Pflaeging
BBTN Associate & Presidente MetaManagement Group

Econique – Diálogo CFO
18/19 de Mayo 2009
90%
 Peter Drucker
McKinsey




Niels Pflaeging
BBTN Associate & Presidente MetaManagement Group

Econique – Diálogo CFO
18/19 de Mayo 2009

                                                   4
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Industrial age ends:                        Knowledge economy advances:
  high               ”Supplies have the power“,                       ”Customers have the power“,
                     Evolution of mass markets:                strong competition, individualized demand:
                   Taylorism as the superior model            decentralized and adaptive model is superior!

                                                                                         Now, all these factors
                                                                                         are equally important!
                Here, only efficiency                                               Competitive
                 mattered, really!                   Characteristics                success factors (CSF)
Dynamics                                             1.  Discontinuous change       - Fast response
   and                                               2.  Short life cycles          - Innovation
complexity                                           3.  Constant pressure on prices Operational excellence
                                                                                    -
                     Characteristics
                                                     4.  Less loyal customers       - Customer intimacy
                     •  Incremental change
                     •  Long life cycles             5.  Choosy employees           - Great place to work
                                                     6.  Transparency,              -  Effective
                     •  Stable prices
                                                         societal pressure             governance
                     •  Loyal customers
                                                       High financial              -  Sustained superior
                     •  Choosy employers                 expectations                  value creation/fin.perf.
                     •  „Managed“ results
  low

         1890                             1980     1990     2000     2010     2020
                Most organizations still use a management model that was designed                     2030
                       for efficiency, while the problem today is complexity.
                                                   6
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
“command and control“




                            •  Too centralized
                            •  Too inward-looking
                            •  Too little customer-oriented
                            •  Too bureaucratic
                            •  Too much focused on control
                            •  Too functionally divided
                            •  Too slow and time-
                               consuming
                            •  Too de-motivating
                            •  …



                        9
One cannot talk sensibly about leadership, or people management,
nor design decent management processes, unless we clarify
beforehand our beliefs with regards to what
people in organizations are like.
We have to arrive at a shared understanding of human nature
and of the consequences of that for our organizations.
              Niels Pflaeging, Leading with Flexible Targets
Theory X
    vs.
Theory Y  Douglas McGregor
Theory X                                           Theory Y
                                   Attitude
People dislike work,                      People need to work and want to take
find it boring,                           an interest in it. Under right conditions,
and will avoid it if they can.            they can enjoy it.
                                  Direction
People must be forced                     People will direct themselves
or bribed                                 towards a target
to make the right effort.                 that they accept.
                                Responsibility
People would rather be directed           People will seek and accept
than accept responsibility,               responsibility, under the right
(which they avoid).                       conditions.
                                     Motivation
People are motivated mainly                 Under the right conditions, people
by money                                    are motivated by the desire to realize
and fears about their job security.         their own potential.
                                     Creativity
Most people have little creativity -        Creativity and ingenuity are
except when it comes to getting             widely distributed
round rules.                                and grossly underused.

                                    Source:12
                                            Douglas McGregor, ‘The Human Side of Enterprise’, 1960
Niels Pflaeging
BBTN Associate & Presidente MetaManagement Group

Econique – Diálogo CFO
18/19 de Mayo 2009
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Theory X                                           Theory Y
                                   Attitude
People dislike work,                      People need to work and want to take
find it boring,                           an interest in it. Under right conditions,




                                                                      ?
and will avoid it if they can.            they can enjoy it.
                                  Direction
People must be forced                     People will direct themselves
or bribed                                 towards a target
to make the right effort.                 that they accept.
                                Responsibility
People would rather be directed           People will seek and accept
than accept responsibility,               responsibility, under the right
(which they avoid).                       conditions.
                                     Motivation
People are motivated mainly                 Under the right conditions, people
by money                                    are motivated by the desire to realize
and fears about their job security.         their own potential.
                                     Creativity
Most people have little creativity -        Creativity and ingenuity are
except when it comes to getting             widely distributed
round rules.                                and grossly underused.

                                    Source:15
                                            Douglas McGregor, ‘The Human Side of Enterprise’, 1960
Org charts                       Performance Appraisals
                     Meritocracy         Absenteeism managem
   Time-based work contracts              Extra hours
                                       Motivation/incentives
          Control of work hours
                                              Individual targets
 Job descriptions
                                     Target negotiation
       Career plans/paths
                                          Salary ranges
                Competence profiling
                                      Knowledge management
 Suggestion Schemes Bonuses
                                     Training budgets
16     Personnel Development
 Assessment Center
     Vortrag: Niels Pfläging
                                          Personnel cost
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
The BetaCodex: The 12 new laws of Leadership

§1    Freedom to act        Connectedness not Dependency
§2    Responsibility        Cells             not Departments
§3    Governance            Leadership        not Management
§4    Performance climate   Result culture    not Duty fulfillment
§5    Success               Fit               not Maximization
§6    Transparency          Intelligence flow not Power accumulation
§7    Orientation           Relative Targets not Top-down prescription
§8    Recognition           Sharing           not Incentives
§9    Mental presence       Preparedness      not Planning
§10   Decision-making       Consequence       not Bureaucracy
§11   Resource usage        Purpose-driven not Status-oriented
§12   Coordination          Market dynamics not Commands



                                 19
Sciences:                                                                            Practice:
Thought leaders            Stafford Beer                                      Industry leaders
(selected)                 Margareth Wheatley
                           Niklas Luhmann




                                                                            ?
                           W. Edwards Deming
                           Kevin Kelly
                           Ross Ashby
                           Joseph Bragdon
                           …
  Douglas McGregor
  Chris Argyris                     Complexity
  Jeffrey Pfeffer                    Theories
  Reinhard Sprenger                                     Industry
  Stephen Covey
  Howard Gardner      Social Sciences
  Viktor Frankl            & HR
  …                                                                Retail

  Peter Drucker
  Tom Peters            Leadership &                               Services
  Charles Handy           Change
  John Kotter
  Peter Senge
  Thomas Davenport
                                  Strategy &
                                 Performance          Government
  Peter Block
  …                              Management             & NGOs
                           Henry Mintzberg
                           Gary Hamel
                           Jeremy Hope
                           Michael Hammer
                           Thomas Johnson
                           Charles Horngren
                           …


                                                 20
Practice:
                              Industry leaders
                                    (selected)




 Industry



            Retail


              Services



Governments
  & NGOs




                         21
^
Periphery


                                              Center

                                         Decision
                          Information

                                             Command


                    Impulse
                                  Reaction
                                                         Centralist command and
                                                          control “collapses“ in
                                                          increasingly complex
                                                              environments
Quelle: Gerhard Wohland
                                                    23
The BetaCodex:
  Thinking and working
on the model,
                 not
       in the model.
Sustaining and
                                                                                    deepening of the
                                                                      Integration   decentralized model,
             Evolution                                                   phase      through generations
             within the decentralized
             model (culture of                       Transformation
             empowerment and trust)                  through radical
                                                     decentralization of
                                                     decision-making
                                Differentiation Stagnation
                                    phase       within the tayloristic model

                                                Low degree of decentralization/
                 Bureaucratization              empowerment
                 through growing hierarchy
                 and functional differentiation
 Pioneering
   phase         High degree of decentralization/
                 empowerment

Foundation                       Time scale: organization's age                Several decades old
White paper – Making Performance Management Work   26   © BetaCodex Network – All rights reserved
Companies.
  Don´t
Need.
   Planning.
Eine Konsequenz aus dem Kodex.
White paper – Making Performance Management Work   28   © BetaCodex Network – All rights reserved
Management processes in command and control
organizations are “straight jackets”

                            Strategy                    “Fixed” performance contract

                           Strategic                    •  Period                              [Fixed]
                        learning cycle                  •  Targets                             [Fixed]
                                                        •  Compensation                       [Fixed]
                        Annual plan
                            Fixed                       •  Plan                                [Fixed]
                        Performance
                          Contract                      •  Resources                           [Fixed]
                           Budget                       •  Coordination                        [Fixed]
                                                        •  Control                             [Fixed]
                       Management                       •  Agreed through           [Negotiation]
                       control cycle
                                                        •  Signed by:     [Manager/Director]

                             Control

      Tayloristic management works like this: As centralistic-burocratic hierarchies,
              held together through a regime of fixed performance contracts!
 Source: BBRT
White paper – Making Performance Management Work   29                       © BetaCodex Network – All rights reserved
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
White paper – Making Performance Management Work   31   © BetaCodex Network – All rights reserved
“I will prepare
   myself and
my time
 must come.”
       Abraham Lincoln
The notion of
dividing an organization
into functions,
and then departments,
is fundamentally flawed.




But what is the alternative?
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
White paper – Making Performance Management Work   35   © BetaCodex Network – All rights reserved
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
White paper – Making Performance Management Work   38   © BetaCodex Network – All rights reserved
White paper – Making Performance Management Work   39   © BetaCodex Network – All rights reserved
The blue pill: Fixed, negotiated targets         The red pill: Relative, self-adjusting targets
Target: absolute ROCE in % (here: 15%)           Target: relative ROCE in % (to market)
      Plan                 Actual                     Target                 Actual

                                                                     Comparison:
             Comparison:                                             Market-Actual
                                     Most         Target: „ROCE                       Most
             Plan-Actual
                                   important        in % better                     important
                            Market competitor      than market               Market competitor
                                                     average”
                 Actual     (25%) (28%)                             Actual   (25%) (28%)
    Plan         (21%)                                              (21%)
   (15%)                                             [independent
    [expected                                       from expected
  market Ø: 13%]                                       market Ø]

•  Interpretation within the plan-actual-        •  Interpretation within actual-actual compa-
   comparison: Plan was outperformed by 6           rison: Performance was 4 percentage points
   percentage points > positive interpretation      below competition! > negative interpretation
•  Better ROCE of the market average and the     •  Absolute assumptions at the moment of
   most important competitor remain unnoticed!      planning don´t matter.
                                                 •  Targets always remain updated and relevant!
 Source: Niels Pfläging
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
42
The case of a radically decentralized organization:
Handelsbanken – an extraordinary leadership philosophy



                                                                                                         The most important objective
                                                                                                         within Handelsbanken Group:
                                                                                                         “Higher Return on Equity than the
                                                                                                         average of comparable banks in
                                                                                                         the Nordic region and Europe.”
                                                                                                         Made real through:
                                                                                                          •  Radical decentralization,
                                                                                                             which in turn leads to…
                                                                                                          •  Best customer service
                                                                                                          •  Lowest cost
                                                                                   Alexander V Dokukin




  Consistently – over a period of 30 years – one of the most successful banks in
      Europe, measured by almost all key performance indicators
      (e.g. ROE, TSR, EPS, Cost/Income, customer satisfaction, …)
ROE = Return on Equity, TSR = Total Shareholder Return, EPS = Earnings per share

White paper – Making Performance Management Work                             43                                   © BetaCodex Network – All rights reserved
How “radical decentralization“ is being reflected in the
company´s organizational structure and decision-making


                     Principles                         Customers


              Customer intimacy
         A large network of self-managed
         teams with full responsibility for        600 branch managers
                                                        (Profit Centers)
                 customer results

                Freedom and
               capability to act                        12 regional                       Fast, open
      “Winning“ culture, combined with the               managers                        information
           freedom and ability to act                   (Invest Centers)
                                                                                           systems

               Governance and
                transparency                                CEO,
       Framework for decision making with               product firms,
          clear values, limits and relative            treasury, IT etc.
             targets, plus transparency


                                       Leads to maximum customer satisfaction!
Source: BBRT Making Performance Management Work
White paper –                                          44                  © BetaCodex Network – All rights reserved
Relative target definition through “league tables“ (rankings) –
instead of planned, fixed targets and internal negotiation

                                               Bank to bank
                                           Return on Equity (RoE)    Region to region
            Principles
                                           1.    Bank D      31% Return on Assets(RoA)etc.
                                           2.      Bank J   24%1.                         Branch to branch
                                                                       Region A   38% Cost/income ratio etc.
                                           3.      Bank I   20%2.      Region C   27%
      Relative targets and
     relative compensation                 4.      Bank B   18%3.      Region H   20%1.     Branch J 28%
                                           5.      Bank E   15%4.      Region B   17%2.     Branch D 32%
                                           6.      Bank F   13%5.      Region F   15%3.     Branch E 37%
   Continuous preparation/
        social control                     7.      Bank C   12%6.      Region E   12%4.     Branch A 39%
                                           8.      Bank H   10%7.      Region J   10%5.     Branch I 41%
                                           9.      Bank G    8% 8.     Region I    7% 6.    Branch F 45%
     “On demand“ flow of                                                           6% 7.    Branch C 54%
          resources/                       10.     Bank A   (2%)9.     Region G
                                                                10.    Region D   (5%)8.    Branch G 65%
     dynamic coordination                                                             9.    Branch H 72%
                                                                                      10.  Branch B 87%



                                          Leads to lowest operational cost!
White paper – Making Performance Management Work             45                      © BetaCodex Network – All rights reserved
Flexible coordination and resources “on demand“ -
instead of allocations and budgets



                                                       Headquarters/
                                                          Region


                                                  Branches acquire resources
                                                    through internal markets

                     Resources                                                  Customer
                                                           Branch
                    (IT, HR etc.)                                                demand


                     Branches                        Branches alone are          Branches
                    decide over                    responsible for efficient      observe
                     necessary                        use of resources           customer
                  resource levels                                                 demand

                                      Leads to eradicating and avoiding waste!
Source: BBRT Making Performance Management Work
White paper –                                                46                © BetaCodex Network – All rights reserved
White paper – Making Performance Management Work   47   © BetaCodex Network – All rights reserved
Bonus        Variable      Bonus
Common practice:                                  hurdle         area         limit       “Ceiling”
„Pay for performance“
compensation            Salary/      Reduction              Maximization              Reduction incentive:
profile with fixed       bonus    incentive: Lower      incentive: Anticipate         postpone results to
performance contract:             result even more             results                    next period
Creates maniuplation
incentive in any situation!        Base salary
                                                   80%          100%:        120% Performance as %
                                                 of target      target      of target of target realization



                                   Linear compensation curve without breaks:
A better model: Result             variable compensation becomes
oriented compensation              decoupled from targets
profile with relative
performance           Salary/                                      Free from
                       bonus                               incentive to manipulate
contracts:
No incentive to
manipulation.

                                                  Actual        Actual       Actual       Performance in
                                                 result #1     result #2    result #3 relative evaluation
Source: Michael Jensen
1 very simple principle:
Always disconnect compensation from targets.
Always.




                           49
Pay-for-performance is an outgrowth of behaviorism, which is
focused on individual organisms, not systems - and, true to its name,
looks only at behaviors, not at reasons and motives and the people who
have them.
I tell Fortune 500 executives (or at least those foolish enough to ask me)
that the best formula for compensation is this: Pay people well, pay them
fairly, and then do everything possible to help them forget about money.
How should we reward our staff? Not at all! They are not our pets.
Pay them well, respect and trust them, free them from disturbance,
provide them with all available information and support to perform
on the highest possible level.           Alfie Kohn, Sociologist



1.  Pay people well
2.  Pay people fairly
3.  And then do everything possible to take money off peoples minds!
All pay-for-performance plans violate that last precept!
1 very simple principle:
Never use bonuses and incentives.
Apply profit sharing and/or shareholding concepts
for community.




                            51
1 very simple principle:
Pay the person. Not the position.
Always.
“I don´t know if it is possible.
                            What I know: It is necessary.“
                                                               Tom Peters




Today we already know for sure it is possible.
And we have also learned how it can be done.

                                              53
Whatwe
  are
waiting
White paper – Making Performance Management Work   55   © BetaCodex Network – All rights reserved
56
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)
Make it real!




www.betacodex.org

A selection of associates:

                             Silke Hermann        Niels Pflaeging              Lars Vollmer
                             silke.hermann@       niels@betacodex.org          vollmer@v-und-s.de
                             insights-group.de    nielspflaeging.com           www.lars-vollmer.com
                             Wiesbaden–New York   São Paulo-New York-Wiesbaden Hannover/Stuttgart




                             Walter Larralde      Valérya Carvalho             Chris Catto
                             wlarralde@           valeria@betacodex.org        christopher.catto@
                             on-strategy.com.mx   Betaleadership.com           putneybreeze.com.au
                             Mexico City          São Paulo                    Melbourne

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Bye-bye Management! Why management is dispensable & how leadership for high performance really works today. Keynote by Niels Pflaeging at GISMA (Hannover/D)

  • 1. Bye-Bye Management! Why management is dispensable and how leadership for high performance really works Gisma, Hannover, 06.02.2012 Niels Pflaeging BBTN Associate & Presidente MetaManagement Group Econique – Diálogo CFO 18/19 de Mayo 2009
  • 2. Niels Pflaeging BBTN Associate & Presidente MetaManagement Group Econique – Diálogo CFO 18/19 de Mayo 2009
  • 4. McKinsey Niels Pflaeging BBTN Associate & Presidente MetaManagement Group Econique – Diálogo CFO 18/19 de Mayo 2009 4
  • 6. Industrial age ends: Knowledge economy advances: high ”Supplies have the power“, ”Customers have the power“, Evolution of mass markets: strong competition, individualized demand: Taylorism as the superior model decentralized and adaptive model is superior! Now, all these factors are equally important! Here, only efficiency Competitive mattered, really! Characteristics success factors (CSF) Dynamics 1.  Discontinuous change - Fast response and 2.  Short life cycles - Innovation complexity 3.  Constant pressure on prices Operational excellence - Characteristics 4.  Less loyal customers - Customer intimacy •  Incremental change •  Long life cycles 5.  Choosy employees - Great place to work 6.  Transparency, -  Effective •  Stable prices societal pressure governance •  Loyal customers   High financial -  Sustained superior •  Choosy employers expectations value creation/fin.perf. •  „Managed“ results low 1890 1980 1990 2000 2010 2020 Most organizations still use a management model that was designed 2030 for efficiency, while the problem today is complexity. 6
  • 9. “command and control“ •  Too centralized •  Too inward-looking •  Too little customer-oriented •  Too bureaucratic •  Too much focused on control •  Too functionally divided •  Too slow and time- consuming •  Too de-motivating •  … 9
  • 10. One cannot talk sensibly about leadership, or people management, nor design decent management processes, unless we clarify beforehand our beliefs with regards to what people in organizations are like. We have to arrive at a shared understanding of human nature and of the consequences of that for our organizations. Niels Pflaeging, Leading with Flexible Targets
  • 11. Theory X vs. Theory Y Douglas McGregor
  • 12. Theory X Theory Y Attitude People dislike work, People need to work and want to take find it boring, an interest in it. Under right conditions, and will avoid it if they can. they can enjoy it. Direction People must be forced People will direct themselves or bribed towards a target to make the right effort. that they accept. Responsibility People would rather be directed People will seek and accept than accept responsibility, responsibility, under the right (which they avoid). conditions. Motivation People are motivated mainly Under the right conditions, people by money are motivated by the desire to realize and fears about their job security. their own potential. Creativity Most people have little creativity - Creativity and ingenuity are except when it comes to getting widely distributed round rules. and grossly underused. Source:12 Douglas McGregor, ‘The Human Side of Enterprise’, 1960
  • 13. Niels Pflaeging BBTN Associate & Presidente MetaManagement Group Econique – Diálogo CFO 18/19 de Mayo 2009
  • 15. Theory X Theory Y Attitude People dislike work, People need to work and want to take find it boring, an interest in it. Under right conditions, ? and will avoid it if they can. they can enjoy it. Direction People must be forced People will direct themselves or bribed towards a target to make the right effort. that they accept. Responsibility People would rather be directed People will seek and accept than accept responsibility, responsibility, under the right (which they avoid). conditions. Motivation People are motivated mainly Under the right conditions, people by money are motivated by the desire to realize and fears about their job security. their own potential. Creativity Most people have little creativity - Creativity and ingenuity are except when it comes to getting widely distributed round rules. and grossly underused. Source:15 Douglas McGregor, ‘The Human Side of Enterprise’, 1960
  • 16. Org charts Performance Appraisals Meritocracy Absenteeism managem Time-based work contracts Extra hours Motivation/incentives Control of work hours Individual targets Job descriptions Target negotiation Career plans/paths Salary ranges Competence profiling Knowledge management Suggestion Schemes Bonuses Training budgets 16 Personnel Development Assessment Center Vortrag: Niels Pfläging Personnel cost
  • 19. The BetaCodex: The 12 new laws of Leadership §1 Freedom to act Connectedness not Dependency §2 Responsibility Cells not Departments §3 Governance Leadership not Management §4 Performance climate Result culture not Duty fulfillment §5 Success Fit not Maximization §6 Transparency Intelligence flow not Power accumulation §7 Orientation Relative Targets not Top-down prescription §8 Recognition Sharing not Incentives §9 Mental presence Preparedness not Planning §10 Decision-making Consequence not Bureaucracy §11 Resource usage Purpose-driven not Status-oriented §12 Coordination Market dynamics not Commands 19
  • 20. Sciences: Practice: Thought leaders Stafford Beer Industry leaders (selected) Margareth Wheatley Niklas Luhmann ? W. Edwards Deming Kevin Kelly Ross Ashby Joseph Bragdon … Douglas McGregor Chris Argyris Complexity Jeffrey Pfeffer Theories Reinhard Sprenger Industry Stephen Covey Howard Gardner Social Sciences Viktor Frankl & HR … Retail Peter Drucker Tom Peters Leadership & Services Charles Handy Change John Kotter Peter Senge Thomas Davenport Strategy & Performance Government Peter Block … Management & NGOs Henry Mintzberg Gary Hamel Jeremy Hope Michael Hammer Thomas Johnson Charles Horngren … 20
  • 21. Practice: Industry leaders (selected) Industry Retail Services Governments & NGOs 21
  • 22. ^
  • 23. Periphery Center Decision Information Command Impulse Reaction Centralist command and control “collapses“ in increasingly complex environments Quelle: Gerhard Wohland 23
  • 24. The BetaCodex: Thinking and working on the model, not in the model.
  • 25. Sustaining and deepening of the Integration decentralized model, Evolution phase through generations within the decentralized model (culture of Transformation empowerment and trust) through radical decentralization of decision-making Differentiation Stagnation phase within the tayloristic model Low degree of decentralization/ Bureaucratization empowerment through growing hierarchy and functional differentiation Pioneering phase High degree of decentralization/ empowerment Foundation Time scale: organization's age Several decades old
  • 26. White paper – Making Performance Management Work 26 © BetaCodex Network – All rights reserved
  • 27. Companies. Don´t Need. Planning. Eine Konsequenz aus dem Kodex.
  • 28. White paper – Making Performance Management Work 28 © BetaCodex Network – All rights reserved
  • 29. Management processes in command and control organizations are “straight jackets” Strategy “Fixed” performance contract Strategic •  Period [Fixed] learning cycle •  Targets [Fixed] •  Compensation [Fixed] Annual plan Fixed •  Plan [Fixed] Performance Contract •  Resources [Fixed] Budget •  Coordination [Fixed] •  Control [Fixed] Management •  Agreed through [Negotiation] control cycle •  Signed by: [Manager/Director] Control Tayloristic management works like this: As centralistic-burocratic hierarchies, held together through a regime of fixed performance contracts! Source: BBRT White paper – Making Performance Management Work 29 © BetaCodex Network – All rights reserved
  • 31. White paper – Making Performance Management Work 31 © BetaCodex Network – All rights reserved
  • 32. “I will prepare myself and my time must come.” Abraham Lincoln
  • 33. The notion of dividing an organization into functions, and then departments, is fundamentally flawed. But what is the alternative?
  • 35. White paper – Making Performance Management Work 35 © BetaCodex Network – All rights reserved
  • 38. White paper – Making Performance Management Work 38 © BetaCodex Network – All rights reserved
  • 39. White paper – Making Performance Management Work 39 © BetaCodex Network – All rights reserved
  • 40. The blue pill: Fixed, negotiated targets The red pill: Relative, self-adjusting targets Target: absolute ROCE in % (here: 15%) Target: relative ROCE in % (to market) Plan Actual Target Actual Comparison: Comparison: Market-Actual Most Target: „ROCE Most Plan-Actual important in % better important Market competitor than market Market competitor average” Actual (25%) (28%) Actual (25%) (28%) Plan (21%) (21%) (15%) [independent [expected from expected market Ø: 13%] market Ø] •  Interpretation within the plan-actual- •  Interpretation within actual-actual compa- comparison: Plan was outperformed by 6 rison: Performance was 4 percentage points percentage points > positive interpretation below competition! > negative interpretation •  Better ROCE of the market average and the •  Absolute assumptions at the moment of most important competitor remain unnoticed! planning don´t matter. •  Targets always remain updated and relevant! Source: Niels Pfläging
  • 42. 42
  • 43. The case of a radically decentralized organization: Handelsbanken – an extraordinary leadership philosophy The most important objective within Handelsbanken Group: “Higher Return on Equity than the average of comparable banks in the Nordic region and Europe.” Made real through: •  Radical decentralization, which in turn leads to… •  Best customer service •  Lowest cost Alexander V Dokukin   Consistently – over a period of 30 years – one of the most successful banks in Europe, measured by almost all key performance indicators (e.g. ROE, TSR, EPS, Cost/Income, customer satisfaction, …) ROE = Return on Equity, TSR = Total Shareholder Return, EPS = Earnings per share White paper – Making Performance Management Work 43 © BetaCodex Network – All rights reserved
  • 44. How “radical decentralization“ is being reflected in the company´s organizational structure and decision-making Principles Customers Customer intimacy A large network of self-managed teams with full responsibility for 600 branch managers (Profit Centers) customer results Freedom and capability to act 12 regional Fast, open “Winning“ culture, combined with the managers information freedom and ability to act (Invest Centers) systems Governance and transparency CEO, Framework for decision making with product firms, clear values, limits and relative treasury, IT etc. targets, plus transparency Leads to maximum customer satisfaction! Source: BBRT Making Performance Management Work White paper – 44 © BetaCodex Network – All rights reserved
  • 45. Relative target definition through “league tables“ (rankings) – instead of planned, fixed targets and internal negotiation Bank to bank Return on Equity (RoE) Region to region Principles 1.  Bank D 31% Return on Assets(RoA)etc. 2.  Bank J 24%1.  Branch to branch Region A 38% Cost/income ratio etc. 3.  Bank I 20%2.  Region C 27% Relative targets and relative compensation 4.  Bank B 18%3.  Region H 20%1.  Branch J 28% 5.  Bank E 15%4.  Region B 17%2.  Branch D 32% 6.  Bank F 13%5.  Region F 15%3.  Branch E 37% Continuous preparation/ social control 7.  Bank C 12%6.  Region E 12%4.  Branch A 39% 8.  Bank H 10%7.  Region J 10%5.  Branch I 41% 9.  Bank G 8% 8.  Region I 7% 6.  Branch F 45% “On demand“ flow of 6% 7.  Branch C 54% resources/ 10.  Bank A (2%)9.  Region G 10.  Region D (5%)8.  Branch G 65% dynamic coordination 9.  Branch H 72% 10.  Branch B 87% Leads to lowest operational cost! White paper – Making Performance Management Work 45 © BetaCodex Network – All rights reserved
  • 46. Flexible coordination and resources “on demand“ - instead of allocations and budgets Headquarters/ Region Branches acquire resources through internal markets Resources Customer Branch (IT, HR etc.) demand Branches Branches alone are Branches decide over responsible for efficient observe necessary use of resources customer resource levels demand Leads to eradicating and avoiding waste! Source: BBRT Making Performance Management Work White paper – 46 © BetaCodex Network – All rights reserved
  • 47. White paper – Making Performance Management Work 47 © BetaCodex Network – All rights reserved
  • 48. Bonus Variable Bonus Common practice: hurdle area limit “Ceiling” „Pay for performance“ compensation Salary/ Reduction Maximization Reduction incentive: profile with fixed bonus incentive: Lower incentive: Anticipate postpone results to performance contract: result even more results next period Creates maniuplation incentive in any situation! Base salary 80% 100%: 120% Performance as % of target target of target of target realization Linear compensation curve without breaks: A better model: Result variable compensation becomes oriented compensation decoupled from targets profile with relative performance Salary/ Free from bonus incentive to manipulate contracts: No incentive to manipulation. Actual Actual Actual Performance in result #1 result #2 result #3 relative evaluation Source: Michael Jensen
  • 49. 1 very simple principle: Always disconnect compensation from targets. Always. 49
  • 50. Pay-for-performance is an outgrowth of behaviorism, which is focused on individual organisms, not systems - and, true to its name, looks only at behaviors, not at reasons and motives and the people who have them. I tell Fortune 500 executives (or at least those foolish enough to ask me) that the best formula for compensation is this: Pay people well, pay them fairly, and then do everything possible to help them forget about money. How should we reward our staff? Not at all! They are not our pets. Pay them well, respect and trust them, free them from disturbance, provide them with all available information and support to perform on the highest possible level. Alfie Kohn, Sociologist 1.  Pay people well 2.  Pay people fairly 3.  And then do everything possible to take money off peoples minds! All pay-for-performance plans violate that last precept!
  • 51. 1 very simple principle: Never use bonuses and incentives. Apply profit sharing and/or shareholding concepts for community. 51
  • 52. 1 very simple principle: Pay the person. Not the position. Always.
  • 53. “I don´t know if it is possible. What I know: It is necessary.“ Tom Peters Today we already know for sure it is possible. And we have also learned how it can be done. 53
  • 55. White paper – Making Performance Management Work 55 © BetaCodex Network – All rights reserved
  • 56. 56
  • 59. Make it real! www.betacodex.org A selection of associates: Silke Hermann Niels Pflaeging Lars Vollmer silke.hermann@ niels@betacodex.org vollmer@v-und-s.de insights-group.de nielspflaeging.com www.lars-vollmer.com Wiesbaden–New York São Paulo-New York-Wiesbaden Hannover/Stuttgart Walter Larralde Valérya Carvalho Chris Catto wlarralde@ valeria@betacodex.org christopher.catto@ on-strategy.com.mx Betaleadership.com putneybreeze.com.au Mexico City São Paulo Melbourne