January 27, 2004

Ecosystems Redux

What happens when you reward merit compensation (pay or bonus)? What are the effects of paying commission? Of performance bonuses? Of quotas? Stock dividends?

You reinforce local optimization over whole system improvement. People are forced to regard the part directly in front of them as the whole. Improve that part, and the whole will benefit. W. Edwards Deming writes: "The aim of anybody, under the merit system, is to please the boss."

An example. Imagine that you have a very simple enterprise: the production of metal plates of various sizes and thicknesses. Each team member is given a quota-the number of plates she will produce. Moreover, each team member receives an annual bonus based on productivity (the number of plates produced annually). Suppose further that stock prices are set and dividends paid based on productivity and inventory.

It is not too difficult to see what would happen. Those plates that are the easiest to produce will quickly form vast mountains of inventory. Plates that are harder to produce will be forever on backorder. Stock-holders walk away with nice profits. And-unhappy customers and the cost of maintaining inventory.

Another example. A salesperson over-promises in order to meet a sales quota and get the bonus. Congratulations, cheer-leading, and the annual award of Top Gun ring out in company celebrations and memos. Meanwhile, production groans under the burden of delivery, customer service must somehow handle the deluge of unhappy service calls-and there is a drop in sales two quarters down the line. How did that happen? Executive management offers even bigger sales incentives, seeing how it worked before. Sales remain stagnant.

Lean manufacturing refers to these kinds of behaviors as favoring local optimization over whole system improvement. This behavior is based on the notion that a whole is simply the summation of its parts-that by improving the parts, we can improve the whole.

Denning recommends abolishing merit pay and performance bonuses unless awarded to everyone in the organization. He also recommends salary rather than commission for sales people. Why? Individual merit pay, bonuses, and commissions force people to optimize to that activity that most readily brings personal reward: that is, local optimization.

Denning writes: "Reward for good performance may be the same as reward to the weather man for a pleasant day." That's because good performance is a product not just of the performer, but of the ecosystem in which she performs. As ecosystems, organizations promote personal growth through communication, collaboration, and relationship. In promoting personal growth, alignment naturally happens. We all want to be-are compelled to be-part of something that is bigger than just ourselves. When organizations promote collaborative and dialogical interaction over self-promotion and competition, they engender social ecosystems in which personal satisfaction and interpersonal interaction are inseparable. Such alignment means that what comes to be good for the whole comes to be good for its individuals.

How might this be done? By favoring processes that encourage collaboration, cooperation, communication, and relationship over processes that encourage independence, performance, and competition. What might this look and sound like? Talking, laughing, sighing, crying, yelling, forgiving, promising, requesting. An overhaul of the language games which constitute collective thinking. A coordinated and (self-)organized campaign to root out and eliminate needless waste, to learn from the customer, and to optimize whole-system throughput.

W. Edwards Deming, The New Economics.
E. Goldratt, Critical Chain.
P. Hawken, A. Lovins, L. Hunter Lovins, Natural Capitalism.
J. Highsmigh, Adaptive Software Development.
J. McCarthy, M. McCarthy, Software For Your Head.
P. M. Senge, The Fifth Discipline

Posted by mhamman at January 27, 2004 03:07 PM | TrackBack