quick intro to pay systems

Work Focused Improvement®Management Essentials for

Daily Use and Ongoing Improvement

By Sam Pratt

© 1986-2013 Samuel H. Pratt / SHP Consulting Limited

Quick Intro to Pay SystemsModule 1 of 44

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


Work Focused Improvementä... 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

People© 1997-2013 Samuel H. Pratt / SHP Consulting Limited

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

Work & Jobs© 1997-2013 Samuel H. Pratt / SHP Consulting Limited

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 non-repetitive 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.


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.


Two Types of WorkLinear Non-linear

Routine Tasks

Non-routine Tasks

Core Workers

Coordinators

Managers

Pay Systems© 1986-2007 Samuel H. Pratt / SHP Consulting Limited

Pay SystemsFuturistic Non-linear Work

Concentrated Linear Work

RepetitiveIndividual

Planning

Coordinating

Team

Pay for Periodic Bottom-line Results

Pay for Immediate Work Performed

Coaching

Collaborating

Measurable elements

Visioning

Gain Share

Direct Incentives

Pay Systems

Executives

Managers

Supervisors

Core Workers

Organization

Gain Share

Direct Incentive


Core Steps (Items 1 to 6 are essential and occur naturally while 7 is situational)

1. Perform Organizational / Environmental Analysis2. Develop Key Performance Indicator Matrix and Graphs3. Follow Work Essentials Process leading to Advancement List4. Design Pay System5. Use Scoreboards to make performance visible & elevate its impact6. Design Communications Program7. Conduct Leadership Training

WFI Pay Systems


10+ Pay System Design Steps(Captured in Workbook)

0) Select Design Team – match personnel with roles

1) The Group – who is covered by the plan2) The Formula – measures that define the gain3) The Baseline – value of formula that must be exceeded4) Smoothing Mechanisms – control volatility of payout5) The Curve – match the pay curve, culture, and stage6) The Share – how much goes to organization & team7) Payout Frequency – how often is bonus paid8) The Split – how are the gains distributed within the team9) Continuous Improvement Adjustment – keep opportunity fair

10) Capital Investment Adjustment – re-engineering recognition


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.


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


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


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

People© 1997-2013 Samuel H. Pratt / SHP Consulting Limited

The American WorkforceIn 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


Direct Incentive OpportunityThe 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

130%

120%

100%

Key Systems & Mechanisms© 1986-20010 Samuel H. Pratt / SHP Consulting Limited

Considerations When Setting BaselinesSocio-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


These are examples many available Pay Curves.

Actual Pay Curves extend below 100% for rating purposes.


Examples When GS is 25% and Direct Incentive is 30%

100.0% 100.0% 100.0%

30.0%15.0%

25.0%

12.5%

5.0%2.5%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

Person on DirectIncentive Only

Person on Gain ShareOnly

Person with 1/2 of Hourson Each

GS while on DI

GS Bonus

DI Bonus

Base Pay

When on Direct Incentive, an individual also gets a 20% Share of The Gain Share Bonus.

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


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


Direct Incentive Annual Continuous Improvement Adjustment

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.

Continuous Improvement Pay Curve Adjustment

0%

50%

100%

150%

200%

250%

300%

0 50 100 150 200 250 300

Widgets Per Hour

% P

erfo

rman

ce

2001 Pay Curve

2002 Pay Curve

Average 2001

Adjusted Average Opportunity Start 2002


Pragmatism, Culture, Reality, EtceterasSummary

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

Organizational Dynamics© 1997-2013 Samuel H. Pratt / SHP Consulting Limited

Over 30% total

improvementeach year,

and atotal of143%

improvementin 3 years

Over 30% total


and atotal of143%


Megan Patton Items from Article: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!

Three Years of Steady

ImprovementUnder Work

Focused Improvement

Actual data from a medical billing company

Quality Charts Processed per Person

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Apr

-99

Jun-

99

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-99

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-99

Dec

-99

Fe

b-0

0

Apr

-00

Jun-

00

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-00

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-00

Dec

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b-0

1

Apr

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Jun-

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-01

Fe

b-0

2

Apr

-02

0

20

40

60

80

100

120

140

160

180

Charts Billed

Employee Count

Linear (Employee Count)

Linear (Charts Billed)

Over 30% total


and atotal of143%


Long Term Care Division

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

3/1/

2004

3/2/

2004

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2004

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2004

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2004

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2004

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2004

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2004

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2004

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/200

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Close Files [inclusive]

Post EOBs [inclusive]

Issue Bill ( invoice) [inclusive]

Issue PO [inclusive]

Verify Order (Order Intake)

Verify Medicare #40% Reduction In Force after 9 work days on Pay System


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. Workable Stretch range 2. Slope or slopes of low section of pay curve 3. Slope of middle section of pay curve 4. Slope of high section or sections of pay curve 5. Intersection point at bottom and top of middle section 6. Ratios of opportunities between Direct Incentive and Gain Share 7. 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.

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.”


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.



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.




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.


quick intro to pay systems

Business

happy work

excellent work

nonrepetitive work

repetitive linear work

work essentials process

basic types of work

sam pratt

design pay system