Rewards Key to Productivity

Sadly, most American managers would rather pay lip service to productivity than money for it. Indeed, most companies would rather downsize, restructure or reorganize than have the guts and brains to better align their incentive systems with their corporate strategies. The simple truth is that if organizations really cared about improving productivity, they would be willing to pay for it.

“For decades, American management has been fascinated by moving boxes around on the organizational charts and thinking that they’re really managing change,” says USC management professor Edward Lawler III. “Their focus is on ‘Where should we put the boxes? We’ll worry about the reward systems later.’ ”

Sure, there’s a lot of lip service. A USC survey spanning 1987 to 1990 revealed that the number of companies practicing productivity “gain sharing” increased from 26% to 40%. But Lawler points out that, typically, fewer than 20% of the organization’s employees were affected.

“More companies are dabbling with pay for productivity,” he says. “Very few are doing it on a widespread basis.”

A company can reorganize and re-strategize all it wants. But to effect meaningful change--to really mold and sculpt its mission and values--it must radically transform the way it recognizes and rewards its people. In this decade, the real key to unlocking organizational innovation and productivity won’t be found in technology or quality or “teamwork”--it will be found in gutsy innovations in organizational compensation schemes that enable those things to happen.

If a company cares about quality, all the statistical process control charts in the world matter less than a willingness to reward people for producing defect-free goods and services. If a company wants to be more customer-responsive, special training needs to be reinforced by incentives that remind people to do the right thing. If an organization wants to promote “teamwork,” why on earth is it only giving merit raises for individual performance?

Far too much attention has been focused on the porcine excesses of top management pay. Of course it’s nauseating how grossly overpaid Peter Principle chief executives can be. But not enough thought has gone into the issue of how to effectively compensate the people who actually do the work. To be sure, Lawler observes that “it’s hard to have a credible pay-for-performance system if the top is not leading by example.”

The critical issue, however, is not how much a company should pay its top dogs but rather how can an organization create enterprise-wide incentives that motivate and reward the behaviors the company truly desires.

You get what you pay for, and most corporations have evolved astonishingly perverse compensation schemes that, more often than not, pay far more for promises than for productivity or performance. What does it matter if IBM is reorganized if the way IBM salesperson quotas are drawn up remains unchanged? How does General Motors have the gall to talk about quality when customer survey data plays only a negligible part in managerial compensation? Why don’t more companies explicitly reward their employees for boosting productivity?

“There is a moderately strong correlation between profit sharing and productivity,” observes Princeton University economist Alan S. Blinder, who edited “Paying for Productivity,” an extensive survey of economic research in the area. “On average, there seems to be a 3% to 11% increase in productivity in companies where profit-sharing exists.” For a Fortune 1000 company, Blinder notes, “a 3% or 4% or 7% increase in productivity can do dramatic things for the bottom line.”

But Blinder acknowledges that, for the most part, “economists have shown very little interest in this area. . . . There’s not a lot of technical sweetness.” We don’t know what the relationships are between incentive structures and organizational competitiveness. Economists find it easier to model the impact of new investment on productivity than new incentive structures.

“We have the most sophisticated compensation professionals in the world,” says USC’s Lawler. “They understand how to manage the cost side of compensation. When it comes to managing the behavioral side--the motivational side, the productivity side--then they’re in another world. . . . We’re really good at doing what was the right thing 10 or 15 years ago. . . . Most companies still seem to be stuck on individual pay for performance rather than realizing that true productivity increases come from team interactions.”

Yes, hundreds of companies are experimenting with pay for productivity. DuPont’s experiment in the area failed dismally, but compensation experts blame the company more than they do the concept.

“Today, compensation is at least as important as strategy,” asserts Jude T. Rich, chairman of Sibson & Co., which has a global clientele in compensation consulting. “The better managed companies now understand that you can’t separate strategic issues from people issues and that you can’t separate people issues from the compensation and internal communication issues.”

It’s ironic--sickening--that so much of the debate surrounding “competitiveness” revolves around slashing wages and workers rather than figuring out ingenious ways to reward productivity. At this moment in our industrial history, America needs compensation innovation--not just technological innovations--to assure its economic future.