You don’t have to be an engineer to appreciate this but, if you evry worked in a factory you totally understand this story
 
A toothpaste factory had a problem: they sometimes shipped empty boxes, without the tube inside.  This was due to the way the production line was set up, and people with experience in designing production lines will tell you how difficult it is to have everything happen with timings so precise that every single unit coming out of it is perfect 100% of the time.  Small variations in the environment (which can’t be controlled in a cost-effective fashion) mean you must have quality assurance checks smartly distributed across the line so that customers all the way down to the supermarket don’t get pissed off and buy another product instead.
 
Understanding how important that was, the CEO of the toothpaste factory got the top people in the company together and they decided to start a new project, in which they would hire an external engineering company to solve their empty boxes problem, as their engineering department was already too stretched to take on any extra effort. 
 
The project followed the usual process: budget and project sponsor allocated, RFP, third-parties selected, and six months (and $8 million) later they had a fantastic solution — on time, on budget, high quality and everyone in the project had a great time.  They solved the problem by using high-tech precision scales that would sound a bell and flash lights whenever a toothpaste box would weigh less than it should.  The line would stop, someone would walk over and yank the defective box out of it, pressing another button when done to re-start the line. 
 
A while later, the CEO decides to have a look at the ROI of the project: amazing results!  No empty boxes ever shipped out of the factory after the scales were put in place.  Very few customer complaints, and they were gaining market share. “That’s some money well spent!” – he says, before looking closely at the other statistics in the report. 
 
It turns out, the number of defects picked up by the scales was 0 after three weeks of production use.  It should’ve been picking up at least a dozen a day, so maybe there was something wrong with the report.  He filed a bug against it, and after some investigation, the engineers come back saying the report was actually correct.  The scales really weren’t picking up any defects, because all boxes that got to that point in the conveyor belt were good. 
 
Puzzled, the CEO traveled down to the factory, and walks up to the part of the line where the precision scales were installed.  A few feet before the scale, there was a $20 desk fan, blowing the empty boxes out of the belt and into a bin. 
 
“Oh, that,” says one of the workers  — “one of the guys put it there ’cause he was tired of walking over every time the bell rang.”

 This story provides an important lesson.  While the $8 million spent for the solution is probably exaggerated, the lesson is clear: If the company trusted and involved employees in identifying and solving problems it could have avoided the huge cost of hiring an outside firm and would be significantly more profitable.   Note that stories like this are common in virtually every medium or large-sized business today, though most are not as striking.

Trust is the key.  A fundamental requirement of good business is trust, including management trusting employees and vice versa.  Trust means management doesn’t have to watch over the employees like a hawk because management understands a fundamental concept of human nature: everyone wants to make a positive difference and feel valued.  When management displays trust and provides the help people need to make their jobs and their products better, people will make them better.  This is only enhanced when management publicly recognizes group and individual efforts and resulting improvements.   Similarly, employees feel better about their jobs and spend less time worrying “around the water cooler” when they trust that management cares and feel like part of the team.

Smart management is the enabler of good work.  It is up to management to provide the environment, communications, and tools to make it possible for workers to do the right things for the company, themselves, and society.  The employees in the story above wouldn’t have improved the toothpaste production line if they hadn’t known there was a problem.  Bringing news of the problem was management’s job.  This illustrates that when employees are informed and have the ability to make a positive difference, they will.  Still, it is up to management to give workers time to learn about and solve problems as well as the authority to implement solutions (all of which requires trust).  Trusted and informed employees, armed with the right training and tools, can solve problems and improve the quality of not just the product, but also working conditions, and do so at the lowest possible cost.

Trust yields other benefits.  Employees who feel trusted and empowered enjoy their work more and feel better about themselves and their employer.   A trusted workforce will perform better in almost every way than one dominated by a command-and-control, “need-to-know”-oriented, bureaucratic management.

Workforce quality improves in an atmosphere of trust.  Trusted employees have lower rates of absenteeism, for example, which is a cost saving and productivity boost to the company.  Since stress is a big factor in overall health, and stress levels are lower when there is less uncertainty, trusted and informed employees will be healthier and have less sick days.  They are also likely to be more receptive to new ideas and welcome training that will make them more valuable to the company.  This works best when management communicates openly and allows involvement of all employees down to the janitors in addressing important business challenges.

Trust breeds higher efficiency.  When management trusts employees managers can spend more time on important issues and let subordinates make more decisions, recognizing that they will come to management with their needs only when they need help, and the rest of the time will solve day-to-day issues quickly and efficiently.  When skip-level communications can occur without worry or political risk, a manager does not feel the need to impose herself/himself as a communications “gatekeeper” to avoid ending up “out of the loop.”  The manager can also give more freedom to employees, who can be confident that they won’t be second-guessed or overridden by their superiors, and that their superiors will be reasonable and fair with them.

Trust breeds loyalty.  Trusted employees are also far more willing to put out extra effort when needed, not fearing that they will be taken advantage of, and are far more likely to protect their employer’s interests if a risk of a leak of sensitive information to a competitor might arise.  A trusting atmosphere in a company makes it a desirable place to work and helps it to attract the best workers.

Trust breeds creativity and innovation.  When employees feel trusted to solve problems and improve their work, and are encouraged to collaborate and work together as a team, they also feel free to investigate and try new things.  Those “things” can result in new products, new methods, and even the opening of new markets.  All of these factors enable the company to grow and be more profitable, and outperform its competitors. 

Can a trusting environment be maintained in only one part of an organization?  Generally trust in an organization must come from the top to produce maximum benefits.  If the CEO does not trust, their subordinates and everyone down through the organization will also learn not to trust.  In such a case, an individual department or division manager may be able to establish a positive and trusting environment for their employees, but they will have to fight the prevailing corporate culture almost daily and in many ways to sustain it.  This requires extra conviction and effort that will be hard to sustain over the long term.  Peer managers will often not understand and may think the trusting manager is a fool, even though a department with a trusting environment will exhibit superior productivity and higher product quality.  Superiors may fail to understand and be uncomfortable with the manager who bucks the prevailing culture.  Superiors will need to be shown the improved results, if such can be done, and even then may fail to understand the dynamic behind the results.  At best they may only be content to let the trusting manager continue since the better results reflect positively on them. 

When trust doesn’t come from the top it’s extremely hard to sustain a high-performing group.  Eventually, in my experience, the trusting manager in a non-trusting organization will burn out.  The battles with peer managers over policy and direction of employees, the need to justify being different to superiors, and the stress of being different will overwhelm the greater sense of satisfaction that comes with managing a loyal, high performing team.  In such a case the trusting manager may leave the company or management position for their own peace of mind or even health, and the department will settle back to operating like the rest of the company.

People can learn – the story of a manager’s conversion to TQM. 

I worked for years for a manager who at first was quite tough.  He made his expectations clear and wasn’t too bad to work for, but there were instances when he would behave in a vindictive way. 

I make a political mistake.  In one case I was standing with my boss and one of his peers (a manager from another department), and my boss made a misstatement that could have caused problems.  I spoke up to correct him as tactfully as possible but I apparently wasn’t tactful enough.  A couple of weeks later I was presenting to a couple of dozen employees from my own and other departments when suddenly my boss was asking questions of me, and not just normal questions but questions tinged with a certain “Have you stopped beating your wife yet?” sort of accusatory tone.  I was taken aback as my manager essentially “hung me out to dry”, asking more questions in a way that suggested that I didn’t know what I was talking about or had made some serious error.  I had expected he would be backing me up on the topic I was speaking on since we had met and agreed to the content of the talk in detail beforehand, but now he was making me look bad in front of a room full of people.  I felt shell-shocked by the time I left the meeting, but then remembered that incident in the hallway when I had corrected him, and the connection was suddenly clear.  He had been upset that I, a subordinate, had corrected him in front of one of his peers, and this had been his way of punishing me.  I was angry, to say the least, but didn’t feel there was anything I could do.  It was clear my boss didn’t feel he could trust me and even felt threatened by me.

Calmly sticking to my guns paid dividends, but didn’t make the work better.  On another occasion I was meeting with my boss in his office and I asked a tough question he apparently didn’t want to answer.  Instead of giving me an answer he got visibly upset with me and changed the topic to one where he could put pressure on me.  I had been in counseling for work-related stress, and had learned the value of staying extremely calm in such situations, so I tensed and relaxed my leg muscles under the table, took a deep breath, and stayed calm and collected.  When possible, I brought my question up again – it needed an answer for me to do an important piece of work.  Again my boss, now raising his voice, went off in another direction, avoiding my question.  When he reached a stopping point and it seemed appropriate, I again asked my question, and this time he nearly flew off the handle.  When he stopped again – this time he had actually been yelling at me – I explained in a very calm voice that I would need an answer to that question to finish important work, and I hoped he could get back to me with an answer soon so I could get the work done on schedule.  Then I excused myself and left his office.  While he never got so upset with me again, he did treat me with more respect after that.  Still, the organization’s culture and management style continued to not permit people to do their best work and to drive a lot of needless waste into day-to-day business.

Enter the Deming Library of video lectures.  At about the same time I was exploring the little-used company library and found shelves full of business training videos, among which were almost an entire set of the Deming Library as well as video lectures by Joseph Juran, Philip Crosby, Tom Peters, and other business gurus of the day.  I checked out one of the Deming videos and watched it in an empty conference room on my lunch break.  I found it so profoundly illuminating that I told my coworkers and, when I watched the next video, several of them joined me.  Over the succeeding weeks a number of us watched the whole series, and some of the other videos in the library, too.  We discussed what we were learning and it was obvious that our company could benefit greatly from implementation of some of the concepts. 

My boss joined us to see what was going on.  Before long my boss got wind of our lunchtime meetings and began joining us, and he also found the material informative and even inspiring.  Within a couple of months he was trusting us to try implementing some of what we were learning in our day-to-day operations, and letting us have a department meeting every Friday morning to bring in problems and organize efforts to solve them.  The results were good, problems were solved, and people started feeling better about their work.  Communications were more efficient, too, as we stopped worrying so much about “going through channels” and just moved information around as efficiently as possible, keeping our boss up to date in a weekly meeting if not via direct contact or other means.  Our boss came out of his office a lot more and walked around talking to people, keeping in touch with our efforts and providing help, “breaking bureaucratic log jams” when we needed that.  Over a period of months the quality and efficiency of our work increased, department costs were driven down, and our boss became happier and increasingly a proponent of TQM and the teachings of Dr. Deming and others.  For several years thereafter we were all noticeably happier and more productive, even as our company saw greatly increased competition and a tougher business environment.  Everyone was enthusiastic about stepping up to the challenges of the business.  It was one of the best times in my entire work life, and that feeling was held by all of us in the department. 

Being different is rarely easy.  Our boss, however, had to contend with political sniping and backbiting from his peers who failed to understand what he was doing, and had to defend his different style of management to his bosses even though his financial and product quality results were superior to those of his peers.  Other managers held to the old model of assuming that an employee, if left to alone, would certainly goof off, for example, and they felt my boss was a fool even while they paradoxically felt threatened by the good results he was achieving.  Eventually he became burned out and frustrated from having to fight for his approach to management, and asked to be demoted back to engineer coincident with cross-company cost cutting, layoffs, and a reorganization that radically changed departmental structure. 

The company failed to learn from our experience.  It was a sad time for all of us as we were dispersed to work under new bosses, almost all of whom hewed to the old ways of the company.  Our commitment to the company declined, and the quality of our work probably did as well.  Certainly efficiency dropped and costs rose as we found ourselves frequently wondering what management was doing and why, and had to resume more bureaucratic behaviors such as running all communications through our supervisors.  We learned a lot and most of us took it with us to other companies as that employer shrank to a shadow of its former self.

Real and lasting improvement must come from the top to be sustainable.   I have seen many organizations trying to improve their businesses and change their cultures, but it is extremely hard to do.  It is even harder if the change doesn’t have the understanding and support of top management.  As in my example, while big improvements can be made, they will be temporary unless the whole organization takes them to heart.  The best way I know for that to happen is for the CEO or other top manager to learn the fundamentals behind the desired change and then pass the knowledge on, down the management chain, so that every worker need only ask their immediate superior to learn more about how they can do better and more enjoyable work.

Real improvement is based in understanding fundamental ideas like trust.  During the 1980′s many companies tried to implement TQM but few made it stick.  Most companies failed to learn one of Dr. Deming’s key lessons: you cannot copy others successfully.  You must instead learn the fundamentals and implement them at a philosophical level.  A positive and constructive philosophy will inform better company strategy, and the strategy will then drive more efficient and effective tactics and products and lead to better company performance.  While this all makes sense, most managers are poorly trained and simply try to replicate management behaviors they’ve seen before or that are common among other company managers. 

The TQM era faded away with too few good implementations.  In the end, many companies held meetings, talked a lot, organized people into teams (but didn’t always think about what the team was to accomplish), and trained everyone in simple analytical tools which, by themselves, failed to yield enough benefit to keep them in use indefinitely.  Very few companies embraced the fundamental principles, the importance of understanding human nature and the drive all healthy people have to do well.  TQM principles were condensed into the simple analytical tools which were then described in books and widely touted as keys to corporate success, sold under names such as “Six Sigma” and “Lean” (later combined into “Lean Six Sigma” by some enterprising but clueless exploiter of others’ work).

Quality standards institutionalized in the TQM era were often misunderstood.  When ISO9000 standards, among others, became established and governments started demanding certification in order to get their business, many companies took the plunge.  Most, however, only saw those standards as a permit to seek business, not as a great opportunity to improve their operations and products.  I was an ISO9000 coordinator and later internal auditor for a major multinational corporation, and wrote many procedures and standards for the company.  While the procedures and standards had value, it never came close to the value the company could have achieved by implementing fundamental principles such as building trust into the corporate culture. 

Quality standards are still frequently misunderstood and poorly implemented.  I have worked for a number of companies who trumpet their audit results far and wide: “We passed our ISO audit and got no findings again this time.”  I (and any auditor worth their salt) know that you can find an ISO9000 violation on almost anyone’s desk or by asking them a few key questions about how they do their work.  The absence of audit findings says the auditors did not look or did not report what they found, and that the company is clueless about the value of such standards and getting little benefit from the work they are doing to implement them.  New standards such as CMMI entered over the years, with the added benefit of requiring continuous improvement, but companies are as good at “sliding by” now as they were thirty years ago, and it is lucky if such pursuits do any more than increase cost.  Sadly, the potential for gaining real benefit from such standards is rarely realized.

Unfortunately, trust never caught on as a management concept.  Perhaps the fundamental concepts taught by Deming and others were too simple or deep to be understood by most.  They may have also seemed threatening to old line command-and-control style managers.  In general, those companies whose founders and/or top managers were savvy, positive thinkers already had the concept of trust built into the way they operated, and their companies generally did well, especially when you control for external variables such as market and regulatory changes.  Most companies operated essentially as before, however, maintaining the mistaken belief that managers’ are to give orders and subordinates are to follow those orders, and that nobody can be depended on for anything more than the most basic functions of the job they have been assigned.  Never mind that each employee is always far more than just their job, and most have valuable insights and ideas well beyond the scope of their work from which the company could benefit.  The clueless, untrusting manager misses most or all of that, and the company’s performance is usually mediocre as a result.  To this day the major business schools fail to teach the fundamental concepts behind business success, of which trust is a key part, and most students never learn the teachings of W. Edwards Deming or his contemporaries.

 As always, I welcome your comments — Tim

Organizational incompetence leads back to the usual source: poor management.  By this I am referring to cultural and systemic defects, and shortfalls in the talents and skills of managers in the hierarchy of the organization.  Small failings in unrelated areas of the organizational management structure can even combine to create clumsy or otherwise dysfunctional operations, and dysfunctional operations tend to be the most easily observed manifestation of organizational incompetence.  Usually activities that are routine for most businesses are noticeably beset with stumbles and roadblocks, or political issues involving fear, or with authority that is only an appearance and not reality.  Following the trail of evidence suggests root causes and, as in any proper root cause investigation, each cause typically has another (or several) behind it.  Let’s look at a case study.

An old, large, and successful corporation provides a good example.  Once I was in a meeting that got me thinking about this topic.  A major company project kept hitting rough spots and the stress was noticeable in meetings.  The company seemed focused on budget control to the point that their people had to stop work on our project on more than one occasion because budget had not been authorized on time.  I asked an acquaintance who was at the meeting about this and we arrived at the conclusion that the company, more than a century old with many successes behind it, either did not have an established spending plan that would support the project (unlikely?) or had a very dysfunctional spending plan (more likely?).  One might expect that an experienced organization would have such a plan and administer it in a way that would never get in the way of the work, but this was apparently not the case.  But was this really the root cause of the work stoppages?

In root cause investigations it is often prudent to dig deeper.  We considered the apparent lack of good funding management, and I conjectured that somewhere above the project there was a manager who was very sensitive to budget control and who was approving funding in only small increments, and only at the last minute, possibly due to a requirement for difficult-to-produce justification.  I further theorized that that person was probably not incompetent, but was probably driven by higher management to make financial control such a high priority that they felt it required a miserly approach – granting funding in tiny increments and at the last minute (or late).  Some managers are just cheap, or have no sensitivity to the impact their decisions, and the timeliness of their decisions, have on the success of the organization beneath them.  Some managers think that if you keep funding marginally low, workers will be more creative and will find lower cost ways of getting the work done even though there is no coherent direction or approach for this change.  Some managers may receive bonuses tied to the amount of funds they save or don’t spend.  This rarely works out well, unfortunately.

I almost never say a person is incompetent, as this should usually be qualified with “in the position where they’ve been placed”.  It may be that the person is well suited to being a dog catcher or a CEO, but either one will probably perform poorly as an engineering supervisor, for example, unless they had prior training and experience.  It is simple management savvy that virtually everyone (who isn’t a sociopath), wants to do good work, feel like they’re contributing positively, and feel they are appreciated for it.  Unfortunately people often are promoted or hired into positions for which they are not adequately trained, or for which they are simply not well suited.  Thus, incompetence must almost always be viewed in the context of the position, the organizational structure and type of business involved, and the management above.  In many cases the way the organization is structured, or the way division managers are compensated, leads to internal conflict or competition that reduces productivity and creates needless stress.  In other cases there is a management style at higher levels that leads to dysfunction lower in the organization.  Sometimes it is the reasons managers are given bonuses that drive dysfunctional operations. It takes savvy about human nature and the nature of organizations to understand and avoid such problems, common sense you might call it, but common sense is anything but common.

The trail of causes usually leads higher.  Manager X is keeping too tight a fist on funding, and is causing problems for at least one project beneath them.  The funding plan most organizations would put in place before project inception is either absent, requires too many approvals or too rigorous justification, or otherwise drives the unplanned work stoppages.  It is possible that financial management is either disconnected from the needs of the project or doesn’t understand the scenario they are essentially creating.  Manager X and/or his or her superiors may lack needed training in finance.  Someone in management may completely misunderstand the cause and impact of the work stoppages, and may blame them on subordinates or other parts of the organization such as project management.   The financial system may be below industry standards or need a fundamental redesign to suit the nature of the business.

Sometimes no clear root cause can be identified, and intuition and a sense of relative probability are needed.  As one pursues the trail of causes less and less data may be available, and the pursuit may end up with a tree structure of possible chains of cause and effect that can only be reduced by gathering more information or, barring that, applying inductive reasoning.  Here is a fishbone diagram I constructed, not fully developed but indicating directions and possibilities, to address the issue described above.

Fishbone (Cause and Effect) Diagram of Work Stoppage Problem

Understanding is a key part of coping effectively with any situation.  When you are forced to work with an apparently dysfunctional organization an understanding of its problems and their causes can mitigate some of the negative impacts.  If you know that they typically approve funding at the last minute and/or in small, barely sufficient amounts, you can apply a little risk-mitigation strategy.  For instance, you can ask the highest management you have access to to see that sufficient funding is approved,  and approved early enough to avoid work stoppages.  You can also ask that the topic of funding and timing of approvals come up regularly on the agendas at management reviews of the project, specifically citing losses in time and increased cost due to the work stoppages.  You can lobby behind the scenes to identify and influence people within the organization who suffer from or can at least see the problem, and perhaps positively influence the group that appears to be at the root of the problem.  In most cases you will never get to the deepest and most fundamental root cause(s), but if your actions prevent an extra day of work stoppage you have served the company well and saved it significant though often difficult-to-measure funds. 

Don’t assume others are seeing or thinking about the problem.  Dysfunctional operations, by definition, involve waste and reduce the positive impact of projects on the firm, but they are part of the system, which may have evolved over a long time or been set up by someone still on the scene who has a vested interest in it.  While you might think managers would be sensitive to such things, their position in the system frequently blinds them to important aspects of the problem, and they may have no view or sensitivity to the root cause, or may feel powerless to address it.

Progress is typically incremental.  While you may not be able to create any big change for the better, you can still focus attention on the issue(s), suggest small changes that will add up to improvement, and eventually see the problem mitigated to some degree, which is still a win for you and the organization.  Just helping people to see that there is a system, planned or evolved, by which things get done can lead to lasting improvement as they come to understand the system itself is the best place to make positive change.

In the final analysis, no organization or person is perfect.  Perspective is always a factor.  To the person who lives on the Great Plains, a mole hill may loom as a significant feature, while to a person who lives in the mountains, that mole hill may be quite invisible.  Try to look at the issues you confront in the overall context of the company, the industry, and the country in which it operates.  Try to anticipate how top management sees your issue (or if they see it, or need to see it).  Use tact when approaching such problems – there are many reasons to do so – and always take a positive and constructive approach.  In all cases you should not focus on blame, or how the situation arose unless that would be key to solving it.  Instead focus on the value of correcting the system in a way that will last and prevent future occurrences of the problem.  Your proactive approach might be noticed, and it will reflect positively on you.  If, on the other hand, all you are left with is a better understanding of the organization and its systems and culture, you are still better off.  Best of luck to you.

As always, I welcome your comments. — Tim

Why do pay-for-performance, merit increases, and periodic performance reviews fail?  Bad feelings are inevitable when people are tested or evaluated and then ranked against each other. The sense of being ranked against others is persistent and divisive. Even where the company claims that people aren’t compared to each other, or when peer reviews and other modern approaches are implemented, the process of being evaluated and rewarded, retrained (punished), or even let go leave a bad taste in people’s mouths.  Sometimes when management has tried to be more constructive with the evaluation scheme and disconnect it from pay raises, the imposition of budget specifically intended for pay increases has undermined the attempt and left employees even more unhappy and angry than usual.  Just the thought of being evaluated is sufficient to cause stress, and the idea that one would be penalized for work performance when one is doing the best one can under the circumstances is itself unfair and distressing.

The individual is not solely responsible for his or her results – the system and culture are involved.  Dr. Deming proved this to us quite powerfully with his Red Bead Experiment, in which workers tightly constrained by the system are rewarded or penalized based on results predominantly influenced by random factors in the system. This exposes one of the critical flaws behind individual evaluations: they don’t take the circumstances (including artifacts of the systems and culture in play) into account in any systematic way. Thus, annual reviews and pay-for-performance fail to deliver the promise of improved performance and completely ignore the systemic nature of work in any human organization, while frustrating and demoralizing employees and putting them in competition with each other instead of instilling a desire for collaboration and company success.

Why performance reviews?  Because they are easy.  Performance reviews have been pervasive because the concept is simple and seems intuitive. The problems come from the fact that reviews and evaluations don’t require management to face the problems their people are experiencing, either on or off the job, and from the fact that periodic reviews focus only on the outcomes, not the systems and processes (part of “the circumstances”) that govern how productive people can be.  That’s like driving by looking in the rear view mirror – you can make corrections but you won’t know if they are the right ones, and by the time you do know it’s too late because you could only see them when they were in the past.  So what did Dr. Deming recommend as a replacement for annual reviews?

As usual, homework done “up front” is worth far more than people realize.  By homework I mean actions management can take before and directly after hiring an employee that will ensure better performance by the employee and the organization over the long term.  Taken directly from Out of the Crisis, Dr. Deming’s seminal work, here are his eight recommendations for replacing pay-for-performance and systems that rank employees by their individual performance, interlaced with my comments:

1. Institute education in leadership, obligations, principles, and methods. *1

Understanding the fundamental factors defining a productive, team-oriented workplace is of highest importance.  Few people are taught the fundamentals of systems thinking and organizational behavior today.  Once a person learns the fundamental principles of how systems work and the impact of organization culture on performance (important leadership training), however, they see their work and the organization around them in a new light.  Understanding that the expectations and guidance given the employee by the organization around them fundamentally governs and predicts the employee’s performance is an epiphany for many, a real wake-up call, and essential knowledge for effective management.  Leadership involves guiding systems and enabling employees to be more productive and creative.  Management is more about monitoring and managing outcomes, and taking corrective action after the quality of the results is determined.  Leadership style is a big factor in determining the culture, which indirectly but powerfully influences performance by individuals and the organization as a whole. 

2. More careful selection of people in the first place. *2

It’s exceedingly difficult to make a silk purse from a sow’s ear, so concentrate more on hiring “silk”.  For an employee to do their best they need not only to have the appropriate skills and an understanding of the job they are to do.  They also need to have a personality that will enable them to interact effectively with the rest of the people and conditions in the system.  Most hiring is done either based on a narrow set of rules and requirements delivered to a department responsible only for finding people with the right skills and without an understanding of how the business actually works, or by an even less rigorous “gut feel” on the part of one or more managers, or through some combination of both.  A manager armed with a fundamental understanding of the systems, culture, and other details of the business as well as a decent understanding of human nature can do much better.  Part of that understanding is gained by working closely with subordinates, peers, and superiors to understand the challenges the organization faces and how those challenges are felt and dealt with at different levels of the company.

Increased emphasis on hiring high quality workers who fit in with the culture produces lasting though hard to measure improvement.  Increased focus on the hiring process and finding candidates more in tune with the culture, pace, and nature of the business, etc. can go a long way towards producing lasting improvements in organizational performance, yet it may be exceedingly difficult to attach those results to particular individuals.  (Identifying star performers in an organization may be misleading and unfair to those with whom they work, and may be a sign that teamwork and team spirit are lacking.)  Without such knowledge many managers view hiring as a painful necessity and a bother, as something that takes them away from their job of running the business.  If this kind of clueless hiring and evaluation continues, eventually the company can be saddled with a large proportion of ill-suited and poorly chosen workers who will hinder performance and profitability in subtle and immeasurable ways for years.

3. Better training and education after selection.  *3

Being hired and then “thrown into the pool to learn to swim” is a poor substitute for proper training.  How many times have you been hired into a firm and given a desk, only to flounder for days or weeks trying to provide value to the organization while feeling frustrated and lost?   In my experience over approximately five different careers, it takes several weeks after starting with most companies before one can contribute substantially, and three to six months to “know the ropes” and be able to function in relative comfort and with good output.  This is wasted productivity that could be improved, and the ramp-up time reduced, with the aid of training for all new employees the first weeks after they sign on. 

Training immediately after hiring can reduce unproductive time and increase worker effectiveness.  A good grounding in the fundamentals of the business, the history and culture of the organization, principles of leadership and systems theory (including control limit theory), communication and record-keeping systems, and the procedures, standards, and guidelines employed by the firm can be acquired in a few days.   Usually those early days would have been of only marginal productivity anyway, and such knowledge will allow the worker to reach a good level of quality and throughput in her or his job much sooner than otherwise.  In addition, the worker’s morale will be enhanced by the knowledge that the firm is willing to invest in them by providing such education, and they will meet people, build relationships, and absorb the less-quantifiable aspects of the culture in the process.

4. A leader, instead of being a judge, will be a colleague, counseling and leading his people on a day-to-day basis, learning from them and with them.  Everybody must be on a team to work for improvement of quality in the four steps of the Shewhart cycle shown in fig. 5 on page 88.  *4

Real leaders are collaborators and coordinators rather than “generals” giving orders.   The most effective managers I’ve worked for have been collaborators, genuinely interested in the people they work with and who work for them, and focused on enabling those who work for and around them to do their best work by eliminating barriers, identifying need for and providing training, and keeping everyone focused on monitoring and improving the systems by which the work is done so that the output was of highest possible and ever-increasing quality.  The Shewhart Cycle is, of course, the famous “Plan – Do – Check – Act” loop which is expressed in so many ways in various popular business improvement schemes, but which is fundamentally always the same. 

5. A leader will discover who if any of his people is (a) outside the system on the good side, (b) outside the system on the poor side, or (c) belonging to the system.  The calculations required (illustrated on p. 114, ch. 11, and elsewhere) are fairly simple if numbers are used for measures of performance.  Ranking of people (outstanding down to unsatisfactory) that belong to the system violates scientific logic and is ruinous as a policy, as may be clear from the text and from chapter 11.  *5

A leader understands how to evaluate performance and improve operations without demoralizing workers or misdirecting them to focus on their personal results at risk of undermining or sub-optimizing the results of the team as a whole.  Focusing on the sub-processes and the quality of inputs at each stage of each process, and giving employees the ability to not only see the results but to actually take the measurements and suggest improvements themselves, is the way to maintain teamwork and achieve improvements in the quality and profitability of the entire organization.  Workers with even rudimentary training in the use of control limit calculations, and with the ability to measure key parameters involved in their work processes, will improve their work. 

Ranking people sends a destructive message.  Once workers think they are being ranked, or that they are being rewarded or penalized based on any measured aspect of the system, they will focus not on company results but mostly on improving that specific measurement, possibly degrading results of surrounding, interdependent processes and the organization as a whole.  The determination of whether results are within the workings of the system or a result of some external cause is made by using the Shewhart control limit calculations, which establish control limits showing the inherent variability of the system when it is running normally and which make it easy to detect external “special causes”.   Note that these special causes must be eliminated before the system can be said to be stable, and it cannot be systematically improved unless and until it is stable.  This understanding is fundamental to be able to make meaningful and lasting improvements in company results.

6. The people of a group that form a system will all be subject to the company’s formula for raises in pay.  This formula may involve (e.g.) seniority. It will not depend on rank within the group, as the people within the system will not be ranked No. 1, No. 2, No. last.  (In bad times, there may be no raise for anybody).    *6

Pay raises are best determined by a common formula, applied to everyone for fairness’ sake, that is NOT performance-based.  While most of us are used to the old, clueless and destructive way of performance measurement, people will understand, with education, why a non-performance based system is used:  it produces happier workers and better company results.  An organization that administers pay increases and other rewards in this way will thus avoid the bad effects from ranking. 

7. Hold a long interview with every employee, three or four hours, at least once a year, not for criticism, but for help and better understanding on the part of everybody.  *7

Periodic interviews are more than, but a positive addition to, practices such as “management by walking around.”  Much has been written about “management by walking around” or MBWA, a concept pioneered at the infant Hewlett Packard Corporation in the heydays of Silicon Valley.  This concept gets managers out of the office and out among the workers and processes they need to understand and guide.  Adding regular discussions to learn of problems affecting the employee’s work, and of their suggestions for improvement, taps into their expertise and allows them to provide significantly increased value to the company.   7*

Socialization into the organization’s culture provides significant but hard to measure influences on company success.  When employees of differing authorities see each other frequently and interact in a social as well as purely-work related context they not only form productive relationships but also better understand their places and functions within the overall system.  “Putting a face on” things is a powerful way to get people to relate to them, and people will, for instance, better know what impact they might have on another worker or group if they cut corners in their implementation of any of the company’s processes.  This will increase stability in the overall process and results and enable real improvement, as well as improve the work-lives.  A manager who understands the strengths and weaknesses of their employees can better utilize those strengths and more appropriately assign people as new work is available and new responsibilities are needed.  Employees who have personal contact with their supervisors and maintain an open and trusting relationship with them will feel much better about their jobs than otherwise, and this will show up in their commitment to the work and the company, as well as in specific areas such as reduced absenteeism.

8. Figures on performance should be used not to rank the people in a group that fall within the system, but to assist the leader to accomplish improvement of the system.  These figures may also point out to him some of his own weaknesses (Michael Dolan, Columbia University, March 1986).   8*

 This final point captures the fundamental reason for adopting this new practice instead of regular evaluations and pay-for-performance.  People are the basis of every business, and the true source of lasting success and profitability.  If people are engaged in improving the process, and allowed to experience and be proud of their contribution to the good of the team, they will perform far better than if they are not.  The fundamental concepts involved are striking in their simplicity.  Anyone with a basic understanding of statistical methods can master the control limit theorem and related calculations, and then, with management support, use them to provide significant benefit to the organization.  These methods enable continuous improvement of product and process, which leads to greater pride and job satisfaction for all employees as well as better results for customers and suppliers alike.  A company that adopts these methods and strives for ever-better understanding of its business fundamentals by all employees will advance faster than its competition, and will most likely carve out a stronger market position and establish a pattern of lasting success over time. 

Unfortunately, much of Dr. Deming’s teachings was allowed to fall by the wayside, though it is still there to be gained and used.  While much of the western business world ignored Dr. Deming’s work, those few that took it to heart had significant periods of success above and beyond their competitors.  Unfortunately, management, worker, and ownership turnover allowed much of this fundamental knowledge to be lost to some of those organizations.   Parts of the knowledge Dr. Deming gave us are still in use, renamed and “productized” under names like “Six Sigma”, but usually without the fundamental core that produces the most positive effects.  Fortunately, the knowledge is still there to be gained and used, and those who learn and internalize it will be better workers and organizations as a result.  I can’t recommend enough that anyone who works in or is interested in business obtain Dr. Deming’s books, tapes, and videos and gain a good understanding of them.  The knowledge there is fundamental, head-smacking stuff that will provide a different and more logical approach to business improvement and success.

As always, I welcome your comments.  — Tim

*1 – p. 117,  Out of the Crisis, W. Edwards Deming, 1982, Massachusetts Institute of Technology, Center for Advanced Engineering Study, Cambridge, MA 02139
*2 - ibid
*3 - ibid
*4 - ibid
*5 - ibid
*6 – ibid
*7 – ibid
*8 – ibid

I imagine this device in a meeting, how it might be introduced, how some (possibly of senior rank) might react violently to its presence, or think it extremely unfunny, and unwelcome.  I then consider how one’s career might be damaged.

I also imagine it on the table at a working meeting that includes no managers-or-above.  People would probably accept it with humor and then keep checking it throughout a meeting.  My sense is it would measurably save time and cost.

Now the problem: how to introduce it …  see if colleague Robert would take a fancy to it and use it in one of his meetings? … Leave it sitting on my desk for a while and see if someone notices it? … (see how fast it gets stolen) … Jeff seems crazy enough – he might use it …   I can’t help it.  The thought of trying to introduce this to most groups at work makes me cringe, but the effect would be so fine to see.

Anyone who has ever been through a routine performance review knows how worthless they can be. Your boss sits across the desk from you, and together you review what went wrong and right during the past year.  You try to play up anything that might reflect positively on your evaluation, hoping there might be a good rating and a raise in it for you.  You also try not to bring up the things you fear might reflect badly on you, and may otherwise feel motivated to play a defensive game, the intensity of which depends almost entirely on the tone of your relationship with your boss.  Your boss may try to make it a useful process, but is probably as uncomfortable as you are.  For some reason regular performance reviews never provide much value, and the reasons why are rooted deeply in human nature.

Why do regular performance reviews seem like such a waste of time? It is rare to walk out of a performance review feeling like something positive has been accomplished (except for any raise you may have been granted).  The supervisor may realize that this meeting is superfluous to your day-to-day interactions, by which they know exactly what and how you’ve done in the past year, or they may feel awkward because they don’t have much interaction with you on a regular basis and really have little understanding of what you do.  Depending on how advanced the organization is, there may be customer-derived metrics from internal or external sources that provide empirical evidence of how you did, but this is as rare as a good understanding of such matters, and meaningful metrics are even more rare.  Finally the meeting concludes with some kind of agreement on how you did, you sign the form acknowledging the review, and maybe you get a raise, or maybe not.  Some managers see formal periodic review as a tool for building a case to discharge an employee who isn’t doing well in their job, has a personality clash with someone in management, or who has been in the wrong place at the wrong time.  There are as many possibilities for such a scenario as there are people, but none of them create much if any positive value for the individuals or organization involved.

Re-design of the periodic evaluation concept has been tried before. In the 1980′s, as Total Quality Management was maturing, some of us were taking hard, analytical looks at how the organizations in which we worked operated.  Common business practices like performance reviews were among the areas getting considerable attention, in part because of the personal pain and sense of lack of value most of us perceived as we went through such systems.  Many revisions of the concept and processes around it were tried in efforts to make it a constructive process.  In some of the most constructive revisions, the performance review was cast as a frank discussion between employee and direct supervision, with a focus on how both (all) individuals involved could improve, and with attention to what benefits the customer and business would see.  Unfortunately the wide variation in supervisor employee relationships, both functionally and personally, sap the value from the process in spite of the best intents of those involved.

W. Edwards Deming revealed the truth: the individual rarely plays a key role in overall results. People in groups behave mostly as they feel they are expected to behave, and their motivations are complex, but it is the systems by which business is done that define the results far more than anything else, and designing and managing the systems is the job of management, not the employee, though they will define the limits and quality of results.  Organizational culture is a tremendously important factor, too, as it has fundamental influences on feelings like sense of ownership that are key elements of people’s motivation.  In the end, the performance evaluation process attempts to make the employee responsible for a great many things outside their control, a fact that may or may not be understood by either the employee or supervisor, but which reduces the value of the performance evaluation to nearly nil.

The lessons of the past are clear when one thinks about them. Deming’s take, in the end, was that giving regular, scheduled raises and only scheduling formal performance-related discussions when a serious problem with the individual worker is suspected is perhaps the best approach.  It saves a lot of time for both workers and supervisors in preparing for such evaluations, but more importantly avoids the pitfalls of misunderstandings, mistakes, and the bad feelings that can result from a poor quality evaluation and the lasting resentment or other bad feelings that can linger thereafter.  Organizational performance is so tied to the feelings of the people involved in the systems of business that a process that creates resentment or bad feelings can greatly reduce the effectiveness of the organization in virtually-unmeasurable ways.  For this reason alone the regular performance evaluation should be retired by practically all business organizations … permanently.

So why are so many of us still subjected to periodic performance reviews on our jobs? While books such as cited in the article linked above give some very good reasons why performance reviews persist, perhaps the most telling is that management savvy and knowledge of human nature, like common sense, aren’t particularly common.  Business schools have never, to my knowledge, taught the “soft” side of business as well as they’ve taught standard practices, quantitative analysis, and financial theory. Culture at every level, local, national, and global, has a huge impact on how business is carried out, but the importance of understanding this critical topic is rarely stressed.   In the end, old style annual performance evaluations are seen as having value to the manager who is insecure and is grasping for any means of feeling in control.  The control provided by formal evaluations is an illusion, unfortunately, and the possibility (probability?) of doing more harm than good is not commonly understood.  Thus, we have the current situation, and performance evaluations continue to be prevalent.

As always, I welcome your comments.  — Tim

“Companies are given a wonderful privilege in society, which is limited liability. And I think society should say to companies the quid pro quo for limited liability is that you will not play a political role at all. Citizens play a political role; companies should just obey political laws, and that’s it. …But the least we can do — and I agree totally with Tom — is have much more transparency and pressure on companies to make their lobbying transparent.”  — Aneel Karnani, associate professor of strategy, Ross School of Business, The University of Michigan, Oct. 20, 2010

Please read the entire article for some very thought provoking discussion on the topic of corporate social responsibility, if the topic interests you.  I maintain that this is a key aspect of corporate behavior, and critical at a time when corporate power is expanding rapidly in our political system and threatening to swamp the influence of the electorate.

As always, I welcome your comments.  – Tim

Please feel free to comment on this key area of knowledge, the ground-breaking work of Dr. Sapolsky, and how it relates to the effectiveness of a manager.     — Tim

My big complaint with corporations is ... I can rarely trust them. After decades of observation and study, a top rank business school MBA, and working in about five careers in eleven companies ranging from a half dozen to nearly 350,000 employees, I have a theory as to how companies evolve from small startups to global corporations and go from customer-friendly and reliable to predatory and untrustworthy.  The conduct of corporations is rooted in the relatively normal actions and motivations of relatively normal people.  Corporate behavior is all based in human nature, as you might expect, but it changes greatly from the founding of a small company through when it reaches ascendancy as a multinational corporation.  So how does this huge turnaround in behavior come about?

Companies begin with good intentions. While some company founders may be sociopaths, they are too few to be worth mentioning, and their companies generally self-sabotage and go out of business or sell their key product lines and businesses to larger companies early.  Most companies are founded by people with good ideas and intentions, who are close enough to their customers and dependent enough on personal relationships for success that they care about the welfare of their customers and recognize that selling a customer something that they don’t need, or that isn’t the best for them, is not going to bring the repeat sales that are the essence of all continuing business success.

The culture of a company changes radically when the founder(s) leave the scene. When the founder(s) of a company leave, the people who run it thereafter rarely retain the principles and ethics of the founders for very long, especially if the company grows and they are no longer in personal contact with customers.  Soon top managers are emphasizing to each other the need to show good returns for the owners/shareholders, the importance of a good stock price on the market, and financial metrics that may be good for the company but really don’t reflect the quality of the service or product the provide.  This is further reinforced by a board of directors, usually investors in the firm, who generally have long involvements in other large corporations.

A new management culture, isolated from customers, takes on characteristics of “group-think”. The larger it grows, the less often the management of a company have any personal contact with customers.   Managers work together for the benefit of the company, coming up with new ideas to increase profits, and form a culture that becomes far more focused on financial results than anything else.  Managers make and share assumptions and decisions, rewarding each other for conformance as well as performance, all of it focused on the welfare of the company and themselves.  As a result, concern for the customer fades away to be replaced by what is effectively simple greed at an organizational level, though it is too masked in corporate policy and practice to be easily understood as such.

The Stanley Milgram experiment becomes a factor. Top managers make recommendations to each other, take the recommendations of their peers to heart, and develop strategies that direct each others’ and their subordinates actions.  The organization becomes analogous to a big Stanley Milgram experiment in which one manager can tell another to do something that is actually evil to customers, though they may or may not realize the full import of it, and it is done because it came from a voice of authority.  Evil concepts evolve from what were originally just standard capitalistic business motivations, and the company becomes increasingly predatory because the decisions are made without insight into or concern for the customer’s situation or needs.  “Out of sight is out of mind.” as they say, and doing what one is told becomes more important than concern for the customer.

The organization becomes litigious. Eventually a customer becomes so unhappy or harmed that they are moved to sue the company, and lawyers are brought in.  Since lawyers operate in a legal system based on adversarial interactions, and which requires opposing sides to push as hard as they can in favor of their clients, often regardless of moral or ethical precepts, the company’s actions and policies become even more predatory towards customers under their influence.  Lawyers, respected for their experience and knowledge of business, may be hired in as top managers.  The organization can become more faceless and litigious at the same time that it becomes larger, more bureaucratic, less efficient, and more prone to mistakes that could bring lawsuits.

With success and growth come cultural changes that make the company untrustworthy. As it grows and expands the corporation’s behavior and culture become dedicated to being competitive and taking the customer’s money by hook or by crook without regard for the wellbeing of the customer.  Customers may be numbered in thousands or millions, and either incoming communications from customers overwhelm the feedback system and are lost, or the bureaucracy effectively stifles them in systems that require information to be processed and re-processed so many times that it never is analyzed, interpreted, or the knowledge gained conveyed to anyone who could act on it in a constructive way.

The emphasis/de-emphasis problem appears as the bureaucracy gets “taller”. As the number of layers of management increase, people’s natural tendencies to increase the importance of words higher up and reluctance to report bad news from below cause off-hand comments at the top to become marching orders for armies far down the chain of command, and problems, even those that could destroy the company, either become translated into “great and advantageous ideas” on their way up the chain or completely disappear before they reach a level of authority at which they could be effectively addressed.  This was a fundamental reason why some companies reduced the height (number of layers) of their management structures in the 1980′s, and I was privileged to be working for a multinational corporation that did this, reducing their hierarchy from more than 15 layers to around 9 over a period of a few years.  The result was significant improvement in organizational effectiveness and efficiency, though it was unfortunately not enough to counter changing market conditions.

The “telephone game” also becomes part of the situation as directions and other information are passed through so many people that, just like the children’s game, what comes out the other end may be nearly unrecognizable compared with the original message.  One of the best protections against miscommunication is the cultural norm of telling people not just what to do , but why, and then listening to the feedback they provide.  Not only can people do a much better job of anything if they know why they are doing it, but the feedback provides opportunities for error-checking and correction that prevent dumb mistakes and bad actions carried out “because we were told to”.  It takes savvy managers to understand and work in this direction, but a good understanding of the impact of culture on corporate performance is apparently rare.

As it grows the company will hire experts in product development, marketing, and advertising, giving it immense power over the customer. Imagine arguing your case with a squad of top notch attorneys whose goal is to protect their client, the company, at all cost.  Unless you are a genius with limitless personal energy, and can bring to bear similar, extremely expensive resources, you have little chance of getting what you want unless it also involves paying increased sums to the company.  Advertising and marketing strategies become extremely sophisticated and subtle, even misleading, when contrived by teams of psychologists, sociologists, and advertising people who have spent their careers and sometimes earned their degrees by coming up with ever more sophisticated ways of convincing you to buy products, whether you need or can afford them or not.  While customer loyalty may fall precipitously, clever marketing and financial moves, such as buying up competitors, can counter that by leaving customers less options.

The corporation naturally evolves into a predatory but inefficient organization that can’t be trusted. I can’t tell you how many times, working in the corporate environment, I and my colleagues have looked at each other and expressed amazement that the organization we worked for ever produced anything of value.  At one auto maker we would sigh and say “Well … at the end of the day the cars will still be rolling out of the plant.”, understanding that the loss of production for just one day would cost the company millions of dollars, creating a powerful incentive to ship product even when it might dissatisfy or endanger customers.  99.9% of the people in the typical large company have almost no customer contact, since even when the product is as widely prevalent as toilet paper, they are convinced the number of customers they speak with is so small as to be of total insignificance.  The organization establishes formal channels for customer feedback, usually through customer service and marketing divisions, but the telephone game and emphasis problems implicit in the long chains of communication, both vertically and horizontally, dilute and corrupt the information through interpretations, re-interpretations, and interpretations of others’ interpretations until it is almost pure luck if something helpful to the customer results.  In the end the company is functioning based almost entirely on how more money can be extracted from customers, nearly  independent of any value provided to them, and the values and principles of the founder(s) are long forgotten.  At this point, from the customer’s viewpoint, the company is not only untrustworthy, but can actually be seen as a huge and extremely powerful predator from which one might obtain what they need, but they will be lucky if it is very satisfactory and even luckier if any suggestions or complaints they have are ever addressed in what they buy.  Mostly the customer can rely on the fact that the company will be out for it’s own profit at their expense, and will trick them or sell them out in any way it can to further that single end.

The huge transition from friendly and helpful startup company to predatory major corporation is driven by human nature. All the greatest problems are systemic, meaning that they are implicit in the hugely complicated systems that evolve to get things done.  Every human is by nature self-interested, as this is an expression of the survival instinct common to all life forms that have instincts.  It is the nature of humans to organize, and our organizations can become amazingly complex as they grow.  The interplay between the various fundamental aspects of human nature inevitably create bureaucracy, inefficiency, waste, and bad behavior unless the highest authorities in the organization are deeply aware of these relationships and actively work to create a collaborative and positive culture, and a corporate awareness that the customer is the sole source of their success, and not just any customer, but the repeat customer who is so happy they will come back again and again and tell or bring their friends.

A few corporations succeed at keeping customer loyalty. The most successful organizations often earn customer loyalty by keeping all their members in touch with customers and the fundamental understanding of the importance of customer loyalty.  Savvy top managers understand the problems I’ve described above: the telephone game, the emphasis/de-emphasis problem, group-think and the Milgram experiment, and the need to stay as close to the customer and as attentive to customer satisfaction as possible, and their companies benefit significantly.  Savvy managers understand that constantly listening, learning, and treating both employees and customers with a concern for their well-being will make them willing to contribute to the company’s success, and to give the company and its management the benefit of the doubt when things don’t go well.

Management, management styles, and corporate culture change over time. Even great corporate successes do not guarantee that a savvy corporation will continue to behave that way forever.  Management succession, changes of ownership, and environmental changes resulting from technology shifts, economic swings, regulatory climate changes, and a host of other factors can degrade a positive and productive culture, and the company that did great for you a decade ago may “burn” you today without an apparent thought, and  you may have no recourse except to go elsewhere.  Thus, corporations rise and decline over time.  There are ways to detect the internal culture of organization, such as watching how they deal with customer problems, but I will write about them at another time.  While what I have written here may seem like common sense, common sense is unfortunately anything but common.

Please give your comments, if you have them, and thanks for reading and thinking about these matters.  My writing is based on my own observations and studies and is not intended to reflect on any specific companies or individuals, but to stimulate thought on this area that seems too little studied or taught, and yet which has such immense impact on our everyday lives and the economy as a whole.

As always, I welcome (and hope to learn from) your comments — Tim

At one employer the budgeting system didn’t support the annual review process, creating feelings of anger and hopelessness among the employees.   It had been a challenging time for the organization over the previous year, and management had asked for extra hours and effort, and gotten it.  We all worked extra hard and put in extra hours without overtime, and many great things were achieved.  In the last quarter of the year we all went through our annual reviews, yielding an overall rating on a one-to-five scale.  My supervisor told me (and everyone he had to review) that he could only give me a 3 because, even though he recognized I had put in 5-level effort, the budget for raises was fixed and tied to our ratings.  He explained that he couldn’t give everyone a 5, even though they deserved it, because he would break the budget.  He said if he gave me a 5 he would have to give someone else a 1 (and a 1 would endanger one’s career with the company if they received more than one such review).  I and nearly everyone else had to accept a rating of 3 in spite of our efforts and commitment, and the rating would stick with us while our “merit raises” would be mediocre.  Needless to say, everyone I spoke with was angry about this situation and many said “I’m not putting that kind of effort out for these <insert expletive> again.”

At other employers the annual review was a waste of time.  At more than one employer the annual review was a requirement, but there was no relationship with compensation.  Whether one got a raise was up to their supervisor or the manager above them, and seemed to have no particular traceability to performance, at least not one that I or my colleagues who discussed the situation could see.  The human resources department sent email reminders to supervisory staff when it was near the anniversary of a particular person’s employment, and the supervisor was expected to fill out forms and have a review meeting with the employee to discuss what had gone right and wrong in the previous year, and what might be changed to make the next year go better.  The tone of the review meeting depended on the personalities involved.  Some supervisors were “hard-asses” who tried to go by the book, and employees (and often supervisors) were unsatisfied and often angered by the experience.  Some supervisors were personable, and the reviews tended to be gripe sessions or to discuss systemic issues the supervisor had no power to address as often the authority and oversight needed to address it was only available quite a few levels above them with a person they might have never even seen.  In those cases the politics involved in escalating an issue high enough for it to have any chance of resolution was often truly daunting.  In the end, the annual reviews tended to be an aggravating waste of time with the potential for decreasing employees’ job satisfaction and motivation.

At one employer what seemed like a very progressive approach to annual reviews went horribly wrong.  I had one manager who came to me after I had been with the company for a number of months and explained that it was time for annual reviews, and the way they did it was that each person wrote their own review.  Then they could review it with their manager and modify it to their mutual satisfaction before it was submitted to the next manager up the org chart.  I hadn’t heard of this sort of process before (this was 1985) and accepted the assignment with a note of hope.  As he approached the office door my manager turned back and said “Oh, by the way, I didn’t have anything to do for a while last weekend so I filled out a review form for you.”  Now suddenly confused, I asked “Does that mean I don’t have to do it?”  He said “Oh, no, you still have to fill out the review form yourself.”  I responded “Well … what if the two reviews don’t agree?”  My manager curtly said “Then, WE have a problem.” and left without saying anything more.  This put me in a no-win position where I would have to try to anticipate what he wrote or face his apparently-stern disagreement.  Since there was no way to do that, I was extremely frustrated and angry at being treated that way.  I filled out the form and went through the exercise, but was quite demotivated and hoped to be re-assigned to a new boss as soon as possible.  I felt only anger, and no respect, for my manager after that, and hated him for bullying me in that way.  This illustrates that annual review processes, no matter how well designed, always have the risk that a manager administering it will be able to misuse it and create more harm than good.

W. Edwards Deming, the great guru of statistical process control and total quality management, also found annual reviews to be of little value.   I haven’t dug for the reference yet, but remember from my study of Deming’s work that he found individual performance reviews to be of little value since the results produced by any employee in an organization are far more the result of the systems and expectations involved than of the individual’s efforts.  His famous Red Bead Experiment clearly demonstrates that in many situations the employee’s results are almost entirely a result of the tools and processes they are given, and that many employees have only a little influence on the quality of their output.  Deming describes in one of his books that the simplest, lowest cost method for handling raises and reviews is to decouple them completely, tie raises to years of service and level of responsibility, and use reviews to identify systemic issues and create collaboration between the employee and management aimed at improving processes, tools, and results.  Total Quality Management and the use of statistical process control were aimed at maximizing the employee’s ability to measure and track results of their work, and then improve processes and tools to create greater value for the organization.  This isn’t really a performance review at all, of course, but has much greater potential to help the firm do better.

Unfortunately old habits and cultural “knowledge” die hard.   In spite of much research and some great publications, many if not most people (in the North American business world at least) think that annual reviews and related raises and promotions are the way business is done.  Small wonder that so many companies struggle and flounder, muddling along with neither significant success nor failure, a scenario that generates the maximum misery for the greatest number of people, in my humble but experienced opinion.

As always, I welcome your comments. — Tim

Pay for performance has been debated for decades, but it was W. Edwards Deming who demonstrated that the performance of the individual is highly dependent on factors external to them. The systems by which the work is done as well as the expectations of the employee, management, and the organizational culture are the biggest determinants of individual performance, and the worker’s ability to influence most of these factors in most cases is small.

In a collaborative and enabling culture the individual may be able to affect those factors, but will rarely have enough influence on them to justify individual performance as a sufficient basis for compensation. Compensation based on organizational performance where the contribution of the individual to those results is fairly clear can be a better motivator, but this still depends on those external factors and the management savvy required to be aware of and manage them. Savvy, like common sense, isn’t common, unfortunately, which is why pay for performance does poorly in most organizations that try it.

On the downside, pay for performance can put employees (and sometimes departments or divisions) at odds with each other, especially in tough times where budgets for pay increases and other rewards are limited, and this can compromise overall efficiency and results. More detailed analyses have been written, so I won’t go farther, but for these reasons I disagree with #5 “pay for performance” as a good approach in most circumstances.

Evaluation of the worker is difficult, and creates issues. The biggest problems with “pay for performance” are the need for evaluation of the employee and the fact that merit bonuses will usually come from a fixed budget.  First of all, the evaluation process is easily skewed, or can be seen to  be skewed, by the subjectivity of the individuals involved, personal or organization-related agendas, and a variety of other factors that have nothing to do with the performance of the individual.  There is no way I have seen or know of, of ensuring objectivity in such a system.  The simple measurement of the work itself is usually insufficient, as even a count of parts produced, for example, will be affected by wear and tear on the equipment used, late component deliveries, holidays, company celebrations or meetings, just to name a few factors that will affect output.  With more complicated work the challenge of how to measure performance is even greater, and most evaluation systems become increasingly subjective.  Various schemes have been tried, such as “360 evaluations” that include not only supervisors but peers, “customers  and suppliers”, and they seem better, but still have significant risks and imperfections.

Standard business practices such as budgeting cause systemic problems with pay for performance schemes. Secondly, since pay increases are almost always tied to a budget, this can put employees in competition with each other.  I can also remember cases where an organization was having tough times and the employees, called on to put in extra hours and effort, performed admirably almost to a person only to find that because of the fixed budget for increases they had to each take an average rating in their record and a mediocre increase, a fact which made everyone angry.  The supervisors themselves would have received poor evaluations if they went over-budget.  In the end, in that case, pay for performance made everyone unhappy and less committed to the organization, certainly not the desired result.

Bonus programs, while often used, have significant shortcomings. It may be that pay based on results of the organization as a whole, often implemented in Western businesses as an annual bonus program, can work effectively.  Unfortunately a bonus can be seen eventually by workers as a regular part of their pay, and many will fail to see how their individual efforts contribute to it, detracting from its potential to motivate better performance.

The simplest approach may be the least costly, and work as well as any other. Deming and others who examined this problem in the past found that pay based on time spent on the job was, for most positions, a sufficient and less-potentially damaging approach.  It leaves the success of the organization as a factor if management regulates pay according to overall profitability of the company, for example, but avoids costly and problematic evaluation systems.

The handling of pay issues is important for companies, but it is tough. While workers should be paid a fair and competitive wage, and this must be determined with an eye towards retaining them while maintaining the profitability of the organization, this area is as complicated and ridden with pitfalls as any other area of human relations.  Since most organizations have practically no ability to assess their real costs around such matters (this is a very difficult undertaking), and the cost of a less-than-optimal pay determining system can be huge in terms of organizational efficiency, it seems the best approach is probably the simplest and lowest cost: pay appropriate for the position and competitive for the industry, modified by time spent on the job.

As always, I solicit your comments.  Thanks for reading – Tim