Pay for Performance

The question of how to motivate employees to perform their functions in a manner that supports the firm’s overall goals and objectives really is the “Golden Ticket” of business.  In my career, I’ve observed and experienced many different “schemes” that were developed to maximize the performance of the firm, none of which have really worked.  Usually, the Leadership establishes goals that aren’t terribly realistic, referring to them as “stretch goals”.  The managers that are tasked with achieving these goals now must – with straight faces – cascade these goals down to their subordinates promising them that achieving these goals will result in annual bonuses.  Since these subordinates are usually bright enough to recognize that these goals can not be achieved under normal circumstances, they begin to “conspire” with their management to look for ways to cut corners or take short cuts as a means to achieving the goals. This act of conspiring is actually one of the benefits of “pay for performance” because it actually forces people everyone to get together and think of creative ways to solve the problems and achieve the goals.  Unfortunately, this is a process that should have taken place before the goals were established!

Since these goals usually involve thresholds for end of the year revenue, inventory and operating free cash flow (OFCF), the organization usually finds itself starting the fourth quarter behind the pace to achieve tits end of the year goals.  This creates a frenzy of brainstorming which usually involves extreme measures to increase revenue, reduce inventory and cut spending to the bone, which is a very inefficient use of organizational resources.  If the organizational leadership just gave realistic expectations – not easy, just realistic – and challenged everyone to be more collaborative and creative on a daily basis rather than just for 90 days at the end of the year, efficiencies and assets utilization would be maximized and the long-term future of the organization would be strengthened and more secure, which would result in a more confident, productive and secure workforce.

Reference

Froeb, L., McCann, B., Shot, M. and Ward, M. (2016). Managerial economics: a problem solving approach. Boston, MA. Cengage Learning.     

The One Lesson of Business

According to Froeb (2016), the one lesson of business s, “the art of business consists of identifying asserts in low-valued uses and devising ways to profitably move them to higher-value ones.”  The reason I find Froeb’s assertion so interesting is that I find different meaning in this statement after nearly 30 years of business experience than I did when I was a newly minted business school graduate. 

I entered the steel industry in 1987 after graduating from Indiana University.  I quickly learned that, in order to make money in the steel industry, you need to extract materials from the earth (iron ore, coal, taconite, silicon, etc.), expose them to extreme temperatures and pressures then sell them to a narrow customer base that is usually unwilling to pay for the value offered.  I’ve been an ardent fan of Capitalism my adult life and I sincerely believe in it and its benefits.  However, I do believe we’ve gotten.  As Capitalists, we may produce different “widgets” but there is one asset that we all share that makes the difference between success and failure.  We’ve still haven’t learned that people are the grease that keep the gears of Capitalism moving and, while we are focusing on costs (which is very important) we forget to consider that every investing a dollar in our people is a more productive use of our assets than investing a dollar in a disposable asset.

As a country, we have a somewhat perverted view of educating and training people.  We do not distribute it freely and evenly to those that need it so that we can improve our country through an educated and well-trained workforce.  Instead, it is used as means of creating wealth for a narrow group of individuals.  If we all changed our view of education and training as an asset to convert a “low-valued asset” into a “high-valued-asset” not just for the good of a single individual but for the good of the whole country, I believe the quality, cost and availability of education and training would change drastically and the value of our greatest assets (people) could be maximized.    

Reference

Froeb, L., McCann, B., Shot, M. and Ward, M. (2016). Managerial economics: a problem solving approach. Boston, MA. Cengage Learning.