Quick Intro to Pay Systems

Work Focused Improvement®
Management Essentials for
Daily Use and Ongoing Improvement
Quick Intro to Pay Systems
Module 1 of 44

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

Management Approaches
• The Control Model

Based on the military model, it is
the fastest in terms of decision making, but does not foster
commitment and does not work with today’s workers

• The Commitment Model

Most management gurus
endorse some variation of the Commitment (Team) model which
does not move individuals out of the Entertainment / Entitlement
Zone

• Work Focused Improvement®
• Linear & Nonlinear work is uniquely managed in
consideration of profound differences
• Pay Systems offer real rewards for advancing the
organization’s bottomline
• People choose to excel and move the organization into the
Performance Zone
• Everyone thinks and acts like an owner

Work Focused Improvement
... in a nutshell
• Endorse & understand the underlying premise: When a
group of people work in concert to advance the business, a
by-product of the effort is a better functioning social unit
• Distinguish between the two basic types of work: linear
and non-linear and design all business mechanisms to
match the work
• Focus on the work, performance and results, not on …
• Hygiene: company policy, wages, working
conditions, security, status, supervision, and interpersonal
relationships
• Feelings & Emotions
• Turf, politics, personality, or blame

• Be a student of management and build a profound
understanding of all leadership and management
mechanisms, tactics, and concepts

People

Two Theories
• If you make people happy they will work
hard
• If people choose to work hard, they will be
happy
• Work hard because the work is inherently
interesting and stimulating
• Work hard because in the process of
doing so there is recognition and reward

Work & Jobs

Pay System Gems
• If excellent work is not meaningfully rewarded, there
will be no healthy and open competition. This is
because people who work very hard for no extra
money are under attack ... from other people, and
even from themselves. The notion is: “Why am I
busting my ass to make some owner richer when I
could coast like Bobby, have some fun, and take
home the same pay.”
• Most management gurus today focus on nonrepetitive work. As for repetitive linear work, they
either pretend it doesn't exist, tell you how to get rid
of it, or camouflage it with things like vertical job
enrichment.

Incentive Overview
• Gain Share pays bonuses to individuals for
improvements in bottomline performance of an
organization or team. Gains are generally idea
based and as such are cumulative over time and
tend to be in the nature of two steps forward and
one step back.
• Direct Incentive pays bonuses to Individuals or
small teams for improved performance on
measurable tasks and quality. While on Direct
Incentive, people also get a 20% share of the
applicable Gain Share. Gains are usually
immediate and large.


Two Types of Work
Linear
Non-linear
Routine Tasks
Non-routine Tasks
Core Workers
Coordinators
Managers

Pay Systems

Pay Systems
Futuristic Non-linear Work
Visioning

Gain
Share

Organization

Pay for Periodic
Bottom-line
Results
Gain
Share

Executives

Coordinating
Collaborating

Team
Direct
Incentive
Direct
Incentives

Planning

Pay for
Immediate
Work
Performed

Individual

Concentrated Linear Work

Managers

Coaching
Supervisors

Repetitive

Core Workers

Measurable elements
Pay Systems

WFI Pay Systems
Core Steps (Items 1 to 6 are essential and occur naturally
while 7 is situational)
1. Perform Organizational / Environmental Analysis
2. Develop Key Performance Indicator Matrix and Graphs
3. Follow Work Essentials Process leading to Advancement List
4. Design Pay System
5. Use Scoreboards to make performance visible & elevate its impact
6. Design Communications Program
7. Conduct Leadership Training


10+ Pay System Design Steps
(Captured in Workbook)

Select Design Team – match personnel with roles
1) The Group – who is covered by the plan
2) The Formula – measures that define the gain
3) The Baseline – value of formula that must be exceeded
4) Smoothing Mechanisms – control volatility of payout
5) The Curve – match the pay curve, culture, and stage
6) The Share – how much goes to organization & team
7) Payout Frequency – how often is bonus paid
8) The Split – how are the gains distributed within the team
9) Continuous Improvement Adjustment – keep opportunity fair
10) Capital Investment Adjustment – re-engineering recognition
0)


Pay Systems

Incentive Imperatives
(applies to both Gain Share & Direct Incentive)

•

When individuals receive bonuses, the
organization experiences a commensurate gain.
Before individuals receive a bonus, their (or
their team’s) performance must exceed:

•
•
•
•

•

the stretch
the baseline
the cost of their earlier bonuses

If the above imperatives are not realized in a
way that is fair to the organization and fair to
individuals, the design must be adjusted.


Environmental Analysis
• Streamlined process
• A carefully sequenced questionnaire includes both
standard and custom questions to dissect an organization
and provide:
• Objective scores for culture & business mechanisms
• Insights on consistency & flexibility
• Knowledge of “if and how” Work Focused
Improvement® can make a difference
• The process
• Is interactive … everyone participates and benefits
• Provides information used to design socio-technically
correct Incentive Baselines & Sculpted Pay Curves


Key Performance Indicators
• Streamlined Process to identify & organize KPIs
• KPIs are measures of performance in all areas of
the organization critical to bottomline results
• To be useful the indicators must be
simple, visible, accurate, meaningful, timely, and
objective
• Some KPIs are measures of individual and team
performance
• In Work Focused Improvement®, standardized
graphs are used in various ways to intensify gains

Pay Systems

Hygiene then Motivators & Movers
“… the factors involved in producing job
satisfaction (and motivation) are separate and
distinct from the factors that lead to job
dissatisfaction.”

“… The opposite of job satisfaction is not job
dissatisfaction but, rather, no job satisfaction;
and similarly, the opposite of job dissatisfaction
is not job satisfaction, but no job dissatisfaction.”
Frederick Herzberg

People

The American Workforce
In the Entertainment / Entitlement Zone
– Tend to identify more with their own objectives than
those of the organization
– Are comfortable saying “My new dog has to get his
shots today, so I have to leave at 2:45,” [assume the
individual is behind on critical work]
– Perform at about 33% to 45% of potential (from
various studies)
– Focus on personal entitlements regardless of the
organization’s performance
– Spend a disproportionate amount of time on social and
entertainment factors as compared to performance
factors and the core work
– Especially struggle with linear work

Direct Incentive Opportunity

130%
120%




100%

The sweet spot (best overall result) is when
there is 130% actual opportunity (earnings as
compared to guaranteed base rate)
As opportunity drops below 130%, increasing
numbers of linear workers lose interest
The only benefits to the company for
opportunities above 130%:
 Stabilize the work force
 Preserve trust by only taking the specified annual
Continuous Improvement Adjustment



Very loose incentives have the potential to be
counterproductive when workers restrict output
to hide the easy opportunity


Key Systems & Mechanisms

Considerations When Setting Baselines
Socio-technical Design
• Technical capabilities of the team (as determined
by studies, data analysis, correction factors)
• Culture of the Work Group
• Size of the gap between where the team is today
and where it technically could be
• Volatility of historic performance coupled to an
assessment of the reasons for peaks, valleys, and
current direction
• Opinions and mindset of the team as it relates to
the incentive design
• Recent initiatives and structural changes

Pay Systems

These are examples many available
Pay Curves.
Actual Pay Curves extend below
100% for rating purposes.

©

1986-2012 Samuel H. Pratt / SHP Consulting Limited

Examples When GS is 25% and Direct Incentive is 30%
160.0%
When on Direct Incentive, an
individual also gets a 20% Share
of The Gain Share Bonus.

140.0%
5.0%

120.0%

2.5%
12.5%

30.0%

25.0%

15.0%

100.0%
GS while on DI
GS Bonus
DI Bonus
Base Pay

An associate will not earn less than his or her base
rate. Poor Direct Incentive performance will subtract
from Gain Share Bonus, but Gain Share Performance
never subtracts from Direct Incentive

80.0%
60.0%
100.0%

100.0%

100.0%

Person on Direct
Incentive Only

Person on Gain Share
Only

Person with 1/2 of Hours
on Each

40.0%
20.0%
0.0%


Pay Systems

Gain Share After Design & Kickoff



A Gain Share System is not crock pot chili that you can make
and then walk away
It requires stirring, tasting, seasoning, and Personal Attention
– Use walkabouts to send the message you care about performance
– Post KPIs on Scoreboards to share information and create the Hawthorne
Effect [Individual, Team & Organization Performance over time]
– Use Work Sampling as an enabling tool
– Focus on facts while giving Personal Attention
– Lead by example and be a visible, positive force
– Give Associates frequent performance data
– Pass the message “We can do it!”
– Secure all gains of the Advancement Process
– Instill everyone with a Continuous Improvement Mindset
– Listen, look, and Over-communicate
– Track Inventory
– Track Direct Incentive to Total Work Hour Ratio
– Monitor Tasks to Date Chart


Pay Systems

Direct Incentive Annual Continuous Improvement Adjustment
Continuous Improvement Pay Curve Adjustment
300%

250%

200%

% Performance

The Annual Year-end Continuous
Adjustment is calculated by reducing
the opportunity in excess of 130%
by 1/3. Example: If the average
opportunity is 160% for 2012, it will
be reduced to 150% for 2013. The
10% reduction is 1/3 of the 30%
excess over 130%. So if it took 22
Quality Widgets per hour in 2012 for
160%, it will take 23.47 in 2013. It
is expected that performance
improvements would continue so
that actual bonuses remain at the
higher level. In the process of
reviewing all rates, some may
actually be increased.

150%

100%

2001 Pay Curve
2002 Pay Curve

50%

Average 2001
Adjusted Average Opportunity Start 2002
0%
0

50

100

150

200

250

300

Widgets Per Hour


Pay Systems

Pragmatism, Culture, Reality, Etceteras
Summary











Don’t expect rapid changes of culture or values.
Never give up on changing culture over the long haul
Recognize that attempts to transform the culture overnight can
be counterproductive due to reality / perception / expectation
gaps [management can look incredibly naive]
Use multi-factored pay systems to change short-term conduct
and long-term culture
Use a wide variety of management tools & techniques to bring
about change
Manage with facts
Push for rapid changes in technology and conduct
Assure that culture is moving in the right direction, and worry
less about the rate of change


Organizational Dynamics

Over 30%
total
improvement
each year,
and a
total of
143%
improvement
in 3 years

Megan Patton Items from Article:

Over 30%
total
improvement
each year,
and a
total of
143%
improvement
in 3 years

She earns an incentive bonus every month, and in one
recent month, she earned a $2,100 bonus on top of
her regular pay.
“It’s a fun atmosphere to work in. I don’t mind coming
to work every day,” she said. I don’t get stressed
out about it.”

It’s important to note that she is producing at
more than 6 times the team average from
one year earlier … and morale is up!

Quality Charts Processed per Person
80,000

180

160

70,000

140
60,000

120
50,000
100
40,000
80
Over 30%
total
improvement
60
each year,
and a 40
total of
143%
20
improvement
in 3 years

30,000

Charts Billed
Employee Count
Linear (Employee Count)
Linear (Charts Billed)

20,000

10,000

Apr-02

Feb-02

Dec-01

Oct-01

Aug-01

Jun-01

Apr-01

Feb-01

Dec-00

Oct-00

Aug-00

Jun-00

Apr-00

Feb-00

Dec-99

Oct-99

Aug-99

Jun-99

0
Apr-99

0

Three Years of
Steady
Improvement
Under Work
Focused
Improvement
Actual data from a
medical billing company

Long Term Care Division

Close Files [inclusive]
Post EOBs [inclusive]
Issue Bill ( invoice) [inclusive]
Issue PO [inclusive]
Verify Order (Order Intake)
Verify Medicare #

450.00

400.00

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

350.00

300.00

250.00

200.00

150.00

100.00

50.00

3/31/2004

3/30/2004

3/29/2004

3/28/2004

3/27/2004

3/26/2004

3/25/2004

3/24/2004

3/23/2004

3/22/2004

3/21/2004

3/20/2004

3/19/2004

3/18/2004

3/17/2004

3/16/2004

3/15/2004

3/14/2004

3/13/2004

3/12/2004

3/11/2004

3/10/2004

3/9/2004

3/8/2004

3/7/2004

3/6/2004

3/5/2004

3/4/2004

3/3/2004

3/2/2004

3/1/2004

0.00

Core Logic and Mechanisms for Optimizing Work Focused Improvement®

The power of Work Focused Improvement® is captured in tables, lists, and algorithms that use
Culture Rating and Stage of WFI to optimize the Pay System with an ongoing process. Examples
of design factors that are calibrated include:
1.
2.
3.
4.
5.
6.
7.

Workable Stretch range
Slope or slopes of low section of pay curve
Slope of middle section of pay curve
Slope of high section or sections of pay curve
Intersection point at bottom and top of middle section
Ratios of opportunities between Direct Incentive and Gain Share
Culture Rating coupled to the Stage of Work Focused Improvement® (refer to “The 3
Stages of Work Focused Improvement®”)

Calibration is verified and ownership transferred by visuals and a list of questions for each
design element / decision. There is a narrative outlining the process. Many of the adjustments
are counter-intuitive.
Those using these tools need high levels of WFI experience and advanced Excel skills. These
tools are continuously improved. For example, if an organization has deviated from the
prescription, resulting anomalies must be factored into the core logic and optimization.

Background / Intro page 1
Do your employees work as hard as they possibly could? Do you wish they
would? Do you wish they wished they would? It’s likely that your associates
do not share your sense of ownership in the company’s future interests. And
you can bet they care less about bottom-line performance. In fact, most of
them are just focused on the social aspects of the job. Things such as
paychecks, bonuses, benefits, vacations and annual raises are viewed as
entitlements.
So how can management get employees to perform? Work Focused
Improvement® (WFI) is the answer. WFI takes all facets of leading
management thinking into consideration and applies it to pay system design. In
doing so, it uniquely factors in both the social (culture) and technical
(scientific) aspects of the workplace to reach effectively and efficiently move
your employees to the Performance Zone.
Frederick Herzberg, a key influence on current management thinking, provides
a good summary statement of his position: “The only way to motivate
employees is to give them challenging work in which they can assume
responsibility.” Often, in management circles, this is reduced to “money
doesn’t motivate.”

For those doing purely non-linear work, these concepts are generally valid.
However, in many instances they are not enough. Take the example of an
engineer who is doing totally creative design work and still sneaks out of work
for half a day to prepare his dirt bike for a weekend race, or the ski instructor
who plays computer games while he should be updating his student plans. In
today’s world, there is always something more interesting to do. Enriching a
job with “challenging” work is increasingly difficult. The current smart phones
afford more interesting challenges than most jobs, and how are you really going
to enrich a job that is, for example, comprised of issuing invoices 80% of the
time?
Alfie Kohn became popular with Fortune 500 companies in the 1990’s with his
own Harvard Business review article “Why Incentives Cannot Work.” Kohn
and Herzberg correctly arrive at the same basic conclusion: unconstrained pay
raises alone will not motivate people to work harder.


Then you must consider Judith M. Bardwick’s thoughts on the matter, from
her book Danger in the Comfort Zone: “Entitlement: People are complacent;
they get raises, bonuses, and benefits pretty much as a matter of course, so
there is no incentive to work hard.” She then makes a compelling argument
that for people to perform best, they need to have some fear that there will be
consequences for poor performance. At one end of the spectrum is
entitlement, with fear on the other end. Earning is in the middle, and it is
noteworthy that the optimum earning zone is closer to fear than entitlement.
There is the notion that a lack of money can be a bigger motivator than money.
Herzberg recognizes this when he writes about humankind’s “built in drive to
avoid pain from the environment. For example, hunger, a basic biological
drive, makes it necessary to earn money, and then money becomes a specific
drive.” So in essence, Herzberg and Bardwick agree that the fear of a lack of
money can motivate.


Another cornerstone of current management thinking is the late Edwards
Deming. He says: “The various segments of the system of profound knowledge
proposed here cannot be separated. They interact with each other.
Thus, knowledge of psychology is incomplete without knowledge of variation.”
Putting all gurus together gets you to the conclusion that while raising salaries
does not improve performance, putting significant pay at risk will.
Most experienced executives acknowledge the successful use of straight
commissions and piece rate incentives. Incentives become problematic when the
work is non-linear, meaning that is not measureable through observation. Even
for linear work, it is difficult to determine the baseline beyond which incentives
will be paid and the pay curve that specifies added bonus for exceptional
performance. Frederick Taylor style industrial engineers set baselines through
scientific observation and analysis. WFI suggests this will not work.
WFI looks at both the social (culture) and technical (scientific) aspects. WFI sets
baselines and pay curves by a proven method of objectively rating both culture
and technical capabilities of the work group. WFI acknowledges other
motivating factors of the job, including:
achievement, responsibility, growth, advancement, trust and individual
autonomy. WFI is the answer. Nothing else works.

Quick Intro to Pay Systems

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