Management by Strategic Balance

1
Transformation/Execution Element 6 7 Reward
Systems, People and, HRM Systems leading to
Employee Satisfaction
2
Inputs
Outputs
TRANSFORMATION (Execution)
Environmental Drivers
Outcomes/Results From High Performance / Exemplar
Organizations
1. External/ Global Business
Environment (15)

THE ORGANIZATION DESIGN PUZZLE (9)
1. Macro Organizational Structures (4)
Organizational Effectiveness (5) The Balanced
Scoreboard (KPIs)
2. Internal Businesses Environment
Corporate Business (8)
8. Shared Leadership Decision Making
FIT
2. The Job/Work
A. Core Capabilities Competencies
7. Recognition and Financial Reward Systems
1. Customers 2. Employees 3. Organizational
Innovation 4. Societal

3. Technologies
B. Culture(s)
6. People and Human Resource Systems
C. Vision Direction (12) (VDSP)
5. Financial/ Business
4. Information and Knowledge Systems

D. Organizational Strategies
5. Micro Team Design
E. Goals/ Objectives (for the 5 KPIs)
9. Organizational Processes (Individual, Group,
Organizational and Business Processes (Total
Quality, Business Processes, etc.)
F. Business Models
G. Mutuality Sup- pliers,Customers
Employees (Union if present)
(Feedback)
Figure 1. Overall open systems theory (OST) model
for Organizational Analysis and Diagnosis
F. Transformation/ Change Processes
________________ Source Modified from Macy, et
al., (1995). Presented to the National Academy
of Management, Vancouver, Canada, August.
3
Traditional Versus New Organization Employee Work
Attitudes
1990s - NOW New Organization Work Attitudes
1950s - 1970s Traditional Work Attitudes
My boss pays my salary. My objective is to keep
my boss happy. Im just a small cog in a big
machine. My best strategy is to keep my head
down and not make waves. If something goes
wrong, I dump the problem onto someone else.
Only suckers take the blame. The person with the
biggest empire wins. The more people that I have
reporting to me, the more important I
am. Tomorrow will be just like today. Studying
the past is the key to success.
Customers pay all our salaries. My objective is
to keep out customers happy. Every job in this
company is essential and important. I get paid
to create value. I must accept responsibility
for problems and solve them. I belong to a team.
We win or lose as a team. When we lose,
nobodys empire wins. Nobody knows what tomorrow
will bring. Constant learning is part of my job.
Source Adapted from The promise of
Reengineering. Fortune, May 3, 1993, 96 Hammer,
M., and Champy, J. Reengineering the Corporation
A Manifesto for Business Revolution. New York
HarperCollins, 1993
4
Management by Strategic Balance
BUSINESS NEEDS
PEOPLE NEEDS
EMPLOYEE INVOLVEMENT/ EMPOWERMENT

• FINANCIAL REWARDS
• SECURITY/ EMPLOYMENT SECURITY
• CHALLENGE
• TRAINING
• BELONGING
• OPPORTUNITY
• RECOGNITION
• EMPOWERED
• ACTUALIZATION

• EFFECTIVENESS
• QUALITY
• FLEXIBILITY
• CUSTOMER-CENTERED
• CONTINUOUS IMPROVEMENT
• EXCELLENCE
• RESPONSIVE
• FUTURE-ORIENTED

5
Benchmarking the Best Practices
Transformation/Execution Elements

• 6. Human Resource Systems and People
• Some to most firms employees are commercially
  Astute
• 48 of the firms hiring (all) by Targeted
  (behavioral) Selection
• 3600 Performance Appraisals are becoming
  common-place
• Individual Development Plan / Individual Business
  Plan
• Peer Evaluation
• Vast majority of the firms have 1 or 2 (Versus.
  10-40) classifications for
• their blue-collar employees
• Employees are multi-skilled (blue and
  white-collar)
• Career Development Systems for all full-time
  employees
• 15-20 of the workforce are contract (called
  999ers) contract 3rd party
• Training/Re-training per Employee Per Year of 140
  hrs. to 222 hrs. (depending
• up industry average is 160 hrs. per
  employee per year (mostly cross-
• functional/multi-skill)
• 48 of firms have a non-traditional work
  schedule
• Leveraging diversity (race x gender) in teams
• Mentoring Systems for all
• 45 of firms have an all salaried workforce

( Mean 48,000 employees, 102 Multi-international
firms Average employees per worksite of New
Design (619) Redesign (859) 44 worksites per
firm data-based upon BENCHMARKING THE BEST
PRACTICES, SURVEY OF INNOVATIVE ORGANIZATIONS
(SIO), Texas Center of Innovative Organizations,
Texas Tech University, 2001
Source Barry A. Macy, Successful Strategic
Change, Berrett-Koehler Publishers, San
Francisco, CA (forthcoming)
6
Some Current HRM Practices

• Currently 40 of entire HR function being
• outsourced
• Going from an employee transactions-
• based to a business transformation based
• By 2010, 60-75 of HR will be outsourced
• (NOT in Private Organizations!)
• Lots of Outsourcing!

7
Benchmarking the Best Practices
Transformation/Execution Elements

• 7. Financial Reward Systems and Recognition
• Share the Wealth with all employees Company
  Core Value Philosophy
• Average of 2 financial reward systems (company
  level business level and
• Individual level) beyond basic wage
• Average company profit sharing per employee per
  year 3,613
• Average business success sharing per employee per
  year 2,109
• Stock and stock options for all employees
• Extra time-off with pay is the most common
  financial reward (average of
• 1 week per employee per year in addition
  to vacation)
• Recognition Status, Equality, Promotion,
  Development, Jobs/Tasks/Work

( Mean 48,000 employees, 102 Multi-international
firms Average employees per worksite of New
Design (619) Redesign (859) 44 worksites per
firm data-based upon BENCHMARKING THE BEST
PRACTICES, SURVEY OF INNOVATIVE ORGANIZATIONS
(SIO), Texas Center of Innovative Organizations,
Texas Tech University, 2001
Source Barry A. Macy, Successful Strategic
Change, Berrett-Koehler Publishers, San
Francisco, CA (forthcoming)
8
WHY DID ORGANIZATIONS CHANGE PAY ?
REASON FOR CHANGE
9
NON-FINANCIAL REWARDS
Status Equality
Promotion/ Development
Recognition
Job/ Work
10
Non Financial Rewards -1

• Recognition
• Time off (with payMost popular non-financial
  perk!)
• Financial Awards (500-5,000)
• Employee of the Month/ Quarter/ Year
• Pat-on-the-back!

11
Non Financial Rewards -2

• Job/ Work
• 4-day work week
• Flex-time
• Work at home (in sourcing)
• Autonomy/ Freedom/ Empowerment
• Working without a manager/ supervisor
• Self-control/ self-fulfillment
• No dress Code
• Low job stress
• some to high employment (NOT job) security
• Everyone has an e-mail address
• Everyone has a computer
• FUN!!!

12
Non Financial Rewards -3

• Status/Equality
• No double-standards
• Everyone treated the same
• NO special/ assigned parking space
• NO special cafeterias (restaurants at work)
• No special dimensions of office size
• NO special carpet
• Few rules and regulations
• Extended family benefits
• Health and fitness facilities on-site (free!)
• services on-site (carwash, dry cleaning,
  schools, etc.)

13
Non Financial Rewards -4

• Promotion/ Development
• Everyone gets time out of work time (10-12 or
  160-200Hrs. Per year) to develop their skills/
  abilities
• Everyone developed!
• Promotions (when they come) are BIG!! (Lots of
  increased responsibility/ accountability)

14
THREE LEVELS OF FINANCIAL REWARD SYSTEMS
MERIT PAY
PAY FOR KNOWLEDGE
PAY FOR SKILL
INDIVIDUAL MERIT/SKILL
TEAM UNIT/ SUB-SYSTEM
PAY FOR DEMONSTRATED SKILL
TEAM BONUS
1
2
3
PAY FOR VERSATILITY/ CONTRIBUTION
ORGANIZATION
COST SAVINGS SHARING
PROFIT SHARING
EMPLOYEE OWNERSHIP/ESOP/ESOT
GAIN SHARING/ ROTA
15
COMMON PROGRESSION OF FINANCIAL REWARD SYSTEMS - 1

• FIRST GENERATION 1930 50s
• Gainsharing Types
• SCANLON PLAN
• RUCKER PLAN
• PROFIT SHARING
• SECOND GENERATION 1960 70s
• USED WITH OTHER TEAM CONFIGURATIONS AND
  SDWTS
• TAYLOR MADE GAIN SHARING SYSTEM
• COST- SAVINGS SHARING
• PAY FOR KNOWLEDGE SYSTEMS
• CAFETERIA BENEFITS SYSTEMS

16
COMMON PROGRESSION OF FINANCIAL REWARD SYSTEMS - 2

• THIRD GENERATION 1980s/ 90s
• USE WITH OTHER CONFIGURATIONS
• PAY FOR DEMONSTRATED SKILL
• TAYLOR MADE GAIN SHARING/COST SAVINGS
  SHARING SYSTEMS
• TIME OFF
• CAFETERIA BENEFITS SYSTEMS
• FOURTH GENERATION 21st Century
• PAY FOR- VERSATILITY / PAY FOR
  CONTRIBUTIONS
• THREE PART/THREE LEVELS SDWTs
• - INDIVIDUAL DEMONSTRATED SKILL
• - SDWT CONTRIBUTION (LEADERSHIP ROLES)
• - BUSINESS CONTRIBUTION
• GAIN SHARING COST SAVING SHARING TAYLOR
  MADE
• (FOR SUCCESS ONLY AFTER 5-7 YEARS IS A REDESIGN
  OR NEW DESIGN
• PROFIT SHARING
• CAFETERIA BENEFITS SYSTEMS

17
COMMON TYPES OF REWARD SYSTEMS 9 TYPES
REWARD SYTEMS
Non-Financial Recognition/ Involvement
Financial Rewards
9
Merit Pay
2
1
3
5
4
8
7
6
Employee Ownership
Pay-for- Knowledge
Gain Sharing
Profit Sharing
Cost Savings- Sharing
Pay-for- Skill
Pay-for- Demonstrated Skill
Pay-for- Versatility/ Pay-for- Contribution
1930s-1950s 1st generation
1950-1970s 2nd generation
1970-1980s 3nd generation
1980- 1985
1985-Present 4th generation

• Scanlon
• Rucker
• Improshare

• Tailor-made
• Gain Share

• Tailor - made

Tailor-made
18
INNOVATIVE FINANCIAL REWARD SYSTEMSTrends in
Innovative Organizations
COMPANY
PROFIT SHARING
WEIGHTED BUSINESS/WORKSITE/OFFICE SUCCESS SHARING
BUSINESS/ WORKSITE
PAY FOR VERSATILITY/ CONTRIBUTION
INDIVIDUAL
MERIT PAY
19
S.I.O 4 Differential Innovative Financial Reward
Systems
S.I.O (1996) HAVE IMPLEMENTED
56
38 B/WS
S.I.O. Survey of Innovative Organizations, Texas
Center for Innovative Organizations, Rawls
College of Business, TTU
22 WS only
14
100
PFK
PAR 1
PFC
PFV
PFS
PFDS50
20
29
20
MM MARS FINANCIAL REWARD SYSTEM
FINANCIAL REWARD TYPE
Merit Pay
Pay-at-Risk
ROTA (return on total assets
CLASSIFICATION
Expected minimum ROTA is 15
Annual Evaluations
80 120 (monthly)
Salaried/ Exempt Non-Exempt

• First Payoff 18
• Second Payoff 21
• Third Payoff 24

Expected minimum ROTA is 15
Pay for Skill
_____ _____

• First Payoff 18
• Second Payoff 21
• Third Payoff 24

Wage/ Hourly
21
Some Organizations (like MM Mars) have 3-4
separate Financial Rewards Systems for every
employee in the Business

• Profit sharing company level
• Success sharing business level
• Gain-sharing office/site level
• Base compensation/pay-for-
• contribution/pay-for-versatility

22

• HUMAN RESSOURCES MANAGEMENT SYSTEMS (HRM)

23
Exemplar Results 700 Publicly Held Firms in all
Major Industries Human Resource Practices and
Outcomes
Based on an index of best human resource
practices prevalence, firms using more
progressive policies in these areas were
generally formed to have superior performance.
The 25 of firms (N700) scoring the highest on
the index Performed substantially higher on the
key performance measure below
Best Practice Human Resource
Index
High Performance Measure
Bottom 25 2nd 25 3rd 25
Top 25
1. Annual Shareholder Return
6.5 6.8
8.2 9.4
2. Gross Return on Capital
3.7 1.5
4.1 11.3
3. Price Cost Margin
.37 .39
.41 .44
4. Sales Per Worker
- -
-
Significant (more)
5. Employee Turnover
- -
- Significant
(less)
______ Source M. Huselid, Human Resources
Management Practices and Firm Performance,
Pre-publication paper, Rutgers University, June
15, 1993. Also see, Huselid, The Impact of Human
Resource Management Practice on Turnover,
Productivity, and Corporate Financial
Performance, Academy of Management Journal, Vol.
38, No. 3, 1995, pp. 635-672
24
Innovative Human Resource Practices and Their
Link to the Conditions for Economic Performance
Integration of HR with Production System and
Strategies
Skill/ Knowledge
Motivation/ Commitment
Innovative HR Practice

• Work Systems Index
• Work Teams
  x x
  x
• Problem-Solving Groups (Employee
• Involvement or Quality Circle
• Groups)
  x x
  x
• Employee Suggestions Made and x
  x
  x
• Implemented
• Job Rotation
  x x
• De-centralization of Quality-Related
• Tasks
  x x
  x
• HRM Policies Index
• Recruitment and Hiring
  x x
• Contingent Compensation
  x
  x
• Status Differentiation
  x
• Training of New Employees
  x x
• Training of Experienced Employees x
  x

Source J.P. Macduffie, Industrial Labor
Relations Review, Vol. 48, No.2, 1995, p. 203
25
Exemplar Results 150 U.S. Manufacturing Firms
--- Degree of Organizational Progressiveness
1978 thru 1983
Annual Change in Financial Performance
High Performance Measure
75 Most Progressive 75 Less
Progressive
1. Profit Growth
10.8
2.6
2. Sales Growth
17.5
10.7
3. Growth in Earnings Per Share
6.2
-3.9
4. Dividend Growth
13.4
9.2
______ Source C. Ichiowski, Human Resource
Management Systems and Performance of U.S.
Manufacturing Businesses, NBER Working Paper
3449, Sept., 1990. Index
Participation and Management Style culture
organization structure creativity reward
systems flexibility and accommodation of needs.
26
Organizational Innovation A Combined and
Integrated Strategy Works Best -1
How to Improve Performance? Solid research
evidence shows that workforce productivity and
organizational effectiveness can be increased at
least 30 to 40 percent with a different work
management paradigmcalled a High Performance
Organization. The research, conducted by Barry
Macy at the Texas Center for Innovative
Organizations, Texas Tech University, was based
on analyses that started with roughly 1900
organizational performance improvement studies
conducted between 1961 and 1991. Macy
identified a list of sixty-one action levers,
defined to include technologies, equipment,
organizational structure changes, quantity
processes, and human resource practices, that
are related to organizational performance. Total
Quality Management is an example of the levers on
the list. Gain sharing is another. The big
increases in performance are realized when
several of the action-levers are used as an
integrated improvement strategy. One of the
problems is and has been that organizations have
jumped on the bandwagon for one of the levers,
treated as a fad, and focused on it in isolation.
That helps to explain the failure of TQM and
reengineering and business/work process redesign.
In combination, the action-levers are elements
of a work paradigm that is very different from
the traditional work management model. For
example, Quality Management would have been a
more powerful lever if it had been connected with
a supportive reward system. Macys research
confirms what is intuitively apparent the
problem is complicated, but the potential for
improvement easily justifies a commitment to
change the way work and business processes are
organized.
Source Adopted from H. Risher (Ed.), Aligning
Pay and Results, American Management Association,
1999, p. 15, 303-304.
27
Organizational Innovation A Combined and
Integrated Strategy Works Best -2
Raising the Bar of Performance It seems at times
that every organization is trying to raise the
bar of performance. They are performing at one
level and would like to raise the bar to a higher
level. New technologies, systems, structures,
and processes are in some cases required to reach
the new level, but at its core this is a people
management problem. The increases in performance
that Barry Macy found in his research 30 to 40
percent (see Chapter 1, p. 15) are attributable
to a new organizational paradigm that enables
people and their organization to perform at
higher levels. Finding ways to raise the bar
can be a decided competitive advantage. Pay by
itself is not going to accomplish this. If work
and business processes, systems, and structures,
are unchanged, a new reward system, such as a
group incentive plan, may well generate better
results, but its likely to be limited. In the
past that was a common strategy. Employees will
work somewhat harder for at least some period of
time, but the big increases in performance are
not attributable to speed or work effort.
Working harder (i.e, increased effort) will not
generate 30 40 percent increase in performance.
Furthermore, if the work unit has a history of
poor employer-employee relations or simply poor
management, it is unlikely that the employees
will jump on the bandwagon simply because a new
carrot is dangled in front of them. They may
also lack the knowledge or skills to adapt their
behavior to new work and business processes.
They could also have Inadequate equipment or
resources available. To reiterate, Barry Macy
identified a list of some sixty-one
Action-levers that have been shown to affect
financial results over a 30-year period. Pay is
only but one of the levers.
Source Adopted from H. Risher (Ed.), Aligning
Pay and Results, American Management Association,
1999, p. 15, 303-304.
28
Organizational Innovation A Combined and
Integrated Strategy Works Best -3
Raising the Bar of Performance (cont) Macys
research shows that the action-levers are more
powerful when used in combination (structure,
human resources, technologies, and total quality)
as the basis for an integrated organizational
transformation strategy. And that is the
direction in which companies are heading. The
changes related to this shift in strategy are
documented in the 1998 State-of-the- Art and
Practice Council Report, a research project
sponsored by the Human Resource Planning Society
that looked at the thinking and practices in
leading companies where human resources
strategies and practices were acknowledged to
provide competitive advantage. The researchers
found that the focus on productivity had shifted
to a broader definition of improved performance
increasing shareholder value. Significantly, the
CEO and COOs contacted for the study mentioned
people as frequently as, if not more so than, the
human resources executives when they outlined
their major business priorities. Those companies
were redesigning their basic organization
architectures to align strategy,
structure,systems, processes, staffing, and
culture to create an organization that is
organized to succeed and that translates into
increased shareholder value. A focal goal of
their efforts was the creation of a high
performance organization (HPO) with an adaptive
culture that encourages leadership, teamwork,
learning,and accountability.
Source Adopted from H. Risher (Ed.), Aligning
Pay and Results, American Management Association,
1999, p. 15, 303-304.
29
REWARD SYSTEMS LESSONS LEARNED

• SUCCESSFUL STRATEGIES
• SUPPORT THE BUSINESS STRATEGY
• FIT THE CULTURE
• ARE BASED ON ENTERPRISES CORE VALUES,
  PRINCIPLES AND PHILOSOPHY
• ARE SIMPLE TO UNDERSTAND
• INVOLVE EMPLOYEES
• ARE WELL - COMMUNICATED

30
Change in Reward Systems in Inevitable

• Gain Sharing/ Success Sharing must tie directly
  to the Business Strategy
• Organizational Renewal /Continuous Improvement
  Strategy
• Commitment to Constant Improvement of Business
  Results
• The Question Becomes How can we best manage
  change in our Reward Systems?