Have you ever heard of an economic model where everyone makes about the same amount of money regardless of what actual value they contribute to society? Of coarse you have…just pick an American factory at random and that’s pretty much what you’ll find. The norm for US factories is to have minimal or marginal income diversity, especially among blue collar workers. Let’s look at this model in a slightly different context. Take entrepreneurship for example. Entrepreneurship usually takes a substantial degree of risk but can be tremendously rewarding if it works. Just about every entrepreneur would tell you flat out that the potential for rewards out-weighs the risk, and that’s why so many people go for it. This is one of the most powerful engines in business and for any economy. In fact, some brave soul(s) made this calculation prior to the birth of every company in existence. If you told an aspiring entrepreneur that no matter how much risk they take on with their dream venture, they would never make much more than $18/hr, do you think they would still go for it? Do you think they would bother with all the brainstorm sessions, raising capital, breakthroughs in innovation and all the exciting and sometimes dreadful aspects of entrepreneurship? Probably not so much.
This model of marginal income diversity contradicts some of the values that America is founded on. Some of those being freedom, prosperity, equality, competition, individualism, progress and change, etc. The compensation system currently used by most American companies is designed to make life easy and predictable for the accounting function. It was designed and deployed before we had computers to do the vast majority of our bean counting. The downside of the current low-income diversity model is that it gradually disengages employees and is counter-productive to the most predominant American values. In other words, it shuts the growth engine off at the shop floor level. This leaves managers scrambling to find the next motivation and performance management tactic to deploy in efforts to maintain or increase productivity levels.
So the question becomes – How can we leverage the values that have made America the most powerful economy in the world to make your company more successful? The answer lies in providing those who create value for your customer with the freedom to create wealth for themselves. Not by working slower and racking up overtime hours; but by working smarter with the time they have available. Not by asking them to claw their way up the corporate ladder in hopes for a higher salary; but by tying their value contribution to their income on a daily basis. The answer lies in converting employees into business owners that operate within the framework of the larger company.
The Value Creator Ownership Model
This is an example of a model where employees are given a tremendous degree of ownership of their work. Every employee has internal suppliers and customers, just like every business has. In this model (in the manufacturing environment), there are those who make stuff and those who provide services. Anyone not a part of the immediate value chain is a Service Provider. The compensation of those on the value chain is linked to the value they contribute on a daily basis. Those on the value chain (aka Value Creators) would be allocated a production budget. Internally (or externally) contracted services would be paid for out of that Value Creator’s budget. The Value Creator is allowed to take home whatever portion of their budget that they don’t use. Value Creators who want to increase their take-home pay might invest more in training and continuous improvement to reduce their operating costs. See my post on Value-Based Compensation for more details on how this works.
Service Providers are compensated based on being “hired” by Value Creators internally to provide a service at rates that they control. In this model, a service provider, such as a maintenance technician or trainer, could potentially price themselves out of the internal market. This provides an incentive for service providers to strive for quality and perfect their craft to keep steady business. Since Value Creators have a choice in who provides their services, Service Providers who are poor performers will struggle to find work in the factory. A Service Provider who wants to increase their pay might invest more in training so they can charge higher rates or they can foster strong relationships with Value Creators to maximize billable time.
The major benefit to this model is that the production floor becomes virtually self-managed. Poor performance anywhere results in lower pay everywhere on the value chain. If a supplier struggles to get parts made, it reduces the value that can be created downstream – resulting in reduced pay for all those affected. This makes the pain of poor performance hit home across the board and puts tremendous pressure on everyone to work together to achieve more.
This model self-corrects many of the issues that plague American manufacturers today such as resistance to change or improvement, managing individual performance, eliminating waste in activities both on and off of the value stream, and others. One of the potential drawbacks to this model is that some people may end up making less than minimum wage. Minimum wages can be instituted as well since manufacturing typically pays well over the legal minimum wage. This works out because those who don’t perform well and end up making just the minimum wage can (and probably will) easily find manufacturing work elsewhere for substantially more money. This automatically free’s up opportunities to on-board higher performers. In the end, your factory becomes a sub-economy that is driven by people’s own desires for freedom and prosperity instead of top-down command and controlling. A manufacturing efficiency expert such as those at Manuficient can help you develop an employee compensation model that leverages American values to create an internal growth engine.
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