Continuous Improvement in HR Part 3 – The Value-Creator Ownership Model

Manuficient - Business Owner

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.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

Is Your Performance Review Process Contributing to Poor Manufacturing Performance?

Manuficient - Performance Review Process

One of the most dreaded processes in business is the annual performance review. Rather you sit in the giving or receiving seat of the review, its usually a pretty uncomfortable process regardless of how well or poorly the employee has performed. The problem lies in the fact that most organizations (and subsequently managers) have very poor methods for gauging an employee’s performance. The review is often skewed toward two factors 1) how the employee has made the manager feel since the manager has become more conscious about the upcoming review (usually a few weeks) and 2) how the manager’s circle of work friends feel about the employee. In other words, performance reviews are often driven more by internal politics than by actual performance. This only contributes to diminishing the overall organization’s effectiveness where actual results have less and less internal value over time.

There is often a clear a mis-alignment between what the customer pays for and what employees are evaluated on during the performance review process. Most companies are very good at measuring what the customer pays for. For example, just about every company has metrics in place to manage quality, cost, and service levels. Other metrics may be used to drive business initiatives such as a Lean or Continuous Improvement implementation. These metrics might get tossed around during management meetings throughout the year but too often don’t weigh in to an individual’s actual performance review. In a perfect world, each individual would be measured based on the amount of value they contributed to the customer and no more. An individual’s political prowess should be evident in that person’s ability to drive sustained quantifiable business results. And fortunately, with a little creativity, all business results are quantifiable to some extent.

The politics-based performance review process is the by-product of they way employees are compensated. Employees generally don’t have much control over how much money they make on a day-to-day or week-to-week basis. Employee compensation is basically fixed aside from overtime, bonuses, or annual pay increases. These long-interval compensation management tactics are designed to convenience accountants and not to leverage human psychology, which would call for immediate and real-time feedback (including compensation). Long-interval compensation management creates a comfort-seeking and risk-averse culture that is counter to what really drives business growth and high performance. An employee would be paid the same if they came in to work and created tremendous value as they would if they showed up, put up mediocre numbers, and just avoided any conflict. This environment makes it too easy to be a prosperous – at par – performer.

Contrarily, leading organizations have developed more systematic approaches to performance reviews that do a better job at quantifying the expected value contribution of each employee in the organization. Its proven that real-time feedback is the most effective method for managing people. Managers simply can’t provide real-time feedback at the level needed to develop world-class talent. The most effective performance review comes directly from the customer (or the understood measure of value for the customer). If you follow the links in the value chain through the factory, you realize that an employee’s manager is not their true customer, yet the manager is usually providing the performance review.  In an ideal state, employees would get frequent feedback automatically from the business system, which should be designed based on understood value for the customer. They would be able to quickly assess how much value they have created against the expected value created for the amount of time they have worked. In this type of system, it is impossible to hide poor performance or for someone to get credit for another person’s contributions. This works best when the supply chain is broken down to clearly defined suppliers and customers at each step in the process. Then value contribution and performance management can be set up in a pull system where each employee is measured in real-time using quantitative factors with input from their immediate downstream customer. This would replace the broken and wasteful push system where unfounded opinions, gross assumptions, and biased perceptions are used to gauge a person’s performance. The next step is to evolve to a real-time compensation model that matches value creation on short intervals, which will be covered in greater detail in a future blog post. This significantly reduces the need for artificial motivation and performance management tactics that are typically used in modern business. A manufacturing efficiency expert such as those at Manuficient can help develop data-driven performance evaluation systems to put your organization on the path to World-Class performance.

Visit my Excelville Profile for tools and resources for your operations excellence initiative.

Regards,
Calvin

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Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.