Chapter 1 – A Problem in Most Companies Today
Life used to be simple. The hunters went out at dawn, and the best came home with a kill. Life used to be simple and fair. The hunters went out, the best came home with food, and those with food lived. Those that did not hunt well or did not hunt hard starved. Food, health, status, and large families came to those worked hard and worked smart. The hunters “ate what they killed”. This simple fairness prospered for a long time. Hard-working farmers who raised more food than others did well. Hard-working weavers who wove more cloth did well. Today, it is not so simple. There has been a loss of fairness. Here are some examples of how things have changed:
- A mid-level manager works through the night, lands the biggest order her firm has ever had, and only gets a pat on the back.
- A top-performing division manager greenlights a new product line, adds $10 million in profits to the company, and gets a low “profit share” bonus because the whole company did badly this year.
- In a subsidiary that has growing losses, the subsidiary president gets a $400,000 bonus for hitting vague “strategic” goals set by a friend at corporate headquarters.
Steve Kerr (Chief Learning Officer at GE and Goldman Sachs) tells the story of how one typical company paid its staff badly:
“The reward system called for annual merit increases to be given to all employees, in one of the following three amounts:
- If the worker was “outstanding” (a select category, into which no more than two employees per section could be placed): 5 percent
- If the worker was “above average” (normally all workers not “outstanding” were so rated): 4 percent
- If the worker committed gross acts of negligence and irresponsibility for which he or she might be discharged in many other companies: 3 percent.”
“Now, since the difference between the five percent theoretically attainable through hard work and the four percent attainable merely by living until the review date is small, many employees were rather indifferent to the possibility of obtaining the extra one percent reward. In addition, since the penalty for error was a loss of only one percent, employees tended to ignore the norm concerning bad behavior.” Until the rise of the modern corporation, most work had tangible links between individual outputs and individual rewards. Until recently, most workers had a part of their output as a reward. In the past, everyone had a piece of the action. In the past, every person ate part of what the person “killed” or produced. However, we have lost that simple linkage. Most employees do not get a piece of the action. People do not get to eat part of what they “killed” or produced. The odds are that your pay package is sub-optimal. Your company probably does not pay you fairly, and the likely result is that you are not motivated to do the right thing. In fact, the odds are that your current pay has little to do with the value you add to the company. These bad pay practices are a shame. They are especially shameful since better pay practices create more profit for companies and more pay for employees. In fact, firms can afford to pay more to employees if they set up the right bonus system. An “Eat What You Kill” company can pay increased bonuses out of increased profits (this is a self-funding approach). We explain how this works in a real-life example in the next chapter.