SD perspective on corporate incentive system

[Ivo_Sarges@monitor.com]

Dear colleagues,

I am working on the problem of incentive systems, performance measures and
decision rights. In particular I am interested in how rewards and
punishments of employees may translate into higher productivity of a given
firm.

Of course, we suspect that somebody has already thought about this in a SD
kind of way.

Any papers / publications / general hints?

Thanx for your efforts -- ivo.
From: Ivo_Sarges@Monitor.com

[Fred Nickols]

Somebody has indeed already thought about it in a closed-loop,
feedback-governed sort of way but not exactly in an SD way. That somebody
is William T Powers and his view of matters, his theory if you will, is
called Perceptual Control Theory (PCT). You will find a nice
recapitulation of Powers theory in George Richardsons book, Feedback
Thought in Social Science and Systems Theory. I am confident that a grasp
of PCT will provide you with new insights into the age-old notion of
manipulating (i.e., managing) human performance through the arrangement of
contingencies relating to rewards and punishments.



Regards,

Fred Nickols
"Assistance at a Distance"
Distance Consulting
nickols@safe-t.net
www.nickols.us

[Bill Harris]

In http://facilitatedsystems.com/expmgmnt.pdf and the associated
http://facilitatedsystems.com/expmgmnt.itm, I created a model that had a
factor for "management pressure": the amount of reaction management
exhibits to poor (or good) lower management performance in expense
management. As that factor was increased, the system became less stable
-- management fixes tended to initial improvement and eventually larger
problems. _Less_ management reaction to performance issues was
generally better. I guess what I called "management pressure" could
also be seen as an incentive system.

The best system performance arose when management put a good business
system in place; then the amount of incentive or punishment made little
difference.

You might also be interested in Reinhold Sprengers <<Mythos Motivation.
Wege aus einer Sackgasse>>
(http://www.amazon.de/exec/obidos/ASIN/3 ... 88-9852869).
In many ways, I think he gives similar suggestions. One of his
simplifying aphorisms (my translation): "All motivational actions are
demotivating."

Bill
From: Bill Harris <bill_harris@facilitatedsystems.com>

--
Bill Harris 3217 102nd Place SE
Facilitated Systems Everett, WA 98208 USA
http://facilitatedsystems.com/ phone: +1 425 337-5541

["Finn Jackson"]

Ivo,

You are right that if you want to improve your incentive system, then you
need to know what it is "for": improving productivity.

For short article (with an "SD-kind-of-approach") on the wider issue of
productivity, please see:
http://www.finnjackson.com/articles/productivity.htm

In summary, there are just three ways to improve the productivity of an
organisation -- Tools, Training, and Teamwork.
(Incentive systems are a form of Training, because they are a way to
reinforce "this is the way we would like you to do things".)

You may also need to research the Balanced Scorecard, in order to know
WHAT to measure and reward.


With regards,
Finn Jackson
From: "Finn Jackson" <Finn.Jackson@Tangley.Com>

["JEAN-JACQUES LAUBLE"]

Hi Ivo.

I am currently trying to better our perspectives in our business, and having
made a vey simple SD Model it appeared that the strongest driver although
soft was the quality of the people in our business (short term vans,trucks
and cars rental).
We knew that for more then thirty years but rather
strangely, we have never tried to measure it, while at the same time we know
for exemple, what cost one day (fixed costs) and one kilometer (variable
cost) of any category of vehicule (standard and real costs) for now more
then 15 years.
The reason of this situation is that I need now to have an indicator of
quality of the people to get a a model that
helps understand how things are going.

The first problem is to settle down how to measure the quality and towards
what direction you want the people to progress.
The direction of progress depends on you.
As for the measure, we use several indicators, about 8, not too much because
things have to be done seriously and it takes time and not too few to have a
general idea of the quality.
For now two things seem important:
1. The delay at wich the indicator(s) is calculated.
2. Is it useful to tell people about these indicators.

1. I personally prefer a very short delay of calculation.
For instance for the first indicator (are the people introducing in their
computer 2 weeks in advance their
working time and are they introducing their presence when they come to work
and does it conform to what what was scheduled) I am informed at the minute
if they happen to use their computer and I can directly phone and ask them
to do it. Of course it is an extreme case, but
the pressure to do it correctly is stronger when you know that the feedback
is coming in the next minutes.
For that case after two days, everybody was doing the job right. Otherwise I
had to wait for months.

2. As to what to say about the indicators:
I choose presently not to say anything for several reasons.
Anything meaning that I dot not even say that there are indicators. The
reasons are:
1. I prefer to have everything tested before saying anything.
2. I fear side effects. People try to biase the results and loose a lot of
time doing this.
3. A lot of time is lost discussing about the subject and people will always
find error in particular in that kind of soft subject.
4. You can always say it afterwards, while if you have talked about it you
cannot go backwards.
5. People will do well what they know is taken into account and nobody will
do the current job. (Exemple washing the cars).
6. The effect of these indicators on people can be counterproductive. People
do not like to be measured.
7. Plus all the other things that are unknown at the moment plus others the
list would be too long.

I am too very interested by the subject anyhow.

A word about punishments.
In France only God has the right to punish and as there is
hardly any more God, there are no more punishments.

Best regards.

J.J. Laublé
From: "JEAN-JACQUES LAUBLE" <JEAN-JACQUES.LAUBLE@WANADOO.FR>

[Marcel =?iso-8859-1?Q?Vall=E9e?=]

Hi Ivo,

I am a senior engineer and geologist who has spent his career in
the mining industry. In the past fifteen years, I have been
increasingly involved in promoting a quality oriented and system
approache in this industry.

It is thankless work. The system approach too often is
forgotten, or is applied inadequately because it involves loking
at more than ones little garden. I subscribed to the
system-dynamics mailing list to a better feel of this field. At
times, I am disappointed because it seems to me that, even here,
the approach to system problems is too limited, restricted.

To me the discussion of matter of corporate incentives is a case
in point

1) WHAT DOES RECENT COMPORATE EXPERIENCE SHOW?

Current experience (Enron and the multiple SEC inquiries, fines,
etc, (as well as the increasing number of similar european
situations) is that the higher the corporate incentives
available, the larger the distortion of the corporate objectives,
the higher the remumeration of executives and the lower the
standards of some accountants and auditors become.

Targets and bonuses tend to have similar, if less obvious results
in companies at lower level.

2) THE DEMING SOLUTION

These numerous "Enron type" situations are demonstrating the
realism of the philosophy embodied in the "FOURTEEN OBLIGATIONS
of W.E. Deming, who targeted this subject in «Out of The
Crisis»,and in his seminars. (Published by the Massachusetts
Institute of Technology, Center for Advanced Educational Study
(MIT-CAES), Cambridge, MA 02139 1986)

I think it is necessary to quote the full fourteen, not just the
ones like #10 that are more closely focused on this subject,
because they all are essential. Of course, their intent and
implementation must be adapted.

««1. Create constancy of purpose toward improvement of product
and service, with the aim to become competitive and to stay in
business, and to provide jobs.

2. Adopt the new philosophy. We are in a new economic age.
Western management must awaken to the challenge, must learn their
responsibilities, and take on leadership for change.

3. Cease dependence on inspection to achieve quality. Eliminate
the need for inspection on a mass basis by building quality into
the product in the first place.

4. End the practice of awarding business on the basis of price
tag. Instead, minimize total cost. Move toward a single supplier
for any one item, on a long-term relationship of loyalty and
trust.

5. Improve constantly and forever the system of production and
service, to improve quality and productivity, and thus constantly
decrease costs.

6. Institute training on the job.

7. Institute leadership The aim of supervision should be to help
people and machines and gadgets to do a better job. Supervision
of management is in need of overhaul as well as supervision of
production workers.

8. Drive out fear, so that everyone may work effectively for the
company

9. Break down barriers between departments. People in research,
design, sales, and production must work as a team, to foresee
problems of production and in use that may be encountered with
the product or service.

10. Eliminate slogans, exhortations, and targets for the work
force asking for zero defects and new levels of productivity.
Such exhortations only create adversarial relationships, as the
bulk of the causes of low quality and low productivity belong to
the system and thus lie beyond the power of the work force.
a. Eliminate work standards (quotas) on the factory floor.
Substitute leadership.
b. Eliminate management by objective. Eliminate management by
numbers, numerical goals. Substitute leadership.»»

11. Remove barriers that rob the hourly worker of his right to
joy of workmanship. The responsibility of supervisors must be
changed from sheer numbers to quality.

12. Remove barriers that rob people in management and in
engineering of their right to joy of workmanship. This means
abolishment of the annual merit rating and of management by
objective

13. Institute a vigorous program of education and
self-improvement.

14. Put everybody in the company to work to accomplish the
transformation. The transformation is everybodys job. »»

At times, depending on the problem discussed and the audience,
Deming made minor changes or added comments to the above
statements, like adding to #10 and #11 that they contribute to
false figures and reports, as recently happened!

Deming was far from being a "green" idealist. In fact he was an
expert statistician and a key contributor to the high standing
the Japanese industry gained in the past 50 years.


3 - HOW TO DEAL WITH HUMAN SYSTEMS?

A strong case has been made by Jamshid Gharajedaghi in a recent
book that dealing with human, managerial and social systems is
«dealing with interdependent components that display
independency». A simple approach is not sufficient.

System Tninking: Managing Chaos and complexity
(A platform for Designing Business Architecture)
Butterworth Heinemann, Boston, etc. 1999.
ISBN 0-0756-7163-7

The last 5 of its 12 chapters each contains an example of a
business/ social redesign.


4 - AN IMPLEMENTATION TO THE MINING SYSTEM.

A paper of mine dealing with the implementation of «System
Thinking for Quality Management and Continuous Improvement in
Mining was published in CIM Bulletin, Feb 2003, p. 51 to 59 ««
»». (Canadian Institute of Mining, Metallurgy and Petroleum.).
This was the Geological Society theme issue.

Material from Gharajedaghys book « » was quite helpfull in
putting into focus the various type of constraints encountered in
implementing a quality system in the mining industry.

«« Constraints are components of all systems and stem from the
system characteristics described above. Continuous improvement is
based on mitigating, modifying or removing constraints in
successive stages (Goldratt, 1984; Deming, 1986). Constraints can
divided into three types depending on their nature and the steps
required for handling them (Gharajedaghi, 1999, Ch. 7). We have
tried here to integrate the perspectives of these three authors.

The constraints described fall into three types: cultural
behavioural (III), organizational (II) and design constraints
(I).

¶ TYPE III CONSTRAINTS consist essentially of the « cultural and
behavioural constraints of the organization, . . . that are
self-imposed and maintain / reinforce the status quo . . . » A
fundation of trust and commitment is essential to achieve the
transformation, « AS THIS IS THE MOST CRITICAL PHASE of realizing
the idealized design. »

«Successful redesign requires a means of identifying and
redefining the organizing principles imbedded in these
dysfunctionnal cultural assumptions . . .(separating them from) .
. . those core assumptions essential to our existence . . .
Successful cultural transformation will involve:
1) making the underlying assumptions about corporate life (and
activities) explicit through public discourse and dialogue, and,
2) gaining, after critical examination, a shared understanding
of what can happen when defaults that are outmoded, misguided
and/or downright fallacious are left unchanged» (Gharajedaghi,
ibid).

This process must involve not only upper company management
(because decision and budgetary power reside there) but involve
the full organization because this is where an essential part of
the technical expertise and "profound knowledge" resides. It
must be based on "psychology."

¶ TYPE II CONSTRAINTS are organizational constraints that are
of the core of an organizations activity. «They are typical of
activities that consume considerable time, resources, knowledge
and management talent . . . They usually require revision of the
throughput, organizational processes and, if necessary, of the
product . . . (throughput processes are those directly concerned
with the actual output of the organization).» . . . «For control
purposes, all critical assumptions and expectations about the
selected course of action must be explicitly recorded and
continuously monitored» (Gharajedaghi, ibid.).

In industry, Type II constraints are the target of quality
mnagement and continuous improvement activities as described by
Deming and others. They deal with how the system, whatever its
type and design, is beind implemented and functions.
Transformation must start with study of Type III constraints
(Gharajedaghi, ibid) and it also requires "leadership,"
"understanding of a system," "study of variation," "profound
knowledge" and "psychology" (Deming, 1986, 1994).

¶ TYPE I CONSTRAINTS «are caused by inadequate design, hence
require design revision and optimisation ins iterative
improvement stages." This allows "successive approximations . .
(that). make up the evolutionary process by which the (design)
transformation effort is conducted» (Gharajedaghi, ibid.).

Demings Fourteen Points, his Seven Deadly Deseases and his
System of Profound Knowledge (Deming, 1986, 1994; Walton, 1986)
deal directly with Gharajedaghis Type III and Type II
constraints; this is the base that will establish the need (the
why) and the how of process redesign. In general, the presence
of Type I constraints at the production phase, with the
accompanying losses and required expenditures for redesign, is
caused by the fact that Type III and Type II constraints were
present at the project definition, planning and development
phases. In such cases, these Type III and Type II constraints
are probably still present and now hindering the production
processes. »»»

As CIM Bulletin has limited availability outside the mining
field, I can supply *.pdf copies of the above paper to those who
are interested.


5 - WHAT IS THE MINING SYSTEM?

Here is a type example that people look mainly at their own
garden patch. When I received the previous issue of CIM Bulletin
(Jan 2003), I found out that the theme selected was: "Total
Mining System." However, the Total Mining System described in the
lead paper described strictly the various components of what I
call the mine extraction process, without any reference to the
upstream and ongoing contributions of the geological processes
(geological and sampling delineation, modelling, estimation, mine
quality control, etc), nor to that of the downstream mineral
extraction processes. I might have been annoyed if my paper had
not been coming the next month!

Sorry for being so long!

Marcel Vallée

--
Marcel Vallée Eng., Geo.
Géoconseil Marcel Vallée Inc.
706 Routhier Ave
Québec, Québec,
Canada G1X 3J9
Tel: (1) 418, 652, 3497
Fax: (1) 418, 652, 9148
Email: vallee.marcel@sympatico.ca