Hack
Hack: Open the processes and the "books"
by Susan Resnick West at Annenberg School, University of Southern California
Co-Authored by Kartik Subbarao
July 2, 2011 at 10:46am
Contribution Summary
Summary
In most transformation efforts, changing the transparency of financial data including salaries is like losing the last five pounds. You know you should, but it’s hard and you hope you can get away without it. This hack addresses the last five pounds.
Moonshot(s)
Problem
Why is discussing salary so taboo?
The systems are frequently indefensible.
Although we have a desire for salary administration to be a meritocracy, base salaries are not performance based reflecting instead a number of factors including market conditions at time of hire, longevity, ability to negotiate and cost of living increases. Systems grow and are “patched” over time, what may have once made sense no longer does. In a command and control culture, information is secretive. Managers feel a need to defend decisions and appear rational even when they know the systems are imperfect. It becomes easy for employees to blame this lack of rationality on managers and deflect the difficulty of the situation and the need to manage their own fate. Lines are drawn. Everyone has someone to blame and no one can discuss the broken system. The emperor is, in fact, standing buck naked in front of us shrouded only in a veil of secrecy. It is exactly this situation that prompted Susan, one of the authors, to suggest that a CEO open up his salary information. His response was, “That’s a great idea and once I figure it out I’ll do just that.” He never did.
Salaries and money are emotionally charged.
There is an old adage in the survey research field, never ask someone their salary until the end of the survey else you risk losing a respondent. One of us has personally asked folks about some pretty intimate topics and got rather descriptive responses (yes, it was about sex). Those same people when asked their salary hesitated, or said “that information is private”.
Why is openness about money so difficult?
Is it that we measure our self worth based on what someone else pays us? Or is it that money is such an unambiguous measure it reduces us to a single number, utterly betraying the “valuing of diversity and individual strengths” highlighted in many of our community of passion hacks.
In Your Brain at Work, David Rock describes how the human brain is attuned to status at a primal level: "A perceived threat to status feels as if it could come with terrible consequences. The response can be visceral, including a flood of cortisol to the blood and a rush of resources to the limbic system that inhibits clear thinking." Along with status, the perception of fairness/unfairness also evokes strong responses from the brain's limbic system.
In most corporate environments, the strongest symbols of status often involve money -- who earns the most, and who controls the most. Just believing someone earns more money than we do can trigger a status response. Compounding this by a sense of unfairness - “hey, they don't deserve to make more” results in a double-whammy significantly impairing our interaction with both the high earner and anyone we perceive has contributed to this grave injustice.
That's why opening the books needs to go hand in hand with a culture that supports open information, empowerment and common fate. Feeling part of something larger than ourselves feeds our souls, which in turn calms our limbic systems. Research shows that in the absence of actual data, people judge the discrepancy between their salary and others to be larger than it actually is. If everyone believes they share in part of the business’s success and failure their sense of status is increased (e.g. feeling empowered to do more than they could before). Along with that, if everyone's sense of fairness is increased (e.g. feeling that the allocation of scarce resources is based on shared principles and values), then passion is unleashed, and the company can build far higher levels of trust and transparency.
Why don’t we open up the financial systems?
Information is power.
By controlling information the old command and control leaders maintained power. Unfortunately they also made decisions without critical data and zapped employees of any sense of ownership for either the problem or the solution. This hack addresses the power structure and the bureaucracy of organizations, both of which attack passion.
Those in power often assume employees will not understand financial systems.
Susan once worked with the largest employer in a small mid-western town, the kind of town where everyone knows everyone else. She begged her client to open up the “books” to the janitorial staff so they could manage their own costs. Her pleas were met by a sincere belief that the janitorial staff would not understand and could not be trained to manage funds. This was particularly ironic since, one of the “janitorial” employees, Jim, was the community’s best soccer coach. Everyone wanted their kids to be on his team. When asked if they thought Jim was capable of managing his household finances and team funds, they retorted “of course”. When they saw Jim as a valued coach they had no trouble conjuring up images of competence. Why then did they assume the same man could not understand the finances of janitorial supplies? When the managers in this small mid-western town viewed Jim as the valued soccer coach they assumed he could manage his own budget, but when Jim was viewed as a janitor, all bets were off.
The systems are frequently indefensible.
Although we have a desire for salary administration to be a meritocracy, base salaries are not performance based reflecting instead a number of factors including market conditions at time of hire, longevity, ability to negotiate and cost of living increases. Systems grow and are “patched” over time, what may have once made sense no longer does. In a command and control culture, information is secretive. Managers feel a need to defend decisions and appear rational even when they know the systems are imperfect. It becomes easy for employees to blame this lack of rationality on managers and deflect the difficulty of the situation and the need to manage their own fate. Lines are drawn. Everyone has someone to blame and no one can discuss the broken system. The emperor is, in fact, standing buck naked in front of us shrouded only in a veil of secrecy. It is exactly this situation that prompted Susan, one of the authors, to suggest that a CEO open up his salary information. His response was, “That’s a great idea and once I figure it out I’ll do just that.” He never did.
Salaries and money are emotionally charged.
There is an old adage in the survey research field, never ask someone their salary until the end of the survey else you risk losing a respondent. One of us has personally asked folks about some pretty intimate topics and got rather descriptive responses (yes, it was about sex). Those same people when asked their salary hesitated, or said “that information is private”.
Why is openness about money so difficult?
Is it that we measure our self worth based on what someone else pays us? Or is it that money is such an unambiguous measure it reduces us to a single number, utterly betraying the “valuing of diversity and individual strengths” highlighted in many of our community of passion hacks.
In Your Brain at Work, David Rock describes how the human brain is attuned to status at a primal level: "A perceived threat to status feels as if it could come with terrible consequences. The response can be visceral, including a flood of cortisol to the blood and a rush of resources to the limbic system that inhibits clear thinking." Along with status, the perception of fairness/unfairness also evokes strong responses from the brain's limbic system.
In most corporate environments, the strongest symbols of status often involve money -- who earns the most, and who controls the most. Just believing someone earns more money than we do can trigger a status response. Compounding this by a sense of unfairness - “hey, they don't deserve to make more” results in a double-whammy significantly impairing our interaction with both the high earner and anyone we perceive has contributed to this grave injustice.
That's why opening the books needs to go hand in hand with a culture that supports open information, empowerment and common fate. Feeling part of something larger than ourselves feeds our souls, which in turn calms our limbic systems. Research shows that in the absence of actual data, people judge the discrepancy between their salary and others to be larger than it actually is. If everyone believes they share in part of the business’s success and failure their sense of status is increased (e.g. feeling empowered to do more than they could before). Along with that, if everyone's sense of fairness is increased (e.g. feeling that the allocation of scarce resources is based on shared principles and values), then passion is unleashed, and the company can build far higher levels of trust and transparency.
Why don’t we open up the financial systems?
Information is power.
By controlling information the old command and control leaders maintained power. Unfortunately they also made decisions without critical data and zapped employees of any sense of ownership for either the problem or the solution. This hack addresses the power structure and the bureaucracy of organizations, both of which attack passion.
Those in power often assume employees will not understand financial systems.
Susan once worked with the largest employer in a small mid-western town, the kind of town where everyone knows everyone else. She begged her client to open up the “books” to the janitorial staff so they could manage their own costs. Her pleas were met by a sincere belief that the janitorial staff would not understand and could not be trained to manage funds. This was particularly ironic since, one of the “janitorial” employees, Jim, was the community’s best soccer coach. Everyone wanted their kids to be on his team. When asked if they thought Jim was capable of managing his household finances and team funds, they retorted “of course”. When they saw Jim as a valued coach they had no trouble conjuring up images of competence. Why then did they assume the same man could not understand the finances of janitorial supplies? When the managers in this small mid-western town viewed Jim as the valued soccer coach they assumed he could manage his own budget, but when Jim was viewed as a janitor, all bets were off.
Solution
This hack has its roots in the work of John Case, Open Book Management and Jack Stack, The Great Game of Business; as well as Ed Lawler and the Center for Effective Organizations’ work on reward systems and open, adaptive and sustainable organizations. Open book management and transparency are also core values of WorldBlu’s Democratic Organizations Movement. We acknowledge that this hack works best as part of a systemic change effort. We call it out because transformation efforts frequently stop short of modifying these systems. Why this happens we believe is core to unlocking deep transformation.
Some Examples:
Some Examples:
- At Pool Covers Inc, as part of a monthly meeting employees reviewed financials together, projecting the numbers on the wall. Sales of pool covers for new construction plunged 49% in two months. As if this wasn’t enough, the company's bank turned down a loan request eliminating funds to get through the impending slow season. Managers asked employees for alternatives to layoffs. Six employees volunteered to be laid off.
- A California Software company openly shares the salaries of its employees, including engineers, who are also responsible for hiring their peers. A particular hire with a specialized skill required the company to pay a higher wage than usual. The group, being aware of the importance of the skill to the success of the firm (and their share of the profits), hired the person and accepted the lack of internal equity.
- Namaste Solar, a democratically run, employee owned solar electricity company operating with open book management makes strategic decisions as a collective. So, when investors approached the company and offered 5 times the employees’ company valuation, all 50 employees convened to decide the companies fate. After much deliberation and analysis of the financial impacts of the decisions, Namaste Solar, protective of their culture, decided to seek alternative funding methods.
Practical Impact
Collateral Benefits
One of the collateral benefits of opening the books is the ability to tap into unexpected sources of creativity. By making detailed financial information related to internal budgets, customers, vendors and partners available to all employees, anyone can potentially work from the same level of information as the CFO, anytime they want to. For example, an R&D employee highly skilled in data analysis, but who otherwise would not have any access to financial data, would be able to mine customer purchasing patterns to build a strong case for a new product.
Systems Impact
This hack would have at least two measurable benefits. By bringing some light to what are frequently political processes, it might improve the way we make decisions. By revealing data, it might help identify barriers to passion and, as an added advantage, it just might increase both profitability and sustainability.
One of the collateral benefits of opening the books is the ability to tap into unexpected sources of creativity. By making detailed financial information related to internal budgets, customers, vendors and partners available to all employees, anyone can potentially work from the same level of information as the CFO, anytime they want to. For example, an R&D employee highly skilled in data analysis, but who otherwise would not have any access to financial data, would be able to mine customer purchasing patterns to build a strong case for a new product.
Systems Impact
This hack would have at least two measurable benefits. By bringing some light to what are frequently political processes, it might improve the way we make decisions. By revealing data, it might help identify barriers to passion and, as an added advantage, it just might increase both profitability and sustainability.
Challenges
It’s hard to do
Creating a line of sight
Global business with its multiple stake holders, transfer costs and creative financing can be complex and it is sometimes challenging to get a clear line of sight between an individual’s or team’s output and the viability of the firm. In fact, this may be why many of the successful cases of open book management occur in companies under 200 people.
Changing the culture of an existing organization, particularly a publicly held organization is much harder than developing a new company with a new culture. Wow that’s an understatement! Not only are there cultural differences but publicly held companies have different requirements for financial accounting.
Overcoming Fear
Fear Of Poaching.
If detailed HR data is made readily available (e.g., job title/level, reporting relationships, and skills, let alone salary), managers fear employees will give the data to headhunters, who will then poach people away. To dispel this fear, a transparent leader can express something like "I want this company to be as good a workplace as it can be. If anyone gets a better opportunity somewhere else, I'm thrilled for them, and glad that we played some part in advancing their career!". The transparent leader is undisturbed by headhunters recruiting his staff -- in fact, he may be concerned if his staff isn't being actively recruited, indicating a low assessment of the firm’s talent.
The irony is that in today’s increasingly connected world of social media, some of the data managers fear sharing with their employees is already available on sites like Glassdoor.com
Fear Of Employee Dissatisfaction.
Managers fear that making salary data available will decrease employee satisfaction. In reality, according to Ed Lawler, “With pay secrecy there is often great dissatisfaction because of individuals misperceiving what others are paid”. Open data provides information to dispel misperceptions.
The Devil Within.
Jon Froda, co-founder of Podio, a self designing platform which democratizes information and data flow within an enterprise, talks about individuals needing to acknowledge the “devil within”. According to Jon, when clients begin the design process, they intend to maximize participation and reduce centralized control. But as the design process progresses and the rubber meets the road, the clients begin to back off. The old devil of top down control begins to rear its head and the clients blurt out “I don’t want them to have veto power!”. He labels this “our devil within” or the reactive stance we take when implementing our values actually requires us to change our behavior. Chris Argyris, a noted academic, describes this same phenomena as the collision of our “espoused theories and theories in use.” It’s what happens when changing our walk to match our talk requires us to leave our comfort zone.
Creating a line of sight
Global business with its multiple stake holders, transfer costs and creative financing can be complex and it is sometimes challenging to get a clear line of sight between an individual’s or team’s output and the viability of the firm. In fact, this may be why many of the successful cases of open book management occur in companies under 200 people.
Changing the culture of an existing organization, particularly a publicly held organization is much harder than developing a new company with a new culture. Wow that’s an understatement! Not only are there cultural differences but publicly held companies have different requirements for financial accounting.
Overcoming Fear
Fear Of Poaching.
If detailed HR data is made readily available (e.g., job title/level, reporting relationships, and skills, let alone salary), managers fear employees will give the data to headhunters, who will then poach people away. To dispel this fear, a transparent leader can express something like "I want this company to be as good a workplace as it can be. If anyone gets a better opportunity somewhere else, I'm thrilled for them, and glad that we played some part in advancing their career!". The transparent leader is undisturbed by headhunters recruiting his staff -- in fact, he may be concerned if his staff isn't being actively recruited, indicating a low assessment of the firm’s talent.
The irony is that in today’s increasingly connected world of social media, some of the data managers fear sharing with their employees is already available on sites like Glassdoor.com
Fear Of Employee Dissatisfaction.
Managers fear that making salary data available will decrease employee satisfaction. In reality, according to Ed Lawler, “With pay secrecy there is often great dissatisfaction because of individuals misperceiving what others are paid”. Open data provides information to dispel misperceptions.
The Devil Within.
Jon Froda, co-founder of Podio, a self designing platform which democratizes information and data flow within an enterprise, talks about individuals needing to acknowledge the “devil within”. According to Jon, when clients begin the design process, they intend to maximize participation and reduce centralized control. But as the design process progresses and the rubber meets the road, the clients begin to back off. The old devil of top down control begins to rear its head and the clients blurt out “I don’t want them to have veto power!”. He labels this “our devil within” or the reactive stance we take when implementing our values actually requires us to change our behavior. Chris Argyris, a noted academic, describes this same phenomena as the collision of our “espoused theories and theories in use.” It’s what happens when changing our walk to match our talk requires us to leave our comfort zone.
First Steps
There are many ways to bring about change and many MIX sites offer advice about pilot projects, involving key stakeholders, and top level support. Most of these methods will apply to making this change as well so we won’t bore you with them here.
We will focus on some things that might get you started on this path.
Some knowledge of business and profit and loss statements is required. If you’re from the “softer side” of the business, you may need to educate yourself about how your business operates. Look for opportunities to help others understand the business as well and develop ways of sharing the information with your organization. There are consulting firms who have experience with this process and you might seek their advice.
While you are getting up the courage to leap into this brave new world, you may want to join up with like minded individuals. Worldblu Live, the annual conference of the Worldblu movement to “Democratize the Workplace” is one such place. Regional conferences are beginning to develop and these will be great places to meet others who are on a similar journey and willing to share their experiences.
Train yourself to notice opportunities where sharing information about the financials of the business will help. Try it yourself and encourage others to do it as well. Empower others to act. The head of finance for our school “taught” all of us how the economics of a university work.
Look for the “Jims” in your organization and help dispel the myth that people’s jobs are too complex for them to understand and that only a few chosen folks care about the firm’s survival.
Acknowledge the devil within. Know it is within every one of us and help others see it as well.
A unilateral “let’s open the books” may not be the best way to proceed. You will need to do some planning but don’t let the planning keep you from jumping in and starting to experiment.
We will focus on some things that might get you started on this path.
Some knowledge of business and profit and loss statements is required. If you’re from the “softer side” of the business, you may need to educate yourself about how your business operates. Look for opportunities to help others understand the business as well and develop ways of sharing the information with your organization. There are consulting firms who have experience with this process and you might seek their advice.
While you are getting up the courage to leap into this brave new world, you may want to join up with like minded individuals. Worldblu Live, the annual conference of the Worldblu movement to “Democratize the Workplace” is one such place. Regional conferences are beginning to develop and these will be great places to meet others who are on a similar journey and willing to share their experiences.
Train yourself to notice opportunities where sharing information about the financials of the business will help. Try it yourself and encourage others to do it as well. Empower others to act. The head of finance for our school “taught” all of us how the economics of a university work.
Look for the “Jims” in your organization and help dispel the myth that people’s jobs are too complex for them to understand and that only a few chosen folks care about the firm’s survival.
Acknowledge the devil within. Know it is within every one of us and help others see it as well.
A unilateral “let’s open the books” may not be the best way to proceed. You will need to do some planning but don’t let the planning keep you from jumping in and starting to experiment.
Credits
Thanks to the Communities of Passion Pilot Team!
Tags
open book management, open culture, open source, financials, communities of passion, democracy of information
Helpful Materials
Worldblu - http://worldblu.com/ Traci Fenton, founder
Ed Lawler and Chris Worley Management Reset: Organizing for Sustainable Effectiveness
The Center for Effective Organizations http://ceo.usc.edu
Namaste Solar - Richard Ivey School of Business. Case 910 M49
John Case Open-Book Management: The Coming Business Revolution
The Great Game of Business http://greatgame.com
Ed Lawler and Chris Worley Management Reset: Organizing for Sustainable Effectiveness
The Center for Effective Organizations http://ceo.usc.edu
Namaste Solar - Richard Ivey School of Business. Case 910 M49
John Case Open-Book Management: The Coming Business Revolution
The Great Game of Business http://greatgame.com
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Comments
Terri Griffith
July 5, 2011 at 3:10pmLove this and will use in class. Great update to 2002 HBR piece "Compensation: What's the Big Secret" http://hbswk.hbs.edu/archive/3181.html My add is that transparency in compensation actually increases the ROI of every compensation dollar. Without transparency, and given the issues noted above about human perception, people will assume that their work is not being rewarded -- decreasing the instrumentality of the compensation/performance management program.
Aaron Anderson
July 5, 2011 at 11:24amAs some one who works in a "Sunshine" State, all salaries of public operations are open - you could find out my salary if you wanted to, but most people don't bother to look it up. That's the essence of transparency. If you open up the books, most people will have a look, and then go about their business day. For the most part, in the not-for or non-profiti sector, salaries line up and are astonishingly low comparatively that most will find it uninteresting. My suspicion is that folks at the upper echelons have trouble with this idea because they have a deep seated fear that when people find out how much they make there will be an outcry from the rank-and-file about how unbalanced the "meritocracy" really is, and call the whole system unfair or worse.
I've suggested that opensourcing the strategic dna of an operation may take transparency to the next level. In that regard, I really love this hack because you are talking about opening the books of the whole operation rather than just salaries. It may be painful at first, but the up-side could be that all who participate in such an experiement will win.
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Christian DE NEEF
July 19, 2011 at 3:46amGo! But so difficult to implement, because we are talking culture, values, moving from a To Have to a To Be mentality... This actually might work better in some cultures than others. But it's a perspective on Openness - Open Data includes Open (Compensation) Data! - @cdn