Hierarchy can be reinvented through a contribution-based “points system,” linked specifically to how each employee impacts the company’s results. This means that anyone can earn more money than their boss and earn equity linked directly to his or her individual and collective contributions.
The problem is that Scientific Management drove organizational design for the industrial age – where it worked very well in an environment where work was largely visible, standalone, and unchanging. In this system, hierarchy became a proxy for contribution and the higher your level, the more prestige and compensation you received – regardless of the specific personal contributions.
Work in the Knowledge Age – where work is often invisible, interdependent and ever-changing -- is ill-suited for this organizational paradigm when it comes to compensation. For example, pay bands are too narrow relative to the large differences with knowledge worker contribution (e.g. genius programmers are 10,000 times more productive than average programmers). Second, hierarchy is too inflexible for contribution-based compensation because it institutionalizes an environment where your past contributions are much more likely to explain your compensation than your current contributions – which is dangerous in a rapidly changing competitive environment. Third, hierarchy-based compensation institutionalizes organizational blockage with bosses who are “fat and happy” after they become “king of the hill.”
The result, is that there is not an organizational management approach to prove out the best ideas (and those that aren’t working) and successfully allocate scarce resources with fluidity in a rapidly changing global environment.
Reward employees with points when they make valuable contributions. The points provide a basis for compensation and perks. The advantages of a points-based system are:
- the most valuable contributors gain the biggest rewards
- only recent contributions count, so employees cannot "rest on their laurels" – the points lapse after 1 year.
- work becomes more fun, as the reward system is open and transparent
Case Study: Brand Velocity
Jack Bergstrand founded Brand Velocity, a consultancy, to become a working laboratory for how to best organize for the Knowledge Age – inspired by Peter Drucker’s Post Capitalist Society.
Brand Velocity developed a points system instead of a hierarchical-based compensation system. Jack was previously chief information officer of The Coca-Cola Company and designed a system that he believed could work in small and large organizations alike.
This has been in operation for five years and, with modifications, is applicable to large organizations as well small ones.
At Brand Velocity, points are awarded for selling great work, delivering great work, and recruiting and developing a diverse group of people who can do the same.
For each engagement, the gross profit for each engagement is translated into points, and those points are awarded to those who contributed to generating this gross profit. The gross profit is calculated by taking the net collected revenue for an engagement and then subtracting costs related to the sales / delivery of that engagement (e.g. direct business development costs, loaded employee costs, contractor costs, sales and delivery commissions, and other miscellaneous costs directly tied to the sales / delivery of the engagement). With the points system, for each collected invoice, 25% of the points go to the sales lead, a 15% pool is distributed by the sales lead for sales assistance, 30% goes to the delivery lead, and a 30% pool is distributed by the delivery lead for delivery assistance. For example: $500,000 dollars gross margin equals 500,000 points – 125,000 for leading the sale, 75,000 distributed for assisting the sale, 150,000 for leading the delivery, and 150,000 distributed for assisting the delivery.
Successful diverse employee recruitment and mentoring also qualifies for points—with 25% to the recruiting lead, a 15% pool distributed by the recruiting lead for recruiting assistance, 30% to the development lead, and a 30% pool distributed for development assistance by the employee. For a qualified diverse recruit, 15% of his or her annual base compensation determines the points to be allocated. For example, a qualified $200,000 recruit equals 30,000 points – 7,500 are awarded for leading recruitment, 4,500 distributed for assisting recruitment, 9,000 for leading development, and 9,000 distributed for assisting the development of the recruit.
The value of each point is determined according to a surplus calculation across the entire fiscal year, with payouts (as applicable) based upon the total points for each active employee. For example, if surplus profits (BV redistributes all operating profit over 15% of revenue back to employees) are $1,000,000 and someone has earned 10% of the points, then he or she will earn a $100,000 bonus. On the other hand, if someone has earned 1% of the points, then he or she will only earn a $10,000 bonus.
Points show results, but BV is fairly tolerant that as long as people are doing the right things that the right results will come. In this regard, BV doesn't do traditional performance appraisals, but asks employees to reflect on the same key questions, and discuss their thoughts with their supervisor, twice per year. The questions are: 1) What do I want to achieve at Brand Velocity short term and long term? 2) How are my current contribution goals defined? 3) What is my record of performance relative to those goals? 3a) What do I need to do the same? 3b) What do I need to do differently? 3c) What do I need from BV? 4) How am I supporting the company's revenue drivers? 4a) Sales, 4b) Delivery, 4c) Recruiting and developing people. 5) How are our espoused values being practiced by the BV team? 5a) Smart 5b) Work hard, 5c) Ambitious, 5d) Nice, 6) How are our functional areas working? 6a) Consulting Strategy, 6b) Engagement Sales, 6c) Relationship Management, 6d) Engagement Delivery, 6e) Human Resources, 6f) Business Systems? 7) What do I need to focus on most over the next six months? 8a) What does BV need to focus on to be most successful as a company? 8b) What does BV need to focus on most to help me be most successful?
Also, at Brand Velocity, experience does matter. People who earn the most points tend to have excellent experience -- they are good at executive presence, are knowledgeable, have learned valuable lessons over the years, and tend to gain respect more rapidly. At the same time, experience is not all that matters. An experienced person who is not contributing points (over time) is also not increasing the performance of the company as much as a less experienced person who is making up for his or her lessor experience with more energy and earning more points.
Part of what helps to manage the "gaming" is that people must also reallocate a significant number of points to those employees who have helped them be successful. This makes points less about individual gaming and does tangibly encourage more teamwork around shared goals. It can also be tailored to non-financial measures. For instance, points are earned at Brand Velocity for employee recruiting and development. With variable compensation, people -- in certain ways -- succeed and fail every year. There is technically no limit to how much money someone can earn on the upside and people are not guaranteed any variable points compensation if they don't earn points. And, it doesn't matter what your rank is; a point is a point. In practice, it's not only about the money. It greatly focuses people's work -- individually and collectively.
In addition to bonus awards based on points there are other awards based on points-based personal contribution to the company – to further develop points as a proxy for contribution versus hierarchical position. They are:
- Golden SWAN Award for achieving 325K annual points. Engraved Plaque and $10K annual trip award. Managing Director nomination with two consecutive years of achievement (or 650K total points over a consecutive two-year span) and based upon living BV values.
- Silver SWAN Award for achieving 250K points. Engraved Plaque and $7.5K annual trip award. Vice President Nomination with two consecutive years of achievement, contingent upon living BV values.
- Bronze SWAN Award for achieving 175K points. Engraved Plaque and $5K annual trip award.
- Founders Award. Engraved Plaque and $10K award; winner redistributes $4.5K for those who helped him / her most– for balanced selling, delivering, recruiting / developing.
- Sales Award (Awarded to employee with largest number of annual Sales points): Acrylic Award and $5K annual trip award.
- Delivery Award (Awarded to employee with largest number of annual Delivery points): Acrylic Award and $5K annual trip award.
- HR Award (Awarded to employee with largest number of annual Recruitment / Development points): Acrylic Award and $5K annual trip award.
- Pinnacle Award: Acrylic Award and $2,500 cash award for the most outstanding support from a non-employee.
- Equity Awards: For achieving the Golden SWAN Award for two consecutive years (or 650K total points over a consecutive two-year span), employees are eligible for options on roughly $300,000 of Brand Velocity equity.
Having a systematic points system in place trumps hierarchy-based incentive structures in the following ways:
- This system enables a true meritocracy. The boss does not automatically earn a higher incentive if he or she is not contributing as much as more junior people. Similarly, anyone in the company can earn more money than their boss and can earn equity in the company if they can successfully sell great work, deliver great work and recruit and develop a diverse group of employees who can do the same.
- With ever-changing and of often invisible knowledge work, the points system is much more fluid at highlighting productive people and productive efforts than the traditional organizational hierarchy.
- In the Knowledge Age it is easy for underperformers to hide in the hierarchy and for superstars to be hidden. The points system helps to increase transparency and directly links personal incentives corporate results.
- The points architecture helps employees self-organize around those things that are the most strategically significant. In the case of Brand Velocity, it’s on selling great work, delivering great work and recuiting / developing great people who can do the same. For other companies the architecture could be different. Simpler is better, but in the end one size fits one.
- The points system also sheds light on those areas that may not be in the company’s sweet spot. For instance, if it’s hard to figure out how a particular area would qualify for points, that area may be a candidate for outsourcing or restructuring.
- The points system also helps in inter-group collaboration and information sharing. With a clear motivation (to gain points) in place, people start becoming more open and friendly with other groups.
QUICK & DIRTY IMPLEMENTATION:
Make a first test where nothing can be lost, only gained! This will remove most problems associated with creating new winners and losers.
STEP 1: WHO: Select a small initiative or project that is important for YOUR group or team.
STEP 2: WHY: Clarify with the group why you think a Points System will be better suited to achieve the goals and objectives of the initiative or project. Additionally point out that you want to understand if the new system could be an alternative to the existing reward system and that you want to make it a group experience/decision.
STEP 3: RULES: Explain that the members will be rewarded if they make valuable contributions. Let them make propositions regarding the valuable contributions (selling/delivering great work) but provide the strategic objectives for the initiative.
(Example: cross- or up-selling, deliver early, great quality, great ideas, improvements etc.)
STEP 4: WHAT IS IN FOR YOU: Dependent on what you want to achieve, define small rewards upfront (things such as cinema tickets, gift vouchers etc.) or tie/source the rewards to/from the budget (savings through beating for example the project budget and time lines).
STEP 5: HOW IT WORKS: During the process, let the team collaboratively decide how many points they want to award to valuable contributions as defined in STEP 3. The higher the overall sum, the smaller the individual shares - so it's up to them to not overrate (minimizing their share) or underrate (destroying team member's engagement) others contributions.
STEP 6: AWARDING: After the initiative or project, the awards/rewards are distributed. Have a dialog with your team members if they are satisfied or frustrated and if they feel the process is a judge one or not. Ask if they think that something has gone lost, if they have perceived changes in behaviors (constructive/destructive), and if they appreciate this idea for future projects. If yes, ask if they would like to change the existing reward system with the Points System. If not, ask why!
STEP 7: LESSONS LEARNED: This small experiment should give you a good indication regarding the basic chance of a Points System in your area of responsibility. If it didn't work out as expected, give it another trial in another small project or initiative and change what didn't work before.
Hypothesis 1: Transparent points system for reward managements has a positive impact on performance.
Hypothesis 2: Transparent points system for reward managements has a positive impact on innovation.
Hypothesis 3: Transparent points system for reward managements has a positive impact on engagement.
For Hypothesis 1, the impact could be measured quantitatively using organization’s data. For example, the number of completed projects, acquired contracts or number of staff recruited could be measured.
For Hypothesis 2, innovation could be measured by a survey (which could be supplemented by interviews) to assess the number of new ideas produced, project proposals completed, new ways of improving customer service, new product/service introductions etc. (depending on the nature of business).
For Hypothesis 3, engagement could be measured quantitatively, for example, by staff engagement survey, by 360 feedback, Gallup’s Q12 questionnaire and/or by conducting semi-structured interviews.
Another option could be to measure an impact on a short, medium and long-term timescale. In short-term, performance and improvement in processes could be measured, in mid-term innovation and resilience and long-term learning and development.
Experimental subjects would be employees in a preferably knowledge intensive organization.
If an organization is chosen to participate in an experiment, one unit/department/division could be randomly allocated to the control group and another to the experimental group. Control group would keep using the traditional compensation system and experimental group would implement reward system based on points. Random allocation is preferred option from methodological perspective, although self-selection could be more practical.
A second option could be to make it a matter of inter-departmental choice within a project context. Half of the participants could keep the old system, the other half is asked to opt in for the points system. In another project, the teams change. After both projects, the teams decide for or against the new solution. This solution would yield a solid control group reference as each team has both roles what would remove the team specific biases from the experiment. Furthermore, a project context limits the risks of visibility because if the points system is rejected, nothing has to be reversed (compensation system) as of the limited time scope a project has.
A suggested timescale for the experiment is:
Day 1-2: Selecting experimental group for the experiment (this could be one division or department)
Day 3-5: Deciding collaboratively on core activities for which points will be awarded, the number of points to be awarded for particular activities, and the process for awarding group points in alignment with business objectives
Day 6-30: Design and implement a pilot process for awarding points
Day 30-35: Assess an impact of the pilot process, collect feedback and refine the process
Day 35-59: Implement refined process for rewarding points
Day 60-62: Assess an impact of the refined process, collect feedback and refine the process further if needed
Day 63-84: Continue with implementation of the process
Day 85-90: Assess an overall impact of the reward points system, conduct interviews/survey to collect feedback and assess impact, collaboratively reflect on the experience and decide if a larger part of an organization (or the whole organization) could implement this idea
A credit should be given to Jack Bergstrand, a CEO of Brand Velocity Inc., for providing case study material for this hack.