Do Monetary Rewards Reinforce Lean Systems?

March 12, 2012
Pay systems exert very powerful effects that either reinforce or undermine lean practices.

The role of monetary rewards in lean systems is controversial. Some lean advocates oppose using monetary incentives, arguing that they are ineffective and counterproductive. Others see compensation programs as critical organization tools for reinforcing the knowledge, skills and behaviors needed in lean systems. Who is correct?

After their rapid expansion in the past two decades, lean initiatives are now ubiquitous. Today it is difficult to find a U.S. manufacturer that is not at least in the early stages of a lean strategy.

A successful lean effort requires fundamental changes in the knowledge, skills and behaviors of employees and managers. The lean toolkit is very deep, requiring both white- and blue-collar employees to learn many new principles and tools for eliminating waste, improving work processes, serving customers more effectively and optimizing production. Little wonder that obtaining employee and management buy-in for lean can be a daunting challenge.

The human resource function offers many methods for building knowledge, skills and abilities. Training, recruitment and selection, job design, performance feedback, career paths, and management style all play important roles in motivating employees to change, and all are advocated in lean writings. What about pay?

The lean literature is mostly silent or negative on the topic of pay. The 18 books on lean in my collection devote less than 18 pages to compensation. Some authorities, most notably W. Edwards Deming, James Womack, and Daniel Jones are negative about incentives. For example, Deming counted merit pay and management by objectives among "seven deadly diseases" on the grounds that they encouraged short-term thinking and unhelpful competition, but he had little to say about other pay practices.

The problem: Pay systems exert very powerful effects that either reinforce or undermine lean practices. Employees certainly take pay seriously -- and they notice whether management "puts its money where its mouth is." The question is not whether pay should be used to support lean, but how to design pay practices to reinforce lean principles.

Best Options have an American Flavor

Almost any type of pay system can be designed to support lean -- even the merit systems detested by Deming. Other options include suggestion rewards, recognition plans and profit sharing, all heavily used in Japan. For example, the Japanese make heavy use of profit sharing and other company bonuses, which typically represent 25% to 30% of compensation -- huge by American standards. However, the best options have an American flavor: skill-based pay and plantwide performance incentives such as gainsharing.

Skill-based pay increase employee capability by rewarding skill acquisition. This facilitates many lean practices, including learning quality and support skills, cross-training, understanding of the overall work process, and flexibility in job assignments. Higher levels in the plan can even be tied to black belt certification. One newer form of skill-based pay, skill bonuses coupled with a simplified job grading system, is especially cost-effective and easy to maintain.

Plantwide incentive plans directly reward improved unit performance. Such incentives lie at a sweet spot -- they are motivational and they reward performance of the whole system. On the other hand, individual and small group incentives encourage competition and suboptimization, while corporate incentives such as profit sharing lack motivational value because of limited line of sight.

In plantwide incentives, employees quickly learn how making suggestions and working together increase performance on plan metrics such as costs, defects, delivery and customer satisfaction. If employees realize that adopting lean practices puts money in their pockets by increasing performance, employees quickly become lean champions.

A final thought: Applying lean thinking to compensation and benefits offers a huge opportunity. Most companies suffer from tremendous hidden waste in rewards due to salary systems, incentives and benefits plans so complex that employees cannot understand them. Leaning out rewards could generate not only important cost savings, but also simpler, clearer, more user-friendly plans.

Gerald Ledford, Ph.D., is president of Ledford Consulting Network, Redondo Beach, Calif., and an authority on human capital issues, including employee reward systems. From 1998 to 2003, he was a leader at Sibson Consulting. From 1982 to 1998, Ledford was a key contributor at the Center for Effective Organizations, University of Southern California. He received a Ph.D. and M.A. in psychology from the University of Michigan. Gerry has authored over 100 articles and 10 books. He can be reached at [email protected].

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