Parable of the Monkeys -- The Persistence of Organizational Culture

Do you have a "problem group" of employees? A department, a team, a division that just doesn't conform to the cultural values you're promoting? At a recent Chief Executive Boards International meeting, a member described a small group of employees that had a history of discontent, attitude issues and a general lack of teamwork.

This situation reminded me of the parable of the monkeys -- told first to me by a member of the Chicago CEBI Board. It happened that there were three monkeys in a cage. Suspended at the top if the cage was a bunch of bananas. There was a ladder from the floor of the cage up to the bananas. One of the monkeys who was both clever and agile and also liked bananas, decided to head up the ladder to grab a banana.

Imagine his surprise (not to mention that of the other two monkeys) when suddenly a fire hose washed down the cage, blasting all three monkeys over to one side. Cold and shivering, the 3 monkeys regrouped and thought about what had happened.

Monkeys don't have a real long memory, and after awhile a second monkey thought again about the bananas and headed up the ladder. Same thing -- a fire hose washed all three monkeys over to the side of the cage. They picked themselves up, shook themselves off, and hoped the sun would come out to warm them up.

After another couple of hours, the third monkey couldn't resist, and he went for it. Sure enough, same result -- fire hose, wet monkeys, and another miserable afternoon of drying out.

Finally, all three monkeys became convinced that going for the bananas was a bad idea, and went on with the rest of their lives.

Then the zookeeper drafted one of the monkeys for another exhibit and replaced him with a new monkey. The new monkey arrived, looked up at the bananas, looked over at the ladder and couldn't figure out why the other monkeys hadn't gone for the bananas. He headed for the ladder and got about 1 rung up when the remaining "experienced" monkeys tackled him, dragged him to the floor and pummeled him into submission. He quickly concluded that climbing the ladder wasn't a good idea.

A week later, the zookeeper replaced the second monkey. Monkeys are somewhat single-minded. The new monkey spied the bananas, headed for the ladder, and the remaining two monkeys tackled him and pummeled him into submission.

Finally the third monkey was replaced and, you guessed it, the same thing happened. So life went on among the monkeys and after some time the first of the "new" monkeys was replaced with yet another monkey. Sure enough, the new guy saw the bananas, went for the ladder, and his two peers tackled him and beat him into submission.

Why was that? None of these monkeys knew anything about the fire hose. None of them had ever gotten wet for having climbed the ladder in the quest for bananas. Yet the monkeys had been fully culturalized to know that it was a bad idea. And you could likely go on individually replacing monkeys one at a time forever, and expect the same result.

The only solution to this problem, if it is one, is to replace all the monkeys with those who don't know the existing culture.

Think about it -- isn't organizational culture really a hand-me-down process? New employees come in and are quickly assimilated into the dominant system of beliefs, values and ideals. If those match yours, it's great. If they don't, it's tough to change, and your wishes or hopes won't get you there.

What ideas, assumptions and values are inadvertently communicated to people new to your organization that you'd prefer weren't? What would you have to do to intervene? Replace all the monkeys? Or something equally aggressive to disrupt the status quo? Click "comment" below and let us know your experiences in overcoming persistent organizational culture.


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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

The #1 Incentive Compensation Plan Design Mistake

This is a summary of a topic that a member brought up in a Chief Executive Boards International meeting. Confidentiality rules preclude any details about the city or the member, but the lesson is solid, even in generic terms. The issue was designing and installing an incentive compensation plan for sales people -- something managers have wrestled with from the beginning of time.

In an earlier article, I emphasized that the foundation of a good incentive compensation plan is its alignment of the employee's self-interest with the company's interests. Said another way, "Figure out exactly what you want an employee (or group of employees with like responsibilities) to do, and then figure out exactly how to pay them for doing just that.

As a friend of mine says, "Says easy, does hard." But this is important work that counts as working on rather than in your business, and you'll make the time to work on it if it's important to you.

Then, the question is how to make the numbers work. That's the subject of this article. In my experience there's ONE single mistake plan designers consistently make. What is that? I call it the "sensitivity" factor. We generally have an idea of where we want to be "on average" -- what we're willing to pay for "good" performance. In our example case in the meeting, a member said he was thinking of paying his inside sales people 1% of the gross margin on their monthly sales. 1% is not a lot, but inside sales people are generally paid a base salary, and this was conceived as a "kicker" on top of an existing base. So the AMOUNT of the compensation seemed fair, especially when we drilled down into the numbers.

The board asked him if he planned to pay that 1% from the "first dollar" of sales -- in other words, if a sales rep sells 1 thing for $100 GM, does he get $1? The member said "I guess so -- why wouldn't I?" In general "first dollar" plans have the fatal flaw of lacking an important factor -- "sensitivity". In other words, once "in the money", does the plan pay enough for incremental performance to appeal to the self-interest of the employee?

How do you examine the plan's sensitivity factor? Graphically is the best way, and using some real number examples is a good way to build the graph. First, decide what "good" is. I sometimes call this the "par" value of the plan. If a rep is doing well, what might you expect for a typical month's sales? Maybe $100,000 in total sales with an average 40% gross margin, resulting in $40,000 in gross margin. At "par" what does the sales rep earn? In this example, 1% or $400. See how long that took to convert into words and for you to parse through and absorb? A graph says it in a second.

So, let's graph the same thing. Start with two axes -- Sales on the horizontal, Commission on the vertical, with some units that match your example, then put a point at "Par":


Now, draw a line from zero through Par:


What does this tell us? We pay something to anyone who sells anything -- it's a classic "first dollar" style commission plan. These work for full commission jobs. They don't serve us very well in jobs like inside sales, where there's a base salary, and we expect some base performance.

So, this is the the interesting part -- Does this match what we're really trying to do? Is the objective to pay the "par" sales rep $400, or is the objective to motivate the "par" sales rep to do, say, 10% better? So, let's look at what 10% better performance does for the sales rep:



Disappointingly (if I'm the sales rep), if I put out enough effort to increase my sales 10%, making the company $4,000 in additional gross margin, what do I get? A lousy 40 bucks.

Worse, If I let my sales slip by 10% for a month, it only costs me 40 bucks. Who cares? This totally fails the sensitivity test.

How could we fix this? One way would be to make the plan richer and pay, say, 5% of gross margin. Here's what that looks like -- either re-draw the line, or change the scale on the commission axis:



Then if the rep increased his sales 10%, the company still makes an additional $4,000, and the rep makes make two hundred bucks -- about 10% of a month's salary! This starting to sound like something he might be interested in doing. But wait! If we start paying at first dollar, that means $200 on top of $2,000! Wow, this is starting to get expensive. I'm now paying 5x what I wanted to pay, and at "par" I'm paying $2,000, rather than $400. If I put this on top of an entry-level inside sales base salary, it's almost a 100% raise.

Is there a better way?

Again, what are we trying to do? We want to incentivize improvement and disincentivize slacking, right? And we think it'll take about a 5% slope in the commission line to be sensitive enough to get their attention, right?

How about NOT paying from first dollar? After all, these people have a base salary. Shouldn't I expect something from them for that? Of course.

So, let's take the 5% "sensitivity" line and lay it over the 4% at "Par" pay point. Completely different answer. What I have to do is set a "quota" below which I'll pay NOTHING, and then I'll pay 5% on anything above that. How does that look?



So, if everyone sells at "par", I'm even. Of course if they all take off like rockets, it's going to cost me. Would I be happy with, say, an additional $10,000 in gross margin that cost me only $500 in commissions? Probably so!

And how does this work out in terms of overall costs? Not bad. First, for those reps who don't make quota, I pay nothing. For those who do, I'm paying LESS than the "first dollar" formula until they hit Par. Look at it this way -- for every $1,000 UNDER Par a rep falls, I SAVE $50, and that goes to the rep that does $1,000 over quota. That's a breakeven, and I got the effect I wanted -- a noticeable change in the pay envelope (both ways).

Then we apply the "sniff" test. Would $50 motivate a rep to upsell an order by $1,000 GM? Seems a lot more likely than $40 motivating him to upsell an order by $4,000.

OK, what if someone really hits the ball out of the park -- sells fifty percent over quota in a given month:



Under Plan A (first-dollar), beating quota by 50% is worth a lousy two hundred bucks. Again, "why bother?" Under Plan B, beating quota by 50% is worth an extra $1,000! Now, would I happily pay $1,000 commission for an additional $20k in GM? All day long! If everyone did that, I could cut my inside sales force by 1/3!

The two important variables in this model are the % and the quota. This gives you the flexibility of setting a lower quota for new sales reps. Maybe the first-year quota is 1/3 of the "standard", second year is 2/3, etc. Now, moving quotas is a major sales rep dissatisfier, so be careful in setting quotas that work, rather than to save money. I wouldn't suggest tinkering with both the quota and the percentage. Get the percentage right for the business model and lock it down.

What can go wrong? The most likely is that a rep sees himself without a prayer of making quota, and just gives up for the month. How might you solve that? First, you might apply a secondary annual bonus to overall % of quota performance -- if he's close to quota a couple of months and over the rest, those close months help out in hitting the annual target.

Another pitfall is the setting of the quota itself. Keep the carrot in sight!! We actually want to be paying some incentive comp, right? If that's not the case, nothing works. So, make sure the quota-setting process meets the "SMART" goals test:

• Specific - Yes, sales are usually rep-specific. You may find a need to introduce a "split-credit" mechanism for larger sales requiring reps to cooperate with each other.


• Measurable -- What's more measurable than sales?


• Achievable - This is the critical success factor for a quota-based bonus -- the carrot has to appear to be within reach, almost every measurement period.


• Relevant - Measuring revenue or profits surely qualifies.


• Time-Based -- Specific timeframe for achievement is identified -- usually a month or a quarter, depending on the sales cycle and frequency of sales. Annually is too long for most people -- again, the carrot is so far away it's almost invisible.

This also meets another litmus test of incentive compensation: "Can the sales rep explain the plan to his wife over no more than one martini?" Not a bad question to apply to any plan.

Designing compensation systems is not simple, and not a one-pass process. In a future article, we'll explore how to use modifier factors to minimize employees "gaming" the system to the disadvantage of the organization.

This prototype addresses a method of taking base salary into account while at the same time making the plan "sensitive" enough to motivate incremental performance. The concept is that above par, the employee is covering his costs by >10x, and we'll pay well for any performance above that point. Try this on for size in your own organization and see if it fits. And let us know some of your ideas for effective incentive compensation design.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Newton Was Right -- Effecting Change in Your Company

This is one of a series of articles on the relationships and parallels of the physical and natural sciences to the dynamics of a business organization. I hope you'll extract some good ideas from these. I hope further that you'll consider adopting some of these parables or "word pictures" in communicating with your own organization. People tend to remember things in visual and familiar terms, and this physical metaphor for propelling change in your business may be useful.

Do you have things within your company that you'd like to change that have simply resisted all efforts so far? Perhaps it's a person's behavior. Perhaps it's a department's behavior or attitude. Perhaps it's a relationship with a customer. Or a change in a business process. You get the idea.

Visualize that employee, department or business process as a physical object that won't move. A physical metaphor for this situation is an object that's standing still, and hasn't moved yet despite the amount of pushing (force) we've applied. Despite our best and multiple efforts, it's still exactly where it started and not moving an inch. Let's visualize that situation as a box of rocks sitting on the floor, and the change we want (the goal) as moving the box of rocks across the floor. From, say, Point A to Point B or even beyond.

In physical terms, here's what that looks like: We've applied a given amount of force, perhaps continuously, more likely sporadically, and the box of rocks is simply sitting exactly where it started. Why is that? Because of the opposing force, friction. The force of friction between the box and the floor is simply larger than the force we've applied to the box, and it's not moving until something changes. This is an example of Newton's Third Law, commonly paraphrased as: "To every action force there is an equal, but opposite, reaction force". This actually isn't a physics lesson, but if you're interested, here's a Wikipedia article you may find interesting: http://en.wikipedia.org/wiki/Newton's_laws#Newton.27s_third_law:_law_of_reciprocal_actions

What's the organizational analogy to friction in this example? We commonly call it "pushback". Someone (or group of someones) just doesn't "get it" and is actually (perhaps passively) resisting the change we want. Or a customer is pushing back against a change in a business process. The subtlety of organizational friction is something to behold. It's everywhere -- punctuality, productivity, quality, cost reduction, revenue growth, etc. In every case, there's a frictional force pushing back against our efforts to effect change (improvement).

Now, in this physical analogy what could we do differently?

The "manager" style, in most cases, reacts to this situation with what? More force. We're generally trained to "make things happen" and the most obvious way to do so in this case is to push harder.

What are the other options?

We could enlist someone else to help push -- to apply even more force -- "gang up on 'em" (Here's where this "inanimate object" model fails slightly -- when you try this in organizations, many times the pushback (or frictional force) actually increases, making forward progress even harder).

We could tie a rope to the box enlist someone to pull. How do we do that in an organization? By showing someone else how it's in his own self interest to cooperate and to assist. Adam Smith, the father of modern economics, laid the entire foundation of his economic theories on the self-interest of the individual, saying: "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." And free-market economic systems have generally proven Smith right.
So, instead of pushing harder, the "Leader" examines the self-interests of those not actively pushing back (easiest initial targets) and puts communications and perhaps incentives in place that will align their self-interests with those of the organization. Now, we have two forces acting against friction, both push by management and pull by employees, and the box begins to move.

Or does it? Perhaps even those two forces together still don't move the box. What then?

The only force keeping it from moving is the friction, isn't it? How would we solve that problem?

There are a few ways to physically reduce friction. In this example, one way would be to add lubrication -- to wax or grease the floor. What's the organizational analogy to that? It's a perceptive, enlightened leader who understands the idea of other people's self-interest asking the magic question "What's getting in the way?", and then eliminating or reducing the resulting pushback (friction). This is my personal favorite strategic planning question. I have seen companies who successfully answer and fix "What's getting in the way?" turn from near failure to outstanding performers.

How do you figure that out? The best known strategy -- ask. In almost every case, properly approached, someone will tell you what's getting in the way. It may be you. It may be an existing policy, put in place for a completely different reason (perhaps one long forgotten). Many times it's a broken compensation system, and/or the broken measurement system that goes with it. Or maybe the lack of a compensation system that makes it clear what we want and rewards for that. In that case, it's probably an opportunity to both reduce friction and increase pull. If the employees believe that "Something good happens to me if I stop pushing back or something even better happens to me if I start pulling", you've either reduced friction, increased pull, or both. Or, as a last alternative, "Something bad happens to me if I don't".


What it it's an external force that you can't control? A Union? A competitor? A customer? Maybe push and pull are your only options.

Or are they?

What about reducing friction by taking half the rocks out of the box? Again, we're not teaching physics here, but the force of friction is, in fact, directly proportional to the mass (weight, for our purposes here) of the box plus the rocks. So half the rocks is a reduction in friction of almost half. How does this relate to our business problem? It's like breaking the problem down into parts and attacking one part at a time. Or reducing the complexity of the intended change. Or taking things sequentially, rather than simultaneously. If moving rocks is the objective and we have only a given amount of push and pull to apply, what's wrong with moving half the rocks now and coming back later for the other half?

Now, as the box begins to move, we come to the advanced lesson -- dynamics vs. statics. Up to this point the box has been immobile. Once it begins moving, however, the game changes and the frictional force changes from "potential friction" to "kinetic friction". Kinetic friction is always lower than potential friction. Think about your own experience -- when you're pushing something across the garage floor, it's easier after it starts moving, right? Once you achieve the "breakaway force" (push plus pull) -- the force required to start the box moving, it keeps moving with less force applied, doesn't it? That's because the friction changes from potential to kinetic friction, which is less resistant to your efforts.

Now we're talking about acceleration. With a continuous amount of force applied to an object, Newton's Second Law kicks in, sometimes paraphrased as: "The rate of change of momentum of a body is proportional to the resultant force acting on the body and is in the same direction." http://en.wikipedia.org/wiki/Newton's_laws#Newton.27s_second_law:_law_of_acceleration

In our metaphor, that would mean the box of rocks would start moving faster, and we'd of course have to start running to keep the same amount of push and pull applied. Examining Newton's equation, we see that the velocity of the box, with the same amount of force continuously applied, would exponentially accelerate the speed of the box, eventually reaching the speed of light! How would you like that happening to a previously "immovable object" in your company?
So, I offer the idea that Newton was, in fact, right. Not only about rocks but also about business. If you want to effect change in your company, look for "What's getting in the way?" and examine the self-interests of all concerned to see if you can get those aligned with your goals. Life's a lot easier when you stop pushing harder.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917