What is more effective in Companies or Organizations that are using Lean or Six-Sigma: Individual Targets or Team Targets?

Author: Menno R. van Dijk MSc

Date: Februari 14th, 2012

 Summary & Conclusions

A lot has been said about bonuses and target related incentives, the past few years. Do they lead to irresponsible behaviour and risk taking within financial institutions? Should managers from state-owned companies, or companies relying on state support, get a bonus if they meet their targets? Interesting questions; however, that’s not what this blog is about. How bonuses and incentives influence the way teams work together, especially in Lean organisations, now that’s something I’m very passionate about.

In my experience as a Lean consultant, I have often found that organisations struggle to maintain the initial rate of improvement: when autonomous production teams, lean quality circles or TPM-teams are first formed, the performance improves spectacular. 20%-50% increase in productivity or machine output is achieved almost every time. In some exceptional situations, I even encountered productivity increase of over 100%. Enough to exceed my clients’ expectations, but my goal was always to get to a state of ‘continuous improvement’. This is when the production teams continue to improve: relentlessly reducing waste, again and again improving their standards.

I strongly believe that financial team targets and incentives can play an important role in making the final step towards continuous improvement. That is why I did this literature search: to find out if my believe is supported by reliable research.

My conclusion: Several publications, especially on effectiveness of ‘Operational Excellence teams’ (e.g. TPM teams, autonomous teams, six sigma project teams, etc.), confirm that team targets and team incentives are more effective than individual targets. However, I had to adjust my strong believe on two points:

• Also individual targets have their merits, and a combination of team and individual targets may well be worth considering
• Team targets and incentives aren’t the only driver, nor the main driver, for success of Operational Excellence teams, and they should be part of an integral approach

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Effectiveness of Incentives

Irrespective of companies are using Lean Sigma or not, financial incentives improve task performance moderately to significantly, but the effectiveness dependents on organizational conditions.  Two recent reviews of the effects of organizational behavior modification indicate that monetary incentives significantly improve task performance. Stajkovic and Luthans ’ s (2003) meta-analysis of 72 fields studies shows that an organizational behavior modification intervention using monetary incentives improved task performance by 23 percent, whereas an intervention with social recognition did so by only 17 percent and feedback by only 10 percent. Furthermore, by combining all three types of motivational reinforcers, performance improved by 45 percent. This is a stronger effect on performance than when each approach was applied separately. Feedback, the strongest phase of PDCA culture in Lean Organizations, combined with money and social recognition produced the strongest effect on performance³.

The standard argument in favor of individual target based incentive scheme (IBIS) is the following: if I am rewarded as an individual for my output, I get the full value for my commitment; if I am paid as part of a team reward, I only get part of the reward, so I may choose not to put in the extra efforts. As a result creative, suggestion and learning culture of a Lean Organization dilutes. In some recent reports, it is said that a team target based incentive scheme (TBIS) “penalizes performers and rewards passengers”. This is known as the ‘free-rider’ problem. Thus the mass production organization choosing to institute an IBIS provides stronger incentives for its employees³. However in Lean Organizations, this scenario is much more different.

Again focusing primarily small business, Jenkins et al.’ s (1998) meta-analysis of 39 studies addresses performance quantity and quality, found that financial incentives are significantly related to performance quantity but not to quality does not support the Lean Principle, “Quality at Source” at all⁴.

Lean and Six Sigma Organisations

Group or team target based incentive systems are consistently effective in Lean and Six-Sigma following Organizations, although they are not well tested in public sector settings, where measures of organizational performance often are uncertain.  Team-based or small-group incentives are characterized as rewards in which a portion of individual pay is contingent on measurable group performance (DeMatteo, Eby, and Sundstrom 1998). Effectiveness depends on the characteristics of the reward system, the organization, the team, and individual team members (DeMatteo, Eby, and Sundstrom 1998).  Honeywell Johnson and Dickinson (1999)  do find that equally divided small-group incentives sustain high levels of productivity and satisfaction for group members and that small-group incentives are at least as effective as individual incentives with groups of two to twelve³.

The aim of any variable payment by result scheme is to provide a direct link between pay and output: the more effectively the worker works, the higher their pay. This direct relationship means that incentives are stronger than in other schemes. However, traditional bonus, piecework and work-measured schemes have declined in recent years, as many employers have moved to all-round performance rather than simple results/output based pay, that’s how Lean Sigma companies are defining Excellence. In most of the Lean Companies bonus schemes incorporate quality measurements or customer service indicators in the assessment to avoid the likelihood of workers cutting corners or compromising safe working methods in order to increase output.

The standard advice when designing best-in-class sales compensation plans has always been to pay for individual performance. Recently, however, an increasing number of companies are finding that team-based performance measures better reflect the way they sell to customers⁵.

Pro’s and Cons of individual and team incentives

Before organizations adopt team-based measures and incentives, they must address two questions: What business conditions are driving the decision to reward team results rather than or in addition to individual results? How can an organization know if this is the right path to follow? Answering these questions requires a close look at the company’s business model, Operations, Sales and Marketing⁵.

As for instance, Organizations need to determine how the work of sales teams and individuals comes together to drive the business. Does the organization subsist on competition among “lone rangers” who rarely need to work together for the good of the customers? Or does it rely on a complex network of account managers, overlays and geographically dispersed customer teams to work in a symbiotic, seamless way to best meet customer needs?

Once an organization understands these key features, it can assess the pros and cons of measuring individual vs. team performance in its sales compensation plan.

 

 

Individual Target – “Lone Ranger”
Pros	Cons
Clearest line-of-sight for plan participants Demands performance and results for pay Clearly differentiates between high and low performers Encourages a strong “sales culture”	Contributes to an “every man for himself” environment May hinder effective team sales behaviors, creates fiefdoms Creates crediting issues when a sales effort comes from multiple contributors
Team Based Target – “Three Musketeers”
Pros		Cons
Fosters a collaborative/selling environment – “happy to help” Enhances a focus on the customer’s needs – “we are customer advocates” Resolves crediting issues for complex team sales		Spreads incentives across high and low performers, potentially allowing low performers to “draft” behind top performers Dilutes pay-for-performance culture Hinders management’s ability to quickly diagnose performance driver(s)
Source: Sibson Consulting

Combining the two

Assuming an organization decides to employ a combination of team and individual incentives, which metrics are best suited for team versus individual measurement? Ideally, an effective sales compensation plan should have three incentive measures. These can range from the objectively quantifiable (such as customer revenue) to the more subjective in nature (such as management by objectives). How the sales strategy and organization support key business objectives will help determine whether a chosen metric is best suited for team or individual measurement. A company should identify those activities that require the greatest collaboration of the team. These may include generating multi-product revenue, cross-territory results or customer satisfaction.

Individual incentives are still critical to success, so an appropriately balanced team vs. individual incentive mix maintains the “skin in the game” for sales reps while supporting and enhancing good team-based decisions for the customer. The best method for a company introducing team-based incentives for the first time is to follow a judicious approach to avoid alienating its valuable high performers⁵.

If the company is moving from a pure individual mix, introducing one team-based measure that accounts for no more than 30 percent of the total incentive would be advisable — leaving 70 percent of the incentive for rewarding individual results. As the organization becomes more comfortable with team-based measures, moving up to 50 percent based on team results will still provide a chance for individual performers to shine and will allow the company to maintain a strong pay-for-performance culture⁵.

Although individual performance measures work best for some organizations, others can benefit from team-based plans. The keys to success include recognizing a team-based sales organization, selecting the best measures at the team level and finding the right balance. Executed with care and a sound business case in the right organization, team-based incentives can support a more collaborative environment that can improve alignment with the company’s overall objectives and create a winning sales strategy⁵.

Recent study shows, to Incentivize Teams vs. Individuals: Incentivized teams increased their performance by 45%; incentivized individuals increased performance an average of 27%. The increase in team performance is thought to result from decreased “social loafing” that occurs in teams, because of the monitoring required by incentive programs. Clearly, peer pressure has significant value⁶.

Conclusion

My conclusion: Several publications, especially on effectiveness of ‘Operational Excellence teams’ (e.g. TPM teams, autonomous teams, six sigma project teams, etc.), confirm that team incentives are more effective than individual targets. However, I had to adjust my strong believe on two points:

• Also individual targets have their merits, and a combination of team and individual targets may well be worth considering
• Targets and incentives aren’t the only driver, nor the main driver, for success of Operational Excellence teams, and they should be part of an integral approach

 

References:

1. See Simon Burgess and Paul Metcalfe, Incentives in Organisations: A Selective Overview of the Literature with Application to the Public Sector CMPO (1999). University of Bristol
2. See Manjari and Rekha, Formulating the concept, Principle, and Parameters for Performance-Related Incentives (PRI), Indian Institute of Management, Ahmadabad, Feb, 2008
3. Motivating Employees in a New Governance Era, Performance Paradigm Revisited, by Debra and Laurie, Indiana University and San Francisco State University respectively. 2006.
4. Promoting employment relations and HR excellence at http://www.acas.org.uk/index.aspx?articleid=735 on 19^th Feb, 12.
5. Are Team-Based Incentive Measures Right for Your Sales Organization? By Sheila McCarthy and Shalin Sharma at http://www.worldatwork.org/waw/adimComment?id=36014
6. Incentives, Motivation and Workplace Performance: Research & Best Practices, Spring 2002. Research Sponsored by The International Society for Performance Improvement