Why would we compensate employees in a manner that discourages productivity?
Consider the following example. Professionals in a peer group each have similar backgrounds and between five (5) and eight (8) years of experience. They all perform similar assignments (tasks) that for simplicity’s sake are assumed to have the same degree of difficulty. The total compensation (salary plus bonus) in this peer group currently ranges between $85,000 and $110,000 per year and each employee has a level of compensation related to their productivity; higher productivity corresponding to higher compensation.
Assume that the least productive employee works 150 tasks per year on average with a total compensation of $85,000. The most productive employee works 300 tasks per year on average for a total compensation of $110,000. Thus, the most productive employee is about twice as productive as the least, but without receiving twice the amount of compensation.
Considering the total number of tasks that each employee is able to complete in a year, the least productive employee is paid an equivalent of about $567 per task and the most productive employee is paid an equivalent of about $367 per task. Thus, the least productive employee is actually being paid about 1.5 times more per task completed.
The following plot has been generated to illustrate this point. In this plot the least productive employee is used as a bench mark. Employee productivity is plotted along the horizontal axis with 100% representing the least productive employee. The corresponding number of tasks per year is represented on the top of the graph for comparison purposes. The vertical scale is a measure of task labor values paid to an employee in comparison to the least productive employee’s task labor value. Corresponding annual compensation and task labor values have been placed along what I call the Productivity Discouragement Curve to illustrate how each decrease with increased productivity.
In essence, managers using the employee compensation model described above are tying task labor values to employee productivity and are lowering these values with increased productivity. The result is a very power negative unspoken message that acts to discourage all employees from increasing their productivity. Of course, some employees will act against the Productivity Discouragement Curve and work harder to get more total compensation. Their level of productivity will be a function of their personal drive, work-life choices and personal needs regardless of the discouragement, but we are dampening their enthusiasm. Why?
What would happen if we didn’t use the Productivity Discouragement Curve as the basis for our compensation models? What if instead we decided to pay the same task labor rate independent of productivity? Or, what if we actually increased the task labor rate for higher levels of productivity?
The result would be an unleashing of employee productivity at all levels. However, such an approach would be very difficult under our present time-based employee performance measurement systems. However, it would be easy and straight forward under a task-based system, such as the Tasks-Completed-Correctly strategy as described in The Optimum Manager.
How would a Tasks-Completed-Correctly strategy that actually encourages productivity work in your business?
Glen R. Andersen, ScD, PE
Let’s explore a very important and fundamental question about the employee performance management process. “Is it better to measure employee performance by time spent or by tasks completed?” In my opinion, the answer is unreservedly “Tasks Completed!” We should measure employee performance by the number and types of tasks completed correctly over a specified time interval. Thus, time should become of secondary importance to performance management rather than of primary importance as it is now used.
An ideal employee performance management process should measure both competency and productivity. Competency is best measured at the end of each task when a manager reviews it for correctness, and as such should be measured continuously. A direct measure of productivity should be based upon the total labor value of all tasks that can be completed correctly by a given employee over a given time interval. One such measure can be the difference between the total labor value of all tasks completed and the total employee compensation received. With these two measures of employee performance, each employee will have a clear and unambiguous understanding of where he stands at all times and can become the master of his own most important commodity; time.
Regrettably, most employee performance management processes are built upon some measurement of total time spent at work, total time spent on billable tasks, and total time spent on nonbillable tasks. We typically measure employee performance on an annual basis during formal reviews. Competency in these reviews is a secondary metric determined long after the tasks that can demonstrate it have been completed. We try to associate competency with types of projects completed and do so in a subjective manner. We also measure employee productivity in these annual reviews; but typically as an agglomerate of various subjective measures such as: opinions from direct supervisors; opinions from group members who work closely with the employee; profitability of projects worked on; or, overall productivity of the group with an assessment of each employee’s individual contribution. The result is at best a highly subjective and very approximate snapshot of any given employee’s performance on an annual basis.
So long as an employee is performing adequately, this highly subjective and very approximate measure of performance is sufficient. However, with an underperforming employee, there is a lot of potential gray area that opens our businesses up to the potential for costly legal action if that employee must be terminated.
In addition to the challenges just described in measuring employee performance, our reliance on time as the fundamental unit of measure sends a very powerful negative unspoken message to our employees:
“Your time spent on the job is most important! Make sure that you charge enough billable hours to meet your utilization goal each week.”
Unfortunately, when we measure billable time, we tend to get more billable time. If all employees are sufficiently motivated to optimize the use of their billable time, then such an outcome is entirely acceptable. However, we see ample evidence that such is not the case in normal businesses. Various research institutions have been tracking levels of employee engagement over the years and have concluded that only a small fraction of employees in a typical business are engaged. The vast majority of employees are disengaged or actively disengaged (http://www.gallup.com).
By changing the primary focus of our employee performance management process to the completion of tasks correctly and by assigning a labor value to each of these tasks, we can avoid the pitfalls just described above. If we track the types of tasks that have been completed correctly and require each employee to work their tasks until they are correct, we can measure competency directly and routinely throughout the year as each task is completed. If we track the labor values for all tasks that are completed correctly over a fixed time interval and use these in a direct comparison to an employee’s total compensation, we can unambiguously measure productivity.
Using this measure of productivity, an employee can be rewarded dollar for dollar when the labor value of all of his tasks completed correctly exceeds his total compensation. Employees that understand their level of competency by direct feedback from their manager at the completion of each task, that have an unambiguous measure of productivity, and that are rewarded directly for that productivity will be able to optimize the use of their time to achieve a desired level of compensation and/or amount of time off while significantly increasing their productivity and consequently the profitability of the business.
Glen R. Andersen, ScD, PE
Author of “The Optimum Manager” http://www.theoptimummanager.com
Available at https://www.smashwords.com/books/view/293552