This is an excerpt from the book "Five Minute Lean", by David McLachlan - a wonderful book that blends teaching of the tools, culture and philosophy of traditional Lean with a modern-day Lean parable. You can get the whole book on Amazon here and enjoy your own copy.
The Power of Incentives – What is Measured and Rewarded Improves
When you’re effecting change in an organisation you should be aware of one of the most powerful influences of a person’s behaviour:
Incentives – but it’s not what you might think.
Billionaire Warren Buffett’s business partner Charlie Munger famously said that he continually underestimates the power of a person’s incentives. Think about the global financial crisis in 2008 – it was caused in large part by institutions financing thousands of terrible loans – simply because their incentives were married to how many they sold and not the quality of the loans themselves. Seems so simple now, doesn’t it? But it made no difference to the salespeople if the loans went bad (which they eventually did), and it ended up causing widespread financial havoc.
So our last step when implementing a change in our company or organisation is this:
- To change how our team members work and act, change how they are measured and rewarded.
This doesn’t have to mean monetary rewards either – it might simply be the difference between pleasure and pain in a task. If a task is extremely difficult or painful to do the right way, it subtly makes the incentive for our team-mates not to do it. If doing a task the wrong way is easier, the unspoken incentive is actually to do it that wrong way.
Changing what we measure has a similar result. If you want team members to stop passing on mistakes or unfinished products downstream (to the next step in the process), then stop measuring them by the amount they do and start measuring them on the quality instead. Make the focus on zero defects, and tie bonuses or Key Performance Indicators (KPIs) to quality or adherence to a standard process, with the amount they do as a secondary consideration. The same works for any other process output you are trying to change, in business and in life.
If you want better customer service, create a standard process around your customer service interactions then change what you measure and reward to reflect it. Feedback (both good and bad) for these things is best given as soon as possible – the longer you wait the less powerful it becomes.
Understanding the effect of incentives on team-mates’ every day decisions can truly change your business and your life.
Selected chapters from the story within Five minute Lean:
- Lean Parable – Where Lisa Makes a Change
- Lean Parable – Where Lisa Discovers a New Way
- Lean Parable – Where Lisa Performs a Balancing Act
- Lean Parable – Where Lisa Pulls the Trigger
- Lean Parable – Where Lisa Sets a New Standard
- Lean Parable – Where Lisa Becomes a Leader
Check out these selected chapters from the teachings within Five Minute Lean:
- The Five Minute Catch-up
- Five Minute Lean – Eliminate the Eight Wastes to Improve Flow
- Five Minute Lean – Help Your Process Flow with Line Balancing
- Five Minute Lean – Value is Determined by the Customer
- Five Minute Lean – Get Your Map Started with a SIPOC
- Five Minute Lean – Use Pareto to Find Where to Start
- Five Minute Lean – Present and Manage Your Change Using an A3 and LCA
- Five Minute Lean – Heijunka: Level the Workload when Demand Fluctuates
- Five Minute Lean – Add Important Data to Your Map
- Five Minute Lean: Glossary
- Five Minute Lean – Create a Pull System with FIFO, Kanban Triggers and Visual Management
- Five Minute Lean – Solve the Real Cause of the Problem
- Five Minute Lean – Build in Quality with Error-Proofing and Autonomation
- Five Minute Lean – Use Kaizen and Kaizen Events to Help Stakeholder Buy-In
- Five Minute Lean Summary
- Five Minute Lean – Put it Together With Design for Ease of Use
- Five Minute Lean – Introduction
- Five Minute Lean – Make Feedback Meaningful with Kano Analysis
- Five Minute Lean – Create a Future State Value Stream Map
- Five Minute Lean – Work Towards One-Piece-Flow (and Reducing Silos or Batching)
This is an excerpt from the book "Five Minute Lean", by David McLachlan - a wonderful book that blends teaching of the tools, culture and philosophy of traditional Lean with a modern-day Lean parable. You can get the whole book on Amazon here and enjoy your own copy.