Tag Archives: leadership

Great article. Now get some sleep!

Amen, “pay for performance” I often cited as a panacea for improving business performance, or worst yet, a “best practice” we all should adopt. It makes me want to throw up! There is no substitute for engaged management, but I do have to admit that “pay for performance” does require management to establish operational metrics and when an owner manager puts his own money on the line, he does tend to be engaged.
Those of us aware of the 1920’s experiment at the Bell Labs Hawthorn plant should recall that the study showed us that productivity improves when management has key metrics to measure output and is engaged with the productivity. Out of this study, we learned (or should have learned) that there is no substitute for management paying attention to positive results – Results have to be measured and it takes metrics to measure results – Amen.
Proponents of the virtues of “pay for performance” often cite numerous success stories of businesses that thrive with a culture using these tools. However, consider, is there causation or a correlation between such performance. In other words, do the businesses that are performing well do so because their compensation formula is some incentive plan, or because the business is among the larger population of strong businesses that have ENGAGED management with METRICS – AMEN.

John, The beauty of this article is its simplicity. Rule #3 is of particular interest to me because I recommend another simple tactic that helps in identifying the priority of actions to improve the generation of profit. I am referring to the 80/20 Pareto Principle that approximates to “80% of your profit comes from 20% of your customers” or “80% of your costs come from 20% of your operations.” This is an oversimplification but applying the thought process across a company does reveal where to apply resources. Richard Koch’s book The 80/20 Principle is the reference work on the subject.
Another comment is more controversial. I like to see business owners measure the value that they are creating in their company and track its change year over year. This is preparation for the day when they will depart, but it is also a check on the health of the company and the industry it is in. The measurement includes a standardized process of a three year forward projection and calculation of the Net Present Value of the cash flow, plus a simple terminal valuation at the end of the third year, discounted to the present. If this valuation is growing, the owner has added comfort in his/her commitment to the company and supports making suitable investments. If it is declining, it is time for a serious look at future plans.