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Compensation Structure

Compensation must always try to balance recognition of the individual with stability and maintenance of the group.

People have to be paid, but every compensation system is liable to misdirect. Compensation always express status, both within the enterprise and in society. It entails judgments on a person’s worth as much as on performance. It is emotionally tied to all our ideas of fairness, justice, and equity. Money is, of course, quantitative. But the money in any compensation system expresses the most intangible, but also the most sensitive, values and qualities. No attempt at a “scientific formula” for compensation can therefore be completely successful.

The best possible compensation plan is of necessity a compromise among the various functions and meanings of compensation, for the individual as well as for the group. Even the best plan will still disorganize as well as organize, misdirect as well as direct, and encourage the wrong as well as the right behavior. The preference should be for simple compensation systems rather than for complex ones. It should be for compensation systems that allow judgment to be used and that enable pay to be fitted to the job of the individual rather than impose one formula on everybody. All one can do is to watch lest the compensation system reward the wrong behavior, emphasize the wrong results, and direct people away from performance for the common good.

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Misdirection by Specialization

“I am building a cathedral.”

An old story tells of three stonecutters who were asked what they were doing. The first replied, “I am making a living.” The second kept on hammering while he said, “I am doing the best job of stonecutting in the entire country.” The third one looked up with a visionary gleam in his eyes and said, “I am building a cathedral.” The third man is, of course, the true manager. The first man knows what he wants to get out of the work and manages to do so. he is likely to give a “fair day’s work for a fair day’s pay.” But he is not a manager and will never be one. It is the second man who is a problem. Workmanship is essential: in fact, an organization demoralizes if it does not demand of its members the highest workmanship they are capable of. But there is always a danger that the true workman, the true professional, will believe that he is accomplishing something when in effect he is just polishing stones, or collecting footnotes. Workmanship must be encouraged in the business enterprise. But it must always be related to the needs of the whole.

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Harmonize the Immediate and Long-range Future

A manager must, so to speak, keep his nose to the grindstone while lifting his eyes to the hills—quite an acrobatic feat.

A manager has two specific tasks. The first is creation of a true whole that is larger than the sum of its parts, a productive entity that turns out more than the sum of the resources put into it. The second specific task of the manager is to harmonize in every decision and action the requirements of the immediate and of the long-range future. A manager cannot sacrifice either without endangering the enterprise.

If a manager does not take care of the next hundred days, there will be no next hundred years. Whatever the manager does should be sound in expediency as well as in basic long-range objective and principle. And where he cannot harmonize the two time dimensions, he must at least balance them. He must calculate the sacrifice he imposes on the long-range future of the enterprise to protect its immediate interests, or the sacrifice he makes today for the sake of tomorrow. He must limit either sacrifice as much as possible. And he must repair as soon as possible the damage it inflicts. he lives and acts in two time dimensions, and is responsible for the performance of the whole enterprise and of his own component in it.

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Fund Development in the Nonprofit

Fund-raising is going around with a begging bowl.

The nonprofit institution needs a fund-development strategy. The source of its money is probably the greatest single difference between the nonprofit sector and business and government. A business raises money by selling to its customers; the government taxes. The nonprofit institution has to raise money from donors. It raises money, or at least a large portion of it—from people who want to participate in the cause but who are not beneficiaries.

A nonprofit institution that becomes a prisoner of money-raising is in serious trouble and in a serious identity crisis. The purpose of a strategy for raising money is precisely to enable the nonprofit institution to carry out its mission without subordinating that mission to fund-raising. This is why nonprofit people have now changed the term they use from “fund raising” to “fund development.” Fund development is creating a constituency that supports the organization because it deserves it. It means developing a membership that participates through giving.

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The Ultimate Control of Organizations

People act as they are being rewarded or punished.

There is a fundamental, incurable, basic limitation to controls in a social institution. A social institution is comprised of persons, each with his own purpose, his own ambitions, his own ideas, his own needs. No matter how authoritarian the institution, it has to satisfy the ambitions and needs of its members, and do so in their capacity as individuals through institutional rewards and punishments, incentives, and deterrents. The expression of this may be quantifiable—such as a raise in salary. But eh system itself is not quantitative in character and cannot be quantified.

Yet here is the real control of the institution. People act as they are being rewarded or punished. For this, to them, rightly, is the true expression of the values of the institution and of its true, as against its professed, purpose and role. A system of controls that is not in conformity with this ultimate control of the organization, which lies it will cause never-ending conflict and will push the organization out of control. In designing controls for an organization, one has to understand and analyze the actual control of the business, its people decisions. One has to realize that even the most powerful “instrument board” complete with computers is secondary to the invisible, qualitative control of any human organization, its systems of rewards and punishments, of values and taboos.

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Controls for Nonmeasurable Events

A balance between the measurable and the nonmeasurable is a central and constant problem of management.

Business, like any other institution, has important results that are incapable of being measured. Any experienced executive knows companies or industries that are bound for extinction because they cannot attract or hold able people. This, every experienced executive also knows, is a more important fact about a company or an industry than last year’s profit statement. Yet the statement cannot be defined clearly let alone “quantified.” It is anything but “intangible”; it is very “tangible” indeed. It is just nonmeasurable. And measurable results will not show up for a decade.

A balance between the measurable and the nonmeasurable is therefore a central and constant problem of management and a true decision area. Measurements that do not spell out the assumptions with respect to the nonmeasurable statements that are being made—misdirect, therefore. They actually misinform. Yet the more we can quantify the truly measurable areas, the greater the temptation to put all-out emphasis on those—the greater, therefore, the danger that what looks like better controls will actually mean less control if not a business out of control altogether.

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Controls Should Focus on Results

What today’s organization needs are synthetic sense organs for the outside.

Every social institution exists to contribute to society, economy, and individual. In consequence results exist only on the outside—in economy, in society, and with the customer. It is the customer only who creates a profit. Everything inside a business creates only costs, is only a “cost center.” But results are entrepreneurial. Yet we do not have adequate, let alone reliable, informaiton regarding the “outside.” The century of patient analysis of managerial, inside phenomena, events and data, the century of patient, skillful work on the individual operations and tasks within the business, has no counterpart with respect to the entrepreneurial job. We can easily record and therefore quantify efficiency, that is, efforts. It is of little value to have the most efficient engineering department if it designs the wrong product. And it mattered little, I daresay, during the period of IBM’s great expansion in the fifties and sixties how “efficient” its operations were; its basic entrepreneurial idea was the right, the effective one.

The outside, the area of results, is much less accessible than the inside. The central problem of executives in the large organization is their insulation from the outside. What today’s organization therefore needs are synthetic sense organs for the outside. If modern controls are to make a contribution, it would be, above all, here.

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Controls: Neither Objective nor Neutral

The act of measurement changes both the event and the observer.

In any social situation of the kind we deal with in enterprise, the act of measurement is neither objective nor neutral. It is subjective and of necessity biased. It changes both the event and the observer. Events in the social situation acquire value by the fact that they are being singled out for the attention of being measured. The fact that this is or that set of phenomena is singled out for being “controlled” signals that it is considered to be important. Controls in a social institution such as a business are goal-setting and value-setting. They are not “objective.” They are of necessity moral. Conserver. They endow events not only with meaning but with value. And this means that the basic question is not “How do we control?” but “What do we measure in our control system?”

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