Raking Up Losses

THE STORY
Once upon a time, there was a wealthy man who owned a large estate out in the country. The back of the estate was filled with large trees. They were beautiful to look at, but a real nuisance in the fall when all of the leaves came down.

The wealthy man did not like having those leaves all over his yard, so he decided he would hire all of the young boys in the neighborhood to rake up his leaves for him. It was important to this man that each boy got paid fairly based on the amount of work the boy did. He didn’t want the lazy boys to get paid as much as the boys who worked hard. Therefore, he designed what he thought was a clever plan.

He divided the huge yard into sections. Each boy was given his own section to rake. The rules were simple. Every time you clear your section of leaves you would get paid a predetermined amount. If you didn’t clear your section, you did not get paid anything at all. The wealthy man put his lazy, spoiled son in charge of inspecting the sections, to see if they were cleared of leaves and to then pay the boys each time their area was clear.

This plan made the wealthy man happy. He was so confident in the plan’s success that he ignored the yard for several weeks. Eventually, he decided to go out back to see how the raking was going on. When he got there, he was shocked to find that all of the leaves were still scattered all over the yard. It was a real mess.

He angrily looked for his son to find out what happened. The wealthy man yelled at his son, saying “After all of these weeks, none of the leaves have been raked up. I certainly hope that you didn’t pay any of those young boys.”

“Actually,” the lazy son said, “I ended up paying them a hundred thousand dollars.”

“A HUNDRED THOUSAND DOLLARS?” the man screamed. “Why did you pay them so much money, when it is obvious that all off the leaves are still on the ground? Are you crazy??”

“I only did just what you said,” replied the son. “Each boy started working with the boy in the section next to theirs. One boy would rake his leaves just over the line onto the section next to him. I would pay him. Then the other boy would rake the leaves back over the line to the first boy. So then I would pay the second boy. All day long, they would rake the pile of leaves back and forth just across the line of their section. Each time one of them pushed the pile of leaves across the line, they would get paid. Eventually the boys got very good at quickly moving the leaf piles back and forth. After awhile, they had made so much money that they all decided to go back home.”

Suddenly, the wealthy man could see the major flaw in what he originally thought was a clever plan. He sighed, “Well, it looks like the only thing that got raked over and cleaned out here was my bank account.”

THE ANALOGY
It’s natural to want to reward the people who work hard and not reward the lazy ones. It seems like the fair thing to do. This was what the wealthy man was trying to do. However, in his attempt to be as fair as possible, he lost sight of the bigger goal. What he really wanted was to rid his yard of leaves. By focusing too much on fairness, he created a reward system that encouraged behavior that did not lead to achieving the desired ultimate goal.

Once we determine a desired strategic goal, we want to set up a compensation system which fairly rewards people who help achieve the strategy. However, if we concentrate too much on “individual fairness” we can end up rewarding people for things that never get us closer to achieving the strategy. Like the man in the story, the only thing we end up doing is raking up losses.

THE PRINCIPLE
As people, we often link “fairness” with “control.” We think that the fair thing to do is to only compensate people for those things that they have direct and/or complete control over. After all, does it seem fair to penalize someone when undesirable results happen over which they do not have direct or complete control? Or, conversely, does it seem fair to reward someone when desirable results happen which they didn’t control?

I couldn’t count the number of times I’ve seen someone look at how they were to be compensated and heard them complain by saying something like, “You can’t bonus me on that. I don’t control the outcome. It’s not fair.”

The problem is that if the individual has complete control over the results, then they have complete control over how to manipulate the results to their personal advantage. Now, to me, that doesn’t sound fair, either.

The boys in the story pretty much had complete control over their situation. Not only could they control how quickly their area got clean, but they could also control how quickly it got dirty. By manipulating that control, they got paid far more than they should have while never accomplishing the greater task of getting the yard clean.

That is why the fairest compensation needs to be one that goes well beyond just compensating people for what they can directly control. It needs to include areas for which they have indirect control and areas which relate directly to moving the company towards achieving the desired strategic outcome.

As it turns out, people have more influence on a business than just areas directly under their control. For example, I know of a clothing retailer where the buyers were compensated for buying the apparel from the manufacturers as cheaply as possible. After all, they are buyers, so they should be compensated for buying well. However, in their attempt to get the lowest price, the buyers would not have the manufacturers put the clothes on hangers or put price tags on the clothes. If they would have asked the manufacturer to do these services, the manufacturers would have charged a higher price, which works against the buyer’s compensation.

Unfortunately, because the buyers did not take care of negotiating for the hanging or tagging, someone in the retailer’s distribution center would have to do that service. It is like in the story where the boys did not clean the yard. All they did was push the leaves into someone else’s grid. All the buyers did was push the hanging and tagging problem into the distribution center’s grid.

In most cases, the manufacturer could perform these services for less than half the cost of the distribution center. So the actions of the buyers had an impact over the costs of the distribution center, an area over which the buyers would say they had no control. In reality, however, they had significant influence. Had the buyers been compensated on the lowest cost to get the goods from the manufacturer to the sales floor, they would have complained about lack of control. However, they also would have negotiated to get the manufacturers to hang and tag the goods, thereby saving the company more money than they did under their current compensation.

Often times, the biggest cost bottlenecks are at the point of transfer between two areas in an organization. As long as compensation stays within the areas of complete control, these transfer points do not get adequately addressed, since the responsibility is shared. By compensating based on areas outside one’s complete control, the transfer points get addressed.

Even in areas where there seems to be very little, if any linkage, there are still ways in which you can control the outcome. There is peer pressure. One can give advice or assistance. One can shift or trade some areas of responsibility that will end up making everyone more productive. And so on.

Finally, it is important to link rewards directly with the strategy. The compensation given the boys was never linked to the goal of getting the entire yard cleared of leaves. As a result, the yard was never cleared. At the end of the day, it is more important that the organization achieves its strategy than for individual areas to temporarily gain while the strategy is ignored. For if the strategy is ignored, eventually everyone loses…and that isn’t very fair.

SUMMARY
It is more important to link compensation to a broader strategy than to what an individual area can completely control. Although this may at first seem unfair, it is actually more fair, because complete control leads to “gaming the system” for personal benefit at the expense of the rest of the organization.

FINAL THOUGHTS
When you focus on smaller goals, you can sometimes perfect a process that does not need to be done at all. For example, if the only thing the wealthy man wanted was to get rid of the leaves, he could have cut down the trees. Then all the costs of raking the leaves every year could be eliminated. Perfecting the unnecessary is a waste of energy. When you focus on the big picture, you often find more creative solutions.