Please Don’t Steal THIS Idea – Paying a % Bonus for Cost Savings
In the Kaizen approach, stealing the ideas of others isn't a negative thing. If somebody else implemented an idea and you can use that idea in your area, a Kaizen organization ENCOURAGES the borrowing, stealing, adoption, and adaptation of ideas. There's no shame in that. This idea was being preached at one hospital I visited yesterday, which was nice to see.
But… USA Today had a blurb the other day about one idea you shouldn't steal. It's an idea that's already proven not to work – paying bonuses based on the value of improvement ideas.
From the paper:
We don't know if this is part of a “Lean Government” effort (see Washington State), but it's good to encourage employees to find and reduce waste. We should want to eliminate inefficiencies and save money.
The thing that doesn't work is offering a percentage of the cost savings as a bonus or incentive payment.
The case for this is laid out well in the outstanding book Ideas Are Free: How the Idea Revolution Is Liberating People and Transforming Organizations that we cited in Healthcare Kaizen.
It sounds reasonable — if you want more cost savings, you should pay employees an incentive to reduce costs.
First off, focusing on cost savings means that people aren't focusing on quality or better service. How is that being rewarded? It's not if it's a system about cost savings — unless reducing defects or rework results in a cost savings. But improvements can't always be quantified or put into dollar terms.
Let's say Bill finds a $1 million dollar idea. Systems like these usually discourage any sort of teamwork because Bill doesn't want somebody stealing the idea and screwing him out of the $100,000 reward. Or, Bill doesn't want to share the prize. So, this discourages collaboration and how many ideas can you really implement on your own? In systems like this, managers have been sadly known to steal ideas from their employees.
If the idea is truly worth $1 million, there's a natural incentive for the employer to DOWNPLAY the value of the idea, thus reducing the value of the bonus and…. saving the state money. Does the boss get 10% of THAT savings? The employee has an incentive to puff up or exaggerate the value of the savings.
Employees get jealous when one person had an idea with a big payout. They might say, “Hey, I tried suggesting that three years ago.” Dysfunction (and lawsuits?) ensue.
And, if the rewards are potentially big, then people aren't going to spend time working on all of the small improvement opportunities that could add up to a big impact. You get more bang for your buck working on one large idea.
A summary of the dysfunctions and recommendations from Ideas are Free (see Chapter 3 “The Pitfalls of Rewards” and page 89 that has a summary:
- Seemingly commonsense reward schemesâ€”offering a percentage of the savings or profit from each ideaâ€”can be highly counterproductive. While they seem logical and fair, they create a tremendous amount of non-value-adding work and undermine teamwork and trust.
- An organization can get all the ideas it wants without offering rewards. Most people already have lots of ideas, want to share them, and would be thrilled to see them used. They feel pride in their work and like to contribute to their organizations' success. For them, the best reward is to see their ideas used.
- If an organization wants to offer rewards, there are good ways to do so. The reward scheme should have three attributes:
- It should base the rewards on simple aggregate measurements.
- It should distribute rewards equitably to all employees using a fair and transparent method.
- It should be integrated as much as possible into how the company already works.
Robinson, Alan G; Schroeder, Dean M. (2005-12-08). Ideas Are Free: How the Idea Revolution Is Liberating People and Transforming Organizations (Kindle Locations 1207-1214). Berrett-Koehler Publishers. Kindle Edition.
In Healthcare Kaizen, we share examples of hospitals that offer small token rewards for the implementation of ANY idea, large or small. Each idea might get a few bucks worth of gift cards for the hospital cafeteria (not a great prize if you have a bad cafetaria)… but the evidence shows that people participate in Kaizen. My co-author's organization, Franciscan St. Francis, has had more than 4,000 ideas each of the last three years with token rewards.
In the “rewards and recognition” equation, don't forget about the power of RECOGNITION! That doesn't cost much – a smile and handshake, but it goes a long way.
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I love this post. The initiative has Cobra Effect written all over it. I can’t wait to see what they come up with. http://en.wikipedia.org/wiki/Cobra_effect
Spot on as usual. Another big problem I see too frequently is setting stringent targets for the number of ideas submitted. In one company, middle managers admitted that, since everyone’s bonus is linked to their idea program,!people often make suggestions just to meet the “quota.” I see the benefit of encouraging ideas, and this company is miles ahead of where they were, but they’ve gone too far. They’re rewarding quantity over quality. But they sure are proud of their program!
Hi Mark. You say, “The thing that doesn’t work is offering a percentage of the cost savings as a bonus or incentive payment.” Can you share a real-world example of this idea backfiring? I’m trying to think of one and am blanking on it. I understand the logic, however. Thanks.
Example (identifying details left out) — an employee has an idea that they think is worth upward of $250,000. The manager rejects the idea saying that it was something the company was going to be doing anyway (which was debatable/arguable). The employee feels like they got screwed out of a bonus by their manager/company and quits after a period of extremely damaged morale. The program that was supposed to spur engagement and improvement had the exact opposite effect because the “promise” wasn’t kept. There are always two sides to a story, but you can see how this is demoralizing?
(This story is not about myself, by the way).
That’s one of the many dysfunctions from these systems – fighting, perceiving unfairness, the lack of teamwork, etc.
Heartily agree. Major individual bonuses for ideas destroys teamwork. Reminds me of Bogart in The Treasure of Sierra Madre. “Keep your filthy hands off of my gold or I’ll have to plug you, see?”. Or something like that. : )