Ask Art: How Do You Align Incentives for a Lean Turnaround?

Such a simple question. I’m sure anyone asking this is looking for a magic-bullet answer along the lines of “Just do X and everything will be fine.” That might work in a traditionally run batch company, but it won’t work for lean. 

A lean turnaround requires fundamental changes in how you work in every function and every layer of the organization. As a result, you’ll have to incentivize all your associates differently.

You can’t motivate your people with monetary incentives alone.

Also, you can’t motivate your people with monetary incentives alone. Indeed, I would argue that non-monetary incentives are far more critical. Sorry to burst your bubble with that!

While monetary incentives can be helpful, most lean practitioners — myself included — believe benefits like job security, safety, opportunities for learning and developing skills, and being part of a winning team are more meaningful incentives than just money. Therefore, the traditional company is much more likely to focus on monetary incentives, while the lean company will prioritize these softer but more meaningful ones.

Lean leaders prefer non-monetary incentives because a successful lean turnaround requires teamwork involving every associate. They understand that transitioning to lean is all about people. They also believe that the leader has three fundamental obligations to the people of the company:

                    1. Protect their jobs

                    2. Improve their skills and their value

                    3. Give them a chance to participate financially in the gains

Protecting Jobs

Successful growing companies provide the best job protection, and a company that follows lean principles guarantees this security by significantly improving the company’s ability to compete and gain market share. For example, lean practices focus on removing waste from every process, shortening lead times from weeks to days, dramatically improving quality, lowering costs, and increasing the company’s customer responsiveness. And all these will boost growth in market share. 

Pursuing the challenging goal of becoming lean will require drastic changes in how you do just about everything and yield significant benefits. For example, you can expect to reduce machine changeover time by 90%, the number of people to complete a job by 50%, and the space needed for the work by 40% to 50%. Also, you’ll ensure quality during production, not at the end of the line, reducing rework. And so, on and on. 

At first, everyone might be scared to death by all the changes everywhere. But, you can help them overcome these initial fears by telling everyone upfront that there will be no layoffs because of the planned changes.

You will get increasingly less resistance from skeptics as people settle down and realize that their jobs are safe in the short-term (no layoffs) and long-term (from market share gains that come from the lean improvements). 

Improving Skills and Increasing Value

Then you can get on with step two: improving everyone’s skills and increasing their value, as the move to lean creates a learning environment that excites every person involved. Adopting lean thinking and practices is achieved through a “learn by doing” approach driven by constant kaizen or continuous improvement activity. The huge gains from a one-week kaizen will convince people to replace their mentality of “this is the way we have always done it” with “how can we eliminate more waste and make it better.”

Your people will learn enormously on every kaizen, enabling you to create even more opportunities for them to learn new skills and reduce nonvalue-adding work. For example, while you may have needed one person to run one machine using just one skill, you’ll need that person to run eight flow cells of several machines, each requiring new skills, after kaizen. The operator will need to learn how to run all the machines, thus increasing his skills.

At a broader level, changing from a functionally organized structure (in manufacturing, by machine type, or in a service business, by narrow skill sets) to a value-stream one will create opportunities for new roles, more learning, and more value for the individual.

Adopting lean thinking and practices produces a healthy tension that prods everyone to contribute ideas to remove the nonvalue-added work (waste) from their jobs and create more value. The best ideas will always come from the people doing the work. Listen to them and support them carefully.

This approach differs radically from the indifferent management style toward workers of a traditionally run company. Employees at a lean company are engaged and constantly contributing. In my experience, they are excited to come to work every day. Creating this learning environment ensures that you will retain employees. Adopting lean thinking and practices creates a huge incentive for learning and the constant opportunity to learn new skills.

Sharing Financial Gains

And, of course, you should leverage monetary rewards, giving everyone a chance to share in the gains they create. You can initiate a suggestion program for all employees that recognizes and rewards new kaizen ideas. The recognition factor is more important, so don’t overdo the money part of this. For example, you could award points toward purchases in a catalog. 

… the best way to reward people as you transition to lean management is to introduce a profit-sharing plan that includes every employee, from the CEO to the lowest-paid associate.

I’ve learned through experience that the best way to reward people as you transition to lean management is to introduce a profit-sharing plan that includes every employee, from the CEO to the lowest-paid associate. Make it simple so that everyone can understand it. I’ve seen all kinds of profit-sharing or gainsharing approaches, and most are so complicated that they go over everyone’s heads, limiting their effect. 

Our plan at Wiremold was simple. It paid out from dollar one. If we made a dollar, we shared it. The formula was easy to understand. We took 15% of pretax earnings and divided it by the straight-time wages for that quarter to create the profit-sharing percentage. Then, we multiplied that percentage by your straight-time wages to determine your profit-sharing amount for that quarter. We posted results every month but paid out only once per quarter. Our target was to make profit sharing equal to 20% of base wages so that it would be meaningful enough to get everyone’s attention. We only hit this for a few quarters, averaging about 14%. Still, it was significant enough to get everyone’s attention.

We also encouraged associates to participate in our 401k program and matched their contributions with company stock. This benefit was designed for the long term, as the 401k program eventually became the company’s largest shareholder. Over the ten years of lean operations, we increased our enterprise value by just under 2,500%, so when we sold the company, we had a lot of happy employees. Ultimately, they created the gains, so they got the biggest payout.

Incentivizing Leaders and Managers

While these benefits (job security, skills training, profit-sharing) applied to all employees, we provided further incentives to a group of bonus-eligible management employees — primarily leveraging the learning and job opportunities this growth created. We used our kaizen gains to double the company’s size in the first four years of lean operations, then doubled it again four years later. We used the cash freed from our lean efforts to purchase 21 companies that needed lean talent to run them.

As we replaced our traditional functional departments with value-stream teams, we promoted our new leaders from within. We also staffed our new full-time kaizen promotion office (KPO) with some of our high-potential employees. After people worked for two years doing nothing but kaizen 24/7 in the KPO, we promoted them. The opportunity for a promotion to a job with higher pay and responsibility has always been a significant incentive. So, we tied promotions to learning and demonstrating proficiency in lean thinking and practices. 

We aligned our bonus system with lean goals that supported true teamwork, such as eliminating incentives based on individual targets and paying the annual bonus based solely on how the team did. So, everyone in the bonus pool got the same percentage payout. In addition, we set bonus targets based on what we were trying to focus on with lean: 40% on earnings, 40% on working capital turns, and 20% on four to five strategic goals. Changing our incentives this way helped drive our lean turnaround.

Traditional companies focus on money as the primary and sometimes exclusive incentive. Companies that have adopted lean thinking offer monetary rewards but focus more on other critical incentives. Securing everyone’s job, growing their skills, putting them in a learning environment, making them vital contributors to a winning team, and giving them a chance to share in the gains they create are, in the end, much more significant incentives.