“From the moment of this realization, we no longer saw our task as producing a documented view of the future business environment five or ten years ahead. Our real target was the microcosms of our decision makers: unless we influenced the mental image, the picture of reality held by critical decision makers, our scenarios would be like water on a stone” – Pierre Wack

This post is part book-review and part deeper semantic reflection.

“Never judge a book by its cover” is probably one of the corniest proverbs out there, but it seemed deeply appropriate to bring it up in the context of this book, since it made too much sense on too many meta levels:

Mastering Leadership: an integrated framework  for breakthrough performance and extraordinary business results – by Robert J. Anderson and William A. Adams

My initial instinct, based on the-over-the-top language in the title, was to add this book to my “worst kind of self-help books” list and go read a different book instead. I’m glad that I gave it the benefit of the doubt and decided to read it, as it clearly makes it into my “Top 3 things I’ve read this year” list instead. As a side note, this is the second time that this is happening to me. The first time was a few years back with “I will teach you how to be rich” which I still believe is one of the better Personal Finance books out there.

Recently I’ve been on a journey, exploring various aspects of vertical development and Mastering Leadership enabled me to take a big step forward in my understanding of this domain, and get a much more tangible sense of what vertical development looks like, how it can be evaluated, and what the key drivers that enables it are.

The contrarian perspective in the book argues that most leaders (and leadership programs) fail to live up to their full potential because they are fully focused on improving the outer game, ignoring the fact that without a material investment on the inner game, any improvements to the outer game will be unsustainable. The inner game drivers the outer game.

In the rest of the book, they gradually build their “Universal Model of Leadership” – a deep synthesis of the field of leadership in the last century, which is heavily influences by Kegan’s work on adult development stages, which I’ve covered in previous posts.

The focus is on the middle three levels which they label: Reactive, Creative and Integral.

This is where things start to get really interesting: the authors are able to articulate the differences between the levels using a framework which describes the interplay between different attributes at each level, called the Leadership Circle Profile (LCP). You can explore it in greater detail here.

The LCP can be used as an assessment tool for both individuals and groups as well as a tool for charting the path for individual and group development.

Another notable aspect of the book is the genuine effort by the authors to keep the level of scientific rigor high, despite the “softness” of the overall topic. This goes well beyond doing a good job citing their sources, and actually establishing a material statistically significant link between leadership effectiveness and business performance and between LCP competencies and leadership effectiveness. Certainly a refreshing approach in a domain that’s mired with really cool-looking frameworks without any data to back them up.

I will not go any deeper in explaining the framework as I will not do it justice, but hopefully I’ve shared enough to pique your interest to go and read the book, despite its title.

My only issue with the book is semantic, but not inconsequential. It goes beyond the use of somewhat hyperbolic language and the introduction of some unnecessary jargon, which I’m more than happy to overlook (and you should too). The material issue here is the decision to frame the developmental journey that’s laid out in the book as “leadership”. Which brings us to the second part of this post.

“It is a shift in context, expressed through a shift in language, that creates the conditions where traditional forms of action can create an alternative future” – Peter Block

In our domain, there’s an overall positive trend of trying to move away from words containing deep notions of power and control like “supervisor”, “manager” or “boss” to words that are a bit more power-neutral, like “coach” and “leader”, in describing the roles and behaviors of individuals who are part of the organization. While the role definitions themselves are a topic for a different post, all I’m trying to argue here is that “leadership” is still the wrong label to use. In trying to better articulate my issue with it, I came across a piece by Mark Gerzon on “Leaders and Leadership” which contained this bit:

The English word “leadership” originates in the ancient root leith, which meant “to go forth and die,” as in battle. By this definition, those who lead Group A to commit violence against Group B are “leaders.”

“Leadership” seems to be going through semantic diffusion. Even if we strip away the violent aspect of the original term, at its core leadership is defined by the interaction between the individual and the group: unless the group’s behavior is influenced by the individual (follows the leader into battle), the person cannot be considered a leader. To remove this component of the definition is to turn leadership into a term that can mean anything and everything. The term “leadership” is therefore, to use the “Mastering Leadership” terminology, a term that’s consistent with a Reactive mind and an outside-in identity. The development path described in the book is trying to move away from an outside-in identity, thus using “leadership” to describe it seems odd to me. It is much more of a path towards self-actualization or deep citizenry than towards leadership. We need a better term to describe the individual transformation that one must undergo in order to be able to participate in more advanced forms of human collaboration effectively. Suggestions are most welcomed.

 

In the “vertical development” piece I covered a few months back, part of the definition of a “self-transforming” mind was:

We can hold more contradiction and oppositeness in our thinking and no longer feel the need to gravitate towards polarized thinking

Seems like a worthy goal, but how do we get there?

Along comes Patricia Beach and Jennifer Joyce‘s summary of Barry Johnson’s work, to help us out:

Escape from Flatland: Using Polarity Management to Coach Organizational Leaders from a Higher Perspective

Problem – concern that can only be solved by one unique right answer, using either/or thinking.

Polarity – concern that can be managed by focusing on two interdependent, diametrically opposed, right answers, using both/and thinking. Good examples: short-term / long-term, centralization / decentralization, customization / standardization, cost / quality.

Most of our toughest business challenges, especially in the “complex” domain, are polarities that need to be managed, rather than problems that need to be solved. They require us ensure that both opposite resolving answers to the concern receive proper attention. Too much attention to one pole of the polarity, while neglecting the other, will lead to a sub-optimal outcome.

Process for managing polarities well

• Identify which of your challenges are problems to solve and which are polarities to manage
• Become well versed in naming the polarities
• Build a Polarity Map – a simple 2×2 listing the strengths and weaknesses that come from paying attention to each pole of the polarity, aimed at reducing the risk of “throwing the baby with the bath water” by focusing on one pole.

• Use the Polarity Map to agree on options that bring attention to both sides of the polarity in an appropriate way – this means giving appropriate time and attention to both sides of the polarity, being sensitive to the adverse impact of neglecting one pole for too long. In neutral scenarios, the outcome is often a blend of elements from both sides of the polarity. But it is often the case that the exercise reveals that one side has already been neglected, requiring diverting more attention and focus to it, at least in the short term. In some cases the management approach calls for oscillating between the two poles, recognizing when the down-side of the pole that currently gets attention is becoming noticeable, and shifting attention to the other pole, starting to capture its up-side:

 

Neat framework by Eric Almquist and the team at Bain:

The Elements of Value

Eric and team decomposed the fuzzy term “value” (to a customer) into a set of 30 “elements of value” organized in a Maslow-inspired pyramid consisting of 4 main categories: functional, emotional, life-changing and social-impact.

To test whether elements of value can be tied to company performance, specifically customer advocacy (as measured by NPS) and revenue growth rate, they’ve asked 10,000 survey respondents to give 50 US companies a 1-10 rating on each value element.

According to the Bain team, companies that received an 8+ rating on 4 or more value elements by at least 50% of the respondents, had an NPS score that’s 4 times higher, and a revenue growth rate that’s 3 times higher than the ones who received an 8+ rating on a single value element.

The team was also able to show that some value elements matter more than others. Specifically that quality trumps all other value elements, and that the other most important elements change from industry to industry.

Given the lack of details on the research methodology, I’m hesitant to derive any conclusive insights from the study itself. The most valuable thing the Bain team produced, in my opinion, is the taxonomy itself, which can be used as an effective scaffolding to drive clarity in conversations around new product development, marketing, consumer insights, etc.

 

This is the 3rd part of my PeopleOps series. Part 1 can be found here.

Start with Why

Monetary compensation for work has been a key component of any people system for quite some time now, ever since the vast majority of people realized that slavery is not the best of ideas…

It had gradually evolved in structure and purpose: from a purely mechanistic structure using time-based components (hourly wages) to incorporating more humanistic components such as loyalty (tenure) and individual contributions (pay-for-performance); and from a pure enabler of sustenance, to an enabler of more refined drivers of motivation aimed at accomplishing higher needs in Maslow’s hierarchy. Monetary compensation is a powerful tool in an organization’s toolbox for improving the organization’s ability to make progress on its mission. In this piece I’d like to make the case for why many so-called progressive compensation systems end up missing that mark, and propose an alternative approach for designing more effective compensation systems.

Meet “incentive pay”- “pay for performance”’s evil twin

There are very good intentions behind the “pay for performance” idea: since individual performance in a given role can vary significantly, this variation should also be reflected in the compensation system. However, in many progressive compensation systems, this idea has devolved into a more simplistic notion called “incentive pay” – a “sticks and carrots”-based approach for improving motivation by offering a monetary reward in return for completing a (short-term) objective such as closing a deal, finishing a project, hitting some KPI or more broadly “crushing it” in a certain role. Unfortunately, research has a few things to teach us about “incentive pay”’s ineffectiveness (at best):

• Ineffective motivator:
  

  “The failure of any given incentive program is due less to a glitch in that program than to the inadequacy of the psychological assumptions that ground all such plans. […] Do rewards work? The answer depends on what we mean by “work.” Research suggests that, by and large, rewards succeed at securing one thing only: temporary compliance. When it comes to producing lasting change in attitudes and behavior, however, rewards, like punishment, are strikingly ineffective”  — Why Incentive Systems Cannot Work, Alfie Kohn 

  External incentives were found to be ineffective in driving long-term behavior change. In some cases they were even found to diminish productivity. They tend to crowd-out intrinsic motivation, crush creativity, foster short-term thinking, and become addictive. If true behavior change is what we seek – external incentives are not the answer.

• Increases tolerance of low performance:
  

  “In a firm which makes extensive use of individual performance rewards, it is often the case that the firm’s reaction to a mediocre or average performer is to say “That’s ok, you can stay — we’ll just pay you less.” This is hardly a recipe for excellence! […]Firms with individual performance-based reward systems often end up tolerating wide varieties of performance” – True Professionalism, David Maister

• Improving the part doesn’t improve the whole:
  

  “If you give a manager a numerical target, he’ll make it even if he has to destroy the company in the process.” -W. Edwards Deming.

  A system purely based on individual performance leads to attempts to game the system, take shortcuts, and more troubling unethical behavior. It erodes relationships and reduces collaboration. People will sometimes throw their peers under the bus (only figuratively, let’s hope) just to meet their personal objectives.

• Fosters a critical attribution error: “no man is an island” cannot be truer in our modern work environment. If you’re a door-to-door salesman, selling cleaning supplies out of a catalog, perhaps you can argue that your contribution to the business can be fully isolated and separated from the contribution of your peers. Therefore, some incentive scheme based on your contribution can be considered as “fair”. But can you make the same argument if you’re selling software to enterprise clients? When each deal is unique and the sales process typically involves more than a handful of people directly and dozens indirectly? Can a successful sale truly be attributed to one person and not the rest? Would the contribution of each of them be identical in each of the deals they contributed to?

Fairness is the name of the game

Hopefully by now we are in agreement that pay-for-performance, as implemented in most progressive compensation systems has a significant, undesirable adverse effect. So how can we take a step forward without having to take two steps back in designing an alternative system?

We first need to take into account that, yes, individual performance varies, and the compensation  system should reflect that. But we also need to take into account that, as discussed in part 1, the work shifts from shallow (algorithmic) to deep (heuristic), intrinsic motivation is the only effective motivation, so external incentives and “sticks and carrots” approaches are simply ineffective motivators.

We cannot ignore the fact that compensation will have some impact on motivation.

But in order to ensure that is has the desired effect, we need to stop thinking about compensation as a direct driver of motivation, and start thinking about it as an indirect driver of intrinsic motivation, through the values that are reflected in the compensation system itself. To use the framework we introduced in part 1, compensation should be thought of as a lever for driving Behavioral Cohesion rather than a lever for driving Intellectual Alignment. First among those is fairness. When we feel that we are compensated unfairly, our motivation takes a big hit. Let’s unpack what this means.

A better compensation system

Fairness is a relative term, as it is a determination coming out of a comparison of two or more things. In the context of a compensation system, we can think about fairness across 4 different dimensions / areas of comparison:

1. Market

Organizations are open systems and people have the freedom to choose to leave one organization and join the other. There is a market for talent, through a rather inefficient one, so prices get distorted. This is not just a problem of asymmetric information. Even if we had a perfect data set of everyone’s compensation information, making a fair comparison will be challenging since neither people nor companies are commodities, so it’ll never be an apples-to-apples comparison, both literally and figuratively. And we haven’t even talked about compensation components whose value cannot be determined with certainty like stock options…

All of this is not to say that market prices should be ignored. The absolute prices should be viewed as important but very loose guardrails. Whichever proxy was chosen for the market price, it’ll be hard to argue that even a ±25% variation is unfair since the measurement error is probably greater than that.

Market prices play a more critical role in the fairness realm when it comes trends. If market prices are changing year-over-year for a certain role, the compensation system should reflect that trend as well.

2. Personal needs and preferences 

Different people have different needs and different personal preferences.The extent to which those are reflected in the compensation system is another dimension of fairness, though a very subjective, cultural-dependent one. This is not as an outlandish an idea as it may sound, even in a capitalistic society: our tax code provides incentives for marriage and childbearing; extended paid family leave is becoming mandatory in more and more states; more companies given their employees some control over their base/upside compensation mix to reflect their personal risk preferences; cost-of-living adjustments are becoming a more fairness-driven debate as companies become more global.

3. Contribution/value to the company – This is the dimension with the most lowest hanging fruits w/r/t fairness, if we can replace “incentive pay” with a better solution. The key attributes of such solution are as following:

1. Focus on the contribution to the long term success of the company. This goes beyond the short term performance of the individual to also include other supporting behaviors such as driving behavioral cohesion (values fit) or helping others improve their performance. Loyalty, which is often implicitly manifested in the compensation system (paid time off is a good example) should we be evaluated through this lens and either be reflect proactively or left out.
2. Quantify the contribution through a set of levels, manifested through a set of ladders for each material function or group of roles. Ladders are likely to differ from one another on the attributes that define performance, due to the varying natures of different roles, but should share the same attributes on the other dimensions of contribution.
3. Loosely couple levels with role (some degree of movement up the ladder is possible without a movement in the organogram), and fully decouple levels from management (management = different ladder). This breaks the unhealthy tight coupling between an increase in compensation and movement up the org.
4. Consistent “above level” contribution merits a promotion to the next level and an increase in compensation.      

4. Success

This is the flip side of contribution/value to the company. When the company is doing well / succeeds – employees compensation should increase.

When should comp change?

Finally, looking at a compensation system as a driver of fairness, not only gives us good guidance on how compensation should be set, it also, and perhaps more importantly, gives us guidance on dynamics of compensation.

Compensation should change, if and only if:

1. Market prices change (or:)
2. Individual needs change (or:)
3. Career ladders or levels change (or:)
4. Company performance changes

Footnotes

I’m going to add here answers to some relevant questions I’ve been asked on this topic.

What about “salary bands”? How do they fit in? 

The short answer is: they don’t. Let’s keep in mind how “salary bands” came to be. They were a pressure valve in a world in which base compensation:

• Was not responsive to changes in the labor market
• Was tightly coupled to role

In a world where this is no longer the case, and compensation changes due to the 4 drivers listed above, it’s unclear that they still have a role to play.

Furthermore, often times they were used as a tool to implicitly reward loyalty/tenure: “this person has been in this role for a while and have been doing a good job, so I can give them a bump as long as they are “within band””. But if you value loyalty/tenure — why not make it an explicit component of your compensation formula rather than have it be a part of an opaque, subjective “band”?

This candidate that we want to close demands a significant higher comp than the one we can offer her at this level. What do we do? 

The short answer is: we don’t hire her. The more nuanced answer is we should ask ourselves two important questions first:

1. Is there reason to believe that there was a significant surge in the market and we should adjust all of our salaries upwards to match it? If the answer is no, then we shouldn’t hire her.
2. Are we leveling her correctly? Can we make a strong case for why we have good reason to expect that she will be able to contribute more to the business and therefore we should higher her into a higher level with a resulting higher comp? If the answer is no, then we shouldn’t hire her.

If we reflect back on the 4 drivers that our compensation system consists of, it’s easy to see how different companies would value (and therefore compensate) the same person differently. A company that’s already in the “printing money” stage should offer high comp (equity included). That doesn’t mean that you should match it.

Christopher Allen put together a wonderful collection called:

Participatory Organizations, Patterns, Processes & Tools — An Overview & Taxonomy

There seems to be an interesting uptick in using GitHub as a system of record for some of these great resources, which is probably a topic for a different blog post.

But in any case, not a lot of color to add to this piece. To some extent, it can be thought of as an extension of the “Solving Societal Problems 2.0” piece from a few weeks back, as it offers a trove of additional resources to those of you interested in taking a deeper dive into the world of participatory org.

At a more meta level, the focus on patterns rather than practices is really interesting. Perhaps this is a better way of getting at what I was trying to highlight with Heuristics vs. Best Practices and being able to separate true/deep understanding of the system/environment and a “theater of practices” that exist only on the surface.