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CHAPTER 3
THE PITFALLS OF REWARDS

But doesn’t the widespread use of rewards suggest… that they work? Why would a failed strategy be preferred?… The negative effects appear over a longer period of time, and by then their connection to the reward may not be at all obvious. The result is that rewards keep getting used.

—Alfie Kohn, Punished by Rewards¹

Whenever managers begin seeking ideas from their employees, the issue of rewards inevitably pops up. The natural, and seemingly the fairest, thing to do is to reward each idea according to its value. This makes eminent sense to everyone and is, in fact, what many organizations end up doing. The most common schemes offer a percentage—usually between 5 and 25 percent—of the first year’s savings or profit from each idea. With such an incentive in place, all managers have to do is sit back and wait for the ideas to pour in. The problem is, they don’t.60

Perhaps the most counterintuitive and certainly the least well-known aspect of managing ideas is how counterproductive seemingly “commonsense” reward schemes can be. In his widely cited article “On the Folly of Rewarding A, While Hoping for B,”² Steven Kerr writes:

In our experience, few managers are aware of the pitfalls in rewards and how they can easily undermine the very behaviors they are supposed to promote. This lack of awareness explains why so many organizations set up dysfunctional reward schemes, without ever realizing anything is wrong. After all, however bad the reward scheme is, it will generate some ideas. And when it does, it is only natural to credit the ideas to the rewards being offered. Unfortunately, the far greater number of ideas that are discouraged by the very same reward scheme go unseen and unmeasured. Few notice their absence, and even fewer connect that absence to the real problem.

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SOME INCONVENIENT EVIDENCE

At first, we, like so many others, assumed that the best way to encourage ideas was to reward each one according to its worth. The bigger the idea, the bigger the reward. It seemed self-evident that the more generous the percentage payouts, the more ideas would flow in. But in the late 1980s, we came across some surprising data that caused us to reexamine this simplistic viewpoint (see table 3.1). Japanese companies were getting extraordinary numbers of ideas from their employees, far more than their U.S. competitors, but without the heavy emphasis on rewards.³

How was it that American companies were paying rewards more than two hundred times greater than their Japanese counterparts, but getting less than a three-hundredth of the number of ideas? How was it that almost nine out of ten Japanese ideas were used while less than a third of American ideas were? How could it be that Japanese employees were so much more interested than their American counterparts in making suggestions, as shown by the participation rates? The bottom line was clear: Japanese companies were realizing overall net savings per employee some twenty times more than the American companies.

Table 3.1. Comparative idea data from the United States and Japan in 198962

All this seemed odd to us. It was the opposite of what we would have expected. Our first reaction was no different from that of most Westerners who saw these strange numbers. We, too, were sure that cultural differences were the cause of the disparity. But that convenient explanation did not hold up for long once we began looking more deeply into the matter.

In the late 1980s and early 1990s, Alan Robinson studied the idea systems of twenty large Japanese companies firsthand. From the beginning, it was obvious that these companies were managing ideas very differently from their U.S. counterparts. And the more we learned about the history of how Japanese companies developed their processes to manage ideas, the harder it became to attribute the many differences with Western practices to “culture.” Just as had happened in the quality field, American experts had played a pivotal role in the inception of high-performing idea systems in Japan shortly after World War II. What seemed so alien to Americans in the 1980s that it had to have come from a foreign culture had in fact originated with leading management thinkers in their own country.

By the early 1990s, North American transplants of Japanese companies using identical minimal-reward philosophies were getting large numbers of ideas from their employees—more, in some cases, than their parent companies back home. By the mid-1990s, a handful of American and European companies with no organizational ties to Japan were doing just as well, too, with the same approach to rewards. By the late 1990s, some of the best idea systems in the world were outside Japan. Worldwide, the pattern was the same—monetary rewards for individual ideas were deemphasized or even eliminated. Why was this? Because the managers involved understood the real reasons why employees step forward with ideas.

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WHY DO PEOPLE STEP FORWARD WITH IDEAS?

Why would people offer ideas without the prospect of rewards? What’s in it for them? The answers to these questions go to the heart of why so many companies have found rewards both unnecessary and counterproductive.

Most people already have lots of ideas for their organizations, want to tell managers about them, and would be thrilled to see them used. An idea starts when a person becomes aware of a problem or opportunity. The definition of a problem is “a source of perplexity, distress, or vexation.” It is something people have a natural inclination to fix. An opportunity—defined as “a time, place, or condition favoring advancement or progress”—quickly becomes a source of frustration to someone who spots it, if the organization is missing it. It bothers that person. In other words, employees will naturally come up with a great number of ideas—whether it is to make their jobs easier or less frustrating, to stop their organizations wasting money, or simply because they see an opportunity to do something better. Consider the following example.

In 2000, Art Samson worked in the Denver center of the Defense Finance and Accounting Service (DFAS). His group handled the payroll for some five hundred thousand U.S. Air Force personnel. One of its responsibilities was to send out roughly 460,000 “allotment” checks each month—payments that Air Force personnel could arrange to be deducted from their wages and forwarded to predesignated parties. These payments could be for anything: bills, alimony, or extra money for a spouse or aging parent.

About fifty times a month, people would call Samson’s department about a missing check. Before issuing a new one, it was necessary to verify that the original had not already been cashed. Roughly 75 percent of the time, it had been.

Each caller was asked to send a signed letter detailing the claim. DFAS attached this letter to a form and mailed it to the U.S. Treasury in Washington, D.C. (By law, the Treasury Department writes almost all checks for the federal government.) Some forty-five days later, the response would arrive. If the check hadn’t been cashed, payment on it would be stopped and a new check ordered. If it had been cashed, Treasury would send a photocopy of its front and back. By comparing the signature on the check with that on the claimant’s letter, DFAS could tell whether that person had cashed it. If someone else had cashed it, the case was forwarded for investigation to the Treasury and the check reissued.

Each case took about half an hour to deal with. Fifty cases a month meant about twenty-five hours of staff time. Furthermore, people who had lost or not received their checks had to wait two months for another one. And every month, three or four people, fed up with waiting for a response, would call their representatives in Congress. When a congressional inquiry came in, DFAS had seventy-two hours to respond. In that time, Samson’s group had to document the case thoroughly, write a report on it, and the director of the center had to review and sign it.65

One day after work, Samson went out for a beer with a friend who had once worked at the Treasury Department and happened to ask him about the search requests. Samson learned that the front and back of every cashed check were scanned into a computer system. When a search request came in, a clerk printed out the image of the check and mailed it back. Samson had an idea: Why couldn’t his group get direct access to this system?

He went to his director, who liked the idea, and together they approached Treasury. As might be expected, their request met with resistance, particularly since the Privacy Act obliged the Treasury Department to keep information out of unauthorized hands. Outsiders had never been given access to its system. Being designed only for internal use, there were no firewalls around the DFAS data. Once logged in, a DFAS employee would be able to access information about many other types of federal checks, too. It took eighteen months of bureaucratic wrangling to persuade Treasury to modify its system so that DFAS could access it securely. Today, most lost-check claims are processed while the caller is still on the telephone. Furthermore, since DFAS/Denver began using the Treasury system, there has not been a single congressional inquiry.66

Samson didn’t think of his idea or champion it for a year and a half to get a reward. He simply wished to eliminate an annoying problem. The truth is that most people step forward with ideas because they want to. They feel pride in their work, enjoy making a difference, and appreciate it when others recognize what they have done.

It is one thing to realize that employees don’t have to be bribed to give in ideas. But one might think that the prospect of getting a share of the benefits from their ideas would only increase their natural motivation. In practice, however, most such schemes backfire. The more money a company dangles in front of its employees, the fewer ideas it gets, and the more problems it creates for itself.

THE INVISIBLE COSTS OF REWARDS

Be careful with money. It can ruin relationships. We appreciated the wisdom in this advice all the more as we developed an understanding of all the problems that organizations create for themselves when they try to reward individual ideas according to each one’s worth. It is amazing how one can get into so much trouble by doing what seems so simple and logical.

The Measurement Problem

In 1997, Jean-François Lefresne, an Air France mechanic at Orly Airport in Paris, came up with a big money-saving suggestion. It won a Trophée d’Innovation for one of the best ideas in the airline that year. The story is this: When airplanes come in for major overhauls, maintenance crews must routinely remove screws that are locked in place with corrosion, particularly in areas that tend to get wet, such as the bottom thresholds of doors. Before Lefresne’s idea, the high torque of the power tools used would often twist the heads off these unyielding screws. When this happened, it took several hours to drill out the body of the screw, retap the hole, put a new screw in, and get the work approved and signed off.

Lefresne’s idea almost completely eliminated this problem. It was based on a standard garden tool used for digging fence post holes. That tool, a kind of giant apple corer on the end of a long shaft, is designed so that a person can stand on it and twist it around to drive it down into the earth. Lefresne realized that if he mounted a screwdriver on the bottom of a similar tool, he could then stand on the recalcitrant screw, break the seal of corrosion with downward force, and apply the necessary torque more gradually and with more control. When Air France adopted his idea, the number of broken screws dropped dramatically.

Had Air France offered rewards for ideas, it would have been a nightmare trying to calculate how much Lefresne’s suggestion was worth. Its mechanics have to remove hundreds of corroded screws each year. (Air France Industries does the heavy maintenance for many airlines around the world.) To figure out how much time and money was saved by just this one idea, someone would have had to determine the total number of broken screws per year systemwide, estimate the cost of each occurrence (including any aircraft downtime), and—most difficult of all—make a stab at how many fewer would now be broken. It is unlikely that maintenance records are kept in a way that would make this task easy. Furthermore, all this work would be non-value adding—its sole purpose would be to determine Lefresne’s reward.68

Worse, since the calculated savings would be both an approximation and a projection, they would be open to dispute. Had Air France offered rewards based on the value of ideas, Lefresne might well have spent his time drafting memos about how much his idea actually saved, rather than moving on to his next one. A number of managers at companies that offer percentage rewards have told us that they systematically inflate the value of ideas, so as to avoid disputes. Still, they can’t avoid them entirely. When money is at stake, these disputes can get quite contentious and cause considerable ill feeling and distrust. A company that gives significant rewards for individual ideas needs some extra procedures in place that Air France does not—namely, an evaluation process to estimate projected savings from each idea, an arbitration process to settle disputes over these calculations, and an audit process to make sure that the reported savings are accurate.

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But even with such processes in place, another problem arises. Because only the ideas with readily documentable savings or revenue earn rewards, employees soon become conditioned to look exclusively for ideas like these. At the same time that they are being exhorted to “think outside the box,” they are being boxed in by rewards that focus them on a very narrow set of problems and opportunities. The reward scheme, that is, unwittingly puts blinders on employees.

Ideas with readily quantifiable cost savings represent only a small part of what is possible—even in financial terms. Many ideas with substantial bottom-line impact cannot be quantified. An organization that limits itself to only ideas with readily quantifiable value misses out on most of the potential performance improvement from employee ideas, as figure 3.1 illustrates. To understand this better, consider, for example, what turned out to be a very big idea at Grapevine Canyon Ranch.70

While searching the Internet, a secretary noticed that most search engines put Grapevine’s Web site well down their lists. Because she maintained her own Web site at home, she happened to know that, all other things being equal, search engines tend to return the most recently updated site. She proposed that the company post a “Horse of the Day” on its Web site, to keep it current. Now, every morning, the office manager leans out of her window, picks a horse in the paddock, takes a picture of it with a digital camera, and uploads it to the Web site. This simple change had an enormous effect on Grapevine’s Internet visibility. (Piggybacking on this, another idea was to post daily weather reports, to entice potential customers from northern climates to Arizona’s warm temperature and abundant sunshine.)

Even though this idea had a huge impact on the resort, with reservations going up markedly, how could the company begin to put a price on it? How could it tease apart the effect of this single change to its Web site from the rest of its marketing initiatives and from the myriad of other factors that influence its reservation rates?

And even if an idea has no financial impact whatsoever, it might still be very worthwhile. At BIC Corporation, for example, an employee noticed that the heavy burlap bags, in which parts arrived for production, were just being thrown away. The employee suggested that the Red Cross could use them as sand bags for floods. When contacted, the Red Cross said it would be happy to accept all the bags that BIC could provide.

The Problem of Fairness

Every improvement or innovation begins with an idea. But an idea is only a possibility—a small beginning that must be nurtured, developed, engineered, tinkered with, championed, tested, implemented, and checked. And even then, it may prove to be only the start of a further evolutionary process that extends, refines, and combines it with other ideas, in order to exploit its potential in different and unexpected ways. Many people could be involved in making the idea happen. In practice, however, it is too difficult and divisive to offer rewards to people other than those who conceive the idea. That is, the rewards are for taking the first step in the creative process, which is often the easiest part. All the hard work and creativity that come afterward are ignored. This can be very unfair.71

In March 1971, James Lisec and Krishan Jagga, two employees of United Airlines, submitted a suggestion that increased the company’s profits by at least $3 million per year. At the time, they had no idea that the fight over the reward for it would change their lives profoundly, turn into a series of bitter and contentious court cases that would drag on for more than twenty years, and end up several times at the California Supreme Court.

Oddly enough, United agreed that Lisec and Jagga had played the key enabling role in the idea.⁴ However, its position was that they were not entitled to the $300,000 reward they expected—10 percent of the value of the idea—because the airline had received many similar suggestions before theirs, even though it had rejected them. But when the two men presented their version of the idea, they made a different and stronger case for it, and they were very persistent in persuading key managers of its merits. They made it happen.

In 1971, Lisec was a personnel manager and Jagga an industrial engineer at the San Francisco maintenance base. Their idea was to offer discounted fares to employees of the major airlines and their families—50 percent off reserved seats, 80 percent off standby seats—in order to fill seats that would otherwise fly empty. Other major airlines, such as TWA and PanAm, did this, and United already discounted fares for its own people as an employee benefit.72

Through the years, United had received many suggestions to extend this benefit to employees of other carriers. But all of them had been rejected by the middle managers asked to evaluate them. Lisec and Jagga’s mission was to get their company to look at reduced rate travel in terms of profits, rather than as an employee benefit. Considerable additional revenue could be generated from employees of other airlines buying tickets on United.

For six months, Lisec and Jagga battled various middle managers who blocked their idea. But everything changed on October 10, 1971, when John Stilwell, a union committee member, approached Edward Carlson, then president of United, at a reception after a speech Carlson had given to the International Association of Machinists. Stilwell knew about the difficulty Lisec and Jagga were having with their idea and told Carlson about it. Carlson thanked Stilwell and forwarded a copy of Lisec and Jagga’s proposal to a senior vice president in the rate department, over the heads of the managers who had been blocking ideas about discounted rates for years. In November 1971, this department confirmed the correctness of Lisec and Jagga’s analysis.

On January 3, 1972, eleven weeks after Stilwell had buttonholed Carlson, the corporate policy committee approved a plan for discounted rates for airline employees that differed only in minor details from Lisec and Jagga’s proposal. Imagine their disappointment when they learned that instead of getting a 10 percent reward, they were to be given a $1,000 “Impetus Award,” to be split between them. The money was to recognize their efforts in championing the idea.

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Lisec and Jagga filed a grievance. When it was turned down in 1973, they filed a lawsuit. In the summer of 1975, a jury awarded them $1.8 million in damages, later reduced to $400,000 by the judge. United appealed, and in 1979, the appeals court reversed the decision, ruling that the rewards were clearly intended for those who suggested the idea first, not for those who championed it.

The two men petitioned for a rehearing, which was denied, and then for a hearing before the California Supreme Court. Shortly after this, too, was denied, they were fired. The reasons, they were told, were the negative publicity generated by a Wall Street Journal article on the case and the opening and closing statements of their attorney Marvin Lewis. (Since he was their lawyer, the airline argued, Lisec and Jagga bore responsibility for his remarks.) The two men sued for wrongful discharge.74

When this case came to trial six years later in 1985, a jury awarded them a total of $2,979,000 in damages—$479,000 for breach of contract (i.e., back wages) plus $2.5 million in punitive damages for “retaliatory firing in violation of public policy, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress.”⁵ United appealed, and in August 1990, the appeals court disallowed the punitive damages but let the breach-of-contract damages stand. The back and forth continued until November 1992, when United’s last appeal to the California Supreme Court was denied. Finally, after almost twenty years of expensive and exhausting litigation, it was over. And no one had really won.

The real problem all along, of course, had been the reward scheme. At the same time that it forced United to do what it did, it managed to make Lisec and Jagga feel that the company was going out of its way to split hairs over definitions in order to avoid paying them what they deserved. It is not hard to see why.

Ideas have no value until they are implemented. What companies should really be trying to encourage, therefore, are completed ideas. Generally, an idea goes through a number of stages and involves a number of different people:

1. Someone comes up with the idea.
2. It may require some work to develop a good case for it.
3. The idea is championed to management and to those who will be affected by it.
4. It may need further development, refining, and pilot-testing.
5. It may also need formal approval from appropriate authorities.
6. It has to be implemented.
7. The actual effect of the idea must be assessed.
8. Customers, suppliers and employees have to be helped to “buy in” to the change.

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Almost all reward schemes are like United’s: They pay only for stage 1—that is, having the idea. This is the most identifiable, discrete, and easily measured part of the process, though it often requires less creativity and effort than some of the other steps. It had been relatively easy to see the advantages of discounted fares at United—the airline had received more than fifteen suggestions on the topic in the previous three years, and other major airlines already offered them. But it had been relatively hard to develop the right case for discounted fares and champion it. Only Lisec and Jagga had succeeded in doing this. To them, it seemed downright unfair to be denied the reward.

Doesn’t everyone who plays a role in fulfilling an idea deserve a reward? Why should some get a reward and others not? Unfortunately, some contributions are hard to distinguish and evaluate. How much was Lisec and Jagga’s championing worth? How hard did the people who implemented the idea have to work, above and beyond what their normal jobs required? In short, it would be a nightmare to apportion credit. And whatever numbers the company might have come up with, they might well have seemed unfair to someone and led to further disputes. This is why most organizations that reward ideas individually stick to rewarding only the people who think up the ideas.

But then they alienate others needed to pull off ideas. The most obvious symptoms of this are bottlenecks in evaluating and implementing ideas. The people needed for these tasks, which can be very time-consuming, often resent them. Why should they figure out how to make someone else’s raw idea workable, when that person will get both the credit and the reward for it? This resentment creates distrust and contributes to an organization-wide reluctance to deal with suggestions.76

We encountered a particularly poignant example of this at a large U.S. vehicle manufacturer, where the engineering department routinely ignored front-line ideas—no matter how good they were. One worker (a grandmother, as she proudly told us) was given parts that wouldn’t fit on the vehicles coming down the assembly line, because the engineering department had specified the wrong locations for holes in these parts. She had set up a table at her workstation and had brought in her own drill to redrill the holes herself, all the time hurrying to keep up with the line.

Twice she submitted a suggestion to fix the part, and twice it was rejected by engineering. Only on the third attempt, after talking with a senior operations manager, was she able to get an engineer to come down and look at it. Even then, rather than correcting the problem immediately, the engineering department refused to change the print until the contract was renewed with the supplier. While workers thought the engineers were arrogant and stupid for resisting even the most obvious improvement suggestions, it bothered the engineers that workers were being paid substantial bounties to second-guess their designs. A number of engineers were also convinced that workers weren’t disclosing many design-related problems during the new model shakedown period, because improvement ideas submitted during this period were not eligible for rewards.

A number of companies have attempted to extend rewards to employees for evaluating and implementing other people’s ideas, only to find themselves faced with a fresh set of problems. Even greater resources and overhead are needed to measure and track all the relevant contributions, and to dole out the rewards. Moreover, the rewards send conflicting and dysfunctional signals. Why should someone be paid extra to help with one idea, because it happens to come from a worker eligible for a reward, but not for another idea because it came from a manager or a process improvement team?

Ideas come up and are implemented through many different channels. If rewards are offered for any stage of the process in any single channel, to be fair, shouldn’t they be offered for every stage in all of the channels? How can employees be expected to participate wholeheartedly in team-based initiatives, if they can make more money for keeping their ideas to themselves and turning them in to the idea system later?

When managers reward only quantifiable ideas, fairness becomes an issue in another way: It puts some employees in better positions than others to make considerable extra money. In any organization, there are places of great potential to originate ideas with high quantifiable value, places of almost no potential, and everything in between. The closer the job is to the company’s “value streams”—that is, where the money is earned and spent—the easier it is to come up with rewardable ideas. At one major U.S. airline, for example, 60 percent of ideas came from mechanics, some of whom made more money from their ideas than their regular work. Aircraft parts are very expensive, and a relatively minor observation—”Strengthen this part a little and it will last far longer” or “Switch suppliers for that part”—can translate into huge savings and tens of thousands of dollars in rewards.78

How Rewards Tempt Managers to Behave Badly

One of the serious problems with the Soviet Union’s “rationalization proposal” system—the idea system mandated by Stalin for almost every organization in the country—was that when a worker came up with a big idea, it put his or her managers in danger. If the suggestion saved ten tons of steel per year, for example, instead of being praised for good leadership, the factory manager was more likely to be asked by higher-ups why he hadn’t pointed it out before. Was he simply incompetent, or was he committing economic sabotage, deliberately undermining his country’s effort to catch up with the West? Economic sabotage was one of the most serious crimes in the Soviet Union and was a charge frequently used by the Communist Party in its purges, because it was so difficult to refute.

This problem would not have existed without the presence of rewards. Without rewards, the source of an idea would not have mattered. A significant idea from a worker would simply have been implemented. Its benefit would have shown up in the aggregate performance of the factory and made its director look good.

Few managers in the rest of the world worry about being executed when a subordinate comes up with a significant idea. But they do worry about what it makes superiors think of them, and this concern can cause them to behave unethically. We came across a particularly shameful example of this in a large European wireless communications company. In 1997, an employee discovered an error in the billing process that was causing the company to lose track of a significant percentage of international calls and fail to bill customers for them. He submitted a simple idea to fix the problem. The missing annual revenue was estimated to be at least $26 million, although no one really knows the exact amount; in fact, management didn’t really want to know it.

Under the rules of the company’s idea system, once the idea was implemented, the suggester would be owed 50 percent of the first year’s revenue from it—in this case some $13 million. At the time we visited the company, top management had been “evaluating” the idea for several years. The idea system manager was furious. The CEO would rather continue losing $26 million per year, he told us, than risk the embarrassment that might ensue from having to pay such a large reward. The sheer size of the oversight would make any manager reluctant to admit that it had happened on his or her watch. A $13 million reward would have been the largest in European history and would have come to the attention of his board. Also, it might well have been picked up by the media. Think of the negative publicity: Not only had management failed to bill customers to the tune of $26 million per year, but it had to pay millions more to discover its blunder. It is easy to see why the CEO wanted the idea buried.

There are other reasons why managers sometimes balk at paying out large rewards, even though they made the rules in the first place. However great the organization-wide savings will be from the idea, the reward has to come out of someone’s budget, and for that person, it is a large expense. And since managers are always under pressure to keep expenses down, the temptation is to skimp on a significant reward or even back out of it entirely. We have been astonished at the imagination some managers have shown in doing this. Consider, for example, the unusually brazen management team at one of Europe’s largest automotive suppliers.

In the late 1990s, the company was having difficulty with an important customer, a prominent European automaker. The problem was that a cooling system it made for engine oil wasn’t able to keep the engine from overheating. The customer had made it clear that unless the problem was solved quickly, it would take its business elsewhere. Luckily, a worker sent in a clever idea. He had realized that the oil wasn’t circulating through the radiator properly. He suggested putting some curved tubes and baffles inside it to make the oil spiral and swirl as it moved through. His idea improved the heat transfer capacity enough to make the cooling system work, and because of it the company retained tens of millions of euros of business.

The employee eagerly anticipated his reward of 50 percent of the first year’s value of his idea—potentially hundreds of thousands of euros. In an astonishing display of ingratitude, the company argued that he wasn’t entitled to any money, because his fix had only made the radiator more expensive. Furthermore, he was told, if he hadn’t thought of this idea, the company would have come up with a fix sooner or later. It was treated as an idea with “noneconomic” benefit, and the worker was given enough “points” for a trip to an auto exhibition in Geneva.81

Whatever other harm rewards do, one should never lose sight of their corrupting effect on the giver and how they undermine the trust and respect necessary to run an organization well.

How Rewards Can Lead to Fraud

As the saying goes, “If money can be made by doing something wrong, someone will.” Another perverse consequence of rewarding individual ideas is that the prospect of large sums of money can lead to outright fraud. Although it is impossible to estimate the full extent of the problem, since most companies don’t want these kinds of crimes made public, based on our experience, it is far from uncommon.

A midsize electronics company had a special committee whose job was to select the best suggestion each quarter. The person with the winning idea was given 10 percent of the money it saved. The committee was composed of managers from sales, finance, human resources, engineering, and manufacturing. The most influential person in this group was the director of manufacturing, because of his position, expertise, and more than twenty years with the company. Unfortunately, he was also shaking down the winners for a payoff. His scam was to approach the person whom he considered to have the most lucrative idea and offer to “put in the fix” for it, in return for half of the resulting reward.

One quarter he happened to approach a new employee who asked for a little time to think the proposition over. Because he couldn’t believe that the company would condone the manager’s behavior, he went to the head of human resources, who quietly alerted the head of accounting.

A fraud investigator was brought in under the cover of being a consultant, charged with taking an “overall look” at the organization. For several months, she conducted interviews with employees and managers, invariably steering the conversation at some point to the suggestion system and asking how they felt it worked. Slowly, the story emerged. When she confronted the director of manufacturing with the evidence, he confessed. Over the years, it turned out, he had stolen some $225,000 from the winning suggesters. As the investigator remarked to us:

This manager got away with his fraud for more than three years, but it was almost inevitable that he would be caught. Too many people knew about it. Most reward-related fraud is harder to detect, because it is more subtle and creative. Consider the following example.

A supervisor in the shipping department of a large garment manufacturer came up with a particularly ingenious scheme. At one point he submitted what appeared to be series of brilliant ideas that dramatically boosted the productivity of his department—but only because he had carefully sabotaged its efficiency over the previous six months. He did this by rejecting a large proportion of the garments that arrived in the warehouse and sending them over to quality assurance. Because the quality department was notoriously slow, this effectively took the clothes out of the production cycle for months. After establishing a lower level of shipping productivity, he made a few modest changes to the shipping process and stopped rejecting garments. Management was delighted with the surge in goods moving through the shipping department and rewarded him with 5 percent of the value of his “ideas,” or some $6,000.

His scheme unraveled because a random inventory audit found hundreds of boxes of garments in the quality assurance department that didn’t match up with inventory records. Not only did the department have far more inventory than it should have had, but none of the stated contents of the boxes matched what was inside.

Unfortunately for the shipping department supervisor, he hadn’t anticipated how the quality manager would react to the flood of rejected garments. To him, this meant there was a big quality problem somewhere. Since he had no idea where it was, he tried to hide its presence by concealing the mountain of rejected clothing until he could discover what was wrong.

Once the quality manager had confessed, it didn’t take long to discover that there was actually nothing wrong with the garments in question and that the same name was on all the rejection slips. When confronted with this, the supervisor admitted what he had done and was immediately fired.

In both of these cases, it was not regular employees who defrauded the idea system but managers. This is not to say that front-line employees are not corrupted by rewards—we often come across cases of them stealing each other’s ideas, grossly overstating the value of their ideas, or gaming and manipulating the system. But managers are in much better positions to commit reward-related fraud.84

REWARD SYSTEMS THAT WORK

After all the dysfunction we have described with percentage rewards for individual ideas, managers might be tempted to shy away from offering any rewards whatsoever. But it is perfectly possible to avoid these problems and still explicitly share with employees the benefits from their ideas. In this section, we describe how a number of companies that have been very successful at getting ideas from their employees also pay out substantial sums of money to them, far more than they would typically earn under a traditional reward scheme. The rewards these organizations give work with, rather than against, the reasons employees already want to give in ideas.

Before we discuss their approaches, however, it is important to point out that rewards are truly optional. Employees will step forward with plenty of ideas without them. The most powerful incentive to hand in an idea is the knowledge that it will be given a fair hearing and will be implemented if it is recognized as a good one. The best reward system a company can set up is a process that assures ideas are handled quickly, effectively, and smoothly. This is why Idemitsu Kosan (whose idea system has consistently been ranked as one of the best in Japan) and Milliken (which gets more ideas per employee than any other U.S. or European company we are aware of) offer no extra rewards for ideas. The financial benefits are shared implicitly, through greater job security and better wages.85

But if managers do want to explicitly share some of the financial benefits of employees’ ideas with them, they can do so without creating the rap sheet of problems we discussed earlier in this chapter. In fact, a good reward system can create useful synergies.

Dana’s Spicer Axle Division facility in Cape Girardeau, Missouri, for example, distributes a monthly bonus pool that is based on how facility-wide measures of productivity and quality compare to standard levels of performance. This money is shared among all employees (including managers) who have submitted at least two ideas that month. Each person’s share is determined by how many hours he or she worked during that month, divided by the total hours worked by everyone in the facility. The philosophy of this approach is that the bonus reflects the benefits of improved performance, most of which comes about through employee ideas. At the time of our visit to this facility, the monthly bonus was adding an extra 20 percent to most people’s paychecks. It is worth noting that employees at Cape Girardeau rarely miss being eligible for this bonus. In fact, in some years they have averaged more than double the twenty-four ideas the company expects from them.

Boardroom uses a similar approach. It gives out substantial bonuses, which average several thousand dollars per employee per quarter, based on overall corporate performance. Because Boardroom, too, believes this performance derives largely from employee ideas, only those employees who have offered at least twenty-six ideas in that quarter are eligible for the bonus. Wain-wright, with sixty-plus ideas per person per year, contributes 20 percent of its profits to employees’ 401(k) plans. Each year, Kacey Fine Furniture links substantial quarterly bonuses for its employees to performance improvements in specific areas. Top management identifies key aspects of performance that can be improved by employee ideas, sets milestones for each of these, and ties specific payouts to each of the different milestones.86

Each of the aforementioned companies has avoided the extra costs, headaches, and behavioral dysfunction that arise from poorly thought-out reward systems. Consequently, they get more ideas and have far more money to share with employees. Although each of their reward systems is different, they all follow three important principles:

1. Rewards are based on higher-level aggregate measures that reflect the broad and collective impact of everyone’s ideas.
2. Benefits are distributed to all employees, equitably and across the board, according to transparent and publicly-stated rules.
3. The idea system and its reward program are integrated into the way the company is run.

Basing rewards on aggregate metrics eliminates the need to figure out the value of every idea and who deserves the reward for it. Overall measures also capture the benefits of small ideas and of ideas whose benefits are intangible or difficult to measure. The financial impact of the idea at Grapevine Canyon that increased the resort’s visibility on the Internet, for example, would be captured in the appropriate aggregate statistic, even though its individual impact would be difficult or impossible to determine. Because aggregate statistics capture the collective impact of ideas, and they are derived from actual performance instead of individual projections, they are more accurate and therefore fairer.87

Distributing rewards in an equitable and broad-based way creates useful synergies, because often many people are involved in taking an idea from concept through implementation. If the reward system is structured so that everyone gains from the resulting improvements, then it no longer matters (except for recognition) who originated the idea or who contributed to it along the way—everyone has an incentive to move it forward. It is in everyone’s interest to support each other’s ideas and to help develop and build on them. Collective reward systems also give people little incentive to manipulate the reward system for personal gain. The production manager in the electronics company discussed earlier, for example, could not have extorted money from employees because there would not have been any large rewards for him to steer in their direction. The technician’s $26 million idea at the European telecommunications company would have helped the CEO, instead of making him fearful of reprisals from his board. Another benefit of spreading rewards around is that people have an incentive to share and copy ideas. For example, at Dana, we came across one idea that, within a matter of weeks, had been copied some fifty-six times at one site.88

To be truly effective, a reward system should be integrated into the routine of the organization. Instead of being an “add-on,” it should be incorporated into the way people work and how the company is managed. The aggregate measures that drive the rewards should be derived from the company’s most critical performance objectives—the same measures that drive day-to-day decision making, performance reviews, other improvement initiatives, and, ultimately, most of management’s actions. This means the reward system will encourage ideas that move the organization in the direction management wants.

Let us go back to Dana’s Cape Girardeau bonus system. The measures it uses are quality, defined as defects per million parts, and productivity, defined as output. These metrics balance each another, are directly tied to the primary drivers of the company’s success, and are readily understood by everyone. Everyone knows how his or her specific actions—and his or her improvement ideas—affect each measure. And one of the main items on each employee’s annual performance review is the quantity and quality of ideas he or she has given in.

At first glance, some of the approaches we have cited to reward employees may seem to be standard bonus or gain-sharing programs. But there is one important difference. They are designed around employee ideas, which is what makes them so effective. Instead of being tactics to get people to work harder, they are strategies to help them to work smarter.

A common complaint from managers about bonus and gain-sharing schemes is that they often fail to motivate employees very much. That is, the bonuses don’t actually change employee behavior appreciably. At the same time, employees complain that while such schemes are a nice benefit when they do pay out, the bonuses depend mostly on factors outside their control. Many employees view bonus schemes as transparent ploys to get them to work harder. But when they are given a genuine way to have a real impact on their bonuses with ideas, the programs become much more effective.89

KEY POINTS

• Seemingly commonsense reward schemes—offering a percentage of the savings or profit from each idea—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:
  
  1. It should base the rewards on simple aggregate measurements.
  2. It should distribute rewards equitably to all employees using a fair and transparent method.
  3. It should be integrated as much as possible into how the company already works.

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GUERRILLA TACTICS

Five actions you can take today (without the boss’s permission)

1. Start with problems. Ideas arise when someone becomes aware of a problem or opportunity. Encourage your people to identify things that make their work difficult, waste money, or detract from the customer experience and then to think of ways to fix them.
2. Identify and display problems. Ask your people for help in identifying problems:
   
   • Create a departmental opportunity board. Encourage everyone to post problems and opportunities on it.
   • Promote an “Opportunity of the Week” or an “Opportunity of the Month.” Get your people involved in identifying and selecting these opportunities.
3. Turn complaints into ideas. When one of your people complains about something, realize that he or she may have identified a valid problem. Ask him or her for an idea to address it.
4. Follow through, follow through, follow through. Follow through on every idea that comes in, including those that are given to you informally. To help ensure that you don’t forget about the informal suggestions, carry a notebook to record them. Remember, the best reward a person can get for an idea is to see it used.91
5. Create heroes (everyone can be one). When people come up with ideas, make sure they are recognized and given credit for them. Perhaps you might bring pizza once a month for lunch and acknowledge everyone who has made contributions.