Mini-Clinic: The Case of the Lost Bonuses

It Is Much Better to Do the Right Things Wronger.

The greatest conceit of managers is that they can motivate people. Managers’ attempts to motivate people will only make things worse.

Behind incentive programs lies management's patronizing and cynical set of assumptions about workers. Managers implicitly say to workers, “I’m okay, you need incentives.” Managers imply that their workers are withholding a certain amount of effort, waiting for it to be bribed out of them.

Scholtes, Peter. The Leader’s Handbook. (Preface, p. x)

The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate the people to do their best, for their own good.

The effect is the exact opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser.

Merit rating rewards the people that do well in the system. It does not reward attempts to improve the system. Don’t rock the boat.

Dr. W.E. Deming, Out of the Crisis. (p. 102)

In Japan, when a company has to absorb a sudden economic hardship such as a 25% decline in sales, the sacrificial pecking order is firmly set. First the corporate dividends are cut. Then the salaries and the bonuses of top management are reduced. Next, management salaries are trimmed from the top to the middle of the hierarchy. Lastly, the rank and file are asked to accept pay cuts or a reduction in the work force through attrition or voluntary discharge. In the United States, a typical firm would probably do the opposite under similar circumstances.

Deming, Dr. W.E. Out of the Crisis. (p. 147)

THE AIM for this newsletter is to provide another Deming mini-clinic on a recent viral video of the CEO for MillerKnoll, Andi R. Owen, reacting to employee questions about their bonuses in the wake of layoffs and a need to find $26M in “savings”. It’s yet another cautionary tale of the future problems we seed for ourselves when we choose to structure our thinking and interactions according to the prevailing styles of management, which in this case centres on using incentives and bonuses to motivate people.

Background

MillerKnoll is the the result of a 2021 acquisition of furniture manufacturer Knoll, Inc. by iconic interior design firm, Herman Miller, a company perhaps best-known for their Eames Lounge Chair, Aeron Office Chair, and Noguchi Coffee Table, as well as their collaborations with top furniture designers and premier design consulting services. The firm employs over 8,800 staff.

Prior to the acquisition in July 2021, Andi Owen was President and CEO of Herman Miller beginning in 2018. According to an April 6, 2023 release, leadership made the decision to close a manufacturing warehouse in Sheboygan, WI resulting in 162 job losses. According to their Q1 2023 report, they reported just over $1B in sales.

The $26 Million Gap

If you haven’t watched the video yet, please pause here and do so: it’s only a minute and half long and well-encapsulates the problems with the prevailing style of management that Dr. Deming warned about decades ago. At issue for CEO Owen is the barrage of unpleasant questions she’s had to field from disgruntled employees who she has directed to close a $26M shortfall without a carrot to chase for their efforts. Owen alludes to her reasoning as a consequence of “perfect storms”:

Questions came through about “How can we stay motivated if we're not going to get a bonus? What can we do, what can we do?”

I'm going to address this head-on: The most important thing we can do right now is focus on the things that we can control. None of us could have predicted covid; none of us could have predicted supply chain [issues]; none of us could have predicted bank failures.

By the end of the video, with a full head of steam behind her, CEO Owen then ironically makes the case against using bonuses. I’m not sure if she realized it in-situ, but I think a light must have gone off in her head at this very moment that bonuses are poison pills when you’re fighting for the survival of your company:

Don't ask about what are we going to do if you don't get a bonus! Get the damn twenty-six million dollars! Spend your time and your effort thinking about the twenty-six million dollars we need and not thinking about what you're going to do if we don't get a bonus, all right? Can I get some commitment for that? I would appreciate it!

Quick Analysis: Saying the Quiet Part Out Loud

Dr. Deming was clear in his opposition to any form of merit pay or pay-for-performance bonus because he understood it was impossible to separate the performance of the individual from the effects of the system they were working within. He famously expressed this as an “unsolvable” equation with two unknowns:

Let x be the contribution of some individual, (yx) the effect of the system on their performance. Then suppose that we have some number for his apparent performance, such as eight mistakes for the year… Then

x + (yx) = 8

We need x. Unfortunately, there are two unknowns and only one equation. Johnny in the sixth grade knows that no one can solve this equation for x. They ignore the other term (yx), which is predominant

Many organizations, including MillerKnoll, like to pretend that this equation can be solved with the charade of annual appraisals and awards for achieving targets, which in turn reinforces a false impression with employees that they need the award to drive their best performance: it must be literally bribed out of them. This is why it can come as a disorienting shock to hear that, unbelievably, when it seems the best performance is needed to overcome a challenge like a $26M shortfall, top-management hand-waves it away as a distraction.

In her final outburst to focus on the goal and not think about the bonus, CEO Owen inadvertently broke the secret top-management code by revealing that bonuses do not, in fact, correlate to increased performance when the chips are down— and by extension never really worked at all. It was all a charade.

Rx? Raise Salaries, Eliminate Remaining Awards, Institute Profit-Sharing, Start Studying

I wanted to write this mini-clinic as a counterpoint to the barrage of misdirected ire towards the CEO for being heartless and tone-deaf. To me, the ire and her errors are two sides of the same management theory coin, but with a twist that Owen is actually doing the right thing the wrong way, while her critics are effectively arguing things be put back into the Matrix. To borrow a phrase from the immortal Dr. Russell Ackoff, here:

The more efficient you are at doing the wrong thing, the wronger you become. It is much better to do the right thing wronger than the wrong thing righter. If you do the right thing wrong and correct it, you get better.

So, what could she and her SLT do right now to fix things in a Deming-aligned way? I suggest structuring the following as PDSA experiments to begin conditioning the SLT and management to introduce system interventions in controlled ways with predictions, methods, and data:

• First, she needs to rebalance the system impact of eliminating bonuses by raising salaries, preferably to an average of past salary ranges + bonuses. This will go a long way to dissolving the psychological impacts of losing the bonuses and clear out the clutter that merit pay put in the way of teamwork. Institute profit-sharing for the next fiscal year, with gradations for years of service.

• Second, for similar reasons, she and her team need to eliminate any sales commissions and raise salaries accordingly. (See my August ‘21 newsletter, Salaries Over Commissions)

• Third, she and the SLT need to demonstrate solidarity with their staff by cutting their own compensation. Perhaps follow the lead of Apple CEO, Tim Cook, and take a 40% cut on base salary while retaining stock and other awards. (See my January newsletter, Are You In Favour of Layoffs?)

• Fourth, to follow up, she and the SLT need to work with the Board to reduce or eliminate executive bonuses and awards going forward. If employees don’t need to be bribed, neither do they. This will go some distance to remove adversarial competition among the SLT and management. (See above newsletter)

• Fifth, the entire SLT needs to undertake study of Dr. Deming’s theory to re-envision their organization as a system and how to manage it accordingly. This will be a never-ending effort, with the aim to improve the quality of not only their products and services but the interactions between employees, leadership, customers, and suppliers.

Reflection Questions

What were your initial reactions to CEO Owen’s outburst about bonuses? Did you think she did the right thing for the wrong reasons, or is she wrong entirely? Why? In your experience, what have been the effects of bonuses and awards in your organization? Have you undergone similar efforts to trim or eliminate them? Did leadership go first, if at all? What effect did this have on morale and teamwork?