In the old days at a tire manufacturing site of a company that shall remain nameless, workers on the production line had a row of lights over their work station.Each light could be green or red, showing whether that aspect of their production process was working with full efficiency or not.
The workers took pride in getting all the lights green before the end of their shift, so that they could climb up onto the railings where they were visible to everyone else, and have a relaxed smoke as a demonstration to all that they had got everything running perfectly.It was their de facto incentive system.
The downside to it was that in left every aspect of their production process untended, there was a result that shortly after the next shift took over, every aspect of the process went down at the same time.The new shift then wrestled with malfunctioning production for several hours, until they too could get all the lights green in the last few minutes of their shift, and climb up to have their smoke…
The point is that people will structure their behavior in response to the incentives available.
You need to be very clear in your own mind, therefore, about what behavior you want to encourage, and what the peripheral impact will be.
In our Income/Outcome business simulations we can demonstrate some fundamental financial truths about business decision-making.
If you measure (and reward) an operation on Sales, it will increase market share – which it can do more easily with lower prices, losing you money.
If you switch to rewarding Profit, the operation will make money for you, which is strictly Income Statement thinking.Typically it makes money by tying up vast amounts of capital all over the Balance Sheet, in buying more efficient machines (lower unit cost), bulk purchases of inventories (lower unit cost), giving customers longer to pay (higher prices), and so on.This can bankrupt you, as the cash outflow can more than offset the profits.
If you then tie the Income Statement and Balance Sheet together through some ratio like Return On Assets, and reward the operation on that number, it is likely to improve the ratio by selling off assets rather than by improving profits.This can lead to short-term gains and a disastrous longer-term situation.
Income/Outcome workshops are designed to improve business acumen, not just by improving business literacy and familiarity with financial concepts, but by showing the impact of decisions.Business decisions don’t just impact the bottom line; every decision made in any one department impacts the ability of every other department to make good decisions.
Better understanding of the impact on other departments has multiple benefits: enhanced support for them; increased teamwork and respect; a more rapid and accurate flow of information in the company; improved personal morale, and therefore reduced turnover and improper use of sick days; and, of course, increased profits.