I need 3 separate things. Please give a summary, with the communication issue, and a recommendation on how to fix

HBR CASE STUDY

The Best-Laid
ncentive Plans

by Steve Kerr

Rainborrel Products knew what it needed from its workforce

and created a performance management system to get it

Now, it’s iiving with the consequences – most of them unintended.

H
IRAM PHILLIPS finished tying his bow
tie and glanced in the mirror Frowning,
he tugged on the left side, then caught

sight of his watch in the mirror. Time to get
going. Moments later, he was down the stairs,
whistling cheerfully and heading toward the
cofFeemaker.

“You’re in a good mood,” his wife said, look-
ing up from the newspaper and smiling.”What’s
that tune?’Accentuate the Positive’?”

“Well done!” Hiram called out. “You know,
I do believe you’re picking up some pop culture
in spite of yourself.” It was a running joke with
them. She was a classically trained cellist and on
the board of the local symphony. He was the one
with the Sinatra and Bing Grosby albums and
thetaste for standards. “You’re getting better at
naming that tune.”

“Or else you’re getting better at whistling.” She
looked over her reading glasses and met his eye.
They let a beat pass before they said in unison:

“Naaah.” Then, with a wink, Hiram shrugged
on his trench coat, grabbed his travel mug, and
went out the door.

Fat and Happy
It was true. Hiram Phillips, GFO and chief ad-
ministrative officer of Rainbarrel Products, a di-
versified consumer-durables manufacturer, was
in a particularly good mood. He was heading
into a breakfast meeting that would bring noth-
ing but good news. Sally Hamilton and Frank
Ormondy from Felding & Company would no
doubt already be at the office when he arrived
and would have with them the all-important
numbers-the statistics that would demonstrate
the positive results of the performance man-
agement system he’d put in place a year ago.
Hiram had already seen many of the figures in
bits and pieces. He’d retained the consultants to
establish baselines on the metrics he wanted
to watch and had seen various interim reports

HBR’s cases, which are fictional, present common managerial dilemmas
and offer concrete solutions from experts.

MOTIVATING PEOPLE JANUARY 2003 27

HBR CASE STUDY

from them since. But today’s meeting would be

the impressive summation capping off a year’s

worth of effort. Merging into the congestion of

Route 45, he thought about the upbeat presen-

tation he would spend the rest of the morning

preparing for tomorrow’s meeting of the corpo-

rate executive council.

It was obvious enough what his introduction

should be. He would start at the beginning-or,

anyway, his own beginning at Rainbarrel Prod-

ucts a year ago. At the time, the company had

just come off a couple of awful quarters. It

wasn’t alone. The sudden slowdown in con-

sumer spending, after a decade-long boom, had

taken the whole industry by surprise. But what

had quickly become clear was that Rainbarrel

was adjusting to the new reality far less rapidly

than its biggest competitors.

Keith Randall,CEOof Rainbarrel,was known

for being an inspiring leader who focused on

innovation. Even outside the industry, he had

a name as a marketing visionary. But over the

course of the ten-year economic boom, he had

allowed his organization to become a little lax.

Take corporate budgeting. Hiram still smiled

when he recalled his first day of interviews with

Rainbarrel’s executives. It immediately became

obvious that the place had no budget integrily

whatsoever. One unit head had said outright,

“Look, none of us fights very hard at budget

time, because after three or four months, no-

body looks at the budget anyway.” Barely con-

cealing his shock, Hiram asked how that could

be; what d id they look at, then? The answer was

that they operated accord ing to one simple rule:

“If it’s a good idea, we say yes to it. If it’s a bad

idea, we say no.”

“And what happens,” Hiram had pressed,

“when you run out of money halfway through

the year?” The fellow rubbed his chin and took

a moment to think before answering. “I guess

we’ve always run outof good ideas before we’ve

run o u t o f money.” Unbelievable!

“Fat and happy” was how Hiram character-

ized Rainbarrel in a conversation with the head-

hunter who had recruited him. Of course, he

wouldn’t use those words in the CEC meeting.

That would sound too disparaging. In fact, he’d

quickly fallen in love with Rainbarrel and the

opportunities it presented. Here was a company

that had the potential for greatness but that was

held back by a lack of discipline. It was like a

racehorse that had the potential to be a Secre-

tariat but lacked a structured training regimen.

Ora Ferrari engine that needed the touch of an

expert mechanic to get it back in trim. In other

words, the oniy thing Rainbarrel was missing

was what someone like Hiram Phillips could

bring to the table. The allure was irresistible;

this was the assignment that would define his

career. And now, a year later, he was ready to

declare a turnaround.

Lean and Mean
Sure enough, as Hiram steered toward the en-

trance to the parking garage, he saw Sally and

Frank in a visitor parking space, pulling their

bulky file bags out of the trunk of Sally’s sedan.

He caught up to them at the security checkpoint

Steve Kerr is the chief iearning officer at Goidman Sachs in New York. Prior to joining Goldman Sachs
in 2001, he spent seven years as the chief iearning ofßcer and head of leadership deveiopment at GE. He

was responsible for CE’s leadership development center at Crotonville.

28 HARVARD BUSINESS REVIEW

The Best-Laid Incentive Plans

in the lobby and took a heavy satchel from

Sally’s hand.

Moments later, they were at a conference

table, each of them poring over a copy o f t h e

consultants’spiral-bound report.”This is great,”

Hiram said.”I can hand this out just as it is. But

what I want to do while you’re here is to really

nail down what the highlights are. I have the

floor for 40 minutes, but I guess I’d better leave

ten for questions. There’s no way I can plow

through all of this.”

” I f l were you,” Sally advised,”I would lead off

with the best numbers. I mean, none of them

are bad. You hit practically every target. But

some of these, where you even exceeded tbe

stretch goal…”

Hiram glanced at the line Sally was under-

scoring with her fingernail. It was an impressive

achievement: a reduction in labor costs. This

had been one ofthe first moves he’d made, and

he’d tried to do it gently He came up with the

idea of identifying the bottom quartile of per-

formers throughout the company and offering

them fairly generous buyout packages. But

when that hadn’t attracted enough takers, he’d

gone the surer route. He imposed an across-

the-board headcount reduction of 10% on all the

units. In that round, the affected people were

given no financial assistance beyond the nor-

mal severance.

“It made a big difference,” he nodded. “But

itwasn’texactiytheworld’smost popular move.”

Hiram was well aware that a certain segment

o f t h e Rainbarrel workforce currently referred

to him as “Fire ’em.” He pointed to another

number on the spreadsheet.”Now, that one tells

a happier story: lower costs as a result of higher

productivity.”

“And better customer service to boot” Frank

chimed in. They were talking about tbe trans-

formation of Rainbarrel’s call center – where

phone representatives took orders and handled

questions and complaints from both trade and

retail customers. The spreadsheet indicated a

dramatic uptick in productivity: The number of

calls each service rep was handling per day had

gone up 50%. A year earlier, reps were spend-

ing up to six minutes per call, whereas now the

MOTIVATING PEOPLE JANUARY 2003 29

HBR CASE STUDY

average was lessthan four minutes.”! guess you
decided togoforthat new automated switching
system?” Frank asked.

“No!” Hiram answered.”That’s the beauty of
it. We got that improvement without any capi-
tal investment. You know what we did? We Just
announced the new targets, let everyone know
we were going to monitor them, and put the

As much as Rainbarrel liked to emphasize
customer service in its values and mission
statement, no reliable metric had been
in place to track it.

names of the worst offenders on a great big
‘wall of shame’ right outside the cafeteria. Never
underestimate the power of peer pressure!”

Sally, meanwhile, was already circling an-
other banner achievement: an increase in on-
time shipments. “You should talk about this,
given that it’s something that wasn’t even being
watched before you came.”

It was true. As much as Rainbarrel liked to
emphasize customer service in its values and
mission statement, no reliable metric had been
in place totrack it. And getting a metric in place
hadn’t been as straightforward as it might
seem – people haggled about what constituted
“on time” and even what constituted “shipped ”
Finally, Hiram had put his foot down and in-
sisted on the most objective of measures. On
time meant when the goods were promised to
ship. And nothing was counted as shipped till it
left company property. Period.”And once again,”
Hiram announced, “not a dollar of capital ex-
penditure. I simply let people know that, from
now on, if they made commitments and didn’t
keep them, we’d have their number.”

“Seems to have done the trick,” Sally ob-
served. “The percentage of goods shipped by
promise date has gone up steadily for the last
six months. It’s now at 92%.”

Scanning the report, Hiram noticed another
huge percentage gain, but he couldn’t recall
what the acronym stood for.”What’s this? Looks
like a good one: a 50% cost reduction?”

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The Best-Laid Incentive Plans

Sally studied the item. “Oh, that. It’s pretty

small change, actually. Remember we separated

out the commissions on sales to employees?” It

came back to Hiram immediately. Rainbarrel had

a policy that allowed current and retired em-

ployees to buy products at a substantial discount.

But the salespeople who served them earned

commissions based on the full retail value, not

the actual price paid. So, in effect, employee pur-

chases were jacking up the commission ex-

penses. Hiram had created a new policy in which

the commission reflected the actual purchase

price. On its own, the change didn’t amount to

a lot, but it reminded Hiram of a larger point he

wanted to make in his presentation: the impor-

tance of straightforward rules-and rewards-in

driving superior performance.

“I know you guys don’t have impact data for

me, but I’m definitely going to talk about the

changes to commission structure and sales in-

centives. There’s no question they must be mak-

ing a difference.”

“Right,” Sally nodded.”A classic case of’keep

it simple,’ isn’t it?” She turned to Frank to ex-

plain.”The old way they calculated commissions

was by using this really complicated formula

that factored in, I can’t remember, at least five

different things.”

“Including sales, I hope?” Frank smirked.

“I’m still not sure!” Hiram answered.”No, se-

riously, sales were the most important single

variable, but they also mixed in all kinds of tar-

gets around mentoring, prospecting new clients,

even keeping the account information current.

It was all way too subjective, and salespeople

were getting very mixed signals. 1 just clarified

the message so they don’t have to wonder what

they’re getting paid for. Same with the sales

contests. It’s simple now: If you sell the most

product in a given quarter,you w i n ”

With Sally and Frank nodding enthusiasti-

cally, Hiram again looked down at the report.

Row after row of numbers attested to Rainbar-

rel’s improved performance. It wouldn’t be easy

to choose the rest of the highlights, but what a

problem to have! He invited the consultants to

weigh in again and leaned back to bask in the

superlatives. And his smile grew wider.

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HBR CASE STUDY

Cause for Concern

The next morning, a well-rested Hiram Phillips

strode into the building, flashed his ID badge at

Charlie, the guard, and joined the throng in the

lobby. In the crowd waiting for the elevator, he

recognized two young women from Rainbarrel,

lattes in hand and headphones around their

necks. One was grimacing melodramatically as

she turned to her friend. “I’m so dreading get-

ting to my desk,” she said. “Right when I was

leaving last night, an e-mail showed up from the

buyer at Sullivan. I just know it’s going to be

‘i can’t figure out how you fellas define ‘shipped.’ We
were told

last Tuesday an order had been shipped, and

come to find out, the stuff was sitting on a railroad
siding across the street from your plant.”

some big, hairy problem to sort out. I couldn’t

bring myself to open it, with the day I’d had. But

I’m going to be sweating it today trying to re-

spond by five o’clock. I can’t rack up any more

late responses,or my bonus is seriously history.”

Her friend had slung her backpack onto the

floor and was rooting through it, barely listen-

ing. But she glanced up to set her friend straight

in the most casual way. “No, see, all they check

is whether you respondedtoan e-mail within 24

hours of opening it. So that’s the key. Just don’t

open it. You know, till you’ve got time to deal

with it.”

Then a belltone announced the arrival of the

elevator, and they were gone.

More Cause for Concern
An hour later, Keith Randall was calling to order

the quarterly meeting of the corporate execu-

tive council. First, he sa id, the group would hear

the results of the annual employee survey, cour-

tesy of human resources VP Lew Hart. Next

would come a demonstration by the chief mar-

keting officer of a practice the CEO hoped to

incorporate into all future meetings. It was a

“quick market intelligence,” or QMI, scan, en-

gaging a few of Rainbarrel’s valued customers

in a prearranged-but not predigested-confer-

ence call, to collect raw data on customer ser-

vice concerns and ideas.”And finally,” Keith con-

cluded, “Hiram’s going to give us some very

good news about cost reductions and operating

efficiencies, all due to the changes he’s designed

and implemented this past year”

Hiram nodded to acknowledge the compli-

ment. He heard little of the next ten minutes’

proceedings, thinking instead about how he

should phrase certain points for maximum ef-

fect. Lew Hart had lost him in the first moments

of his presentation on the “people survey” by

beginning with an overview of “purpose, meth-

odology, and historical trends.” Deadly.

It was the phrase “mindlessly counting

patents” that finally turned Hiram’s attention

back to his colleague. Lew, it seemed, was now

intothe”findings”sectionof h is remarks. Hiram

pieced together that he was reporting on an un-

precedented level of negativity in the responses

from Rainbarrel’s R&D department and was

quoting the complaints people had scribbled on

their surveys. “Another one put it this way,” Lew

said. “We’re now highly focused on who’s get-

ting the most patents, who’s getting the most

copyrights, who’s submitting the most grant

proposals, etc. But are we more creative? It’s not

that simple”

“You know,”Rainbarrel’schief counsel noted,

“I have thought lately that we’re filing for a lot

of patents for products that will never be com-

mercially viable”

“But the thing that’s really got these guys

frustrated seems to be their ‘Innovation X’

project,” Lew continued. “They’re all saying it’s

the bestthing since sliced bread, a generational

leap on the product line, but they’re getting no

uptake.”

Eyes in the room turned to the products divi-

sion president, who promptly threw up his

hands.”Whatcan I say,gang? We neverexpected

that breakthrough to happen in this fiscal year

It’s not in the budget to bring it to market”

Lew Hart silenced the rising voices, remind-

ing the group he had more findings to share.

Unfortunately, it didn’t get much better. Both

current and retired employees were complain-

ing about being treated poorly by sales person-

nel when they sought to place orders or obtain

information about company products. There

was a lot of residual unhapplness about the lay-

offs, and not simply because those who re-

mained had more work to do. Some people had

noted that, because the reduction was based on

headcount, not costs, managers had tended to

fire low-level people, crippling the company

without saving much money. And because the

32 HARVARD BUSINESS REVIEW

The Best-Laid Incentive Plans

reduction was across the board,the highest per-

forming departments had been forced to lay off

some of the company’s best employees. Others

had heard about inequities in the severance

deals: “As far as I can tell, we gave our lowest

performers a better package than our good

ones,” he quoted one employee as saying.

And then there was a chorus of complaints

from the sales organization. “No role models.”

“No mentoring.” “No chance to pick the veter-

ans’ brains.” “No knowledge sharing about ac-

counts.” More than ever, salespeople were dis-

satisfied with their territories and clamoring for

the more affluent, high-volume districts.”It didn’t

help that all the sales-contest winners this year

were from places like Scarsdale, Shaker Heights,

and Beverly Hills,” a salesperson was quoted as

saying. Lew concluded with a promise to look

further into the apparent decline in morale to

determine whether it was an aberration.

The Ugly Truth
But if the group thought the mood would im-

prove in the meeting’s next segment-the QMI

chat with the folks at longtime customer Bren-

ton Brothers-they soon found out otherwise.

Booming out of the speakerphone in the middle

of the table came the Southern-tinged voices of

Billy Brenton and three of his employees repre-

senting various parts of his organization.

“What’s up with your shipping department?”

Billy called out. “My people are telling me it’s

taking forever to get the stock replenished”

Hiram sat up straight, then leaned toward

the speakerphone. “Excuse me, Mr. Brenton.

This is Hiram Phillips-I don’t believe we’ve met.

But are you saying we are not shipping by our

promise date?”

A cough – or was it a guffaw? – came back

across the wire. “Weil, son. Let me tell you about

t h a t First of all, what y’alt promise is not always

what we are saying we require- and what we

believe we deserve. Annie, isn’t that right?”

“Yes, Mr. Brenton,” said the buyer. “In some

cases, I’ve been told to take a late date or other-

wise forgo the purchase. That becomes the

promise date, I guess, but it’s not the date I

asked for.”

“And second,” Billy continued,”! can’t figure

out howyou fellas define’shipped.’We were told

last Tuesday an order had been shipped, and

come to find out, the stuff was sitting on a rail-

road siding across the street from your plant.”

“That’s an important order for us,” another

Brenton voice piped up. “I sent an e-mail to try

to sort it out, but I haven’t heard back about it.”

Hiram winced, recalling the conversation in the

lobby that morning. The voice persisted: “I

thought that might be the better way to contact

your service people these days? They always

seem in such an all-fired hurry to get off the

phone when I call. Sometimes it takes two or

three calls to get something squared away.”

The call didn’t end t h e r e – a few more short-

comings were discussed. Then Keith Randall, to

his credit, pulled the conversation onto more

positive ground by reaffirming the great regard

Rainbarrel had for Brenton Brothers and the

mutual value of that enduring relationship.

Promises were made and hearty thanks ex-

tended for the frank feedback. Meanwhile,

Hiram felt the eyes of his colleagues on him. Fi-

nally, the call ended and the CEO announced

that he, for one, needed a break before the last

agenda item.

Dazed and Confused
Hiram considered following his boss o u t o f the

room and asking him to table the whole discus-

sion of the new metrics and incentives. The cli-

mate was suddenly bad for the news he had

looked forward to sharing. But he knew that de-

laying the discussion would be weak and wrong.

After all, he had plenty of evidence to show he

was on the right track. The problems the group

had just been hearing about were side effects,

but surely they didn’t outweigh the cure.

He moved to the side table and poured a glass

of ice water, then leaned against the wall to col-

lect his thoughts. Perhaps he should reframe his

opening comments in Iightofthe employee and

customer feedback. As he considered how he

might do so, Keith Randall appeared at his side.

“Looks like we have our work cut out for us,

eh Hiram?” he said quietly – and charitably

enough. “Some of those metrics taking hold,

um, a little too strongly?” Hiram started to ob-

ject but saw the seriousness in his boss’s eyes.

He lifted the stack of reports Feld ing & Com-

pany had prepared for him and turned to the

conference table. “Well, I guess that’s something

for the group to talk about”

Should Rainbarrel revisit its approach
t o performance management?

Four commentators offer expert advice.

MOTIVATING PEOPLE JANUARY 2003 33

H B R CASE C O M M E N T A R Y • Should Rainbarrel Revisit Its Approach to Performance Management?

I
f Rainbarrel were within a month of bank-

ruptcy and in the hands of a turnaround

manager, the kinds of changes Hiram has

imposed wouldn’t be so unusual and might

even be considered reasonable. But as far as I

can tell, Rainbarrel just needs to tighten its belt

in a period of cyclically soft sales and more ag-

gressive competition. The case portrays Rain-

barrel Products as a basically beaithy and suc-

cessful company.

But I’d bet that we as readers are seeing only

half the trouble Hiram has caused. Given the

take years ago by requiring Arrow warehouses

to ship all orders received by 4 PM the same day.

Since the orders were routed by our computer

to a printer in tbe warehouse, the key to ioo%

same-day shipping performance was obvious:

They pulled the plug on the printer at three

o’clock.

All ofthis suggests another truism about per-

formance management: The devil is in the de-

tails. It’s very difficult to define the right metric

and anticipate exactly how your people will

react to it. Your best chance of knowi ng whether

It’s very difficult to define the right metric and anticipate exactly how

your people will react to it Your best chance of knowing whether it will

have the intended effect is to talk to the people directly involved.

Stephen P. Kaufinan
recently retired as
chairman ofthe board
of Arrow Electronics,
a company he served
as CEO for 14 years.
He is a senior lecturer
at Harvard Business
School in Boston.

pressure to ship faster, the warehouse is proba-

bly making more errors and thus adding to the

number of returns and customer complaints.

Now that every department bas cut its staff, the

company is probably hiring more expensive

temps, consultants, and outsourcing firms. And

let’s not even speculate on what the impact of a

“wall of shame” might be. That’s the kind of hu-

miliating tactic that could turn a devoted em-

ployee into a saboteur.

These troubles should be enough to teach

Rainbarrel the first rule of performance man-

agement: You get what you pay for. If the ware-

house workers are praised for putting a box over

an imaginary line, they will put it there even if

it’s not ready If you pay the sales force only for

sales dollars, you might end up with more sales,

but at bad prices or with too many extra services

promised. I remember a time at Arrow Elec-

tronics wben we decided to pay out a part ofthe

sales reps’ commissions at the time they took

the customers’ orders. The result was that we

got orders tbat never shipped – or that were

shipped and later returned for full credit. One

veteran salesman explained it this way, and I’ve

beard the phrase many times since: “Look, you

make the rules, we’ll play the game.”

Before top management starts introducing

new rules, then, it had better have a good sense

ofthe kinds of games these rules may promote.

Hiram is blindsided by the discovery that his

customer service people have learned not to

open problematic e-mails. I made a similar mis-

it will have the intended effect is to talk to the

people directly involved as well as their imme-

diate supervisors. It’s very telling that Hiram is

seen meeting with only his henchmen. He

needs to go to the cafeteria, get a tray, and sit

with the people who are doing the work at Rain-

barrel. If he were my new chief financial officer,

I’d have told him,”Staple yourself to the back of

a warehouse manager for a week. Take the time

to follow a general manager around his divi-

sion. Ride along with some salespeople. Spend

several months getting to know this company

really well before you settle into your staff job.”

Hiram knows nothing about Rainbarrel’s in-

dustry and how it works and knows little or

nothing about the culture o f t h e company. He

must understand both in order to know what

kind and what pace of change are appropriate

in this situation.

That point brings me to a big question about

the Rainbarrel case. Where has the CEO been?

Keith Randall has seriously abdicated his re-

sponsibilities as chief executive in giving a

newly hired CFO such free rein-and across such

a broad range of functions, many of them typi-

cally nota CFO’sJob. When I was a young man,

my father told me,”Cood judgment comes from

experience. But unfortunately, experience

comes from bad judgment” A manager’s career

is all about building a base of good judgment on

the back of mistakes. Hiram, if he’s at all reflec-

tive, will learn a lesson here. But his boss should

have known it by now.

34 HARVARD BUSINESS REVIEW

should Rainbarrel Revisit Its Approach to Performance Management? • H B R CASE C O M M E N T A R Y

T he good news in this case is that wesee a senior management team thatis focusing on performance measures
as a way of creating more accountability for re-

sults. The bad news is that the team is using the

wrong measures, and it has gone about estab-

lishing them in the wrong way. As a result, it is

sacrificing long-term business success for short-

term operational gains. What Rainbarrel needs

are performance metrics that are less employee

focused and more customer focused. But even

these kinds of externally focused measures are

likely to be ineffective unless management can

successfully help workers understand and ac-

cept them.

The only reasonable way to embark on any

performance management effort is to define

the criteria for success, and that’s a step H i ram

seems to have skipped. What’s the ultimate

goal? Sales? Profits? Retained business? Lacking

that big picture, Hiram is focusing on interme-

diary steps and assuming that such enhance-

ments will produce a positive impact on the

bottom line. Measuring the number of calls

being handled by the call center is a good ex-

ample. That’s a customer service measure but

not an indicator of customer satisfaction. “Did

one call solve the customer’s problem?” might

be a better question for them to ask. Employee

turnover is another metric that might make

sense, given that employee tenure is highly cor-

related to the quality of customer service in

these kinds of jobs. Practically speaking, it’s al-

ways tricky to balance what can be measured

objectively and internally, what customers

really want, and what ultimately creates value

for the organization.

If I were Hiram, I wouldn’t have made a sin-

gle change until I’d asked two basic questions:

“What do we want employees to do differently

to support the business?” and “Why aren’t they

already doing it?” The answers to the second

question willyield the greatest insights. Is it that

they don’t have the knowledge or skills? Or is it

that they don’t have sufficient tools or infra-

structure? Is it a question of motivation? And if

it’s a question of motivation, do people need to

be spurred to work harder or smarter? Many of

Hiram’s metrics were based on the assumption

that the organization wasn’t working hard

enough, but that’s usually not the case in most

companies. Overwhelmingly, I think, people

want to do a good job. Has anyone asked the

warehouse workers why some orders weren’t

being delivered on time?

There is no evidence that Hiram sought any

input from employees on the design ofhis mea-

sures, and I suspect that his approach to rolling

out the new program featured information ver-

sus communication and education. If he wanted

buy-in from employees, he should have gone

much further than simply telling them what

their goals were, helping them instead to gen-

uinely understand why those objectives mat-

tered to the business and to shareholders. He

should have launched his program asa pilot and

made ¡t clear to employees that it would be

refined based on their experience and input.

Even better, at the outset, he could have ex-

plained the company’s goals and then let em-

ployees own the process of defining how the

goals should be reached and how progress to-

ward them should be measured. I remember a

time I was advising a client who ran a mine in

Wyoming. Management wanted to bring down

costs and had placed incentives for savings on

all the factors that influenced costs. The com-

pany found itself paying out bonuses, yet the

profitability of the mine didn’t improve. We

were asked to investigate, and since the quanti-

tative results were inconclusive, we went to

Wyoming for some qualitative feedback. We

asked the workers, “Is there anything you’ve

done in the past 12 months that you might not

Many of Hiram’s metrics were based on the

assumption that the organization wasn’t

working hard enough, but that’s usually

not the case in most companies.

have done if not for the bonus plan?”Therewas:

They had shut off some of the faucets to con-

serve water. The problem was, less water flow

meant less throughput ofthe material they were

extracting. So, yes, water conservation yielded

a 12% improvement on that metric. But the ulti-

mate outcome was that the operation made less

money due to lower productivity.

This isa perfect example of how you become

what you reward. By rewarding the wrong short-

term performance, this company was missing

the greater opportunity for long-term success.

Steven E. Gross leads
the U.S. compensation
consulting practice of
Mercer Human Resource
Consulting. Based in
Philadelphia, he is a
frequent author and
speaker on reward issues.

MOTIVATING PEOPLE JANUARY 2003 35

H B R C A S E C O M M E N T A R Y • S h o u l d R a ‘ n b a r r e l R e v i s i t Its A p p r o a c h t o P e r f o r m a n c e M a n a g e m e n t ?

Is it any surprise that rank-and-file employees aren’t sufficiently focused

on what is good for the company? Their leaders obviously aren’t

Vice Admiral Diego
E. Hernández (U.S.
Navy, retired) is
a management
consultant in both
the public and
private sectors and
serves on a number
of corporate boards.
He is based in Miami
Lakes, Florida.

L et’s spend a moment assessing Hiram’sjoh performance over the past year. Inthat short period of time, he has man-
aged to create a climate of uncertainty and self-

preservation amongemployeesby reducing the

workforce in two poorly planned increments.

He has eliminated workers without reducing

the amount of work. He has established the

wrong metrics for customer service, shipping,

and R&D. He has arrested the development of

the company’s next generation of salespeople.

He has delayed the launch of a breakthrough

product- He has publicly humiliated company

employees. And he has succeeded in teaching

Rainbarrel’s workers that the best use of their

time and energy is in devising ways to game

the system.

Yes, I would say that Hiram needs to rethink

his approach.

But I would hasten to add that Rainbarrel’s

problems don’t begin and end with the CFO and

his performance metrics. He is clearly oblivious

to what his actions have done to the company,

but he is not the only one. The CEO, first and

foremost, doesn’t seem to be paying attention

to his people or his customers. The VP of human

resources says hedoesn’t know what to make of

the apparent decline in morale. The products di-

vision president knew he had a product break-

through that was not funded but did not raise

the issue with the CEO. The chief counsel knew

that many ofthe patents he was reviewing were

not commercially viable. There Is something

fundamentally wrong in a company where ex-

ecutives do not communicate openly and con-

tinually with one another about the busi-

ness-where they do not question questionable

things. Is it any surprise that rank-and-file em-

ployees aren’t sufficiently focused on what is

good for the company? Their leaders obviously

aren’t.

Effective performance management begins

with clear two-way communications to ensure

goals are understood and accepted. Even more,

it requires multiple feedback channels for em-

ployees so that they can inform managers of

any problem areas in their jobs. Senior man-

agers cannot make good decisions without

knowing the truth, and at Rainbarrel, they aren’t

hearing it.

When it comes to improving individual per-

formance, I would urge Rainbarrel’s manage-

ment to look beyond pay for performance and

make more effective use of intangible rewards.

Public recognition, a letter of appreciation, or a

word of praise can do a great deal to focus an in-

dividual’s attention on organizational targets.

Such motivational tools are powerful yet terri-

bly underused in business settings.

That bias comes from my naval experience,

no doubt. Leaders in the U.S. armed services

have no control over compensation levels and

don’t have the option of giving bonuses to high

performers. We’re intensely focused on mission

achievement and realize that’s entirely depen-

dent on everyone buying in and giving it every-

thing they’ve g o t – b u t the pay scales are set by

Congress. How do we motivate people? We set

high goals and communicate them simply and

repeatedly. We take pains to establish valid

metrics. We provide the means for people to

achieve those goals, and we help remove the

obstacles that always arise. In order to do that,

we listen to people’s concerns and make use

of multiple feedback loops so we can hear the

t r u t h . We create interim goals and publicly

recognize interim successes. We differentiate,

with an aim to promoting the top performers

and getting rid of underperformers. And we

do all this continuously. In the end, our people

identify strongly with the goals ofthe organiza-

tion and feel energized when they achieve these

goals. And I can testify that there is nothing

more electrifying to a leader than obtaining

that level of commitment.

Right now, Rainbarrel’s management is wit-

nessing the opposite condition. Employees are

thoroughly alienated, for good reason, and they

will have to reconnect with the company before

anything good can happen. Management’s im-

mediate focus should be to create the condi-

tions that will allow employees to achieve Rain-

barrel’s goals and to find ways to acknowledge

and reward those achievements. Metrics are

important, but the key to high performance

is within people.

36 HARVARD BUSINESS REVIEW

Should Rainbarrel Revisit Its Approach to Performance Management? – H B R CASE C O M M E N T A R Y

Unfortunately for Rainbarrel, it needs tospend some time undoing the damagedone by Hiram Phillips. As soon as pos-
sible, the CEO should focus on two change

strategies for short-term and systemwide per-

formance improvement: selecting performance-

driven leaders and aligning the performance

culture with the company’s strategic direction.

Research has demonstrated that a company’s

top performers in mid- to senior-level jobs have

a tremendous effect on corporate outcomes –

that is, these top performers are 50% more pro-

ductive than their average-performing counter-

pa rts.That means it’s imperative to identifyand

develop these significant contributors early on,

ensure that they have the right skills, and then

place them in high-level positions. Doing so may

be one of the most effective ways to build and

sustain a strong performance culture and, in

turn, improve performance.

That said,creating a strong performance cul-

ture isn’t enough to change overall performance.

A company must also align its performance and

reward culture with its strategies. Indeed, a well-

communicated strategy, with an integrated set

of activities to support it, can itself signal to em-

ployees what senior executives really value,

even if the leaders are advocating one set of be-

haviors and unintentionally rewarding another.

But a company achieves its greatest advantage

when performance culture and strategy rein-

force each other and senior leaders consistently

reward the activities they advocate.

Selecting the right leaders and aligning culture

with strategy, though critical to performance,

are considered by some to be “soft” initiatives,

and their importance may be underestimated

by leaders who focus mainly on results. Such

leaders are apt to continually seek engineering

solutions to people issues-to no avail.

Hiram seems to fit this description. He has

introduced performance metrics without think-

ing them through or consulting other business-

unit heads about how these changes will affect

the company. He has actually hurt performance.

And Keith Randall isn’t any better. After all, he

chose Hiram as a leader. What does this tell

you about his understanding of how to lead or-

ganizational change? What signal has he sent to

employees about his criteria for selecting senior

leaders, and how does this affect his credibility?

During my career as a consultant and HR ex-

ecutive, I’ve seen many companies like Rain-

barrel that unintentionally discourage em-

ployee behaviors that might increase corporate

performance. For instance, top executives at one

company tried to measure individuals’ perfor-

mance and leadership skills by asking in a 360-

degree survey “to what extent the leader pro-

vides consequences to those who commit to

performance contracts and miss them.” The

problem was, high scores on this item, meaning

the leader was likely to provide consequences,

hada low correlation with “effective leadership”

in the survey. In other words, those who provided

consequences were less likelyto be seen as com-

petent leaders by subordinates and peers. So in

effect, the company was signaling that it valued

relationships and harmony over results.

Many companies also discourage behaviors

like challenging the status quo and raising diffi-

cult issues, which are essential to corporate per-

formance. When candidates who display these

behaviors are up for high-level positions, they

often lose out because they’re considered rebel-

lious or in need of “polish.”

Justas illogical isthe waythatpay-for-perfor-

mance plays out in most companies. The whole

point of such schemes is to differentiate and im-

prove individual performance. But since employ-

ees know their target bonus, and the bonus pools

A company achieves its greatest advantage when

performance culture and strategy reinforce each other.

are zero-sum, it’s impossible for a manager to

give one individual an outsize reward without

penalizing one or more average performers,

however slightly. Faced with this outcome, man-

agers routinely default to the same target for

everyone, fearful of demotivating the average

performers. And that reluctance undermines all

the powerof performance-based pay,effectively

punishing the high performers.

I could offer up more in this vein, but my

point is simple. If Keith Randall selects the right

leaders, communicates a clear set of goals, and

aligns the company’s performance culture with

its strategy, results will be achieved -slowly in

the short term, perhaps, but exponentially faster

overtime. ^

Barry Leskin was the
chief learning officer for
ChevronTexaco, the
human resources partner
at Ernst & Young, UK,
and the chairman of the
management and
organization department
at the University of
Southern California’s
Marshall Schm)! of
Business. He is now an
independent consultant.

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MOTIVATING PEOPLE JANUARY 2003 37

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