„We are hostages to deeply ingrained attitudes”

Where is performance coming from?

Gary, let's talk about performance. Is performance just becoming more important again, in times when we have to deal with multiple crises?

One of the questions that has occupied every generation of management thinkers is: Where does performance come from? There’s a lot of research on this, but no one has a singular and precise answer. Whether you’re looking at profitability, growth or innovation, it is hard to reduce success to just one or two things. Performance depends on dozens, perhaps hundreds, of factors. So, companies establish hundreds, and often thousands, of KPIs. But as counter-intuitive as it may seem, the more complex the problem you’re trying to solve —like maximizing performance— the fewer KPIs a company should have. You can’t engineer success top down. You have to give individuals on the front lines a few broad targets around profitability, growth and customer satisfaction — and trust them to make the many subtle trade-offs that are necessary to get an optimal result

In many companies, however, something rather different can be observed...

Unfortunately, the more variegated and uncertain the environment becomes, and the more this this complexity exceeds the cognitive limits of those at the top, the more senior leaders try to script behaviours from the top. They believe that if they can just make sure everyone’s following the script, success will ensue. But this doesn’t work.

Performance depends on dozens, perhaps hundreds, of factors. So, companies establish hundreds, and often thousands, of KPIs. But as counter-intuitive as it may seem, the more complex the problem you’re trying to solve the fewer KPIs a company should have.

And what do you think really drives performance?

If you look at all the research, there’s one factor that stands out — where the correlation with performance is strong enough to allows us to be unambiguous. More than anything else, performance depends on clear willingness of employees to bring their imagination and ingenuity to work. Researchers repeatedly find a significant relationship between performance, growth and profitability and the way a company treats its people.

Dignity, opportunity to grow, equity

How should people be treated to perform at their best?

Employees want three things: first, dignity. They want to believe that their work matters to the company, customers and society. Second, they want the opportunity to achieve and grow. They want to learn, progress, and tackle more interesting challenges. And third, equity. They want to know that the rewards of success will be distributed fairly based on contribution, rather than on rank or seniority.

If the analyses of Gallup & Co are to be believed, little has changed over the years. Have we already have reached the upper end of performance possibilities?

I don’t think so. While roughly 80 per cent of people at work are not fully engaged at work — 20 per cent are. So we can learn from those high-performing companies where employees feel like owners, and are treated as critical to success. You see this in companies like Haier, Nucor, Roche, Handelsbanken and others.  In these organization you find fewer than half the number of management levels that are typical in most large companies — two or three layers instead of seven or eight. Friends tell me that Google has nine layers in its technical organization. When you power has to trickle down through all those layers, there’s precious little left to share with those on the front lines. That’s a problem, because its autonomy, more than anything else, that drives employee engagement.

And when it comes to making money, employees are seen as mere “resources” and tools. We know this our own experiences outside of work that if someone treats you as tool, that’s a toxic relationship—and most employees are in a toxic relationship with their employer.

But many organisations proclaim that their employees are at the centre of everything they do. Is that just marketing?

The top-down, manager-first model of work is so deeply baked into our organization, that most of us just take it for granted. We are hostages to deeply ingrained attitudes inherited from the industrial age. We believe that the thinkers are at the top and the doers at the bottom—and this is reflected in compensation structures. It’s a caste system. A decade ago, the elite talked about the working class. Now they talk about the uneducated, or low-skilled workers. But credentials are often a poor measure of capabilities, and no job is inherently low-skilled. But there are millions of jobs that are bereft of dignity, opportunity and equity.

The top-down, manager-first model of work is so deeply baked into our organization, that most of us just take it for granted.

Two years ago, a survey was conducted among 30.000 European companies. Only 25 percent of the managers who took part said they thought frontline workers were critical to success. Just a quarter! Many employees have learned that it’s hopeless to have aspire at work to a larger role or more fulfilling job. So, they leave most of initiative and ingenuity at home. The data is pretty clear: most organizations waste more human capacity than they effectively use.

Train the frontline workers

How do you think this could be changed? How could frontline workers be turned into real high performers to a greater extent?

We need to turn this around: People join institutions to earn a living, but also to make a difference in the world. In this mindset, the institution is the instrument, not the employee. This seems like a subtle shift, but when you put this into practice, it’s huge. It means never viewing anyone as expendable; it means training every employee; it means giving every employee a genuine upside; and training every employee to think like a business person. Every employee should know what a P&L is, and understand what drives ROI and customer retention. In my view, one of the best things a company can do is to take its entire leadership development budget and refocus it on training frontline workers in the basic language of business.

But there is definitely a need for development among managers too, isn't it?

Of course. We should train managers to take a systemic view. One of the biggest challenges for leaders today is to imagine organisations that are fundamentally different from the ones they’re in right now. I often ask CEOs: “Can you imagine an organization that is as different from the status quo—in terms of structures and processes—as YouTube is different from the BBC, or PayPal is different from a chequebook?” Most CEOs have seen the impact of radical business model innovation, but now they have to open their minds to the need for radical changes in the management model. Without this, we’re never going to change the engagement numbers, or build organizations that are fundamentally more daring, resilient and innovative than is currently the case.

The best things a company can do is to take its entire leadership development budget and refocus it on training frontline workers in the basic language of business.

In this regard, one of the most interesting conversations I had with a CEO was with Haier’s Zhang Ruimin. He visited me in California in 2011. He said, "Gary, you’ve argued that organisations need to become more like platforms and less like hierarchies. Has anyone actually done that?" I said, “I didn't think so.” With a very determined look in his eyes, he said, "I want to build a company where everyone has a chance to be CEO, because people are not a means, they are an end in themselves." Here’s a CEO quoting Emmanuel Kant, and the categorical imperative that was at the core of enlightenment. The idea that every human being has dignity in herself or himself. This is a great place to start if you want to build an organization that can outperform expectations.

But apart from these exceptional personalities, do you think CEOs and top executives are not bold enough in their ideas and visions?

Yes. Look at the automotive industry. Mercedes, BMW and Volkswagen are at least ten years behind Tesla in the development of electric vehicles. Yet it’s been evident for years that we need to reduce CO2 emissions, that batteries are becoming vastly better, and that GPUs were becoming ever more powerful—making self-driving cars a real possibility. I’m sure there were many people in the legacy car makers who could see these changes. But in a bureaucracy, no one moves until the CEO gives the order. But by the time a problem, or opportunity, is big enough to attract the CEO’s attention, it’s already too late.

In your opinion, do top executives deserve their salaries?

I don’t think there’s any study that proves CEOs are worth what they’re paid money—not across the board. In fact, one of the most recent studies found a negative correlation between CEO compensation and performance. I find it very hard to argue that any CEOs should earn 400 or 500 times that of a regular employee—unless, perhaps they’re a founder, and their compensation is entirely based on increases in market value—as is true for Elon Musk at Tesla. Last year, Andy Jassy at Amazon earned six and a half thousand times the median income of an Amazon employee. As a practical matter, how do you tell employees that they are critical to success, when you have these sorts of disparities in pay?

By the time a problem, or opportunity, is big enough to attract the CEO’s attention, it’s already too late.

What changes in the compensation system would you suggest?

I understand the logic of linking compensation to changes in the share price. But in practice, this hasn’t worked very well; it’s been executed in a very simplistic way. There’s no evidence that CEOs have gotten better at building new capabilities, at creating new markets, or raising engagement levels. What they have got better at is manipulating the share price – most easily through share buybacks. I believe we should base compensation on medium- to long-term changes in enterprise value, adjusted for mergers and acquisitions, for macroeconomic cycles, and relative to the performance of industry peers. In this model, a CEO gets a big pay-out only if he or she has increased the company’s market value significantly faster than peers on a rolling three- or five-year basis.

Reducing the direct costs of bureaucracy

In your book "Humanocracy" you calculate that a human-centred world of work has the potential to raise annual economic output by 3.4 trillion dollars in the US, and by as much as 10 trillion dollars globally. How do you arrive at these figures?

Since 1983, the number of managers and administrators in the US has more than doubled, while the number of non-managerial jobs has increased by only 44 per cent. We estimate that there are 13.45 million managers and the equivalent of 9.5 million employees who produce little or no economic value—who are absorbed in bureaucratic tasks that are unnecessary. If each of those individuals contributed $148,000 to the economy instead of zero—$148,000 is the annual GDP per capita in the us—, then overall GDP would increase by more than three trillion dollars.

Most of the costs of bureaucracy never show up on the P&L, at least not directly. But the costs are real, and we need to measure them and make managers responsible for reducing them.

So, you need to put these numbers together: the efficiency gains from reducing the direct costs of “bureausclerosis” and the indirect gains from giving employees more opportunities to contribute and innovate. If we were able to realize these gains, we would quickly reverse the long slide in productivity growth we’ve seen across the OECD.

How can this calculation be applied to single organisations?

We have introduced the Bureaucratic Mass Index, or BMI, a simple and free tool. It allows organisations to measure their bureaucratic drag. We ask questions like: How long does it take for a decision to be made? How important are political behaviours in getting ahead within your organization? Or how much time do managers spend on internal vs external issues? Most of the costs of bureaucracy never show up on the P&L, at least not directly. But the costs are real, and we need to measure them and make managers responsible for reducing their company’s BMI.

It's not only legislation that hinders performance

Bureaucracy also arises from legislation. This is supposed to prevent environmental damage or protect human rights, for example. Do you think such laws are unnecessary?

No, but the fact is that most of the bureaucracy we find in companies driven by internal compliance demands, not external requirements. I was talking to leaders in a large pharmaceutical company, and they said their internal compliance rules were far more onerous than anything imposed on them by the US Food and Drug Administration.

The fact is that most of the bureaucracy we find in companies driven by internal compliance demands, not external requirements.

Of course, nobody wants bureaucracy. But rules and guidelines are necessary to a certain extent. Otherwise, you have to renegotiate processes again and again...

You don’t need bureaucracy, per se, but you need the primary benefit we associate with bureaucracy: control. A certain amount of control or discipline is critical in every organization. But you can get control without bureaucracy. Without layers of managers and stifling rules. As a teacher, it’s not bureaucracy that pushes me to do a good job, but the demands of my students. I have enormous freedom over what I teach and how I teach it, but at the end of every term, my students rate me.  That’s definitely a form of control, but it’s not bureaucratic. And that’s what we see in the post-bureaucratic pioneers: control that comes from peers, from pride, from transparency of results, and from having a financial stake in your own work.

Many initiatives have focused on reducing layers and implementing agile working, but often fail to produce better results. What else is needed?

Being agile is important, but what really drive performance is when everyone feels like an owner. This isn’t a matter of owning a few shares, but of having the freedom to think and act like an entrepreneur—like someone who is running their own business. Entrepreneurship is a combination of imagination, accountability and risk-taking. In a company like Nucor, the world’s most consistently profitable steel company, every employee, including production employees, behave like entrepreneurs. They have a lot of autonomy. They can spend up to $50,000 without getting a manager’s approval. Frontline teams have the freedom to experiment with new methods and tools, and when the raise the productivity of their team they get a direct financial incentive. But I suspect very, very few CEOs see their “blue collar” employees as entrepreneurs.

That’s what we see in the post-bureaucratic pioneers: control that comes from peers, from pride, from transparency of results, and from having a financial stake in your own work.

What is your hypothesis why so few CEOS have committed themselves fully to building more human-centric organizations?

Most leaders are unwilling to embark on a journey where you can’t see the end from the beginning, and where there’s no clear roadmap. Problem is, there isn’t a simple methodology for defeating bureaucracy and building a radically more capable organization. There are principles you can follow, and stages to work through, but no detailed gameplan. A CEO can’t export this work to consultants. So that’s the first problem—a reluctance to actually lead.

The primary job of leaders

Secondly, few leaders have the appetite, or perhaps the skills, to tackle complex, systemic problems. They’re looking for a silver bullet; for a six-month project that will turn things around. But if you want to build a post-bureaucratic organization, everything has to change—how we develop leaders, how we create plans, how we assign decision rights, how we promote people, how we allocate resource, and so on. Organizations are immensely complex, and to change them deeply you have to embrace that complexity. A lot of CEOs just don’t have the stomach for this—they’d rather buy back more shares, do another acquisition, spin off a business, or lobby in Brussels or Washington.

There isn’t a simple methodology for defeating bureaucracy and building a radically more capable organization. There are principles you can follow, and stages to work through, but no detailed gameplan. A CEO can’t export this work to consultants.

Finally, this is a long journey—it’s taking stamina and perseverance. Many leaders blame short-term thinking on shareholders, but that’s just an excuse. Making the leap from bureaucracy to humanocracy takes time, but it doesn’t require huge capital investments, or entail big operational risks. You just have to keep at it—processes by process, leader by leader, rule by rule. My mantra is revolutionary goals, but evolutionary steps.

Are there any glimmers of hope on the horizon in this regard?

I know one leadership team that’s made enormous progress in building a more resilient organization. To this end, the top leadership team has met for a full day each week for the past five years, architecting and supporting the necessary changes. And they don’t think their job will ever be done. They understand that as leaders their primary job isn’t to run the business — there are others who can do that. Their primary job is to change the way the business runs, in ways that will make it fit for the future and fit for human beings.