Self-managed teams are hot. Everyone is talking about them and knows about companies like Buurtzorg and Morning Star. Frederic Laloux has emerged as the new management guru. It all sounds sounds very attractive; employees making their own decisions, managers gone; happier and more engaged employees; more agility and productivity.
Self management’s promise is that people think more like owners. If managers still decide whether someone deserves a raise or step in their career, people will do whatever it is that makes their manager happy. Not what is best for the organization. But if the manager is gone, who assesses performance and who decides on raises and promotions? This article is about how you rate and reward in self-managed organizations.
Your reward system determines your culture
Lets start with the ‘why’. Why is your reward system so important? The following table illustrates what goes wrong in so many organizations.
If your people are not doing what you want them to do, don’t blame them – people merely do what they are rewarded to do. What you reward says everything about your culture. Rewards are to be interpreted broadly. Who gets the cool assignment, or who has drinks with the owners? Whose name is being mentioned in an all hands meeting?
Your culture is defined by how people answer the question ‘what does one need to do to get ahead here?’
First people respond with good things; ‘innovate’, ‘hard work’, ‘eye for detail.’ Keep asking and they’ll get to the less desirable truths, like ‘24×7 availability by mail’, ‘sound smart’, ‘get consensus for every decision’. The behaviors you reward and punish are what defines your culture.
Design a good reward system in 3 steps
In his book Reward Systems: Does Yours Measure Up? Steve Kerr outlines the 3 step process to design a reward system that is in line with your company’s mission. Steve’s “define-measure-reward” process is simple – define your goal, find a way to measure it, and reward the measured success.
Step 1. – Define
Here you establish what is expected of people. Not only results, but also expected behaviors need to be clear. Everything follows from how well you define expectations. You have no chance of successfully measuring and rewarding what is not clearly defined.
For self management you must explain what someone needs to do (or stop doing) to show entrepreneurship and self-management. And what behaviors you see when someone is taking responsibility. What the exact goals are and when are these goals are achieved. And what behaviors are needed to solve tensions and conflicts constructively.
But without a manager who provides a clear direction to the team? The short answer is: the team itself.
A clear description of everyone’s roles and responsibilities is critical for self-managed teams. Here are examples of how it is done:
- In Holacracy the constitution details the process of defining and modifying the roles and responsibilities.
- At Morning Star the “Colleague Letter of Understanding (CLOU) details everyone’s roles and responsibilities.
- The ‘Advice process’ is used to create, change or remove roles and responsibilities.
Step 2. – Measure
People are interested in rewards, but not in measurement. However, starting at the wrong end – rewarding what you don’t know how to measure – is a big mistake.
The success of your reward system is fully dependent on how well you can measure what it is that you are rewarding. If you want to to reward people for the ‘good’ and hold them accountable for the ‘not so good,’ you need to be able to measure what that is.
Self-managed teams measure things like team results, productivity and profit, just like other organizations. You also see the following:
- Team focus. Focus is on the team, not the individual
- Transparency. It is visible to everyone.
- Feedback. There is a strong feedback culture
- Peer-based system. If a formal performance review exists (less common), it is peer based.
Step 3 – Reward
Rewards are anything that increases the probability of a future response. Offering money to make people do something increases chance that they will do it. Giving feedback increases chance that behavior improves.
Rewarding the right things is important, but so is choosing the right rewards. Rewards can be either financial (salary, bonus, shares) or non-financial. Non-financial rewards consist of prestige rewards (e.g. job title) and job content rewards (autonomy, recognition, feedback, etc.)
3.2 Determine salary in self-managed teams?
Financial rewards are made up of compensation (salary, bonus, etc.) and benefits (pension, health insurance, etc.). And compensation can be further divided into a fixed (salary) and a variable (bonus, shares, etc.) component.
Money’s impact on motivation is different than you may think – money does not motivate. Yes, you are reading it correctly; more money does not motivate. But not enough money does de-motivate. What counts is that the amount has to be fair. And perceived fairness is about comparing oneself to others. Self-managed organizations still look at the market to figure out the value of roles (Is salary in line with what others pay?).
3.3 Determine raises in self-managed teams
After the initial value has been set, the question becomes ‘when is someone entitled to a raise?’ People deserve a raise because of good performance and/or they reach a higher (experience) level.
There are 2 methods:
- Colleagues decide your raise
For example, once a year everyone ‘rates’ their colleagues. People answer questions about their colleagues like ‘does this person contribute (much) more or (much) less compared to me’. This is the basis of determining raises.
- Self-set salaries
For example, people use an advice process whereby someone proposes a raise (or pitches) after seeking advice and recommendations from colleagues. Assessing your own contribution to the team and validating that with colleagues is part of the process. A democratically chosen committee ultimately approves or denies the raise.
3.4 Who decides?
Teams and people themselves are responsible for rewards in self-managed teams. Special roles (in holocracy) or committees can be created. The amount of money available for raises and bonus pay-outs is often determined by the founders or shareholders.
Modern organization no longer believe that incentives will motivate people. They do not like to focus on the individual and want to steer clear of competition between team members.
An alternative for individual incentives is team incentives. Teams who deliver excellent results will get a bonus to be distributed equally among the members. Some organizations go a step further; at the end of the year a portion of the profit will be shared with everyone (same percentage of salary or same amount).
Self-managed organizations would be wise to follow the 3 step process (define-measure-reward) when designing their reward system. Do not rush through steps 1 and 2 just because you’re most excited about rewards. Starting at the wrong end – choosing rewards before clarifying what you want to reward and how you measure it – is a big mistake.
The quality of your reward system depends on clearly defining what you expect of people. In a successful self-managed organization everyone knows exactly what their roles and responsibilities are. They also understand what behavior the organization wants to see and what behavior it wants to discourage. Similarly, the success of your reward system depends on how good your measurement tool is.
When thinking about rewards, self-managed organizations need to consider some fundamental issues:
- What is the value of roles?
- How to get a raise?
- View on incentives (profit sharing or performance based, individual vs. team performance)
- Who is responsible for process and decision on money available for financial rewards?
- How transparent do you want to be?
Designing a rewards system that supports your mission will be a piece of cake if you follow the 3 step process and have addressed these fundamental issues.
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The author of this guest blog is Maja Roosjen. She worked as a US litigator and international business advisor before she became a rewards expert in the corporate world where she experimented with self-managing teams. Her mission is to make work better and she wants to help organizations build reward systems that are effective and in line with their values.