Does Value Creation Need Financial Incentives

When you wake up do you say I will Create Value?

Before you can think of financial incentives for Value Creation, it is important that

Value be understood and recognised and also be measured. As you read further,

you will relate to these important aspects of Value Creation.

Studies have shown that incentives do not improve the innovativeness of creative

people. An experiment was conducted on two groups of creative people assigned

to create a faster process. The first group was asked to increase the average

speed. The second group was incentivised as individuals: the fastest two would

get rewards. The first group members did better than the incentivised group.

Further studies have shown that incentives work best for routine jobs. ‘More pay

for laying more bricks’ works.

Value Creation by employees has hitherto been an unconscious process. Few

employees get up in the morning and say today I will create value. In fact they do

not know often know when they are creating or destroying value.

We are now suggesting to companies that the role of an executive is to create

value. We give examples of how value can be created or destroyed.

Now employees start to consciously think about creating value. What is this value

and how is it perceived by others? How can it be measured? Intangibles are the

most difficult to measure. Intangibles include corporate culture, brands,

intellectual property, and employee assets. Value Creation impacts all these. So

Creating Value in intangibles is even more difficult to measure unless one is

using quantitative measures. Qualitative metrics ask recipients about value

creation or whether they perceive these values? Did they feel good, did they see

a benefit? Were they happier with this? Would they do business again? What did

they think of the employee? Were the errors reduced? Were systemic problems

identified and corrected? Is the brand equity of the employee increasing?

Moshe Davidow of Carmel Academic Centre in Haifa, Israel and I had a delightful

conversation on identifying and measuring value. Certain transactions, said

Moshe create value because the transaction ended in your buying something. I

countered, if you had no choice but to buy, the transaction might have destroyed

Value (for example having to buy an expensive plane ticket on a route having

little competition). We agreed value can be created or destroyed and this can be

recognised by the receiver. We went on to discuss how value can be measured,

and the value of a transaction.

Measurements change and improve, added Moshe, but we have to start

somewhere. What gets measured gets done. The model he used to measure

complaint handling when he was a manager is different (and less good) than the

one he uses today. Rules change, and measurement changes (leading to

managerial changes). In soccer, a tie was worth one point, and a win was worth

two points, so there were a lot of tie games. When winning became worth three

points, suddenly more teams started to go for the win instead of the tie. The

game had changed….

Typically, said Moshe, satisfaction or service quality is expectation minus

perceived performance, and is measured soon after the transaction. Value is

what it cost versus what benefits you got. Was it worthwhile? When you read this

article, you are expending your time, and value is created for you if the time was

spent in a worthwhile fashion or you got something worthwhile out of the article.

Value therefore goes beyond satisfaction, and you can measure Value of a

transaction on a 10 point scale (and preferably against competing transactions).

So how would you rate this article vs. the time you spent on a ten point scale?

And you can see why I am against a rating of a lecture or a workshop at the end

of the lecture. Do you rate based on what you learnt or on the quality of the

lecture (was it fun?) or should you rate it on how you can use the learning. And if

your boss sent you and he paid for you to attend the workshop, I would ask him a

month later was it worth your while to send Joe Blow to the workshop. He would

rate the workshop based on how Joe used the learnings or how he had changed

(and versus the cost such as fees and travel and the loss of Joe’s time at work),

and not on whether Joe had a good time. That is why Value goes beyond

satisfaction on a transaction and can be measured on a ten point scale. Moshe

agreed.

So as Value is being created and is being recognised, we can also measure

value albeit in some kind of a personal, perceived fashion. This concept can be

improved by smarter people than me (read you).

Take Jim Carras who worked with Phil Crosby. He told me that a potential

customer, a current customer and a past customer are the primary targets for

Creating Value. Till a company or organization truly understands the customer’s

emotional feelings and traits (the key drivers companies should impact), and

what changes these emotions, they can never know what it takes to create value

for the customer. Let's assume a company does have good data to support how

customers really feel, and they also know what their company can do to increase

"Customer Value", they have the bigger problem: how do they translate that

down to their company employees so they can make a deliberate attempt to

change what they do to impact Customer Value. You can't just tell employees to

create Customer Value, because they need to know and then apply action based

on factual information. While I agree with Jim on expected or suggested Value

Creation, I believe as a start just going beyond your job requirements will create

value or not doing your job will destroy value (being rude is an example of value

destruction).

I believe (says Jim) the critical component of Value Creation is first, the ability of

a company to truly understand the emotional drivers for what drives their

customers value, and then second, the ability to translate that into every

employee in the company, the processes they follow, and the tools or technology

they use.

And then we come to incentivising the Value Creation. As long as the activity is

new and increases value to the stakeholders (including employees, customers,

partners, unions, society and the company), it requires some creativity and often

conscious creativity. Can we or should we incentivise such creativity? And how

do we differentiate between Value Creation and expected work or expected

tasks? And then how do we measure these?

The easy answer is that Value Creation becomes obvious. We notice it, just as

we would notice a smile on a normally frowning person, or helpfulness of a

generally unhelpful person (or company). But sometimes you Create Value in not

so obvious ways, or in ways people do not notice. You replace 4 spoke revolving

office chairs with 5 spoke ones which are much safer, but no one realises safety

has been improved and Value has been created.

However, there are means to measure Value as pointed out earlier, and slowly

measurement methodologies can be implemented.

For these creative people, can we improve their value creation propensity by

incentivising? Will they create more value? I have 18 patents, and incentivising

would not have made me more creative. Nor was I less creative because I

received no incentives.

What is your take on this?

Moshe ended by saying, this is an exciting time to be working on Value Creation!

Call at (+91) 9971288580

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Gautam Mahajan, President-Customer Value Foundation

M: +91 9810060368

Tel: 11-26831226, Fax: 11-26929055

email: mahajan@customervaluefoundation.com

website: http://www.customervaluefoundation.com

Customer Value Foundation (CVF) helps companies to Create Value and profit by Creating Value for the customers, employee

and for each person working with the companies.

Total Customer Value Management (Total CVM) focuses the entire company and its employees on Creating Value for the

customer, thereby increasing Customer Value and Shareholder Wealth.