Monday, February 7, 2011

Organizational Physics of Pressure

According to the authors of Freakonomics a situation developed at a day care in which parents were routinely tardy in picking up their children. The day care operators decided to put a little pressure by installing a penalty when the parents were late. After the fine started, more parents were late.

So how do you create a penalty or an incentive that puts the right amount of pressure without affecting something else? Our organizational systems are like a balloon. If you squeeze one spot, the balloon expands in another area. Changing one policy or process in a business could affect how well another area operates.

The ideal gas law states that

PV = NkT

where P = pressure, V = volume, N=the amount of gas, k=a constant (Boltzmann's constant) and T = temperature.

This equation shows that if you increase the pressure without changing the volume, then the temperature will increase. Or if you increase the amount of material, either the pressure or the volume will increase.

Let's translate this for an organization. P, or pressure, could be the amount of a penalty or incentive. V, or volume, could be the capacity or resources available. If the quantity and quality of the work (NkT) is to remain the same, then as the penalty or incentive increases, the capacity will increase. On the other hand, as the penalty/incentive increases, the amount of work (N) would increase, or the urgency/quality of the work would increase (T) but not both.

Rule #1: Don't start with the left hand of the equation--pressure and volume. Don't try to manipulate the penalty or incentives. An organization is composed of individuals. Individuals have a complex range of motives. Grouping those motives make the organization very unstable and unpredictable with regard to any incentive or amount of pressure. Some will respond as you'd like. Others will rebel for a few different reasons: rebelliousness from a sense of manipulation or loss of self-control, fight or flight behavior to the increased pressure, self-induced compensatory reduction in capacity to maintain stasis, etc. (Like the day care operators, you may be surprised by the response.) In some cases, the pressure (incentive) needs to be substantial in order to drive any changes in behavior; some studies show that it has to be more than 10% of current pay (much higher than any normal merit or performance review based increases).

If you manipulate the capacity, and want the same sort of output then the penalty/incentive should be adjusted.

Rule #2: Start with the vision of the urgency, output, quality and overall results you expect. Talk about how much more needs to be accomplished. As the N or the T changes, you should be willing to adjust P or V. If the business is growing, increase the reward or hire more staff. If the quality of the work improves, and customers are more loyal, then also increase the recognition and bonuses. Let the "pressure" be a reward for the accomplishment, not as an incentive however.

In one company, we created a bonus based on Economic Value Added (EVA). The bonus was directly related to EVA. As we worked on the corporate results, then the bonus was assured. The bonus could have been $1 or $10,000 depending on how well we did. Our level of ouput, urgency and quality determined the results and determined the bonus we received. We did not hold out a target or threshold before anyone would receive a bonus. As I said, we focused on the vision of what we wanted our accomplishments to be, and then we were rewarded according to the results.

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