Academics and practitioners from a wide range of backgrounds agree that bringing about sustainable, productive changes in organizations is difficult. They disagree, however, on why this is the case. Consequently, they disagree on the most effective approaches to analyzing and solving organizational problems, and on the most effective approaches to implementing solutions. At the heart of the disagreement are differences over the factors that motivate individuals to change their behavior. Behavioral changes on the part of individuals are required for organizational change, and compensation systems affect behavior. Thus, it is critical to consider the role that compensation systems play in the process of organizational change. The paper explains why establishing a strong, positive relation between rewards and performance is critical to bringing about value-creating organizational change. Throughout it draws on ideas and evidence, both old and new, from theory and practice. The ways in which well-designed compensation systems create value in organizations are grouped into four broad categories. Specifically, compensation systems: 1. Improve the motivation and productivity of employees, 2. Promote productive turnover in personnel, 3. Mobilize valuable specific knowledge by allowing effective decentralization, and 4. Help overcome organizational inertia and opposition to change. The paper also analyzes the issue of timing in the implementation of a new compensation system. Conventional wisdom in the field of organizational behavior advocates changing compensation systems only after new "strategy and structure" are designed and implemented. In contrast, I provide arguments and evidence in support of changing compensation systems "early." By early, I mean that compensation systems should be redesigned after managers identify and adopt an over-arching objective for the firm, but before they have completely specified how that objective translates into a new strategy and/or structure.
{"title":"Compensation, Incentives and Organizational Change: Ideas and Evidence from Theory and Practice","authors":"Karen H. Wruck","doi":"10.2139/ssrn.203268","DOIUrl":"https://doi.org/10.2139/ssrn.203268","url":null,"abstract":"Academics and practitioners from a wide range of backgrounds agree that bringing about sustainable, productive changes in organizations is difficult. They disagree, however, on why this is the case. Consequently, they disagree on the most effective approaches to analyzing and solving organizational problems, and on the most effective approaches to implementing solutions. At the heart of the disagreement are differences over the factors that motivate individuals to change their behavior. Behavioral changes on the part of individuals are required for organizational change, and compensation systems affect behavior. Thus, it is critical to consider the role that compensation systems play in the process of organizational change. The paper explains why establishing a strong, positive relation between rewards and performance is critical to bringing about value-creating organizational change. Throughout it draws on ideas and evidence, both old and new, from theory and practice. The ways in which well-designed compensation systems create value in organizations are grouped into four broad categories. Specifically, compensation systems: 1. Improve the motivation and productivity of employees, 2. Promote productive turnover in personnel, 3. Mobilize valuable specific knowledge by allowing effective decentralization, and 4. Help overcome organizational inertia and opposition to change. The paper also analyzes the issue of timing in the implementation of a new compensation system. Conventional wisdom in the field of organizational behavior advocates changing compensation systems only after new \"strategy and structure\" are designed and implemented. In contrast, I provide arguments and evidence in support of changing compensation systems \"early.\" By early, I mean that compensation systems should be redesigned after managers identify and adopt an over-arching objective for the firm, but before they have completely specified how that objective translates into a new strategy and/or structure.","PeriodicalId":142706,"journal":{"name":"Fisher: Dice Center for Financial Economics/Finance (Topic)","volume":"100 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2000-01-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127997412","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article analyzes Total Quality Management as an innovation in organizational technology that can be used by companies to increase the productivity of both labor and capital. As an organizing technology, TQM has three distinguishing features: (1) it is science-based in the sense that individuals at all levels of the organization are trained to use scientific method in everyday decision-making; (2) it is non-hierarchical insofar as it provides a process for decentralizing decision-making in ways that do not correspond to the traditional corporate hierarchy; (3) it is non-market-oriented in that it does not use prices or formal exchange mechanisms, such as transfer pricing systems, to motivate cooperation or the transfer of decision rights.Despite the potential benefits of TQM, and the many TQM success stories, there is also considerable testimony to the difficulty of establishing and maintaining effective TQM programs. We suggest that one important source of TQM's implementation problems has been the failure to develop a systematic approach to identifying the entire set of organizational changes required by a comprehensive TQM program. While typically arising out of a concern for product quality, the most successful TQM programs end up becoming efficiency improvement initiatives that involve organization-wide changes in decision-making authority and performance measures. For this reason, effective implementation of TQM requires major changes in all three components of what we refer to collectively as the organizational rules of the game--that is, not only (1) systems for allocating decision rights and (2) performance measurement systems, but also (3) reward and punishment systems. Unlike those quality advocates like Edward Deming who object to the use of monetary incentives to reinforce TQM initiatives, we argue that "the increased decentralization associated with TQM should be associated with a strengthening of the relation between performance and rewards of all types."Note: This paper draws heavily on our Journal of Accounting and Economics paper of the same title, Volume 18, 1994, pp. 247-287. See the working paper version of this paper "Science, Specific Knowledge, and Total Quality Management".
{"title":"Science, Specific Knowledge and Total Quality Management","authors":"Karen H. Wruck, M. C. Jensen","doi":"10.2139/ssrn.47731","DOIUrl":"https://doi.org/10.2139/ssrn.47731","url":null,"abstract":"This article analyzes Total Quality Management as an innovation in organizational technology that can be used by companies to increase the productivity of both labor and capital. As an organizing technology, TQM has three distinguishing features: (1) it is science-based in the sense that individuals at all levels of the organization are trained to use scientific method in everyday decision-making; (2) it is non-hierarchical insofar as it provides a process for decentralizing decision-making in ways that do not correspond to the traditional corporate hierarchy; (3) it is non-market-oriented in that it does not use prices or formal exchange mechanisms, such as transfer pricing systems, to motivate cooperation or the transfer of decision rights.Despite the potential benefits of TQM, and the many TQM success stories, there is also considerable testimony to the difficulty of establishing and maintaining effective TQM programs. We suggest that one important source of TQM's implementation problems has been the failure to develop a systematic approach to identifying the entire set of organizational changes required by a comprehensive TQM program. While typically arising out of a concern for product quality, the most successful TQM programs end up becoming efficiency improvement initiatives that involve organization-wide changes in decision-making authority and performance measures. For this reason, effective implementation of TQM requires major changes in all three components of what we refer to collectively as the organizational rules of the game--that is, not only (1) systems for allocating decision rights and (2) performance measurement systems, but also (3) reward and punishment systems. Unlike those quality advocates like Edward Deming who object to the use of monetary incentives to reinforce TQM initiatives, we argue that \"the increased decentralization associated with TQM should be associated with a strengthening of the relation between performance and rewards of all types.\"Note: This paper draws heavily on our Journal of Accounting and Economics paper of the same title, Volume 18, 1994, pp. 247-287. See the working paper version of this paper \"Science, Specific Knowledge, and Total Quality Management\".","PeriodicalId":142706,"journal":{"name":"Fisher: Dice Center for Financial Economics/Finance (Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1994-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121835231","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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