The Innovator's Dilemma: Reward Plan Edition

Think that premium employment brand and strong reward package are going to help you succeed in the age of disruption?

Think again.

In his revolutionary bestseller The Innovator's Dilemma, Harvard Business School professor and innovation expert Clayton Christensen explored the dilemma behind innovative, well-managed companies who seem to do everything right and yet encounter a dive in their market share or even disappear entirely.  In fact and most disturbing of all, Christensen's research showed that the things that bring and secure an organization's initial success can often become the most powerful reason behind its failure.

In their chapter within the new Oxford University Handbook on Organizational Climate and Culture, Mercer consultants Richard Guzzo, Haig Nalbantian and Luis Parra tell the story of a company that experienced the reward plan version of the innovator's dilemma.  Organizations -- the authors note (and many of us know from our experience) -- often become what they reward, and pay is considered a critical expression of an organization's culture.  When a company's culture, which has been a key reason for its business success, becomes an impediment to necessary change, the reward system may be a primary culprit.

The authors share the example of Digitt, a global technology and information services company.  Digitt was renowned for a strong culture that emphasized innovation, teamwork, employee participation in decisions and performance-based pay.  In studying Digitt, the authors took a "big data" dive, conducting an internal labor market (ILM) analysis that drew on up to 10 years of employee data in order to statistically measure, model and ultimately understand the most important drivers of workforce outcomes.  In addition to other findings, the analysis revealed the following two characteristics of the company's reward program:

• Digitt had a strong internal labor market that was insulated from outside labor market dynamics.  Talent was built from within, with the most successfu employees entering the organization right from school and advancing internally.  Mid and late career professional hires were infrequent.  Most open positions were filled internally through promotion or transfer.
• Because Digitt's performance rewards were predominantly group-based, pay variations reflected business unit performance much more than individual performance.  As a consequence, an employee's tenure and business unit location were the biggest drivers of pay.  There was little variation in the level of rewards flowing to the lowest performers versus the highest performers.  (In fact, the authors concluded that close to $100 million a year in rewards flowed to lowest quartile performers when all elements of "performance-based" pay were added up.)

Digitt, in the face of rising competition and technological change, found itself in a place where it had to transform both its business model and its product/service offerings -- a transition that had enormous implications for the skills and capabilities of its workforce.  It needed, in essence, to renovate its talent base. Unfortunately, the company's cultural reality, driven substantially by its reward practices, threw some substantial roadblocks into its path:

• Being handsomely paid based on their tenure and their position in declining yet still profitable business units, there was little incentive for those with outdated skills and capabilities to leave.
• In contrast, newer employees with more relevant skills and experience were disadvantaged pay-wise by a system that rewarded tenure and reflected their placement in newer business units that were still ramping up and not yet profitable enough to reap the rewards of existing incentive and profit-sharing plans.
• The problems above were exacerbated by the insulation of Digitt's internal labor market and the lack of market-sensitivity in its reward programs.  As the authors noted:

Internal labor market signals about relative value were telling lower-performing analog engineers to stay at Digitt, even as external labor market signals would have communicated depreciation of their value...

The lesson of Digitt (which from my reckoning, doesn't appear to have survived this challenge) is this:  When business conditions change, as they are doing at an ever quickening pace, the very culture and reward programs that created success could now be an obstacle to sustaining that success ... or even surviving.  That speaks to a level of vigilance that I suspect few of us are keeping.

I'll bet some of you are living your own version of this innovator's dilemma. Care to share your experiences?

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations.  Ann and fellow Compensation Café writers, Margaret O’Hanlon and Dan Walter will soon be releasing a new book on communicating compensation - stay posted! Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

 Creative Commons image "Oops - Part II" by Kyle May

Comments

[Haig Nalbantian]

At present, my team and I are working with another large technology company that, like many others these days, is in the midst of business transformation involving a stark transition from being a producer of products to becoming a provider of technology solutions, with emphasis on services/consulting. To its credit, this company has tackled head on the workforce planning implications of its business shift. But like Digitt above, they too have a reward structure that does not consistently value the capabilities and behaviors required to support their new business model. And like Digitt, they have a very strong culture reflecting the values and attitudes of their founders and early hires. They have the facts now to understand what needs to change in their reward structure to drive business change. But is this enough? Can the direction provided by impersonal "evidence" overcome the influence of a powerful, if outdated, organization culture that has come to define what this company is, especially for those who lead it? Sometimes, in our work, developing the facts and drawing/sharing appropriate conclusions is not enough. We also need to deal with the psychology of historically successful leaders who are strongly vested in the culture they helped create. That's often far harder than even the most sophisticated analytics we provide and certainly requires a different skill set.

[E. James (Jim) Brennan]

Rational logic imposed from outside has little chance of success against the inertia of engrained history and established internal culture. A lot of persistent focus and sustained effort will be required to produce meaningful change, I fear.

[Ann Bares]

Haig,

Thanks for sharing your experience, perspective and questions here. You've helped clarify the nature of the challenge we face in these situations and the fact that we'll need to draw on a skill set beyond what that in which many of us feel most secure to address it.

Jim:

Agree that we are talking about moving a mountain here - and need to fully appreciate the nature of the task.

My thanks to both of you for extending the conversation!