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Deming's Point Twelve

Eliminate barriers that rob people of their right to pride of workmanship. Eliminate the annual appraisal or merit rating system.

♦ He who enjoys his work is a joy to work with.

♦ How can a production worker take pride in his work when there are problems with inspection?... when the machine is out of order (again), and no one listens to his pleas for assistance?

♦ One is born with intrinsic motivaton, self-esteem, dignity, cooperation, curiosity, joy in learning. These attributes are high at the beginning of life, but are gradually crushed by the forces of destruction.

♦ Forces of destruction include forced distribution of grades in school; gold stars (Why didn't I get one, too?); merit systems; judging people; putting them into slots; competition between people, groups, divisions; incentive pay; pay for performance; numerical goals without a method.

♦ Point 12 rests on the premise that people are intrinsically motivated. They strive naturally for dignity, pride and joy in their work. Unfortunately, the current American management system destroys intrinsic motivation by substituting extrinsic motivators such as merit pay, sales commissions and grades in school. Thus, too many students strive for high grades, not knowledge. Too many workers strive for high ratings – or to avoid low ratings – not quality or the intrinsic joy one experiences from a job well done.

♦ As it relates to motivation, is the appropriate strategy to try to motivate people? Or is it to remove barriers to their own (intrinsic) motivation? Senge wrote about how this dilemma exists in efforts to achieve the goal of continuous improvement, “which remains an elusive target for most American organizations.”

• Motivate them. From an extrinsic perspective, the only way to get continuous improvement is to find ways to continually motivate people to improve... Otherwise, they will just sit there – or worse yet, slide backwards. This leads to what workers perceive as management continually raising the bar to manipulate them.

• Loose their own motivation with information and appropriate tools. However, from an intrinsic perspective, there is nothing mysterious at all about continuous improvement. If left to their own devices, people will naturally look for ways to do things better. What they need is adequate information and appropriate tools. From the intrinsic perspective, people’s innate curiosity and desire to experiment, if unleashed [I might add, if not blocked], creates an engine for improvement that can never be matched by extrinsic rewards.

♦ Traditional practices of rating performance also destroy teamwork, foster mediocrity, confound the worker with other parts of the system, increase variability and foster short-term thinking – all detriments to continuing improvement. (William Scherkenbach)

♦ Consider the confounding effects of merit bonuses or commissions for salespeople: A salesperson may control whether he or she visits Customer A or Customer B this morning. But the salesperson does not control the product design, production quality, delays in lead time, delivery performance, billing practices, after-sale technical service, and many other factors that may please or displease the customer.

♦ The merit bonus or sales commission system, however, ignores the reality that many factors influence whether or not the sale is made, whether or not there is a repeat sale. Locked in an age of mythology, our management rituals confound the salesperson with all the other variables.

♦ A commission or merit pay system views end-of-month sales variance numbers – or progress versus work objectives; or end-of-project budget and schedule variances; etc. – and assigns them to the person alone. Then the person is rewarded or punished as if he or she had complete control over all of the variables that combined to produce the results. Ludicrous.

♦ Deming warned that traditional appraisal and merit pay systems foster short-term performance, annihilate teamwork and encourage fear (see Deming's Point Eight). They also lead to the deadly disease of mobility of management. "If someone doesn't get the top rating, which means a raise, he looks around for another job. The fourth deadly disease is mobility of management; people moving around; not having roots in the company; not understanding... the problems of production, of sales, of service."

♦ It is far better to develop compensation systems that foster teamwork and constancy of purpose. Beyond annual cost-of-living increases, plant and office employees at Taylor and Fenn were paid quarterly bonuses based on the company's performance in such areas as on-time delivery, quality improvement and safety. Over a five year period, the bonuses averaged an additional three weeks' pay per person per year.

♦ Department managers at Nucor Steel have base salaries that are lower than what other companies pay. But they all qualify for an annual gain-sharing bonus based on their plants' return on assets that varies from 0 to 82 percent of their base salary. If the plant does well, all the managers share the benefit. If their plant does poorly, they share the pain. There is no competition among them for higher merit increases than others.

♦ Senior officers at Nucor share one compensation system. They do not get profit sharing (which too often fosters short-term thinking and behavior, to the detriment of the long-term health of a company). They also get no pensions or retirement plans. Their base salaries are set below industry standards. They receive one annual payment based on the return of shareholders' equity above certain minimum earnings thresholds. Paid 60 percent in stock and 40 percent in cash, the payments can range from 0 to several hundred percent of salary. Because there is no pension plan, they'd better make darn sure that they work together to contribute to the long-term health of the company and its stock!

♦ Such compensation systems foster and reward teamwork, sharing and cooperation among managers (See Deming's Point Nine). They also foster long-term constancy of purpose (see Deming's Point One); everyone on the same page; everyone moving in the same direction over time. This is especially true when the majority of senior executives' gain-sharing compensation is in the form of stock instead of cash.

♦ Beyond team-based compensation systems, constancy of purpose also helps everyone to benefit in the long term. One of the few remaining steel companies in the U.S., Nucor has not laid off any employees in the last three decades – a time span that has not been kind to the steel industry as a whole.

♦ Theorem: For every 70 workers, seven will fall in the bottom ten percent. The question is not: Are they different? The question is: Are they significantly different? Are any outside the control limits?

♦ If employee performance or student achievement levels are significantly different, treat and reward them differently. Nobody ever said everybody gets the same raise; nobody ever said everybody gets the same grade.

♦ On the other hand, if the performance or achievement levels are not significantly different, don't treat or reward them differently. The limits we use to test for significance are dictated and controlled by common causes of variation from within the process – of which those people are but a part. People in a group that constitutes a system must not be ranked. Instead, engage them in efforts to continuously improve the process (see Deming's Point Five).

♦ Every time you improve a process, the performance of every person who works in that process can improve. In the absence of process improvement, people can perform no better than the process allows – no matter how many job-related bogies or objectives you want to shoot out there for the next review period.

♦ Substitute leadership (see Deming's Point Seven).

“A grade is an inadequate report of an inaccurate judgment by a biased and variable judge of the extent to which a student has attained an undefined level of mastery of an unknown proportion of an indefinite amount of material.” (Paul Dresser, Michigan State University)

Notes

W, E. Deming, Out of the Crisis, , MIT Center for Advanced Educational Services, Cambridge, MA (1986), pp. 78-85, 107.

W. E. Deming, The New Economics for Industry, Government, Education, MIT Center for Advanced Educational Services, Cambridge, MA (1993), p. 122.

J. F. Leonard, The New Philosophy for K-12 Education: A Deming Framework for Transforming America’s Schools, ASQ Quality Press, Milwaukee, WI (1996), pp. 9-10, 212, 317.

________________, Management's Five Deadly Diseases: A Conversation with Dr. W. Edwards Deming, Encyclopaedia Britannica Educational Corporation, Lake Orion, MI (1984), videocassette.

P. Senge, “Building Learning Organizations,” Reprint from the Journal for Quality and Participation, March 1992, p. 3.

G. P. Smith, "How Nucor Steel Rewards Performance and Productivity," Business Know-How, www.businessknowhow.com, Attard Communications, Inc., Bohemia, NY (2015).