Does Value Creation Need Financial Incentives?

When you wake up in the morning do you say I will Create Value today?

Before you can think of financial incentives for Value Creation, it is important that Value be understood and recognized 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 incentivized as individuals: the fastest two would get rewards. The first group members did better than the incentivized 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 and leaders 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 value? 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?

Intangible assets include all your stakeholder assets (such as customer assets, employee assets, partner assets, ESG assets, shareholder assets) and goodwill, brand equity, Intellectual properties (Trade Secrets, Patents, Trademark and Copyrights), Knowledge assets (including what does not work), licensing, Technology assets, social assets, value creation assets (and avoiding value destruction).

Moshe Davidow of Carmel Academic Center 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. 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 recognized 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 recognized, 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 incentivizing 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 incentivize 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 realizes 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 incentivizing? Will they create more value? I have 18 patents, and incentivizing 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!

Best,

Gautam Mahajan, President, Customer Value Foundation
Founder Editor, Journal of Creating Value jcv.sagepub.com
New Delhi 110065 +91 98100 60368
mahajan@customervaluefoundation.com
http://www.customervaluefoundation.com
Twitter @ValueCreationJ
Blogs: https://customervaluefoundation.wordpress.com/
Author of Value Creation, Total Customer Value Management, Customer Value Investment, How Creating Customer Value Makes you a Great Executive, The Value Imperative, Value Dominant Logic, Customer Value Starvation can Kill
Join the Creating Value Alliance at creatingvalue.co

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