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Compensation for Contribution: A new Model?

Uber and Grab heralded the coming of age of the “gig economy” where payment is for services rendered where the provider is not necessarily highly skilled. After all, we have always paid plumbers, car mechanics, hairdressers and electricians for services rendered. The pay-as-you-use model has also been around for many years earlier. However “piece work” originated in the industrial factories has a negative connotation. It is most closely associated with “sweatshops” of the first industrial revolution. What has changed? Well, as a result of a massive movement of workers from the countryside to the city, there were precious few jobs with too many takers. Often, also there was little labour protection and unscrupulous employers cheated their workers.

It was partly the abuse of the workers that eventually led to the creation of unions and legislation designed to protect workers allowing them a fair compensation for the effort, time and skill required to complete a task. The shortage of workers led to a better compensation system, amply demonstrated by the surge pricing model adopted by Uber. When demand for labour builds, it becomes scarce and hence incentives are required to pull more workers into the system!

Unlike the case of Uber and Grab, most employees don’t have specific enough tasks that can be accurately measured, or there is too much variance of the daily tasks. Or the labour pool is not available “on demand” as specific skills are required. Therefore most companies adopt a “pay for hours worked” compensation model, which is linked to job titles. Sadly, this often keeps employees at their desks wondering what they should be doing and gives the bosses a feeling of power!

There are hybrid models that work though. Take the case of house-keeping services for the hotel business that I worked in. Instead of having full-time housekeeping staff we use an outsourced service and pay for each room cleaned. In Australia, where labour policies are more regulated than the United Kingdom, we had effectively one rate for “occupied clean” which was lower than “check-out clean” as not having to change the sheets meant the job could be completed a little quicker. Rates also varied with the day of the week and time. So nights, weekends and public holidays were more expensive than weekdays. It took us a while to get the system working according to the level of efficiency we expected, but it eventually it worked out well. In a sense, this is piece work, but the rate was negotiated and the outsource provider was able to recruit staff on this basis. Hence, I felt this was a fair system. We paid for each room cleaned and the housekeeping staff income varied with the hotel occupancy – a system that suited us since our income varied with occupancy. For the housekeeping staff, fewer rooms occupied meant less income, but also fewer hours worked and in a sense more time off! I leave you to judge if this was fair to them.

Laundry services were also based on units washed – sheets, pillow cases, towels, etc. As mentioned earlier the “compensation for contribution” model has its limitations, though. There is a problem when it’s not possible to measure the contribution or output of individuals, or small teams, which is typical of the office environment. Hence my surprise to learn of a mid-sized accounting firm that successfully implemented this system over three years ago.

The accounting industry is well known for its harsh treatment of new recruits who need to work extremely long hours, especially during the audit season. At this time it would seem that employees live in the office and return home during their breaks! Therefore, many employees leave or feel disengaged and the few that make it up the ranks continue to perpetuate this practice. It seems they feel that “work-life balance” means you work 14 hours a day for the first 8-10 years of your life and then you balance it with time off.

Krishnan worked with an accounting firm for a number of years before setting up his own practice, NK Associates. He decided that having a real work-life balance meant that employees needed to have time off during the day to spend with their families, exercising and taking better care of their health. What was the point of driving by parks and recreation areas in the day time without being able to enjoy them? The 9 am – 6 pm work day constrained traffic which resulted in traffic jams and commuters spending an hour each way achieving very little.

So he thought. How do I change the work structure so that employees can choose a suitable time to work, work at their own pace and get rewarded, or compensated for their contribution? After several rounds of discussions with the staff – critical to get their “buy-in” and allowing them to answer the “what’s in it for me?” question – they decided on a simple and elegant solution. All employees were predesignated into three categories; L1 – Group Managers, L2 – Middle Managers and L3 – Base Management. This was consistent over all three practice areas; Audit, Tax and Accounting. They had 25 workstations (not enough for all the staff) for L3 staff that operated in 2 shifts; 7 am – 1 pm and 2 pm – 8 pm. Two shifts meant they only needed half the office space. All staff had to book their sessions through an application developed in-house. It also tracked job progress, billing and employee contributions. This meant the firm was able to work two shifts and get better utilisation their fixed assets. Here’s the interesting part, though – L3 staff were not paid for the hours they worked, but instead for their output, or contribution.

The firm was able to define units of output and a compensation for each unit of output. This was the difficult part as output had to be quantifiable and transparent, allowing staff to track their compensation. Krishnan found that all output, that the output of L3 staff was correlated to only three factors; cost, risk or liability and revenue. Over time they developed a formula to calculate the output – compensation model for L3 staff. They have effectively brought “piece work” to a white collar, previously hourly paid job. New recruits who worked smarter, were better compensated and earned more than their peers in other firms. Plus, they only worked 6 hours a day, had time off to spend with their families and achieve a real “work life balance”. Here’s the bonus, though – you pick when you want to work, so there is no need to apply for leave! Krishnan had switched from a pay for hours spent, to compensation for contribution model. Staff choose how many sessions they want to work a week (up to 2 weeks in advance) and when they want time off. No more processing of leave applications, eliminating all the administrative work! And the firm enjoyed near zero attrition. To get an improvement in efficiencies, he invested heavily in the staff training and development. This meant better tools, equipment and an allocation for skills upgrading. After all, you now only have 6 hours to do what took you 8 hours previously!

Were there obstacles and difficulties to overcome? Yes, of course. Clients had to get used to audit staff only being available at certain times in the day. Middle Managers (L2) compensation was pegged to the contribution of their teams and so their role evolved into helping, coaching and supporting the L3s. The better the team performed, they higher was everyone’s compensation. In addition, they are paid an allowance for the “management role”. Interesting right? Did they face challenges? Yes, but when you try something new, you don’t expect to get it right the first time. To attempt a radical move like this there are important prerequisites;

  1. Management must be honest, transparent and involve all stakeholders in the system design. Rewards need to be shared and the unit of measure, plus the compensation needs to be fair.

  2. What’s in it for me? This needs to be answered, both for the employer and the employee.

  3. You need to invest in the tools of production as well as training of staff. Else how will they learn to be more productive?

  4. You must be prepared for a settling period where adjustments will have to be made.

I hope that sharing of this example highlights the opportunities large companies have to implement entrepreneurial work practices and change the structure of their organisations. These are issues we deal with in our book; 9 Entrepreneurisms: Management Practice for a VUCA World, available on Amazon from me. Feel free to reach out if you would like to host a workshop or speaking session.

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