Below is an amalgamation of answers by both Brent Barton and Mike De Luca.
In our last webinar “Organizational Adaptability Through Active Executive Sponsorship” – the third installation in our Business Agility Webinar Series – SolutionsIQ’s Brent Barton and Beyond Budgeting Round Table North America’s Mike De Luca focused on a typical mistake that executives do in their Agile transformation initiatives: delegating the entire change initiative rather than actively engaging in and supporting the process. The discussion raised to several interesting questions including a few that we couldn’t cover, which are answered here.
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1. Ranata asked, “Say you are entering an organization that has started Agile transformation but the PMO organization is still operating in a traditional PMO role. Are there specific suggestions on where you might start to change how that PMO works?”
There are two types of PMO’s, in my opinion: tactical and strategic. A tactical PMO essentially acts as a housing for project managers, and it runs in a very tactical fashion. It’s very difficult for a tactical PMO to change an organization at a grass-roots level because their job is by definition not strategic: They are given a budget, scope and schedule, which they’re trying to manage and over which they don’t have a lot of power. The ideal here would be elevate the tactical PMO to be more strategic, to integrate more strategy into the work it does and how it does that work. It means inviting in the people that are making strategy decisions and changing the entire conversation. Unfortunately, the PMO manager may perceive this as a career-advancing move more than an organization-enhancing move, and this may be a risk for the organization to consider.
In contrast, the strategic PMO tends to have a lot of representation from business, if it’s in an IT environment. So, conversations around prioritization and portfolio naturally arise. Thus, we have the opportunity to engage them, along with their financial counterparts, to really help shift the conversation. In the webinar, Mike De Luca gave an example of a large business doing away with the traditional budget, and in this context we have the opportunity to shift the strategy and bring together key stakeholders:
- The demand representation, who are concerned about what we should be going after, what should shift, which things should stay the course, and which we should walk away from
- The capacity representation, who are the teams and their actual capacity to deliver and the manner of that delivery
- The strategic PMO, which represents the people in portfolio management along with the people that operate those endeavors within that portfolio
- Finance representatives
Because all of this goes beyond the PMO, you need an executive transformation team. You need to be able to change the stories because changes will not survive without the CFO, the business leaders and the CEO coming to agreement and supporting the transformation.
2. Jeffrey inspired the following question: “How do you adapt executive compensation to enable organizational adaptability? Doesn’t the organizational alignment required to do away with traditional budgeting, for example, challenge the justification for the current compensation structure?”
Considering that the lifetime of an executive has gotten so short, executive compensation favors short-term gains over long-term organizational health. Many organizations are learning how to not succumb to the next quarter’s results but also pull back with a clearer perspective so that we can moderate and actually invest in the future and create stability. Executive compensation structures need to take that long horizon into consideration. Here are some ideas that we’ve heard:
- If an executive is going to introduce a change, then they are required to live in that role long enough to see the outcomes and their bonuses are based on those outcomes, not based on changes themselves.
- Consider market growth. Many executives simply reap the economic growth of our current market, which is coming out of a very difficult recessionary period into this slow growth. Therefore, executive bonuses often have nothing or very little to do with their real value-add.
- Consider a triple bottom line approach to business valuation. It can’t just be financial.
Meanwhile, Beyond Budgeting has 12 principles, two of which apply to the topic of executive compensation and business valuation: Targets and Rewards.
Principle 8: Targets – Set directional, ambitious and relative goals; avoid fixed and cascaded targets.
This means that goals need to reach further out than the traditional annual boundary (“If you hit this year’s budget or sales growth number, you get a bonus”) and they need to be relative, taking into consideration organizational capability as well as the market environment. Businesses need to move away from short-term focus and fixed targets, like sales numbers and even budgets.
Principle 12: Rewards – Reward shared success over competition; not against fixed performance contracts.
Although there’s no single answer for how a rewards structure looks and behaves (it has to align with your organizational, your industry, and your culture), there are two points here worth making:
- Rewards should move away from financial incentives. As De Luca says, “The dollar may be a near-term incentive but very quickly, it becomes an entitlement. And no additional effort is put out to get what is perceived as an entitlement.”
- If you retain financial incentives, make them team-based or organization-wide. De Luca again: “If executives have the ability to be financially rewarded for organizational good performance, than everyone down to the front line should have the same opportunity.”
On this topic, De Luca offers his experience at Group Health as an idea of the possible:
“We did this in Group Health right away. We had management performance agreements, annual performance agreements, that said you will meet or do better than their targets. All of that language came out immediately. That was one of our first very tactical steps in implementing Beyond Budgeting. But then you have to think about what to replace it with… Beyond Budgeting doesn’t tell you there’s one way to solve this, this has to be really sensitive to both your market and your corporate culture. You’ll have some corporations where sales is a big part of the business model, where you may still have an individual incentive. You just have to think about how does that fit [with what the organization is trying to achieve]?
Most organizations that have moved away from the budget will do away with incentives entirely and move toward more of intrinsic motivation. Because now you’re organized around a common goal, and the engagement at the individual and the team level comes from achievement of outcomes… So some organizations will move away from financial rewards entirely and reward in different ways and move toward more of that culture of intrinsic motivation.
Other organizations, either as an interim step or more permanently, will move toward a team-based incentive. If this team or team of teams does x, achieves x as an outcome, then it could get this kind of reward. In Group Health, the entire organization had to hit certain outcomes, so it was disconnected, in some ways, to what I did personally as an executive director. But I still wanted the organization to be successful. And I knew that there was the possibility of some financial benefit at the end of the year, but it meant that everybody had to be focused on the organization being successful. And it wasn’t just around monetary outcomes: it was primarily around quality, customer satisfaction, access. It was around the things that mattered to our customers that we got measured on, on an ongoing basis.