“Your culture needs to be institutionalized without becoming bureaucratized.”  —Patrick Lencioni

“I am one of twelve people in the world who can do the work that I do—I know them all, and I am the only one working at this firm,” my colleague explained.  “I’m at the top of my field, and there is no place for the company to promote me other than into management.” He dropped is head in disgust and turned toward his office.

He momentarily turned back to add, “Since I am at the top of my pay bracket here, I am doomed to minuscule—if any—raises for the remainder of my career at this place.  What’s my incentive to stay, or even perform at a higher level?  I stay here, in my engineering capacity, because I love what I do and hate the idea of being a manager.”

My friend (I’ll call him Bob for this article) shook his head in deep frustration as we discussed our employer’s annual performance review process. I nodded my head in agreement at Bob’s struggle. How do you appropriately reward people and also build a culture of innovation? We struggled with this concept at our company. Questions came up like, “Is it ok for a technical person to be paid more than their manager?”

We have all seen brilliantly creative and productive engineers and inventors promoted to management sheerly for career prestige or to finally pay them appropriately. But are they good managers? Bob had no desire to be a manager. So, he remained underpaid, but in a position he loved.

Manager vs. creator

Manager and creator are vastly different skills. I’ve been witness to several meteoric burnouts due to the practice of promoting the creative person simply for the purpose of appropriate compensation. There are occasional successes with this strategy, but those are much less common. As a result, both corporate culture and product development suffer.  Companies are creating misery within the workplace by not having a solution to appropriately pay technical and creative personnel.

Enter an article by Safi Bahcall published in Harvard Business Review titled, “The Innovation Equation.” Safi brilliantly breaks down the managerial systems, policies, and human resource tools of an organization that support and encourage innovation. He also brilliantly deals with the situation my friend, the technical expert, was dealing with.

Safi developed his formula in an attempt to answer the question: “How is it that companies so quickly shift from nurturing ‘crazy’ projects—the ‘loonshots’ that transform industries—to rejecting important innovations?” Safi deemed this point—when a company no longer nurtures transformational ideas— as “point M” in his formula and equates it to the freezing point of water. In this analogy, actions can be taken to change the freezing point of water, such as adding salt.  But what can be done within a company to change its “M” point?

The Innovation Equation

Safi’s research led to the identification of four critical controlling values of “point M” and the creation of his resulting formula. From Safi’s article, the variables are (in my words, not Safi’s):

• (E)The Equity Fraction: Are incentives greater based on the outcome of projects, or based on your rank in the company? (Hint: increase project incentives.)
• (F) Fitness Ratio: Simply put, this measures how a project member’s skills fit the project. Will investing another hour on the project benefit the project and therefore the member or, if their skills are not a fit, should the member spend that hour playing politics and schmoozing? (Hint: increase project benefits.)
• (S) Management Span: (My personal favorite) How many direct reports does each executive and manager have? And how many levels of hierarchy exist from the bottom to the top of the organization? (Hint: increase direct reports and reduce hierarchy.)
• (G) Salary Growth: What is the increase in salary and benefits due to a promotion versus rewards for success on a project? Again, this would directly impact the desire to focus on the success of a project, versus lobbying for a promotion. (Hint: decrease promotional benefits.)

This leads us to Safi’s innovation equation:

Point M= (E*S²*F) /G

Within an organization desiring greater innovation, the desire is to make “M” a larger number. You do so by increasing E, S, and F. And by decreasing the size of G.  By manipulating these numbers within your culture, you will create a higher resilience against the complacency of the status quo.  These are the controlling factors that Safi has brilliantly defined in his HBR article and book titled “Loonshots.”  I highly recommend reading the article at minimum and preferably both!

The Promotion Dilemma

So, what would have needed to change in my friend Bob’s example, to incentivise him to remain in a role that released his brilliance and creativity? Let’s break it down variable by variable from Safi’s equation.

• (E)The Equity Fraction: For Bob, the environment at our workplace was incredibly political. It was much easier to receive honor, prestige, and salary by being promoted than by success on a project. Had the company shifted its mindset to rewarding project success far more than promotional rewards, Bob would have been satisfied. And frankly, many people who had left the company probably would have stayed.
• (F) Fitness Ratio: This variable, in Bob’s case, was set perfectly. His skill set precisely met what the project required.
• (S) Management Span: The distance between project staff and senior management at Bob’s firm was extensive. I was working at the same firm and in my ten years, I only met with one vice president.
• (G) Salary Growth: It is often said that the culture of a company reflects the culture of its largest customer. Our customer was a U.S. government agency and our corporate culture rated pretty high on the scale of political behavior. For Bob, had he invested in political behaviors and invested in promotion, he would have made more money, but lost the position he really loved.

For me, Safi’s article added new management tools that reinforce and promote a healthy business culture and effective teams. I have long been a proponent of and now am a practitioner of—Patrick Lencioni’s model of effective teams and culture. These behavioral disciplines make your company healthy and are required in order to amplify how smart your team is in the decision sciences such as technology, strategy, finance, etc. (see a quick explanation of smart versus healthy). Lencioni’s and Safi’s models are therefore not exclusive, but rather complimentary.

The Four Disciplines

With Safi’s innovation equation we are handed a set of management disciplines, which, when combined with the four disciplines of building a healthy team from Lencioni, become a dynamic powerhouse. The four disciplines to build a healthy company and effective teams are as follows: (You can read more in Lencioni’s book The Advantage).

1. Build a Cohesive Leadership Team.
2. Create Clarity.
3. Communicate Clarity.
4. Reinforce Clarity.

The first three quadrants of this model include some of the following activities which are simple to understand, but can be challenging to execute.

1. Get clear on why your company exists.
2. Define your primary values.
3. Be very clear on what is most important, and who does what.
4. Embrace conflict.
5. Over-communicate your clarity.
6. Hire ideal team players.

It is in the fourth discipline of a healthy company where human and management systems are implemented that institutionalize a culture without bureaucratizing it. In this step, a company begins to create the internal practices that reinforce their culture.

Accessing the Dials

Safi’s innovation equation creates a management and compensation system that reduces politics and rewards the right behaviors. Lencioni’s model gives you those behaviors! Between the two models, you now have the “dials” to fine tune your corporate culture (The Equity Fraction, Fitness Ratio, Management Span, Salary Growth). As a team pursues the four disciplines of a healthy team year after year, the management disciplines in place will become more refined and powerful. When practicing these disciplines, organizations can build a “health acumen” advantage over the competition.

The dial settings will be different in a small bakery compared to a large manufacturer, but most companies never even have access to the dials.

Now we do!