We work with complex organizations with equally intricate business strategies, but not all complexity results in better returns for shareholders. Simplifying portfolios, processes, and structure seems like a logical way to optimize efficient delivery of strategy. Nevertheless, incentives are often the challenge, standing in the way of driving substantial changes in growth priorities and refocusing organizational resources on the biggest potential gains.
Organization design is about lining up the strategy with structure, process, people practices, and rewards. Rewards are intended to align individual actions with organizational goals, but sometimes there are unintended consequences of an organization’s incentives.
Costly and complex product portfolios, for example, can have a ripple effect through an entire organization, creating an unprofitable cost-to-serve from R&D, to supply chain, to customer service. While the true cost of this complexity may be hard to quantify, intuitively, our clients understand the burden of the “long SKU tail” in SG&A. Traditional incentives often discourage leaders from making significant changes in portfolio complexity. New transformation incentives, focused less on short-term profit and revenue targets and more on change objectives, could motivate executives to simplify the portfolio and set the organization up for stronger medium and long term investment focus and profitability.
The Wall Street Journal reported on August 26th of this year that P&G’s CEO, David Taylor, was rewarded for “overhauling the supply chain, improving cybersecurity and streamlining the product portfolio.” He and his team received significant bonuses due to high marks in longer-term transformation incentives, despite weaker scores in sales and earnings targets. Such an approach is intended to “encourage executives to push forward on initiatives that fuel the company’s long-term turn around even if they don’t have an immediate impact on earnings and sales.”
While incentives and metrics are often an after-thought in organization design, they can be either powerful derailers or powerful motivators. We recommend careful and thoughtful alignment of rewards to the other elements of organization design. P&G has a long journey ahead in returning to the levels of growth seen earlier in the decade. Let’s see if this innovative approach to incentives makes a difference in that momentum.