Episode Details

E2, Foundation track — Part 3 of 3

The previous essay ended on the gap. Profit sharing is a flow that resets. Equity is a stock that requires a sale. What neither does is attribute value to the person who produced it and let him carry it when he goes.

This essay is about what an instrument would have to do to close that gap, what it costs, and the 2 things in it I cannot yet answer.

I. The claim, where a CFO can see it

None of it is worth arguing unless the deposit pays for itself. So here is the falsifiable claim, on the table, where a chief financial officer can see it.

The firm must capture the majority of the return. Not a minority. Not a rounding error to be defended in a values statement. If the employer nets positive after the deposit, this survives a downturn, and it survives the arrival of a CFO who does not care about any of this. If the employer nets negative and does it anyway, it is philanthropy, and philanthropy dies in the first bad quarter. That is not a hypothesis. That is what happened to every training budget in this country in 2009.

In March of this year a research team led by Fidan Ana Kurtulus at the University of Massachusetts Amherst — with Hoyt, Ouimet, Blasi, Kruse, Freeman and Castellano — published the largest study of its kind, joining 3 restricted Census micro-databases to the Department of Labor’s Form 5500 filings. 44,000 American manufacturing establishments across 22,500 companies, observed in 2010 and again in 2015.

They define labor productivity the way a plant does: total value of shipments and inventory divided by total hours worked.

The 600 establishments that adopted an ESOP after 2010 showed labor productivity higher by 5.6 to 6.7 percent when measured in 2015 — the total change across the period, after controlling for management practices, headcount, capital and material inputs, union status, geography and industry trend.

Then the finding that matters most. Establishments that adopted an ESOP and maintained broad-based group performance pay across those same years showed productivity growth of 12.93 percent — an average of 2.6 percent a year.

Roughly double.

The instrument alone is worth something. The instrument paired with the practice is worth twice as much. A deposit is not a payment. It is one component of a formation apparatus, and it badly underperforms when it arrives alone.

And consider what the Census counted as the practices that do the multiplying: performance goal monitoring, remedial action when the production process goes wrong, broad-based information sharing with workers, and group performance bonuses inclusive of non-managerial employees.

That is not a management theory. That is a description of a plant manager’s job, written by the Census Bureau, and it turns out to be the multiplier on the money.

II. Twice, on 2 continents

I have watched it work twice, 18 years apart, and both times it looked the same.

At Lansing Delta Township, the fix that unblocked a bottleneck costing $1M to $1.5M a day was 4 things: line balance on over-cycled stations, training cycles on a third shift where new people had not had enough repetitions, a roof molding station never run at full rate, and defect containment before chassis. Containment first, then irreversible corrective action, engineers and team leaders working it at the station with the people running it.

At Royal Enfield in 2008 we inherited a list of more than 100 customer-facing defects. Dr. Nair pulled us through it problem statement by problem statement, with the repairmen, the drivers, the testers, the production team members — not just containment so defects stopped reaching customers, but correction, so the check-and-repair loop could be dismantled rather than permanently staffed. Those fixes then went into the design of