The W. Edwards Deming Institute Blog

Peter Drucker Advocated a Ratio of 20 to 1 for CEO to Average Worker Pay

Dr. Deming didn’t directly address executive pay as far as I know. Executives were paid well and without much detrimental impact on companies historically. In the 1980s many CEOs started treating corporate treasuries as personal bank accounts and problems exploded. Peter Drucker had no issue with high and reasonable CEO pay, as things became more and more abusive he spoke out more and more strongly about the damage being done by CEOs and those allowing such behavior. Since that time things have progressively and dramatically worsened as pay for senior executives exploded.

Rick Wartzman, Executive Director of the Drucker Institute, wrote, in 2011, to the Securities and Exchange Commission in support of requiring public companies to disclose the pay of their typical worker compared to the pay of their chief executive.

When it came to the relationship between a CEO’s pay and that of the average worker, Drucker advocated a ratio around 25 to 1 (as he suggested in a 1977 article) or 20 to 1 (as he expressed in a 1984 essay and several times thereafter). Widen the pay gap much beyond that, he said, and it makes it difficult to foster the kind of teamwork and trust that businesses need to succeed.

“I have often advised managers that a 20 to 1 salary ratio is the limit beyond which they can not go if they don’t want resentment and falling morale to hit their companies,” Drucker explained (At last year’s World Economic Forum in Davos, Switzerland, those looking to cap runaway CEO pay came to refer to the 20 to 1 mark as “the Drucker principle.”)

In a 2004 interview, Drucker elaborated further: “I’m not talking about the bitter feelings of the people on the plant floor… It’s the midlevel management that is incredibly disillusioned” by king size CEO compensation.

I agree with Drucker’s reasoning and the Drucker Institute’s continuing to take a stand against the bad practice of so many CEOs today. If someone wants a lot of money to lead your organization and they are qualified, fine. If they won’t run your organization for less than a king’s ransom find someone who is more interested in leading your organization than in treating it as their personal bank account.

It is hard to know how strongly Dr. Deming would feel about the problems caused by the current epidemic of overpaid executives. I feel strongly he would have vigorously objected to the damage being done to corporations and the management system by such practices. But that is my opinion, and it is possible I am wrong. Though I don’t know of any prominent Deming practitioners that support the current practices.

I have written about the problems caused by such practices over the years. In fact, I include it in what I call the 2 new deadly diseases: extremely excessive executive pay and the broken patent and copyright systems.

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Knowledge, Personality, and Persuasive Power

As I use the term here, the job of a leader is to accomplish transformation of his organization. He possesses knowledge, personality, and persuasive power.

W. Edwards Deming, The New Economics, page 116

This is a wonderful, succinct quote on the sources of influence available to a leader, and in fact everyone else too.

You have knowledge that can be applied to achieving whatever is being attempted. That knowledge is used as well in helping improve the system over the long term.

Your personality will impact your ability to succeed. If you are outgoing you will be more easily able to reach out to others. If you are persistent you will overcome short term obstacles. If you are curious you will seek out new knowledge. If you are happy often you will make those around you happy and likely find people interested in helping you.

And your persuasive power impacts your ability to convince others of the wisdom of what you believe. Sometimes this persuasive power is detrimental, for example, when you convince others to follow a path that was in fact unwise. A person that has persuasive power is able to convince people to make wise decisions, but also to convince people to make unwise decisions.

Thus it is best for the organization when that person has knowledge; and also the wisdom to know when they would be better off seeking someone else’s advice. That wisdom is more rare, in my experience.

These traits, while providing a guide to understand your means to influence the organization also provide a guide for potential weaknesses in your management system. There is really no advantage to having decisions unduly influenced by those with persuasive power while ignoring ideas from those without much ability to persuade people. What you really want it to follow the best course of action, not the course championed by the most persuasive person.

And actually the Deming management system does address that to some extent. Our psychology cannot be comply overcome, so persuasive power remains an unduly large factor in convincing people.

Using tools and concepts like the PDSA cycle, data based decision making, respect for people will help the organization alleviate some of the weaknesses we have due to our psychology that leads us to follow more charismatic and persuasive people even if the idea isn’t as wise as one championed by someone without much charisma.

The management system also seeks to encourage the constant seeking more knowledge and the testing of knowledge using experiments. And by encouraging an understanding of variation it seeks to reduce the risk of people being mislead by persuasive people that are making claims unsupported by the data.

Related: Dr. Deming on Leadership (includes more context for quote above)W. Edwards Deming on Leadership and Management of PeopleYour authority stems from: position, knowledge and personality


Keith Sparkjoy on Adopting the Deming Management System at Pluralsight

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Keith Sparkjoy, Cofounder and Culture Coach of Pluralsight discusses his “awakening” on their journey to keep Pluralsight’s healthy culture as they rapidly expanded (download the podcast).

Keith started by reading Out of the Crisis and thought it would be tough to use that book as a tool to convince his cofounder and CEO that using Deming’s ideas was important for Pluralsight. He heard about the Deming Library videos and decided to buy them and found them to be a great tool and something he could imagine his CEO learning from. And it turned out that the DVDs from the Deming Library worked well as a tool to engage the CEO in learning more about Deming’s ideas on management.

We very quickly started making changes. We started transformation and moved very fast. One of the very first things we did, we eliminated all incentive pay for all executives on the leadership team. We renegotiated their salary, bumped it up, so that they didn’t have to worry about hitting a target or anything. We wanted that team to work as a team. So that is one of the first things we did.

In 2014 the sales team also decommissioned the sales force.

They have seen great things going on. Watching sales people help each other now. They used to help each other before, but not like this.

We’re attracting the type of talent we want. Which is the type of talent that is going to come in and really try and do what is right for the customer and help move the company forward for long term success.

In 2015 they are replacing all bonuses in the company with a profit sharing plan.

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Quality Comes to City Hall

image of the book cover for Out of the Crisis

Out of the Crisis included a couple pages (245-7) that Dr. Deming asked my father to write on the efforts to apply Deming’s management ideas at the City of Madison (the first effort to do so in the public sector as far as I know). This article provides more details on that effort and is packed with good ideas: Quality Comes to City Hall, Harvard Business Review, 1991 by the former mayor of Madison, Wisconsin – Joseph Sensenbrenner.

Deming said, it was our system of make-and-inspect, which if applied to making toast would be expressed: “You burn, I’ll scrape.” It is folly to correct defects “downstream”; the critical issue, he said, is to get your “upstream” processes under control so you can guarantee the outcome every time. To do this, an organization must create a culture of quality; it must master proven quality techniques. Most important, it must define quality—first, as continuous improvement in pleasing customers and second, as reducing the variation in whatever service or product it offers.

Changing to a culture that has a Deming perspective on customer focus is not easy. When you succeed though the way people think is profoundly changed. The City of Madison police department even did customer surveys for those they arrested and used the results to improve the process in ways that make sense. Obviously there are restrictions on what you can do to please those being arrested but this is really always the case – you can’t give all your products and services away for free even if that would make customers happy.

The first initial effort with the City maintenance garage ran into issues created by the existing management system.

We discovered that the fleet included 440 different types, makes, models, and years of equipment. Why the bewildering variety? Because, the parts manager told us, it was city policy to buy whatever vehicle had the lowest sticker price on the day of purchase.

“It doesn’t make any sense,” one mechanic said. “When you look at all the equipment downtime, the warranty work that weak suppliers don’t cover, the unreliability of cheaper machines, and the lower resale value, buying what’s cheapest doesn’t save us anything.”

Our next trip was to the parts purchaser. He agreed with the mechanic. “It would certainly make my job easier to have fewer parts to stock from a few reliable suppliers. But central purchasing won’t let me do it.” Onward to central purchasing, where we heard this: “Boy, I understand what you’re saying because I hear it from all over the organization. But there’s no way we can change the policy. The comptroller wouldn’t let us do it.”

Enter the comptroller. “You make a very strong case,” he admitted. “But I can’t let you do it because the city attorney won’t let me approve such a thing.” On to the city attorney. “Why, of course you can do that,” he said. “All you need to do is write the specifications so they include the warranty, the ease of maintenance, the availability of parts, and the resale value over time. Make sure that’s clear in advance, and there’s no problem. In fact, I assumed you were doing it all along.”

This was a stunning disclosure.

This sequence is one I have found to be repeated over and over. People think the status quo is required by law, regulation or policy. Those responsible for policy (in government those responsible for creating policy and regulation in compliance with the law) think sensible judgement is being used (as the policy normally allows). But in fact the management system has evolved to strictly follow silly guidelines that are not only not the intended result of policy but are often directly contrary to policy (as in this example, making spending decisions that those making the decision knew to be bad, but they incorrectly thought were required by policy).

I have never seen a place that the policy says you must by on lowest price tag. But many organization have management systems where buying on lowest price tag is the default position that is nearly universally adopted as the “proper way” to do business. Often the process requires buying based on lowest price tag, even though the policy does not.

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Monta Akin on The 20 Year Deming Journey at the Leander Independent School District

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Monta Akin, Assistant Superintendent for Leander Independent School District in Leander, Texas joined Tripp Babbitt to record the latest podcast for the Deming Institute.

Monta shares the compelling story of Leander Independent School District’s transformation to a Deming based management system. It begins when Monta was first introduced to Deming when she came across the PBS broadcast of Quality or Else and has continued for 20 years.

In the podcast Monta stated:

Deming stated that is it important to “drive out fear” and I always wondered why we aren’t talking about building trust. It didn’t talk me to long to discover fear just creeps into the system unless you are aggressively trying to drive it out.

With teachers she trusted to speak freely, she asked “what is the biggest fear for you as a teacher at our school?”

The same answer came back time and time again and that was the teacher evaluation system and the rating and ranking associated with it.

All the typical things that you would expect from studding Deming’s philosophy were apparent. People stopped collaborating: why would you show your best work when somebody could steal that lesson and [get a good rating, which could then reduce the size of your bonus].

People also would distort the system…

So the Leander school district requested a waiver to eliminate the evaluation from improvement and rewards. There was still an evaluation to determine if teachers were performing their job successfully.

That was huge in terms of gaining buy-in and trust from teachers. They saw that we were listening and we were willing to make changes to the system that will make it better for them.

Related: Deming Today-Leander Texas Independent School DistrictDeming Podcast: David Langford on Improving EducationUsing Control Charts to Aid in Improving the Classroom Learning EnvironmentDeming’s Ideas Applied in High School Education


How to Start Applying Deming’s Ideas on Management

There are many different ways to start applying W. Edwards Deming’s ideas on management. There isn’t a cookbook on what should be done first. This is helpful in that you can avoid trying things that would be very difficult given the current state of your management system. However, it is also very challenging in that you have to decide what to do yourself instead of just following a recipe.

This is one reason why a knowledgeable consultant can be so useful. They have the experience and wisdom to know what is likely to work and what will be difficult as you begin to improve management practices. In the recent podcast with Fred Wambier, CEO of Finishing Technology, he mentions the crucial role Kelly Allan continues to serve as Finishing Technology adopts Deming’s ideas.

But if you can’t enjoy the benefit of a consultant you can still proceed. Read what you can (books, by Deming and others, blogs, etc.) and watch the Deming Library videos, listen to the Deming podcasts. Then make changes in your behavior.

Don’t try to start with changing other people. And don’t try to make enormous changes first. Start small, but on things that are important, and build on each attempt. Change what you do. Experiment and learn and experiment some more. Involve others in the changes but I find it is much better to start with those that want to change first. Dealing with those that don’t want to change is best delayed until you build up a record of success using new management ideas, in most cases.

I have written on my other blog on some ideas on getting started: Start small, with projects people actually care about, Grow Your Circle of Influence, Psychology of Improvement, Helping Employees Improve). What you want to do is chose projects you can get started on now (not projects where you are going to be delayed trying to convince others to go along) and where the process and results will help show others the benefits of adopting some new ideas.

Don’t worry about the perfect way to start. There isn’t one. What matters is creating a system that is effective today and which is built to continually improve: a good management system is robust and continually improving.

Related: Change has to Start from the Top (and you are the top of something): Webcast with David LangfordThinking Required: Not Just a Recipe to FollowCustomer Focus with a Deming Perspective


Deming Podcast with Fred Wambier and Kelly Allan On Applying Deming’s Ideas at Finishing Technology

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Fred Warmbier, CEO of Finishing Technology and Kelly Allan, Senior Associate of Kelly Allan Associates and Chair of the Deming Institute Advisory Board are guests on the latest Deming Institute podcast.

Fred and Kelly discuss the Deming journey of Finishing Technology, which they also have been documenting in their excellent New York Times small business blog. Fred first discovered Deming’s management ideas in September 2013 when he attended a Deming Institute 2.5 day seminar presented in partnership with Aileron (a non-profit with a mission of “unleashing the potential of private businesses through professional management”).

We try to develop our critical thinking skills as a team and we asked people what is your theory of this?

And that thinking is taking hold, as Fred continued, recently there was an issue with the results of a process and when questioned the employee said “I’ll test my theory and get back to you.” Great words to hear.

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11 Most Popular Posts on The W. Edwards Deming Institute Blog in 2014

Here is a list of the 11 most popular posts on this blog last year (as measured by views counted by our analytics applications). We published our first blog post on October 1st 2012.

My guess is the 2012 posts are very popular largely because I intentionally wrote posts initially that I thought would be useful references for readers and also for me to link to in future posts.

So I wrote posts on Deming’s System of Profound Knowledge and the 4 components that make up the system. I also posted about items of continued interest such as Deming on leadership, valuing people, performance appraisal, and inspection. And I wrote posts on concepts such as the Deming chain reaction. Those “reference” posts are linked to in many posts allowing readers to find out more on specific topics; such posts make up a large part of the top 11.

I included the 11th most popular post since it was the highest ranking post from 2014. Posts from 2014 (especially later in the year) suffer from not having the whole year to attract visitors but they also benefit from a large spike in traffic in the first couple of weeks. For the next 10 most popular post, 2 were written in 2012, 5 in 2013 and 3 in 2014.

Another thing to note is that the way the data is collected only views of a specific web page count. Many readers use blog feed readers to read each post as they are published; those readers are not captured in the data used here. Also if they just read posts on the home page of the blog those don’t count. We have many more view of the home page than any specific post. Both of these factors likely mean posts written in 2014 were read much more the the “popular list” indicates; but our data collection method doesn’t credit those readers to each posts popularity.


Deming Podcast with Bob Mason and Clare Crawford-Mason

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In this podcast Bob Mason and Clare Crawford-Mason discuss meeting W. Edwards Deming and creating the NBC white paper – “If Japan Can, Why Can’t We?” They also discuss the decades of pursuing and promoting Deming’s management ideas, including their work co-creating the 32 volume Deming Library (which is now available from the Deming Institute) in this podcast.

Clare Crawford-Mason:

The world has changed so much in our lifetime, and there are so many things that are going from, from a new global world, communication and so on that if you don’t have an underlying basis of how you view what is happening you are lost.

image of the Understanding Profound Knowledge, Deming Library video

The complexity we have in organizations today is not easily understood correctly without an understanding of variation and a view of the organization as a system. The challenges current managers face require an understanding of management that encompasses these ideas. And unfortunately our default management education and practice fail to do this.

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Donate to the W. Edwards Deming Institute Scholarship Fund

Guest Post by Jack Hillerich

More than 50 years ago, I started working in our family business, Hillerich & Bradsby Co., maker of the Louisville Slugger® baseball bat. It was the early 1960’s and I had just graduated from Vanderbilt University. I was 21.

When my father passed away in 1969, I was suddenly promoted to the position of President of the company. I was only 28 with very little management experience, and yet I was faced with leading the legendary Louisville Slugger® brand. The responsibility was immense, and I faced many challenges as I learned how to lead and run our family enterprise.

In 1980, I watched the NBC White Paper “If Japan Can, Why Can’t We” which included a segment on Dr. Deming’s role as a catalyst for the revitalization of industry in post-war Japan. It was so compelling, I couldn’t get the message out of my mind! In 1984, I finally had the opportunity to attend one of Dr. Deming’s seminars. What I learned changed me, our company, our suppliers and our customers. His emphasis on innovation, continual improvement, leadership and quality helped Louisville Slugger® become a thriving and successful business. Dr. Deming died in 1993, but the philosophy he taught me did not. His influence benefits me in some way, every day.

That’s why I personally make a gift each year to the Scholarship Fund at The Deming Institute. Over the past three years, the Institute has awarded more than 230 scholarships to students, educators, non-profit professionals, emerging entrepreneurs and others so they could benefit from Deming Institute conferences and seminars. There are many, many more individuals who have the desire to learn and passion for new knowledge, but lack the financial means to attend these events.

Photos of Jack Hillerich and students

Jack Hillerich and students at a W. Edwards Deming Institute conference.

How can you help? By making a gift to the Scholarship Fund today:

  • $200 will fund one student’s attendance at the Deming Institute Fall Conference.
  • $1,000 will establish a named scholarship (to honor a friend, colleague or loved one) and cover registration and travel costs to attend a Deming Institute educational event.
  • A one-time gift of any size builds the scholarship fund to assist more students.
  • A recurring monthly gift is a convenient way to provide sustained scholarship support.

Our aim is to more than double the number of individuals who will receive scholarships for Deming Institute learning opportunities next year.

You can make a contribution online or by sending a check to The Deming Institute, PO Box 309, Ketchum, ID 83340.

Thank you for considering a gift of the Deming teachings and lifelong learning!

Sincerely,

Jack Hillerich
Chairman, Hillerich and Bradsby Company
Deming Institute Board Trustee

PS: I hope you will join me in giving to those seeking new knowledge to improve their businesses, organizations and communities. Your gift will make a difference.