MBM Framework and Long-Term Value Created Incentives

The Koch MBM framework has five “dimensions” that guide decision making processes.  The five dimensions are, Vision, Virtue and Talent, Knowledge Process, Decision Rights, and Incentives.  All five dimensions of the MBM framework are meant to be mutually reinforcing, based on having the right people in the right places, and giving those people a right to decide based comparative advantages of skill and talent, while guided by an overarching vision.  In this article we will focus on a single case study and how Koch’s MBM was utilized to reimagine incentives.  For a more in-depth view of Koch’s Market-Based Management (MBM) framework, consider reading “Good Profit” by Charles G. Koch. 

Georgia-Pacific Incentives Reimagined

In 2005, Koch Industries bought Georgia-Pacific and revitalized and transformed it by applying the Koch MBM Framework.  Georgia-Pacific (GP) traditionally rewarded people for meeting budgets and quarterly projections, as opposed to contributions to long term value.  Employees were paid based on pay grades and bonuses were capped and based on a formula.  Employees that failed to make budget did not receive bonuses, and bonuses were capped when they did meet projections.  They found that short term incentives discourage their employees from innovating. 

Under Koch Industries guidance through use of MBM incentives were reimagined.  Employee bonuses and incentives were switched to rewarding them based on their contribution to long-term value creation.  With the change, they considered not only concurrent earnings and return, but the overall building of future capabilities as a platform for creating value.  Instead of rewarding leaders on just meeting budget’s and profits, leaders are rewarded by improving culture.  They also, switch their sales force incentives form one based on volume to one based on long-term profitability, improved customer relations, and value for customers.

Aligning Incentives

When companies develop beneficial incentives, they motivate people to work harder, become more creative, and produce more value.  Beneficial incentives are mutually beneficial for customers, employees, and businesses. Employers need to learn how to use incentives to guide employees to increase their capabilities, focus and effort.  Employers should use beneficial incentives to enable their employees to grow and develop.  It requires aligning incentives to a company’s vision and interests with that of the employee. 

To align incentives, it is important financial incentives are tied to what matters towards the creation of long-term value. This requires attaching incentives to performance towards what employees are accountable and contribution towards the overall long-term creation of value.  This switch from incentivizing more than mere results to overall value creation can guide how to assign bonuses and raises. 

How HR can Apply an MBM to Compensation

For human resources, the traditional thinking about compensation and bonuses are always tied with results either annually or quarterly. However, in “Ditch the Once a Year Performance Review”, we discussed that HR should divorce compensation from performance results, rather make it a separate conversation.  MBM could help human resources to help guide how to divvy out bonuses and raises, based on a criterion separate from results of performance, instead use the long-term value employees created for the company.  It may be difficult for employers to determine the long-term value any individual creates through their work, being that some value is objective, while some is subjective. However, long-term value can be calculated to some end.  It is important to remind employers that one of the four key drivers for long-term value creation is talent. 

Investing in and properly compensating employees has a significantly impacts a company’s potential to create long-term value.  Tying an employee’s compensation to that long-term value creation will help incentivize work that is mutually beneficial for employee and employer.  This can serve as a framework in calculating bonuses and pay increases beyond mere results and an annual performance review.