It was reported that $450 million in bonuses was paid out to AIG after losing $40.5 billion.  I ask how can an organization pay out a large amount when losing this much money?  I see two drivers of this nonsense.

  1. The first has to do with sub-optimization of a system.
     
  2. The second is the inability of US organizations to treat their organizations as a system.

Sub-optimization comes from scientific management theory where organizations separate the work into parts to create more production.  Marketing, sales, operations, finance, etc. work independently to optimize their own function.  This is based on a production mentality (or command and control) and creates a situation where the parts are optimized at the expense of the whole.  This creates a win-lose scenario.  For instance, Sales can make the sale by cutting price and get there commission, but it can not be produced profitable.  Companies create more and more controls to get around the commissions adding more and more cost to their company.  I see most US organizations with bonus and incentive schemes that don’t add up (sub-optimization) to better performance in terms of optimization of all components.  I liken it to a bunch of prima donnas playing solos in an orchestra competing to be heard.  A better way is to play music as a system that optimizes the pleasant sound to the audience.  This is true for business . . . an organization must play like an orchestra to achieve profitablity.

Their is a better way referenced as systems thinking approach.  Organizations need leadership development that includes movement away from scientific management theory toward a way that optimizes performance.  Those organizations that understand the difference will be the future those that don’t will be like AIG begging for more taxpayor money.  Leaving us all shaking our heads.