Market Based Management

Introduction

The Market-Based Management philosophy was developed by Charles Koch and is employed by Koch Industries, the largest privately-held company in the world, according to Forbes magazine. MBM is based on rules of just conduct, economic thinking, and sound mental models which harnesses the dispersed knowledge of employees, just as markets harness knowledge in society. Market-Based Management enables an organization to succeed long term by applying the principles that cause a free society to prosper. Market-Based Management applies concepts and tools posed in the application problems, it allows you to learn experientially by changing input values to see how different situations impact performance, and also teaches to perform your own analysis by replacing the application problem data with your own data. We know from history, economics, and other disciplines that prosperous societies have very different rules and values from failed societies, and that the rules and values in prosperous societies encourage entrepreneurial innovation that leads to wealth, health, and happiness. An organization applying the MBM approach is one that has similar principles, rules, and culture, in order to foster principled, entrepreneurial behavior among its employees (http://www.mbminstitute.org/what-is-mbm.cfm (para 1). MBM is organized in and interpreted through five dimensions: vision, virtue and talents, decision rights, incentives, and knowledge processes (http://www.mbminstitute.org/what-is-mbm.cfm (para 3).

The concepts to be discussed throughout this paper will be incentives, compensation, and motivation. Incentives, compensations, and motivation are applied within numerous organizations to not only help increase employee performance, but to also help the longevity of the organization. If an employees’ overall performance increases, so will the company’s profitability. For instance if company A gives their employees an incentive to meet a certain sales quota with a motivation team in place, then top performers of company A will be rewarded in addition, the company will seek long term revenue benefits. Keeping employees motivated in addition to creating incentives and/or additional ways for employees to receive more compensation will create better performance overall within an organization. Contrary if company B gives their employees incentives to perform, without any motivational tactics they probably will not have as many top performances as company A, in addition the company may only seek short term rewards verses have long term success. Lack of motivation for employees within an organization, can cause long term damage for the company’s success. Different things motivate everyone; therefore there should be a system in place to keep employees motivated for the long term success of the company. In the MBM textbook under the concept of incentives, compensation, and motivation, there are a couple of different views of how it should be applied within an organization. We will discuss The Social Role of Profit, Personal Profit and Losses, and the way Market-Based Management view how incentives, compensation, and motivation should be applied and the things that effectively drive employees’ actions while at work.

The Social Role of Profit

The market system is critical if people are to receive rewards for helping others accomplish their goals (Gable, W., and Ellig, J ). It is believed that leaders who focus strictly on profitability don’t think about the longevity of the organization. For instance if an incentive is set in place for an employee to be rewarded for achieving a particular goal, that employee may focus strictly on that goal and not go above what it is that they are asked to do. When employees perform based only on what their incentive specifies, it only handles immediate problem areas for the company, and does not focus futuristic goals of the organization.

Personal Profit and Losses

Within organizations, no aspect of motivation generates as much controversy as the issue of rewards. Some people think of incentives in a very mechanical and superficial way, assuming that people are naturally