Business Management: Aligning compensation plans

In a previous Business Management column I discussed “Hiring for Talent” (August, 2015), providing guidelines on how to evaluate individuals with a strong emphasis on their ability to self-manage.

This leads to the topic of aligning staff compensation plans in direct support of financial goals established when the company starts its hiring process.

When I engage organizations and review compensation plans I’m always amazed that they tend to reward deliverables that I view as subjective, non-quantifiable, or disconnected with the organization’s core goals. I often see bonus plans that reward for the organization’s macro performance, without direct accountability for the managers and employees themselves.

I’ve seen capped bonus plans that drive away revenue and talent. But the worst culprits are misaligned plans where pay-out reduces bottom line profits for the company.

CASE IN POINT

I performed a turnaround at a national company where a sales team member had just closed a new $600,000 client. This organization made its revenue by charging packaged

goods clients for storage and pick-and-pack services in a warehouse environment with an end point of shipping to major retailers.

Sales people were compensated on revenue for new business development, warehouse managers were compensated $500/month on hitting a monthly labour-to-revenue ratio.

In one case a particular new client was offered free shipping, free on-boarding and setup into the warehouse provider’s physical and  electronic environment as part of a deal—a small price to pay to secure such a large and active client.

Unfortunately for the warehouse manager, having 15 trailers of goods unexpectedly arrive on the loading dock was not a “planned event”, and with no corresponding revenue, “free on-boarding” was cost without revenue to the warehouse manager and a threat to his monthly bonus.

Thus, each day he serviced all revenue-generating clients first, then dealt with the new project only when labour became available.

By the third day the new client started to forward service orders to the warehouse customer service reps for required shipments to retailers, but these orders could not be fulfilled as the stock had not been placed nor was it in the electronic inventory yet.

Tensions amongst the sales staff, the warehouse manager, customer service rep and the client rose quickly, major retail compliance charges commenced.

At no point did the warehouse manager comment that he was protecting his bonus with his inaction, instead a series of excuses were thrown up, only confusing the issue.

Senior management’s intervention and a series of conference calls resolved the issue. The company paid fines, lost revenue, and the relationship with a new client suffered. Ironically at month-end the VP of sales celebrated the new business win, and the VP of operations awarded the warehouse manager his bonus.

BUILD A BUSINESS OF BUSINESSES

The above could have been avoided with better communication, or a side deal with the warehouse manager to ‘back out’ any on-boarding labour expenses. But structurally, the plans were not aligned within the organization’s goals.

Ultimately, when it comes to compensation: “Managers and staff will act in their own best interest.”

If you accept this to be true, then the formula to better align compensation plans is to ensure that the reward drives behaviour that positively impacts on the P & L, resulting in decision modification.

The best organizations structure around a concept I call “Building a Business of Businesses.”

In a Business of Businesses, each sub-total on the company’s P& L represents a “bottom line” on each department’s financial report. Each report is structured to capture department metrics that might be altered by their actions, avoiding a clash among department managers.

CHANGES TO BEHAVIOUR

When sales persons are compensated on gross profit dollars and not revenue, hunting practices change and business is sought for low season and not low-balled into high season which results in operations incurring overtime labour costs. Commodity selling is reduced as lower pricing reduces commission directly.

When sales plans are not capped and previous year’s home runs are not baked into the new baseline then sales plans are not manipulated by the sales team to fit the best case scenario at the expense of the organization.

If an organization is structured to increase profitability, the best approach is to construct a Business of Businesses and align all departments, their processes, manager’s discretionary authority and compensation accordingly to support the company’s profit objectives.

Andrew Wood has held senior positions in manufacturing, supply chain and other industries and sits on TEC, Canada’s Trusted Advisors Council. 

andrewjwood@changeagent.ca