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What’s the Best Compensation Program for You?

Incentive compensation is today’s hottest topic for many marketers.   Owners and managers want to find the quick fix bonus program that will ensure that their company will soar to new levels of revenue, profits and efficiency. The trouble is the cookie-cutter approach to bonus programs doesn’t work.

Unfortunately, what works great at one company usually becomes a dismal failure when adopted by another company. Why? Because that program was designed to fit the exact situation, needs and culture of a particular company. Unless the adopting company has the very same situation, needs and culture, the “adopted” bonus program misses the mark.

What this means is your company’s best chance of success is starting from scratch. Although that may sound like a daunting task, it’s not as hard as it sounds. Start with realistic goals for what you want accomplished. Then make a brutally honest assessment of why those goals are not currently being reached. Finally, design a self-funding bonus program to reach your target. (Owners take note of the phrase “self-funding.” Good bonus programs always produce much more than they cost!)

First, let’s start with what it is you want your bonus program to do. Usually, bonus goals are linked to productivity – the theory being that increased productivity translates to profits. One key to an effective bonus program, however, is to identify the exact activities that produce profit. Let’s work with a concrete example from the wholesale side of the industry.

A marketer decided he wanted to reduce bad debts at his company. Conventional thinking would mean that he would design a bonus program based on decreasing bad debt dollars or percentages. The activities, however, that prevent bad debts are credit checking and monitoring. From an analysis of his prior bad debts, he discovered that his company was lacking an on-going credit review process of existing customers.

Therefore, with the input of his credit staff, he established a monthly number of existing account reviews with a final goal of having every customer with a credit line of $10,000 or greater reviewed by year-end. For each reviewed file, staff also determined and set-up a future review schedule based upon risk. Review schedules were quarterly, semi-annual, or annual. They clearly defined what constitutes a review and how it would be documented in the customer file.

Notice, bad debts could not have been avoided by all this review activity unless the credit person could appropriately identify potential bad debts and take the correct measures to insure payment. This bonus system was successful because the credit staff knew how to take collateral, structure payment schedules, etc.   Sometimes owners expect staff to fix what is broken, but don’t give them the education and tools to do the job. Ask your people what they need to be successful!

So, what about the money? Activity-based bonus programs are ideally suited for small monthly bonuses that keep staff motivated and energized, coupled with larger payout at year-end for meeting a more aggressive goal. When the company enjoys greater cash flow and profits from employee effort, they share in the rewards. This bonus program was based upon a total 10% payout of the prior year’s bad debt dollars lost.

Most effective bonus programs pay out 10% to 20% of the realized gain to the employees. Ideally, the timing of the payout should match the cash flow of the company. For instance, if your bonus activity was error-free store to home office paperwork, you would want to assess the current cost per incident of incorrect paperwork including research time, correction time and any other hard costs. One company analyzed their costs and found that each error on a store’s daily report was costing $22! There were as many as five errors on a single report, or $110 total. After looking at the total error rate, they estimated at least $2,200 per week was being lost, or almost $9,000 per month. The payout pool was set based on $15 per reduction with a total monthly pool possible of $1,500. The program was successful. Although errors still occurred, the reduction saved the company over $5,000 per month after bonus payouts.

As you design a bonus program, be aware of possible ancillary negative side effects. For instance, the credit bonus program previously mentioned had a negative, unanticipated effect of slowing down new customer credit approvals. Because staff was focused on account review, new credit apps took a back seat. It didn’t take long for sales staff to start complaining, management to get wind of the complaints, and a new layer added to the bonus structure that included a timeliness element on new applications! With any new bonus program, eligible participants will focus on the bonus activity while non-bonus activities tend to be neglected.

Another unanticipated negative consequence of bonus programs is intercompany, departmental bickering and tension. If one department has a bonus program, and must rely upon input or data from another non-bonus department, the bonus program can cause jealousy, bickering, and pressure. As you design your bonus program, consider what behaviors you are encouraging and how those behaviors will impact other areas of your organization.

Finally, don’t ever get too comfortable with even a great bonus program. Since these programs are rewarding continuous improvement, we should always be setting higher and higher targets of employee performance. Once an activity is mastered, go on to the next, and so forth. Ideally, your folks will enjoy the games, and you’ll enjoy the profits they produce!

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