In business, ROI (return on investment) is routinely calculated, planned and monitored. Many organizations’ expectations of these monetary rewards programs include employee retention as well as achievement of critical goals and targets. But, the greater value of these programs can best be gained and measured in the achievement of the business strategy — in particular, the company’s competitive differentiation and its strategic growth plan.
Designing compensation, commission and bonus programs that aren’t tied to competitive differentiation can have costly unintended consequences. Let’s look at two examples that are typical in today’s organizations.
Company A provided all employees with quarterly incentive bonuses. The criteria for earning the bonuses included targets such as EBIT, Operating Cash and Sales Revenue.
These targets generated a variety of unplanned consequences depending on employee departments and roles. For example, to earn bonuses, supervisors avoided purchasing items such as supplies, tools, and equipment; others reduced travel and associated expenses; and production managers deployed mandatory overtime to manage headcount and avoid hiring additional people. These actions had a domino effect, causing the following results:
– Increased customer returns due to quality defects
– Increased scrap due to tooling issues
– Longer production times due to unmaintained equipment and tooling
– Late shipments
The bottom line: Bonuses were earned and paid out as customer complaints and departures increased.
Company B paid its sales force commission plus low/no salaries, plus annual bonuses. Commission scales were based on total revenue and the criteria to earn annual bonuses included overall corporate performance against revenue and profit goals plus individual performance on sales revenue and operating cash. There were a number of unintended consequences:
– Sales employees focused on selling products they knew well and had sold successfully in the past
– They visited established customers to maintain relationships and to obtain repeat orders
– Sales people avoided spending their time prospecting
– They ignored taking the time to learn and sell the new and different products in different product lines than they had sold in the past
Most Sales employees achieved their targets and received the associated monetary rewards, despite the lack of progress on new business development and expansion in selected industries.
As you can see, the biggest shortfalls in performance for these companies were strategic — the monetary rewards programs failed to focus performance on what is most important:
– Delivery of the company’s unique value, the reason their customers buy from them in the first place
– Achieving strategic objectives for growth
Company A: Their Value Proposition was on-time delivery of high quality, precision metal parts. With employees focusing on dollars instead of on quality and on-time-delivery, the company’s performance was causing customers to be disappointed time and again. Company A’s failure to align compensation and bonuses with the business strategy was causing the loss of new and existing customers.
Company B: The company’s strategy included a competitive differentiation emphasizing its breadth and depth of products and services, which required Sales to increase sales across product lines, and new business development and growth in specific industries which required prospecting. When employees stuck to selling products they already knew, to customers they already had, progress on achieving the strategy was not a priority.
In order to maximize the ROI on compensation, commission and bonus programs, these programs need to be effectively aligned with your strategy, rooted in your competitive differentiation and your strategic growth plan.
Today’s Challenge: Many companies are not realizing full benefit from their compensation, commission and bonus programs. Is your company one of these? How well aligned are your monetary rewards programs with your business strategy? Are these rewards structured to help employees to focus on what’s most important?