Monday, March 15, 2010

Incent The Desired Behaviors

I just finished watching a 60 minutes segment on Wall Street, talk about an eye opener. Millions upon millions of dollars paid out for "performance" that did not benefit shareholders....aka - the owners. Could you imagine paying your store workers a bonus of ten times their salaries for taking actions that bankrupted your business? Sounds crazy, but it did and continues to happen on Wall Street.

The issue is simple. You must design a compensation system that rewards the type of behavior you want from your employees....ones that build long term, sustainable economic value. If you design a short term reward system, heavily weighted on short term outcomes, you can have results that negatively impact longer term economic fact your to blame for creating the incentive system!

Aligning all aspects of your business with long term strategic goals is sound fundamentals. Your compensation system is no different. In retail, you need to think through all aspects of the business thoroughly, before designing particular bonuses. Be careful to consider all scenarios and potential impacts of your bonus structure. Individuals will always have an inclination to "game" the system to max out their bonus based on the system. You need to ensure your bonus system does not inadvertently cause behavioral changes you did not anticipate.

For example, suppose you have a system that pays a bonus on annual sales and has specific thresholds for % bonus. Say $0 to $99,999 is 5% and over $100,000 is 15% but you make no stipulations for returns. A sales person in November has already sold $100,000 and now pushes product through to his customers so that he can achieve a higher commission on remaining sales in the calendar year. If the customers return the goods in January, he still gets his commission. He may even ship the order at the end of December knowing they'll be returned. He may cut a deal with the customer to move up January sales into December (at a lower price to the customer) to make a higher commission. By not stipulating the rules of the bonus structure, you have allowed the system to be "gamed".

Next time you design a compensation system, be careful. You may be asking for something you never considered....just ask Wall Street!

No comments: