Tuesday, September 13, 2016

Part II – Are your incentives tied to the right behaviors for success?

As a corporate employer, you may ask, what difference does it make if I’m tying incentives only to the end results if they make their “numbers” and everyone makes the forecasts?  If budgets are met, and my incentives are tied to making budgets, everyone goes home wealthier, right?  One of the many problems I see with this short-sightedness is reflected in the extreme, predictable and avoidable ups and downs and the scare of scrambling I see in companies each year, year after year. Without strengthening various parts of the chain of a business, meeting those end numbers is far more difficult than it needs to be. As an example, one particular company I worked with would start in January happy, optimistic and generous (but not extravagant or wasteful) in its resource allocations and spending. Hiring would take place, plans would be made for new initiatives and work was fun. Then, the end of the 1st quarter numbers would be released, and they didn’t match the forecasts.  There was some notice and caution, but nothing to get too worked up about. Then the 2nd quarter results would come in, and it was a red alert with alarm bells sounding everywhere. We had only 6 months to make up
gaps from the first half of the year, plus keep on target for the next 6-month forecast. The edict would come down from on high…cut
10% of the personnel and 10-15% (or more) of forecasted expenses. Do more with less…A hunkering down mode would begin and fear
was in the hearts and minds of everyone.

Then the 3rd quarter results would come in, and
not enough was done in the 3rd quarter to put things back on track and it was full-on panic. The craziness would ensue. Everyone was required to do anything and everything humanely (even if insanely) possible to make
those numbers in both cost cutting and bringing in any sales possible. The sales force would work out deals with customers to pay things early or upfront and manipulations would occur for revenue recognition with accounting procedures…anything and everything was on the table. Now, I’m not saying anything unethical or illegal was done ever, but it was an all-out blitz of spend no money and get any dollar you can on the books. People didn’t sleep and they absolutely killed themselves. Tempers were short and everyone was grumpy and motivated more by fear than anything else. It was never a nice place to work during
those last 3 months of every year.

Then the year-end results would come in, and they’d done it. They had succeeded in the near impossible feat of making up for the earlier budget misses while still making their quarterly requirements. Celebrations were everywhere, and everyone – those who were left anyway – would go into the year-end holiday season fat, happy and exhausted. In January, we were back to the “happy go-lucky” fresh start mode and the cycle would begin again. This happened every year I was there. You could set your calendar by it. You could always tell what time of year it was by the attitude and temperament of the environment. It was awful….and completely unnecessary.

I wish I could say this behavior was limited to just an isolated company here or there, but it’s not. I saw similar behaviors in many a company. The most significant factors I saw creating this dysfunction were: (i) because they couldn’t see the impact of the process
chain of cause and effect and what impacts what, they focused almost entirely on end results; (ii) the companies were managing their performance by quarters instead of longer term performance that would produce greater success over time; and (iii) because of the first two factors in (i) and (ii), they weren’t incentivizing most of the activities that actually created the results they wanted, so they were having to recreate the short-term circumstances to produce those end results every year. While there is a serious problem with the American culture with its shareholders expecting – no, demanding - continual increases in a company’s profitability and revenues quarter after quarter, creating an unsustainable corporate model over the long term which produces the behavior in (ii) above, I will address only the issues reflected in (i) and (iii) here. Solving (i) and (iii) will help with the unrealistic, dysfunctional and destructive culture behind (ii) and we’ll leave the discussion of (ii) itself for another article.

In order to incentivize the behavior that produces the results you want, you have to actually understand what behavior and activities actually do produce those results. It’s not as simple as “good sales people produce revenues”.  If you aren’t creating the system that fosters the results, you are having continually to start over and recreate every sale and every relationship over and over again…the hamster on a wheel…you never get ahead because you’re always fighting and you end up doing little more than replacing the sand that falls out of that sieve. Therefore, you end up relying nearly 100% on just your sales people and everyone else just becomes “sales support” (and we all know sales people with this sense of entitlement). The reality is that most every division or person in a company has a role to play in identifying, recruiting, soliciting, selling, supporting, servicing, manufacturing for, distributing to and retaining a customer that spends money with the company. If you don’t understand how every
person in your company impacts a customer or a revenue dollar, you can’t understand the milestones or activities that you want to promote that will make it easier for the company to achieve its objectives. The vast majority of companies have bonus plans only for senior managers and sales people. The problem with that is that everyone in the chain can either satisfy, dissatisfy, retain or lose a paying client. We all know how that goes with diversion of resources and management trying to save a customer, money going out the door in free
product, service or reduced pricing to try and save a client. Then comes the blame, finger pointing, and bad relations with customers as well as internally between employees. This only adds to the “us vs. them” mentality between the sales department and everyone else.

So, how do you avoid this terrible game most American companies play and create stronger foundations with more productivity, greater customer retention, satisfaction, and therefore stronger corporate reputation, which translates into greater revenues with less work? The first step is to do a reverse engineering and process mapping of each and every department of how they contribute to your mission, to a product or service, how they touch the customer and how they interact with one another internally in the flow of business.  Too many employees and departments do what I call “throwing the hot potato over the wall” with an attitude of "it's your problem now...it's off my plate."  Each individual employee has to understand where they fit into that process of their department and how that fits into the whole of the company – meaning understanding the direct impact to others of their actions or in-actions.  Once you’ve done that, only then can you more accurately identify how you want each of those employees performing those roles to behave in their responsibilities that contribute to the ultimate goal...happy customers spending money with your business.

Here is where your numbers come back into play. These objectives and metrics need to be measurable…. “doing a good job with a smile on your face” in that list of job duties isn’t sufficient. Is there a timing component, is there a service or productivity component…what would tell you whether someone did well, just “ok” or terribly? Put a key performance indicator and metric on those … and here’s the important part…tie it to a bonus or some other financial incentive. That’s right…give every single employee an opportunity for a performance bonus and financial incentive. Every. Single. Employee.  You do this for 2 main reasons. First, every single employee has an impact on the chain of processes that produces or supports something that touches the customer and you want that part of the process to go smoothly, productively and with the highest degree of intention and quality. Second, every single employee needs to understand how they touch or support the customer and the business objectives, and needs to feel that they are an important part of the chain. Because a customer can be lost at any point in this chain, you need to have a strong chain
that is holding that customer and it needs to be attached to a sturdy foundation.

This is how you keep both customers and employees. Retained customers continue to buy from you, alleviating you from having to always start over finding new customers and making up for lost revenues or the end of sales from that customer. Retained customers also forgive missteps easier and refer other customers to you, providing valuable references and contributing to that strong foundation and corporate reputation that brings in new customers without you making as much effort. This allows you to truly grow your customer and revenue base, filling up those holes in your bucket that allow you to step out of hamster on a wheel mode running furiously trying to put more sand in the bucket to replace the sand falling through the holes. Instead, it helps you create a bigger sand box.

This is also how you retain employees. When every employee understands their importance in the chain of activities, and is treated as the valuable part of the chain that they are and they are financially rewarded for it, they are happier, perform better and stay longer. They not only have greater pride in their work, but now they have a financial incentive to have that pride and go above and beyond the “not my job” mentality. This results in less money, time and lost productivity by the company in training new employees as well.

You don’t have to pay at the top of the salary market for good talent. Instead, put that extra money towards incentivizing the right behaviors throughout the chain of business activity and you will be paying more for results that really help you achieve the corporate goals. Your employees then will stay with you because they feel like they have a purpose and importance beyond “just doing a job” and they’re being financially rewarded for it beyond just a static salary.  Who wouldn’t put their money where their objectives truly are? Paying employees for doing what you really want while creating a systemic and functional team environment is the most productive use of any company’s time and money. 

Monday, September 12, 2016

Are you incentivizing the behavior you want?

(The first in a 2-part series)

People often express surprise and disdain when company employees don’t seem to care much about delivering quality performance with intention.  Too often we think employees just want to get that pay check, striving only to click the “done” box on their job
duties. Blame is usually focused more on the individual employee as just someone who doesn’t have motivation or pride in their work. In most cases, however, this apparent apathy translates into a representation of the company. The company then loses customers, suppliers and partners. This isn’t always an individual problem. All too often this is a problem with improper or a complete lack of incentives with little to no comprehension of that individual's value to the organization and the role they play in its success. This can and does happen at all levels of the organization, from the lowest to the highest levels.

I’ve personally managed regional and global divisions of large and small, domestic and international companies, and when I was trying to help a divisional vice president of an international company institute better quality procedures in his division, in order to produce better and more reliable products with improved customer satisfaction (read, improved customer retention and therefore more reliable revenue), I was speechless when he said to my face “I hear you, and I recognize the value, but I don’t get ‘bonused’ on that activity….I have to focus our division’s efforts on what we are measured on in our performance – and paid for - at the end of the year, and we don’t have time or capacity for this initiative.”  What?! You aren’t going to participate in an endeavor to produce better quality products that produce greater customer retention and satisfaction, which translates in the long run to more company revenue and better company reputation because you don’t get bonused on that directly?! What about doing it because it’s the “right thing” and in the long run better for the company?  To him, that was a secondary consideration because at the end of the year, that wasn’t part of the criteria on which he and his “success” would be measured. Never in a million years at that point in my career would I have fathomed that kind of response from someone at that level. However, it was exactly what I needed to hear in order to understand the dysfunction in corporate America.

From that point, I recognized that money was what spoke to and motivated people as much or more than anything else.  So, in order to motivate change, we had to show how money translated into the equation.
To do this, I spearheaded the introduction of a “cost of quality” program that measured just the hard costs (meaning costs that were actually expended or went out the door in free goods or services) incurred by the business resulting from the lack of these quality procedures. While it took me several months to convince even my own staff of the need to put time into this initiative in order to tie quality to finances -- because they too couldn’t understand why people wouldn’t just improve because it was “the right thing to do” or because it was “the law” or because it was better to produce better products. However, after a few months of driving this home and pointing out each and every time a financial impact could be tied back to a quality process (or lack thereof), I finally convinced my own staff of the value of buckling down and devoting the time to design a program instead of  making excuses why something else was more important and took up their time (the department’s “to-do” list was always well longer than available time to accomplish…the quality/regulatory/legal department was not at that time a popular place to devote resources with its perception as just a “cost center”). It ended up being one of the best uses of time we and our company went through that year. In less than 12 months, this very basic, hard-cost-only “cost of quality” pilot program caught a million dollars of hard costs to the business as a direct result from quality process gaps. That revelation produced widespread support and adoption of a more pervasive cost of quality program to identify more issues that led to buy-in by everyone from top to bottom of the need for changes and the value of quality processes – not just to customers, but to the company’s bottom line.

While this is not an article about the importance of quality processes, per se, it was the bigger picture that spoke volumes to me. This experience told me several things about basic corporate environments that has proven to hold true most everywhere: (i) people don’t see the “down the chain” impacts of their actions; (ii) financial rewards through bonuses and increases in salaries based upon performance reviews more than anything else are the motivators for a large number of corporate employees; and (iii) most companies don’t have the right financial incentives and performance metrics in place to create the end results they really want.  The reasons why incentives are not adequately tied to the right activities are, in large part, because of the fact presented in (i) above and the continual dragging along of traditional, long-standing performance metrics and formulaic bonus plans that are based almost entirely on the end results of revenues, cost control and profitability numbers.  These plans are also mostly reserved for only the senior managers and the sales employees despite the role that everyone else plays in the success of the company.

The biggest problem I have seen with this standard employee incentive and bonus structure is that they aren’t addressing the milestones that produce those desired end result revenue, cost and profitability numbers. Even when companies try to get progressive about revamping their incentive and bonus plans, they still have trouble seeing the beginning and middle genesis of the chain reactions. They focus still on the outcomes instead of the process that leads to the outcomes. They also leave out everyone in that chain for financial rewards and incentives. Employers base performance mostly on the end game of how much money is in the till – how much in sales and how much money did you spend. There is a smattering of productivity measures in there, but again those are usually another end-result numbers game. Metrics have to be measurable, so what’s better at being measurable than numbers, right?

The problem isn’t that they are using just numbers to measure performance and incent behavior, it is that they aren’t incentivizing the right activities and points in the processes along the way that create the end game they want.  As a result, the employees aren’t focusing on the process and the activities that create the solid foundations that make it easier to produce the results. Instead, they’re focusing only on the end result, and it doesn’t really matter much to the employers or the employees how they get there. As a result, companies end up incentivizing little more than employed hamsters on wheels producing a
house of cards and everyone is a loser at this game, from customers, employees and the companies themselves.

So, does it really matter that you’re only incentivizing end-game numbers if the profitability numbers are being met?  What else really matters……………?

Read tomorrow’s part 2 for the conclusion....