Improving Business Performance Through Incentives

A well-defined strategy does not start and stop the at the company level. Many Wholesale Distributors have developed a strategic vision which defines their key objectives for the near future, often three to five years. However, the strategy does not go far enough in defining key departmental goals, initiatives, performance measures, and activities necessary to execute the company vision. Often a “disconnect” exists between company strategic goals and objectives and departmental goals and objectives. For example, a company objective of improving revenue 2-4 percent yearly may require, as one departmental objective, the implementation of incentives designed to enhance performance

Incentives support the achievement of KPI (key performance indicators) targets. The question becomes, “what type of incentive is best to achieve the desired result?” If the incentive is individually based instead of team….the team may not pull together to reach the desired result….if the incentive is too long term, the team may not believe the effort is worth the incentive….if the incentive is not “valued” by the team or individual the desired result will certainly not be achieved. Incentives can also have a negative influence. For example, companies that have installed incentives and have had to subsequently eliminate or reduce the incentive for financial reasons, often find that morale is lower than before the incentive was installed which can lead to higher incidences of turnover and lower productivity. Moreover, financial incentives implemented at the executive level may promote a “short-term” mentality while overlooking longer-term benefits to the organization.

Another common pitfall is the implementation of an incentive before reengineering of processes within the department where the incentive is in effect. While the net result may very well be an increase in revenue, revenue may have been enhanced through process improvements resulting in higher operating profit since sales increases without incurring the cost of an incentive program. Reengineering processes after the implementation of an incentive program may dramatically increase costs above targeted cost per unit goals. This occurs when incentives are already paid, significant productivity improvements occur and the employee begins reaping a windfall from the process or procedure change.

Incentive programs are not sustainable without on-going scrutiny. Validation of results, quality control, fairness, cultural integration and achievement of desired results must be periodically evaluated. Obviously, this often adds a layer of cost which must be added to the cost of the incentive to objectively evaluate program costs versus benefits achieved. However, this typically does not negate the fact that incentives can and do play an important role in achieving a desired result, most often an improvement in operating profits.

Incentives are typically easier to implement and administer in departments subject to few extraneous variables. For example, an employee working in a warehouse picking cases of beverage daily would be simpler to assign an incentive than a sales person working in the market. The market may be subject to demographic shifts, competitive factors, pricing strategies, legislative actions, internal factors, and a whole host of other variables which can affect performance in either direction, up or down. When this occurs, the incentive program must be reevaluated.

Internal to the incentive program is the frequently asked question, “should management determine the activities that drive performance and base the incentive system on those activities, or should the incentive system be based on selected goals and objectives, thus allowing the employee flexibility in determining the activities which will allow them to achieve the desired result”. For example, should a sales persons incentive be based on an activity, such as the number of new promotional sets completed or on the goal of increasing share points within a given market or territory? The answer may rest with the quality of the sale force or with management if the true drivers of performance can be determined.

Finally, behaviors will undoubtedly change with the introduction of an incentive system. Therefore, a discussion of the desired behaviors should occur and concepts evaluated before completing the incentive system design. Both internal and external customer service may deteriorate if the incentive system is not balanced between the needs of the employee, customers, management, and the company’s image in the market place.

About the Author

Patrick Jones is Managing Partner and Co-Owner of The GARR Consulting Group based in Atlanta Georgia. The GARR Consulting Group is a multi-disciplined firm focusing on assisting wholesale distributors and retailers improve profitability. Mr. Jones has extensive

experience in the areas of operational improvement, strategy articulation, organizational structure, customer service and HR programs. Mr. Jones can be reached at 256-682-3510.