What is the ROI that your company expects from its compensation, commission and bonus programs?
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In business, ROI (return on investment) is routinely calculated, planned and monitored. Many organizations' expectations of these monetary rewards programs include employee retention -- and some include expectations in performance. But, the greater value of these programs can best be gained and measured in the achievement of the business strategy.
We have worked with several companies who in one way or another missed the boat on the strategic design of their monetary rewards programs. And it cost them. Let's look at two examples that we believe 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 directed employee focus in different ways depending on their position. So, to earn bonuses, people focused on avoiding purchasing items such as supplies, tools, and equipment and on reducing travel and associated expenses; and supervisors deployed mandatory overtime to manage headcount and avoid hiring additional people. There were several unintended consequences, such as the following:
- Increased customer returns due to quality defects
- Increased scrap due to tooling issues
- Longer production times due to unmaintained equipment and tooling
- Late shipments
Bonuses were earned and paid out as customer departures increased.
Company B paid its sales force commission only (no salaries) and annual bonuses. Commission scales were based on total volume sold 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, while new business and expansion in selected industries was not happening.
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 selling across product lines, new business development and growth in specific industries. When employees stuck to selling products they already knew, to customers they already had, progress on achieving the strategy was not a priority.
Company B's Value Proposition was service by sales employees who were experts in the products and the way they are used in the customers' industries. Since employees frequently did not spend time and money to travel to attend company training in various product lines and industries, their expertise was limited as a result. Further, the lack of focus on prospecting prevented new business from being developed and inhibited the company's growth into specific industry markets.
In order to maximize the ROI on compensation, commission and bonus programs, these programs need to be effectively aligned with your business strategy.
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