Pay For Performance!
Furniture World Magazine
By David McMahon
It’s a path to success!
Operations Management by David McMahon
“My bottom line is 14%.” That was what a member of one of our performance groups modestly reported recently. “Wow!” and “How?” That was the reaction from the audience.
In a time when businesses with decent profitability are reporting around 5% net income, this company is at the top of their game. Are they just lucky? Are they an anomaly? I think not. I’ve seen similar break out performances many times – in ALL economies.
It comes down to this: to win you must create a business environment that breeds success – everywhere.
You see, a prime reason why top performing companies outperform their average performing peers is they pay extra when their people achieve better results. These successful businesses align their self interests with their employee’s self interests. They have a well executed Pay for Performance strategy (PFP). They understand that everyone deserves to make money – especially when they make the business money.
In this article we will look at how to create a winning PFP strategy for your furniture business. Be sure not to miss Chart #1 on the following page. It provides detailed examples of how you might implement your strategy.
The goal with PFP is to reward performance on the upside, above normal performance levels. This is not intended to replace your regular salaries or bread and butter sales commissions. It is intended to focus people’s attention on helping you accomplish certain business objectives. PFP costs you nothing if executed correctly since you only pay when productivity is increased. Best of all, it gives people a vested interest in your success by focusing their attention on your organizational goals. There are five basic steps to implementing a winning PFP strategy:
Set Performance Objectives
“I don't care how much power, brilliance or energy you have, if you don't harness it and focus it on a specific target, and hold it there you're never going to accomplish as much as your ability warrants.” ~ Zig Ziglar.
Goals and micro-goals are the basis for PFP. You must know specifically where you need improvement to establish proper goals. Furthermore, you must know specifically how to make that improvement. For example, suppose you realize that your warranty close rate averages 10% on sales that can have product warrantees. Knowing that the best performing operations can close over 90%, it tells you that this is an area of opportunity. Set a performance objective to improve warranty sales. If you achieve this micro-goal, your bigger goals of increasing sales and gross margin could also be realized.
Determine The Payment
Once you have your target set, you need to define the motivating element. Define the “carrot” for the “rabbits” to chase. This should be customized to your situation and your people. It could be money, paid time off, merchandise, dinner vouchers, sports’ tickets; you name it, and don’t be afraid to be creative and fun. Let’s say that you interview your sales associates and find that cash should be the “carrot”. And just for fun, let’s make this a team PFP program. After working the numbers, you decide to pay $1,000 per quarter to all sales associates for a 10% increase in the warranty close rate over the previous quarter’s close rate.
Define How It Works
Keep it simple. Have the performance metric and term of measurement clearly defined whether it be a month, quarter, or year. Have the people that are responsible for performing, track and measure the metric that you are trying to improve every week. This will keep you moving toward your target. By measuring along the way, you can see if changes in strategy, methods, or further education are needed. When it comes time to assess the final measurement, you will already know if you have obtained the result that you were seeking. In our example, at the end of the quarter, if a close rate of 20% is reached, the team gets to split $1,000. This is all to the up side. There is no loss to the business. Everyone is happy. If not, try again next quarter or make a change to the program.
Add, Drop, Change, Replace
Like merchandise, like employees, like vendors, like all things, some PFP programs will work better than others. If you create one that everyone likes, performance clearly improves making it easy to manage. You’ve got a winner. Let your winners run. On the other hand, if you have a PFP program that is not producing the desired results, change it if the metric is important. However, don’t be afraid to drop and replace programs to change the focus of your goals as your organization changes. Let’s say that you get your warranty close rates up to 70% on a consistent basis and you are happy with that; the effort that it might take to get it up to 90% might not be worth the time. Instead, you may decide to discontinue that program and replace it with a PFP that focuses on increasing average sales per individual. Keep your PFP strategy dynamic.
Set The Rules
Think of it like a game. Be creative. Keep it simple. Keep it fun. Let others keep score. Results are reported to you – pay when your goals are realized. Cheaters are penalized.
One important thing to understand when creating your PFP strategy is ALL departments and business partners should be included. Don’t leave anyone out. Improving sales metrics is not the only factor that contributes to increased cash flow and profitability. Every area, from purchasing to accounting, should be considered. You should even consider giving a bonus to your vendors and customers for exceptional performance.
To stimulate your creative side, check out Chart #1 below. You can take these ideas, customize them for your business and people, and get started on producing a PFP strategy.
David W. McMahon is an inventory management and operations expert. Questions about any aspect of retail operations management or for help implementing the 5 SMART Steps in your business contact David care of FURNITURE WORLD at email@example.com or call him direct at 800-888-5564.
David McMahon is a Certified Management Accountant and Consultant with PROFITconsulting, a Division of PROFITsystems. Questions about this article, or to request a similar analysis on your financial statements contact him at Davidm@furninfo.com or call 8oo-888-5565.
Read other articles by David McMahon