Business 101: Incentives, bonuses and rewards

An incentive program is a powerful tool that can be used to enlist the creativity of your staff toward increasing sales and profitability, encourage implementation and support for effective cost-controlling measures, and, ultimately, drive meaningful and sustainable growth for your company.

Over the years, though, we’ve seen more of these programs executed poorly rather than successfully. We’ve blown a few ourselves.

In this article, we hope to shed light on incentive programs and help you decide if you want to take this path in your organization, and how to do it.

It’s important to remember, creating an incentive program is not an isolated decision you make in your company:

Incentive programs are intimately tied to what kind of culture you want to institute and promote.

What we mean by this can be summarized by two statements:

A. The good news about incentive programs is that they encourage participants to care about your business and they give you the chance to share your company’s profitability.

B. The bad news about incentive programs is that they encourage participants to care about your business and they give you the chance to share your company’s profitability.

We’re not trying to be facetious here and we’re not making a judgment:

• You may not want to have everyone thinking about costs and margins and efficiency: “How much are we paying the cleaning service? Couldn’t we do it cheaper ourselves?” “Why do we carry Brand X when the margins are so low?” “We have too many people on staff in the evenings” when one of those people is your brother, Spider, who’s out on parole and you’re doing him a favor.
• You may not want to share profits. Many of us don’t. A perfectly reasonable decision.
• You may not want to have a participatory culture in your company. Many of us are not comfortable in that environment.

No one ever said participatory management was easier or more efficient. Autocracy trumps democracy every time, in terms of being lean and mean, but that’s another discussion.

Rest assured, once you install any form of incentive program on the broader indicators of your business, you will begin to change the culture of your organization toward more participation, more caring, more investment and more human complexity.

We tend to think that is a good thing.

More complicated to be sure. Issues will arise you did not anticipate. A good incentive program is not self-managing: It will require your time setting it up, maintaining the data, and educating your staff and explaining your operations to folks who, a year ago, may not have cared as much.

For the sake of the discussion that follows, let’s assume you either already have incentives in place or are considering implementing them.

Let’s also limit what we’re talking about by eliminating those valid incentives or rewards or bonuses that don’t truly fall under the heading of a “program,” such as:

• Recognizing someone’s work and from time-to-time unexpectedly giving a gift or cash bonus or time off, or simply saying “thank you.” We recommend this, but nothing approaching a “program” is required.
• Having a staff party seasonally and expressing appreciation is a simple thing to do that builds trust and teamwork.
• Tying a reward, cash or otherwise, to a specific task can also be done simply and without major cultural convulsions. This might include store cleanup at night, getting the deposit into the bank each day on time or balancing the cash drawer.

But things get more complex when there are dependencies between people or departments, when there are functions that affect one person’s or a group’s reward that are under someone else’s control, and when the incentive reward is tied closer to the business at large.

Here are a few examples of some of the kinds of complaints we’ve heard in the past relating to rewards, bonuses or incentive programs:

1. A shipping and receiving group talking about a quick receiving turnaround incentive: “We would have made our bonus, but the buyers regularly didn’t have the documents to us by the time the goods arrived, and in most cases, they hadn’t even entered the PO!”
2. Buyers talking: “I missed my points on gross profit because the manager in Store 2 has an issue with Brand X and refused to even stock the product.”
3. A salesperson talking: “I’m supposed to earn five bucks each time I sell a Super Gizmo, but the buyers don’t keep them in stock. How’s that fair?”
4. A store manager talking: “This is goofy. A quarter of my pay comes from a percentage of net operating profits for my store, but guess who spends my SG&A (Selling, General and Administrative Expenses) without even talking to me?”
5. Manager, buyers and salespeople talking: “Our sales would be huge if we had product, but our credit is so poor, we don’t get shipped and we miss our bonuses.”
6. Everyone talking: “They told us we’d get profit sharing if we did well and WE DID, but it seems like they just want to keep it all for themselves. It seems they’re just manipulating us.”
7. Since we opened that new store, we haven’t gotten a dime in bonuses. That was a bad idea.”
8. “Who does that gal think she is? We didn’t need to hire her. Her wage is coming out of my pocket!”

Et cetera, et cetera, ad tedium. If you have incentive programs in your company, you’ve undoubtedly heard some or all of these complaints. They are all legitimate.

So our goal is to set up our incentive programs to anticipate and preclude as many of these problems as we can in advance.

Here are a few general guidelines we’d like to offer for your consideration:

1. The truest incentive program will reflect and be based upon your company’s overall profitability performance. This is the real deal. It’s what motivates you as an owner or company executive — so why shouldn’t it motivate others?

a. This type of program can be a percentage of EBITDA or net operating profits for a month, a quarter or a year, allocated to various staffers on a sliding scale based upon job description, tenure or other factors.

b. If you go this route, be prepared to open the books. If you want your team (and this can be just managers and buyers or all your staff) to own the P&L, you’ve got to explain how it works, review results regularly, be able to justify decisions you make in the longer-term interest that may have seemingly negative short-term implications and strategize how to address negative variances.

c. You aren’t required to share everything so don’t panic. Wages, dividends paid, loan agreements and balance sheet data are not necessary for everyone to know.

d. In this environment, creating a management or company team is essential, a place where participants can openly discuss operations, problems, ideas, etc. This setting will help mitigate squabbles such as those we listed in the common complaints example above, but only if you, as the leader, act upon the issues.

2. Bonuses on overall profitability are not the only effective motivators. Managers, merchandisers and supervisors all can be effectively motivated by incentive programs or bonuses based upon results in their areas of responsibility.

a. For buyers, there are ample metrics available that go right to the heart of your profit engine: gross profit, GMROI, sales growth, inventory levels, etc.

b. Store managers hold the keys to many of your expenses, to your service levels and the personality of your company as perceived by the public and the staff. Expense management, mystery shopping, visual merchandising assessments, customer comment cards, staff reviews, etc., can all be quantified.

c. Operations and accounting staff members can make or break your success and many of the functions they perform can be measured.

3. Establish the metrics, calculations, timing, pay periods, etc., of your program as precisely as you possibly can. Write them down. Provide copies to everyone involved. If there are contingencies, exceptions or external dependencies, state them. You want your staff to trust the program, rely upon it and understand how it works.

4. Set up your incentive program to be something your staff can count on:

a. If a bonus or incentive is only paid at your discretion, the benefit to you of having an incentive program will be greatly diminished.

b. If you exercise your discretion in a way that your staff regularly does not earn the incentive despite good performance, you will achieve the opposite and quite negative results – and your business will suffer.

c. Make it a deal you are committed to. Again, ask, “What motivates me?” If your business does well, but your equity only grows if your state’s governor is in a good mood, your motivation will be greatly diminished to say the least. You’re committed. You want commitments from your business partners. It’s reasonable for your staff to expect commitment from you.

5. Set rewards based upon the things you really want to achieve. Be comprehensive and look for metrics that are as broadly encompassing as possible.

a. Do you want turns to go up? Really? What if it means that sales decline? Wouldn’t some factoring of sales, gross profit dollars and turnover be better?

b. Do you really want your buyers to increase margin percentages without any other considerations? Problem solved: raise prices. Sales may decline, but you’ll likely have a nice looking percentage to look at.

c. Do you want your store manager to stick to the dollar wage budget exactly? What if traffic and sales double and customers begin to feel your service levels have slipped? Wouldn’t managing wages as a sliding percentage of net sales be more dynamic?

d. Incentivizing your distribution manager to cut costs could backfire and result in an operations bottleneck with stores not getting goods on time and a manager confused about why you’re not happy.

e. And finally, we all know the secret to making sales skyrocket: Cut those prices by 80 percent, but that’s not exactly going to work wonders with the bottom line.

6. With acknowledgement to B.F. Skinner, the more regular and immediate the rewards, the more effective.

7. Set goals realistically. Setting a sales goal and bonus for your store staff at 75 percent over last year when you know you’ll be very pleased at 20 percent and putting money in the bank is a tactic from the Draconian Business School. As well, if your staff, say, cuts overheads 10 percent this year, think seriously before setting a goal for next year to reduce by another 10 percent. You may not like what you get.

8. Sales commissions are an entire conversation in and of themselves. We like them and think that, done well, they can help a business. Deciding whether to offer a commission on base sales, growth only, for individuals or a group are all pivotal questions to be answered with sometimes profound cultural and image implications.

a. Sales trainer Harry Friedman will tell us any group incentive is communism. We disagree. Group programs can help lift the professionalism of the whole team.

b. Individual commissions work well with certain personality types, people who are also naturally inclined toward teamwork or collegiality. The downside can be rogues or prima donnas who refuse to stock the shelves, execute a markdown, clean the store or attend a meeting since it may take away from their paycheck.

c. Sales commissions, especially at the individual level, require POS support and more robust reporting.

d. Consider commission rates by sales type if you take this route. For instance, we’d suggest you may not want to pay the same rate on full-price sales as you do on diminished-margin discounted sales.

e. We tend to like commission programs at retail that are based upon sales growth: Rewarding the status quo can turn into an entitlement program.

f. Change them up from time to time. Supplement your base program with brand, item or category spiffs.

9. Even with function-specific or individual or departmental goals and incentives, keep everyone aware of the overall performance of your business. Their performance or their department’s efficiency does not exist in a vacuum. We’ve all heard stories of Fortune 500 CEO compensation increasing exponentially when the share price plummets. Chaos and irrationality reign even at the highest levels.

As you can see, there is much more complexity involved with reward programs than can be covered in this brief overview. But don’t be put off: The basics are quite manageable, even for smaller operations. At the core, a good incentive program, as we said in the introduction, is about changing your company’s culture to reward caring and commitment through sharing the fruits of your enterprise.

Happy retailing!

This article is part of a new Business 101 Training series for store management and owners, produced by SNEWS® and authored by Geoff O’Keeffe and Michael Hodgson. Geoff O’Keeffe has held retail senior management positions at Granite Stairway Mountaineering, Adventure 16, Patagonia and PlanetOutdoors.com, as well as having served as president of Lowe Alpine Systems USA and Mountainsmith. He is currently the president of Slumberjack, and lives in the mountains above Boulder, Colo., where he is a fourth-generation resident. SNEWS® co-owner and president Michael Hodgson, in a former life, was a manager for five years with Adventure 16 and the general manager overseeing a team of buyers and store managers for three years at Western Mountaineering. In those roles, he learned the immense value of skilled, well-trained, and very nimble teams to achieve business success.