I was looking at a performance plan and bonus scheme for someone today and noticed a rather problematic hurdle. That’s one of those statements that says you get a $10,000 or whatever bonus if revenue exceeds $1 million. These weren’t the numbers but I blanched at the amounts as the bonus was large and the hurdle was high. It was so high, it was almost a cliff.
I’ve worked with people before, who when they realize they don’t have any chance of meeting their bonus, sandbag sales in order to shift them into the next year. The same thing happens with ceilings. In the old days IBM had a rule that no one could earn more that the President. That stopped more than one sales rep from selling late in the year.
The problem is, what do you do about performance hurdles and ceilings? I think ceilings are stupid. You can get burned one year without a ceiling but you can change the comp plan the next year so the expected revenue is more in line with reality.
But hurdles are another matter. How do you set a minimum standard without a hurdle. I don’t think there is any way to deal with them except through one of my favourite tools, trailing 12 month averaging. Paying every quarter or even monthly based on the last twelve months results doesn’t penalize or benefit anyone for sandbagging and you can adjust the hurdle rate to make it more realistic on a regular basis.
I know one company that pays bonuses based on weekly results. You can have an off week and it won’t affect the rest of your month. It also means that you can’t slack off for very long as you’re being measured all the time. They have hurdles and they work when measured weekly.
Complex to administer, maybe but it gets rid of quarter and year end stuffing which inevitably leads to operating issues and it keeps people on their toes all the time.
You can take that story to a very high level and probably find that when Target put their own exec into Target Canada to “fix it”, he probably realized that because his and his peers’ income is heavily based on on their share value, which will go down while Target Canada is in a mess. He isn’t compensated for gross margin, but for share value. The bisiness is reun by the real estate group, not the retailers.
ACP
And I was amused to see that the CEO’s severance package is larger than those of all other employees combined. Perhaps he looked at what he would earn by fixing the company and that didn’t compare favourably with what he would earn by shutting it down.
As long as we don’t see a government running in at the last second with a big, fat bailout cheque to try to preserve the thousands of part-time, minimum wage jobs that allow the Target Canada staff to barely make ends meet.
Some of these golden parachutes are too bold a reward for failure – but I’ll let shareholders opine on that. I just hope Target Canada isn’t getting in line behind U.S. Steel for a bailout that failed entrepreneurs, mom and pop shops, and other independent retailers squeezed out by the big boys will be contributing a portion of their (lack of) income taxes towards.
Sorry. We were talking about Performance Hurdles. Here we are now talking about the success Target Canada had playing Performance Limbo. “Umm, Target. You were supposed to go over the bar!”
I had never thought of a retailer bailout. I hope the government never gets that desperate for job creation.
Your note outlines many of the challenges with performance comp plans based on revenue or gross profit targets. I think it is time for companies to be more innovative in their comp structures. For example, a business I know pays its sales team a performance bonus based on quantifiable cost savings or agreed ROI delivered to their customers. The customer actually signs off that the returns were realized. Guess what? Double digit revenue growth for several years followed this customer aligned comp plan. Huge differentiator.
You are right about the need for innovation. It will be interesting to see if the cost saving/ROI model works out over time. It may work as long as the company revenue is not tied to cost savings/ROI on some sort of contingency basis. I was in a business like that for a short time and the client relations were problematic to say the least. Clients were too quick to claim that they would have saved the cost anyway and frequently debated the impact that we had on their results. There isn’t much research that is saying that bonuses work but unfortunately, most companies don’t read research.