The Issue – January 2017

INCENTIVE COMPENSATION FOR NON-SALES PEOPLE

Guidelines to Ensure Unambiguous Performance

By Chris Chillingworth

You can quote me, “Sales People are ‘coin-operated’.” I don’t know of a single salesperson who wouldn’t sell a product at a loss to his or her company if they were paid a commission to do it! It’s been that way for centuries, so we might as well get used to it. But how do you motivate non-sales people to go “above-and-beyond” their job description to accomplish something extraordinary for your company?

Admittedly, there are a broad range of points of view on the subject. At one end of the spectrum are companies who feel that employees should be grateful to have a job and the incentive to perform well is the avoidance of a pink slip. A job well done may result in a promotion or a raise, but there is no expectation of incentives for employees to work towards. At the other end of the spectrum are companies that desire their employees to do something extraordinary, and develop incentive plans annually to promote just that behavior. There are still other companies that hold salaries flat each year, but view a one-time bonus as a way to achieve exemplary performance, without having to perpetuate the additional compensation in the form of a raise. The differences may lie in corporate culture, the industry the company is in, the tightness of the labor market, whether a company is public or not, growing or not, or whether the company is in a mode to breakout of its historical performance, or move in a totally different direction.

One theme is universal. Bonuses should be paid for exemplary, not ordinary performance.

Let’s focus on companies that have historically paid bonuses, or are ready to shake things up. The concept of taking overall corporate goals and making them personal goals has been around for several decades. Peter Drucker first outlined the idea for management by objectives (MBO) in his book, “The Practice of Management,” published in 1954. The idea was further developed by his student, George Ordiorne, who became popular in the 1960’s and 1970’s. It survives to this day.

How do you decide which corporate goals to incent? Consider these questions:

  • First, it starts at the top. What are the specific objectives that the Board has given to the CEO for the coming year?
  • What role does my organization play in supporting those objectives?
  • What are the drivers of those objectives?
  • And which of those drivers fall within my sphere of influence to accomplish.
  • Who on my staff can exert influence to accomplish the objective?
  • What is the relative value (priority) in accomplishing this objective?
  • In what timeframe can this objective be accomplished?
  • And are there objectives to make your organization more efficient, more supportive to other organizations that mine interfaces with, and what objectives, if implemented, would drive down expenses, or make the company more profitable?

Answer these questions and you are well on your way to establishing specific objectives for each leader in your organization.

In what form should the attainment of objectives be rewarded?

Cash, payable as a bonus, is a form that everyone understands. But not every company has the resources, particularly if they are cash-constrained, to pay a cash bonus. Alternatively, stock options, and restricted stock awards, particularly if the company is public or pre-IPO, can be very meaningful. Additionally, a 401k contribution or other deferred compensation award can be attractive. If the achievement is particularly substantive, consider a promotion, which combines both recognition and compensation, and which spreads the award over a successive period.

Always, make the achievement a point of Company recognition. Ensure that everyone knows who the over-achievers are, at a company-wide event or annual meeting. Consider a Gold-Silver-Bronze Recognition award, and, perhaps, an overall award, such as Most Valuable Player.

How much should we offer an individual contributor?

The individual award should be meaningful, but proportional to the objective obtained. Most common are awards in the 5 – 25% range of annual compensation, cumulatively. Leaders are generally paid more, percentage-wise, than producers, but that can depend on the individual employee.

How many objectives should be pursued at the same time?

In my experience, three to five objectives over an annual period is enough to be meaningful, but limited enough to assure performance. Prioritize. The objectives need not be equally weighted. Make sure the objective that is most important is rewarded accordingly. You may, for instance, assign 10% to a major objective, and 5% to the achievement of lesser objective. Again, the cumulative achievement of all objectives should not exceed the upper range for the individual, although the Company could consider one overall financial award

How do we define the objectives?

The objective should be clearly defined, objective, and measurable (both in terms of progress and accomplishment). Individuals know that if you are measuring performance, the objective is more likely to get done. People do what you inspect, not what you expect. State the objective in terms where the result will not be uncertain. An example of a good objective would be: “Reduce Days Sales Outstanding, or DSO’s (a measure of receivables collection efficiency) to 30 days by March 31st. Simple, straightforward, objective, unambiguous. “A poorly worded objective would be: “Expand product awareness in the various regions.” (Unmeasurable, ambiguous, without a time frame) There should be no confusion or ambiguity as to whether the objective has been obtained.

Make sure the individual has the authority to carry out the objective. Without authority, the objective is unlikely to be met. If the objective requires the contributions of a team, then the individual leader must have the authority to incent members to join the team, and to dismiss members from the team for non-performance.

There must be a reasonable timeframe within which the objective is accomplished. A goal without a timeframe is simply that, a goal. A quarter may be enough, but a semi-annual or annual goal is more likely to be meaningful and achievable. Have regular meetings to measure progress. Weekly meetings for quarterly goals, bi-weekly meeting for semi-annual goals, monthly meetings for annual goals. The form below may be a useful tool to measure progress towards the ultimate objective.

John or Jane Doe
ABC Company MBO's
Jan 1, xxxx - Dec 31, xxxx
ObjectiveDeadlineStatus / % CompleteAccomplishments Week 5Shortfalls Week 5DependenciesPriorities Week 6

Allow team members to offer their own objectives. While the ultimate objective will be determined by management, team members are more likely to be engaged if they feel they had a hand in setting the objectives in the first place.

A word of caution: The owner of a particular objective should not also be responsible for measuring that objective. For instance, it may be inappropriate for the Company Controller to be assigned a profitability objective, since the Controller has the ability to manipulate certain data to produce a certain result, without achieving the objective for which the goal was premised.

Examples of well-defined objectives

  • Cut customer waiting time online to 90 seconds’ average over a period of 3 months by Dec 31st (Assumes the company has a means of measuring customer response time).
  • Improve the accounting close time to 10 days by June 30th as measured by completed checklist and supporting schedules reviewed by CFO.
  • Ensure all employees are onboarded within 5 days of their start date by Sep 30th. (All employee documents signed, Employee handbook delivered and acknowledged, employee enrolled in all eligible benefit plans)
  • Ensure that technical documents covering each new feature are final before release of product on May 31st, approved by engineering, marketing, sales, customer service, and operations.
  • Lower warranty return rate to less than .01% of shipments by Aug 31st.

Summary

If your company regularly issues incentives to non-sales people, or is considering doing so, use these guidelines to set simple, objective, and unambiguous standards for exemplary performance. If you need assistance in assessing how to establish incentive objectives for non-sales people, please contact Chris Chillingworth at CFOs2Go (cchillingworth@cfos2gopartners.com) or by calling him at (408) 309-1343.


Chris Chillingworth is a partner with CFOs2Go Partners specializing in the high tech manufacturing, software, and service industries. He has over 30 years’ experience in financial leadership including multiple roles as a CFO in both the public and private sector.

He leads our financial systems, technical accounting, equity crowdfunding, and corporate governance practice groups.

http://www.2gocompanies.com/cfos2go/team/practice-groups/technical-accounting-practice-group/

Partner: Chris Chillingworth Practice Group: Corporate Restructuring, Equity Crowd Funding, Financial Systems and Reporting, Technical Accounting and Stock Compensation

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