The Secret to Optimizing ROI on Compensation, Commission and Bonus Programs

What is the ROI that your company expects from its compensation, commission and bonus programs?

In business, Return on Investment is routinely calculated, planned and monitored. Many organizations’ expectations of these monetary rewards programs include employee retention as well as achievement of critical goals and targets. But, business sustainability is a powerful impact these programs can help bring to fruition, by enabling achievement of the business strategy — in particular, the company’s competitive differentiation and its strategic growth plan.

in fact, dsigning compensation, commission and bonus programs that aren’t tied to competitive differentiation can have costly unintended consequences. Let’s look at two examples that are typical in today’s organizations.

Company A, a small division of a large organization, 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 generated a variety of planned and unplanned consequences depending on employee departments and roles. For example, to earn bonuses, department supervisors avoided purchasing items such as supplies, tools, and equipment; sales and marketing functions reduced travel and associated expenses; and production managers deployed mandatory overtime to manage headcount and avoid hiring additional people. These actions had a domino effect, causing the following results:

– Increased customer returns due to quality defects

– Increased scrap due to tooling issues

– Longer production times due to unmaintained equipment and tooling

– Late shipments

The bottom line: Bonuses were earned and paid out as customer complaints and departures increased.

Company B, established decades ago, paid its sales force commission plus low/no salaries, plus annual bonuses. Commission scales were based on total revenue and the criteria to earn annual bonuses included overall corporate performance against revenue and profit goals along with 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, despite the lack of progress on new business development and expansion in selected industries.

Company C, a manufacturer of medical products, sold precision products as their primary profit leader. Management established one criteria for manufacturing’s bonus to be issued: on-time delivery.

The single bonus criteria encouraged people to find ways of saving time in order fulfillment. Manufacturing began to skip steps in machine maintenance, product inspection, and training of new hires. Quality and Shipping skipped inspection steps. Purchasing almost doubled raw material inventory to avoid running out of materials needed by Production.

Upper Management was encouraged to see a quick and ongoing improvement in on-time delivery. They paid out the first bonuses before customer returns and complaints ramped up.

The company’s strategic differentiation of custom, high quality products on-time failed to be accomplished. Bonuses had been paid only to find products returned for rework, and raw material consumption ate up profits. Loss of trust had caused some customers to find alternate suppliers.

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 competitive differentiation 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 a competitive differentiation emphasizing its breadth and depth of products and services, which required Sales to increase sales across product lines, and on new business development and growth in specific industries, which required prospecting. When employees stuck to selling products they already knew, to customers they already had, progress on achieving the strategy was not a priority.

Company C: Their products were labor-intensive to meet tight specifications. Their customers required on-time delivery. Their competitive strategy emphasized quality and on-time delivery. To overcome obstacles to on-time delivery quickly, people skipped steps in training new hires, machine process inspection, and final quality inspection.

Products were delivered on time, but quality and customer trust were casualties. Bonuses were paid out for two months before root causes of the uptick in returns and complaints were understood, while orders were being reworked by employees on overtime and customers found alternative suppliers to improve reliability.

Key Point: In order to maximize the ROI on compensation, commission and bonus programs, these programs need to be effectively aligned with your strategy, rooted in your competitive differentiation and your strategic growth plan.

Today’s Challenge: Many companies are not realizing full benefit from their compensation, commission and bonus programs. Is your company one of these? How well aligned are your monetary rewards programs with your business strategy? Are these rewards structured to help employees to focus on what’s most important?