1. Why didn't this incentive system work?

2. How should it be fixed now?

The Best-Laid Incentive Plans IRAM PHILLIPS Finished tying his bom tie and glanced in the mirror Frowning sight of his watch in the mirror. Time to get going. Moments later he was down the stairs, whistling cheerfully and heading toward the coffeemaker. "You're in a good mood," his wife said, look ing up from the newspaper and smiing. "What's that tunel Accentuate the positive?" Well donel Hiram called cut. "You know I do believe you're picking up some pop culture in spite of yourself it was a running Joke with them. She was a classically trained cellist and on the board of the local symphony. He was the one with the Sinatra and Bing Crosby albums and the taste for standards. "You're getting better at naming that tune" Or else you're getting better at Wiktling She looked over her reading glasses and met his eye They let a beat pass before they said in unison: "Nasah." Then, with a wink, Hiram shrugged on his trench com, grabbed his travel meg, and went out the door Fat and Happy It was true. Hiram Philips, CFO and chief ad ministrative officer of Rainerrel Products, adi versified consumer-durable manufacture was in a particularly good mood. He was heading into a breakfast meeting that would bring noth ing but good news Sally Hamilton and Frank Ormoney from Felding & Company would no doubt already be at the office when he arrived and would have with them the all-important numbers thematistics that would demonstrate the positive results of the performance man agement system he'd put in place a year ago Hiram had already seen many of the foures in bits and preces. He'd retained the consultants to establish baselines on the metrics he wanted to watch and had seen various interim reports from them since. But today's meeting would be the impressive summation capping off a year's worth of effort. Merging in the congestion of Route 4s he thought about the upbeat present tation he would spend the rest of the morning preparing for tomorrow's meeting of the corpo rate executive Council It was obvious enough what his introduction should be. He would start the beginning-oc, anyway, his own beginning at Rainbarrel Prod ucts a year ago. At the time, the company had just come off a couple of awful quarters. It wasn't alone. The sudden slowdown in con sumer spending after a decade-long boom, had taken the whole Industry by surprise. But what had quickly become clear was that Rainbarrel was adjusting to the new reality for less rapidly than its biggest competitors. Keith Randall CEO of Rainberrel, was known for being an inspiring leader who focused on innovation. Even outside the industry, he had a name as a marketing visionary. But over the course of the ten-year economic boom, he had allowed his organization to become a little lax. Take corporate budgeting, Hiromil smiled when he recalled his first day of interviews with Rainbarrels executives, it immediately became obvious that the place had no budget Integrity whatsoever One unit head had said origi, "Look, none of us fights very hard at budget time, because after three or four months, ne body looks at the budget anyway" Barely.com cealing his shock, Hiram asked how that could be; what did they look at, then? The answer was that they operated according to one simple rule: Fit's a good idea, we say yes to it. If Its a bad idea, we say na "And what happens, "Hiram had pressed "when you run out of money Halfway through the year?" The fellow rubbed his chin and took a moment to think before answering. "I guess we've always run out of good ideas before we've run out of money." Unbelievable "Fat and happy was how Hiram character ind Rainbarrel in a conversation with the head. hunter who had recruited him. Of course, he wouldn't use those words in the CEC meeting. That would sound to disparaging. In fact, he'd quickly fallen in love with Rainbarrel and the opportunities i presented. Here was a company that had the potential for greatness but that was held back by a lack of discipline. I was like a racehorse that had the potential to be a Secre- tariat but lached a structured training regimen. Or a Ferrari engine that needed the touch of an expert mechanic to get it back in trim. In other words, the only thing Rainbarrel was missing was what someone like Hiram Philips could bring to the table. The allure was irresistible; this was the assignment that would delines career. And now, a year later, he was ready to declare a turnaround Lean and Mean Sure enough, as Hiram steered toward the en trance to the parking garage, he saw Sally and Frank in a visitor parking space, puting their buleyfile bags out of the trunk of Salysedan He caught up to them at the security checkpoint in the lobby and took a heavy satchel from Sally hand Moments later, they were at a conference table, each of them poring over a copy of the consultants' spiral-bound report. This is great." Hiram said." can hand this out just as is. Bu what I want to do while you're here is to really nail down what the highlights are. I have the floor for 40 minutes, but I guess I'd better live ten for questions. There's no way I can plow through all of this." inere you "Sally advised,"would lead of with the best numbers. I mean, none of them are bad. You hit practically every target. But some of these, where you even exceeded the stretch goal... Hiram glanced at the line Sally was under scoring with her fingernail. It was an impressive achievementi a reduction in labor costs. This had been one of the first moves led made, and he'd tried to do it gently. He came up with the idea of identifying the bottom quartile of per formers throughout the company and offering them fairly generous buyout packages. But when that hadn't attracted enough takers, he'd gone the surer route He imposed an across the board headcount reduction of on all the units. In that round, the affected people were given o Anancial assistance beyond the nor mal severance. "I made a big difference" he modded. But it wesit eactly the world's most popular move." Hiram was well aware that a certain segment of the Rainbarrel workforce currently referred to him as "Fire 'em." He pointed to another number on the spreadsheet"Now that one tells a happier story: lower costs as a result of higher productivity "And better customer service to boot." Frank chimed in. They were talking about the trans formation of Rainbarrel's call center where phone representatives took orders and tundled questions and complaints from both trade and retail customers. The spreadsheet indicated a dramatk uptick in productivity: The number of calls each service repas handling per day had gone up Son. A year earlier, reps were spend ing up to six minutes per call, whereas now the average was less than four minutes. "I guess you decided to go for that new automated switching system?" Frank asked "Nol"Hiram answered. That's the beauty of it. We got that improvement without any capi tal investment. You know what we did we just announced the new targets, let everyone know we were going to monitor them, and put the names of the worst offenders on a great big wall of shame right outside the cafeteria. Never underestimate the power of peer pressure!" Sally, meanwhile, was already circling an other banner achievement an increase in on time shipments. "You should talk about this, given that is something that wasn't even being watched before you came." I was true. As much as Rainbarreled to emphasize customer service in its values and mission statement, no reliable metric had been in place to track it and getting a metric in place hadn't been as straightforward as it might sem-people hapgled about what constituted on time and even what constituted shipped Finally, Hiram had put his foot down and in sisted on the most objective of measures. On time meant when the goods were promised to ship. And nothing was counted as shipped tillit left company property. Period. "And once again Hiram announced, not a dollar of capitale penditure. I simply let people know that, from now on, if they made commitments and didn't keep them, we'd have their number "Seems to have done the trick Sally ob served. "The percentage of goods shipped by promise date has gone up steadily for the last six months. It's now atgon." Scanning the report, Hiram noticed another huge percentage gain, but he couldn't recall what the acronym stood for."What's this? Looks like a good one a Son cost reduction?" Saly studied the hem "Oh, that. It's pretty small change, tually Remember we separated out the commissions on sales to employees came back to Hiram immediately Rainbarrelad a policy that allowed current and retired em ployees to buy products a substantial discount But the salespeople who served them earned commissions based on the full real value, not the actual price paid. So, in effect, employee pur chases were jacking up the commissione pensel. Hiram had created a new policy in which the commission reflected the actual purchase price. On its own, the change didn't amount to a lot, but it reminded Hiram of a larger point he wanted to make in his presentation the impor- tance of straightforward rules and rewards-in driving superior performance "I know you guys don't have impact data for me, but I'm definitely going to talk about the changes to commission structure and sales in centives. There's no question they must be mak- ing a difference "Right," Sally nodded. "A classk case of keep it simple isn't it? She turned to Frank to e plain." The old way they calculated commissions was by using this really complicated formula that factored in, I can't remember at least five different things." including sales, I hope" Frank smirked. "I'm still not surel Hiram answered. No, riously, sales were the most important single variable, but they also mined in all kinds of tar gets around mentoring prospecting new clients, even keeping the account information current It was all way too subjective, and salespeople were getting very mied signals. I just clarified the message so they don't have to wonder what they're getting paid for Same with the sales contests. It's simple now. If you sell the most product in a given Quarter, you will With Sally and Frank nodding enthusiasti- cally, Hiram again looked down at the report Row after row of numbers attened to Rainbat rer's improved performance. It wouldn't be easy to choose the rest of the highlights, but what a 2 problem to have! He invited the consultants to should phrase certain points for maximum ef weigh in again and leaned back to back in the fect. Lew Hart had lost him in the first moments superlatives. And his smile grew wider. of his presentation on the people survey by beginning with an overview of purpose, meth Cause for Concern odology, and historical trends Deadly The meat morning, a well-rested Hiram Philips It was the phrase "mindlessly counting Strode into the building, flashed Is badge at patents that finally turned Hiram's attention Charlie, the guard and joined the throng in the back to his colleague. Low, it seemed, was now lobby, in the crowd waiting for the elevator, he into the findings section of his remarks. Hiram recognized two young women from Rainborrel plece together that he was reporting on an un lates in hand and headphones around their precedented level of negativity in the responses necks. One was grimacing melodramatically as from Rainbarrel's R&D department and was she turned to her friend. "Im so dreading get quoting the complaints people had scribbledon ting to my desk the said. "Right when I was their surveys. Another one put this way. Lew leaving last night, an email showed up from the said. "We're now Nighly focused on whe's get buyer at Sullivan. I just know it's going to be ting the most patents, who's getting the most some big hairy problem to sort out. I couldn't copyrights, who's submitting the most grant bring myself to open it with the day I'd had. But proposals, etc. But are ne more creative it's not I'm going to be seating it today trying to re that simple." spond by five o'clock I can't rack up any more "You know," Rainbarrel's chief counsel noted, late response, or my bonus is seriously history." "have thought lately that we're filing for all Her friend had slung her backpack onto the of patents for products that will never be com floor and was rooting through it, barely listen. mercially viable." Ing. But she glanced up to set her friend straight "But the thing that's really got these guys in the most casual way. No see all they check frustrated seem to be their innovation X is whether you responded to an e-mail within 24 project le continued. "They're all saying is hours of Opening it so that's the key. Just don't the best thing since sliced bread, a generational open it. You know, till you've got time to deal lap on the product line, but they're getting no with it uptake Then a belltone announced the arrival of the Eyes in the room turned to the products dit elevator, and they were pone. sion president, who promptly threw up his hands. What can I say,ging? We never expected More Cause for Concern that breakthrough to happen in this fiscal year. An hour later, Keith Randall was calling to order it's not in the budget to bring it to market the quarterly meeting of the corporate cu Lew Harl Silenced the rising voices, remind- Live Council. First, he said, the group would hearing the group he had more findings to share the results of the annual employee survey.cour Unfortunately, it didn't get much better both tesy of human resources VP Lew Hart. Next current and retired employees were complain- would come a demonstration by the chief mar ing about being tre med poorly by sales person keting officer of practice the CEO hoped to nel when they sought to place orders or obtain incorporate into all future meetings. It was a information about company products. There "quick market intelligence" or OMI, scan, en was a lot of residual unhappiness about the lay gaging a few of Rainbarrel's valued customers orts, and not simply because those who re- in a pearranged - but not predigested-conter mained had more work to do. Some people had ence call to collect raw data on customer ser noted that, because the reduction was based on Vice concerns and ideas. "And finally Keith conheadcount, not costs, managers had tended to cluded, "Hiram's going to give us some very fire low level people, crippling the company good news about cost reductions and operating without saving much money. And because the efficiencies, all due to the changes he's designed reduction was across the board, the highest per- and implemented this past year forming departments had been forced to lay off Hiram nodded to acknowledge the compli some of the company's best employees. Others ment. He heard intle of the next ten minutes had heard about inequities in the severance proceedings, thinking Instead about how he deals: "As far as I can tell, we gave our lower performers a better package than our good Hiram winced, recalling the conversation in the ones," he quoted one employte as saying lobby that morning. The voice persisted" And then there was a chorus of complaints thought that might be the better way to contact from the sales organization. "No role models. your service people these days? They always "No mentoring"No chance to pick the veter seem in such an allired hurry to get off the ans' brains"No knowledge sharing about a phone when I call. Sometimes it takes the or Couns. More than et salespeople were dis three calls to get something squared away satisfied with their territories and clamoring for The call didn't end there a few more short the more affluent, high volume districts didn't comings were discussed. Then Keith Randall, help that all the sales contest winners this year his credit, pulled the conversation onto more were from places like Scarsdale, Shaker Height positive ground by reaffirming the great regard and Beverly Hills," a salesperson was quoted as Rainbarrel had for Brendon Brothers and the saying, low concluded with a promise to look mutual value of that enduring relationship further into the apparent decline in morale to Promises were made and hearty thanks ex determine whether it was an aberration. tended for the frank feedback. Meanwhile, Hiram felt the eyes of his colleagues on him. Fi- The Ugly Truth cally, the call ended and the CEO announced But if the group thought the mood would im that he, for one, needed a break before the last prove in the meeting's next segment the OMI agenda item chat with the foles at longtime customer Bren ton Brothers - they soon found out otherwise Dazed and Confused Booming out of the speakerphone in the middle Hiram considered following his boss out of the of the table came the Southern-tinged voices of room and asking him to table the whole discus Billy Brenton and three of his employees repre sion of the new metrics and incentives. The cl serting various parts of his organization. mate was suddenly bad for the news he had "What's up with your shipping department?" looked forward to sharing. But he knew that de Billy called out. "My people are telling me it's laying the discussion would be weak and wrong. taking forever to get the stock replenished After all, he had plenty of evidence to show he Hiram sat up straight, then leaned toward was on the right track. The problems the group the speakerphone. Excuse me, Mr. Brenton had just been hearing about were side effects, This is Hiram Philips I don't believe we've met but surely they didn't outweigh the cure. But are you saying we are not shipping by our He moved to the side table and poured a glass promise de of ice water, then leaned against the wall to co A cough or was it a guffaw? - came back Bect is thoughts. Perhaps he should reframe his across the wire. Well on. Let me tell you about opening comments in light of the employee and that. First of all, what all promise is not always customer feedback. As he considered how he what we are saying we require and what we might do so, Keith Randall appeared at his side believe we deserve. Annie, isn't the right? "Looks like we have our work cut out for us. "Yes, Me Brenton." said the buyer. "In some eh Hiram?" he said quietly - and charitably cases, I've been told to take alate date or other enough. "Some of those metrics taking hold, wise for the purchase. That becomes the uma lietle too strongly"Hiram started to ob promise dute, I guess, but it's not the date ! Ject but saw the seriousness in his boss's eyes. asked for He lifted the stack of reports Felding & Com "And second," Billy continued. "I can't figure pany had prepared for him and turned to the out how you telles define shipped We were told conference table."Well, I guess that's something last Tuesday an order had been shipped, and for the group to talk about come to find out, the stuff was sitting on a rail road siding across the street from your plant." "That's an important order for us," another Brenton vole piped up I send an e-mail to try Case Critique Question to sort it out, but I haven't heard back about it 1. Why didn't this incentive system work? 2. How should it be fixed now