BACKGROUND Connect Corp. (CC) is a service-based organization, focused on connecting multiple company operational software programs offered by various vendors. Companies using CCs product experience more streamlined and accurate data flows, advanced reporting and (almost) live integration between the tools. CCs (cloud based) product allows companies to hand-select from the hundreds of various operational products available and trust that CCs functionality will make it all purr like a kitten. CC has a promising position in the marketplace as an early entrant and hasnt felt much pressure from competitors at this point. On the other hand, employee headcount is approaching 500 and the ability to wing-it has faded and misjudgments have started to become more expensive than ever before. With rapid growth on the horizon, CC needs to put some structure behind a few of its processes to further drive its ongoing success. INCENTIVE STRUCTURE One of the more painful realizations in the past couple of months occurred when bonus checks were paid out. The entrepreneurial company leadership started to understand that it s bonus structure hadnt really generated any meaningful business results last year. What should have been a celebration, as employees who delivered results received bonuses, felt like checks were being handed out to every employee, regardless of their individual, team or department s performance. In addition to fears that the significant investment in incentives did not drive additional performance, it appeared to wreak havoc on the performance evaluation process. Calibration sessions with departments were highly emotional as managers pushed for extremely high scores on the company s 5-point scale. The company average score as the process began was over a 4.0 and leadership decided it was not worth continuing to push on managers when the average score approached 3.8. The 5-point scale used by CC to evaluate performance is summarized below, with the anticipated bell-curve distribution: 1. Unsatisfactory (~5%) 2. Needs Some Improvement (~15%) 3. Fully Meets Expectations (we would expect ~60% of employees to fall here) 4. Exceeds Expectations (~15%) 5. Exceptional (~5%) The bonus structure was set-up as follows:

All CC employees at every level are eligible for an annual bonus ranging from 0 20% of their base salary. CC employees will be evaluated at the end of every fiscal year and their bonus payout will be based on the immediate managers assessment of this question: How would you rate the overall performance of _______? The manager would select a score from 1 5 (scale above) and bonus payouts would be processed as follows: o Scores of 1 2 (no bonus payout) o Score of 3 (5% of base salary bonus payout) o Score of 4 (10% of base salary bonus payout) o Score of 5 (20% of base salary bonus payout) CC has a promising future and wants to get its employees pushing harder and more aligned with the company objectives of growing revenue, managing expenses and acquiring new customers. CC is convinced that their current incentive structure, although generous to the employees, may not be effectively rewarding employees for the right behaviors. In fact, it may actually be motivating some alternative behaviors, especially in the managers assessing employee performance. WHAT IS THE BUDGET? For purposes of this case, lets assume that the average employee salary is $60,000 and the average bonus payout was 10% (as the average evaluation score hovered close to a 4.0). This would indicate that the company spent $3 million in bonus payouts for its 500 employees. ($6,000 x 500 employees)

ASSIGNMENT Assume that the CEO of CC has requested you to advise her specifically on two critical elements related to their incentive structure:

1. What are the challenges with our current system?

2. How should we design a new incentive program that will drive greater results?