Don’t Forget Sales Manager Pay

Twice a year, I conduct a ½-day seminar at the University of Wisconsin School of Business on the whys and hows of sales force compensation. Over time, the audience has been in sales management, with varying levels of experience and decision making authority. We have done this for nearly two decades.

During our session, we focus our attention primarily upon members of the (field) sales force. We discuss what motivates different types of sales professionals to succeed (i.e.: sales-success profiles), and then review what compensation (and other motivation) tools represent current best practices and work best in various situations. It is a quick-paced three-hour journey.

At the very end of our discussion and slides, we always pause to remind the session participants: Now, don’t forget the sales manager! Why do we say that? Because the expectations, tools and methods for rewarding sales managers are quite different than those we have discussed throughout the previous few hours in addressing the needs of the field-sales professional. Then, I spend about 10 minutes delineating those differences to the participants. It always feels like we are not spending enough time, and we are likely not.

We have more time and space to discuss the sales manager today. So let me outline below what we have found to be the three keys of success for effective sales manager compensation.

1. A sales manager is not just a better-paid field sales professional. A sales manager is just what the title says: a manager. We believe the job of the successful sales manager must be focused upon two prime activities—
1.  Building bridges, or linkages, between the organization’s strategic plan and the account-based actions and initiatives of their sales team undertaken within their assigned district or region—i.e.: their regional sales plan. Managers direct and advise their sales professionals regarding what to do, and more importantly, what is expected. Some call this merely goal setting. It goes well beyond that.
2. Developing and improving the skill base and overall quality of their field sales team. The sales manager must determine who can do the job, and alternatively, who cannot. Then their job is to first maximize the impact of their high-skilled and best sales professionals, and then improve or replace other (less-skilled or capable) members of the sales team.
2. The sales manager is paid quite differently than a sales professional. An effective sales manager pay plan will pay the manager primarily based upon the results of their entire sales team. If their sales team is to deliver $40 million in sales next year the manager will generally earn a competitive or target (agreed-upon) amount of pay—and the mechanics of the bonus plan will assure that. While there may be other components of pay, if the sales manager is not held accountable for the performance and actions of their team, the plan is way off target and that sales region will likely fail to meet the organization’s sales or profit objectives.
   
   You also see a different mix and amount of pay for a field sales manager plan. The sales manager will generally earn at least 30% more in total annual compensation (salary plus bonus) than that of an experienced sales professional, if they both achieve targeted levels of performance. Typically manager salaries will also be higher than that same experienced sales professional. Of course, higher or lower levels of performance and experience will change that total compensation spread.
3. Sales manager bonus pay is riskier. Since the sales manager is solely (or jointly) responsible for his or her district or regional performance, a well-designed bonus-pay plan will reflect that performance. Consequently, if the sales manager meets their plan and underlying company strategic goals (for sales or profit), they will fully earn their agreed-upon annual bonus. If they do better, they will then make more. But if their sales team underperforms, they will earn much less. And at unacceptable levels of performance, they can earn nothing or very little in annual bonus. Clearly, we are not talking about a classic commission or a commission-override pay plan here.

Now some would say: “all the above is good, but we are a small firm and our sales managers must maintain their own book of business to earn their keep.”  It is common for sales management (all the way up to the company President in my experience) to have a few accounts that they manage. There are some good reasons to do this (e.g.: client’s choice, field engagement…), but there is a limit. If your sales manager is spending more than 10% of their time managing and servicing their “own” accounts, they are likely not operating as a manager and your district or regional results will surely suffer. Further, you have now provided an excuse for failure that goes well beyond compensation issues.

Are your sales managers acting like managers, and being paid accordingly? If the answer is no or you are unsure, go back and apply the rules and principles we stated above to your sales management team.

2015 will be here in a matter of weeks. As you think about making changes to your sales incentive programs for the coming year—don’t forget the sales manager.

Wilkening & Company has assisted clients with improving their sales effectiveness and sales force compensation systems for over three decades. Are your 2015 sales professional and sales manager pay plans everything they should be? If you are unsure, call me at (847) 823-5090.

Paying your sales force to sell the product of the future

Substituting purchased subscription-based services for hard company assets is becoming increasingly popular. This particularly true in the area of IT software and hardware services, where “cloud solutions” are rapidly gaining industry traction and favor.

Cloud solutions are offered by both hardware and software providers (or their channel-selling partners) to create both virtual processing capabilities and software ownership or access for the users of both. This allows the client to move from a capital investment model to a fully-supported leasing model and reduces the need for periodic major investment combined with ongoing support staff, facilities and other overhead.

We recently helped produce and participate in a webinar entitled Cloud Sales Compensation: The Challenges, The Solutions with Tom Horan of Cloud Business Builder.

In our webinar we provided the example of a traditional hardware and software reseller firm (not a manufacturer) that desires to keep pace with technology and market trends and rapidly grow its mix of cloud-based business and client base from virtually nothing to nearly 40% of its total business mix in just 3 years. This is clearly an attractive value proposition for the reseller in terms of avoiding technological obsolescence and creating increased financial enterprise value through steady and profitable multi-year contracts “on-the-books.”

While one can see and can quantify the benefits for the company, is the sales force also motivated by these same benefits? In short, no. We find that in the cloud-service market the sales force may be very conflicted regarding what is in their best interest. Why is that true? Typically legacy-product reseller sales pay arrangements are built around selling periodic and larger client sales of hardware, software or “plumbing.” If I can sell $100,000 of hardware today and get a $5,000 check versus signing a 5-year cloud-service subscription for the same total of $100,000 and get a $1,000 check, I know what I would be motivated to do.

Does this dilemma sound familiar to you?

While our recent webinar focused upon cloud-solution selling issues, we believe the two-step sales incentive compensation plan offered below would apply to any company trying to motivate its sales professionals to shift from focusing on its traditional (comfortable) products to rapidly adopting a new strategically-important product or service—the product of the future.

1. Communicate with your sales force about the strategic importance of selling your product of the future (whatever it may be). If you expect a quarter of 2016 company (and their) revenue will be coming from this new product, be clear about it.
2. Pull out the sales-compensation toolbox and apply a few reliable and proven methods and tools for getting the attention of your sales pros.

• Shake up or replace your current commission structure by paying more for strategic products than others. Say 2% of all sales, and 8% for strategic products (e.g.: cloud-service) sales—the amounts or ratio of old to new is up to you. But be sure that the strategic premium is only paid if annual minimum revenue expectations are met—such a practice also avoids commissions becoming energy-sapping annuities.  
• To the above foundation, continue to shift the sands by applying a bonus or two with your new core commission structure (for example)—
• Pay a flat  bonus (say $10 to $15,000) if your strategic-product backlog doubles or reaches an agreed-to amount by year end; and/or
• Pay bonuses for selling high-value-building products, such as multi-year service contracts, based upon the length of the contract—say $2,000 for 2 years, and $3,000 for 3 years, etc. [As a general rule: pay commissions as revenue is received, but bonuses can be paid at time of agreement signing.]

Other bonuses can also be considered based upon company objectives, but remember to be effective, any incentive compensation plan must be simple.

A simple and organized approach as outlined above can put you and your sales force on the same page in 2015, and assure attention is paid to your chosen product of the future.

Whether your sales force is selling cloud-services or another strategic product of the future, we believe our 2-step plan can be both an effective attention getter and revenue and profit producer. If you agree, start today making plans for your new 2015 sales compensation plan. Do not hesitate. Your competitors won’t.

Wilkening & Company has assisted clients for over 25 years as sales consultants with the design of effective sales-compensation systems using proven pay tools & techniques. The firm has provided advice to clients in the services business including software publishers and sellers. Have a question regarding sales force pay, call us at (847) 823-5090.

Is your pay plan working? Try doing our top-line review this summer and find out

I am often asked to help a client determine whether their current sales rep and sales manager commission-bonus plans are working, by design or in practice.

Before engaging in time-consuming and in-depth rounds of fact finding, interviews or analyses, I always suggest a “top-line” review to see if there appears to be a problem in the first place.

So, what is a top-line review? Glad you asked. It is a high-level analysis of the effectiveness of your current commission-bonus plan. It simply asks the general question: "Are your sales reps and managers being paid correctly based upon their performance?" To do so requires three simple steps:

1. First, collect two years (or more) of performance data for each sales rep, sales territory, account assignment or region—however the sales force is organized. You will want to use performance metrics like: revenue, gross profit, contribution profit before overhead, volume or other quality-of-revenue measure of performance. Much emphasis should also be placed of year-over-year growth. When I have finished collecting this data, I then meet with the CEO and ask which performance metrics are most important to enterprise success—usually it quickly evolves into a sales versus profit discussion. With priorities set for the performance metrics, we then rank the sales reps and managers high to low starting with the best performers within the entire affinity group at the top of the page. Simple so far?
2. Then, we collect sales-rep and manager territory or region commission and bonus data for the same period of time as the above performance data—we usually recommend the last six to eighteen months, or more. Current-year data can also generally be predicted based upon (at least) six months of year-to-date results for both performance and pay. With the matching commission-bonus data in hand, we can then also rank the sales reps and managers highest to lowest with the best earners at the top of the page—just as we did above. Do you see where this is going?
3. Lastly, lay both above lists side by side. Do the best performers earn the most?  While you are seldom going to find a perfect one-on-one match or correlation, an effective pay plan will (rank-order) match top performance and earnings over 75% of the time.  And if you break the performance rankings into top 1/3, middle 1/3 and bottom 1/3, the correlation of pay and performance for an effective plan should even be higher. 

Using a top-line review, an effective pay plan will clearly shine, while non-effective plans will display nothing but exceptions. If your plan is clearly not effective, quick action is indicated—and midyear is a good time to find out.

While the findings of your sales-pay assessment might not turn out to be black and white, the above analysis will clearly present a series of questions to be addressed and will also likely prescribe a required course of action and next steps.

It is the middle of summer and your accounting staff has just probably closed the 1st half of the year. Ask your CFO for 2013 and 2014 YTD performance metrics tomorrow and start your top-line review immediately. You have no time to lose.

Wilkening & Company has spent three decades assisting clients with improving sale force effectiveness through performance management, compensation and organization. If you think your sales force or sales-pay plan is falling behind the competition or the market, call us we can help. bob@wilkeningco.com, (847) 823-5090.

Managing employee expectations

Most discord is the result of unfulfilled expectations. This bold statement is Shakespearian in its origin and represents one of the unavoidable truths that govern employee-employer, individual or family relationships.

In short, when an employee or a stakeholder expects one thing, and then is disappointed with a lesser outcome, trust and understanding will suffer. This is a subject that we often broach or otherwise discuss when addressing the subjects of incentive pay and compensation or relations amongst the stakeholders within a family business. Today I will focus upon the broad issue of matching rewards with employee expectations—to assure positive outcomes.

How many times have you heard the following from an employee or group of employees:

• “What do you mean I am not going to get a raise this year?! I have always been told I am an excellent performer.”
• “How is it possible that members of my sales staff are earning more than me—I am the sales manager?”
• “What do you mean the company did not make enough money this year, and there will be no annual bonus? Someone said we actually earned more this year than last—and I got a $15,000 bonus for that. Is that true, and what do I tell my spouse about the swimming pool?” [in the words of Clark Griswold]
• “How come Joe got that promotion, instead of me?”
• “You did not tell me that I was responsible for growing sales by 15% this year, now you are telling me that only 10% growth means I get no bonus!”
• “You told me that I would earn more than any member of our key-competitor’s sales force. I am not. What gives?”
• “It’s April and I am not earning what you suggested I would earn by this time in the year.”
• “You have always treated me fairly in the past, why not now?”

Do you recognize a situation above that has also caused some angst within your organization? If so, look at the two common threads shared in most of these statements. First, the employee did not get what they believed was promised; and second, the employer understands the promise-to-be-met quite differently. Of course, in the last statement the train seems to have fully come off the tracks for unknown reasons—the manager asks: “What did I do (or not do)?”

In any event, there is actual or brewing trouble with regard to the employer-employee relationship that needs to be fixed or reversed fast (if fixable, at all). Were these misunderstandings and disappointments avoidable? In 99% of cases the answer is a resounding yes.

What can an executive or manager do to avoid this type of future trouble? We suggest the use of four basic and simple rules to establish clear understanding between employer and employee. This simple four-step strategy that can be used universally or selectively:

1. If you are promising something (especially anything that will result in a payment), put it in writing. In fact in some states, written agreements have now become mandatory—so know your local laws.
2. If you use metrics or performance standards to determine bonuses or incentives, frequently report monthly or YTD results for everyone involved to see. For broadly-based “profit-sharing” bonuses or programs, report key results to everyone in the building.
3. Be honest and open with your employees regarding their performance and how you see it. Are your annual performance reviews just a feel-good exercise for delivering a raise and a smile on both sides of the table? If so, trouble is lurking in your future—and you should have the phone number of your labor counsel handy. If an employee is not doing the job you expect, tell them now and tell them again until you are sure the message has gotten through.
4. Be clear with your managers and staff regarding how you will determine and deliver their compensation. Be prepared to share both the whys and hows.

Notice that the common characteristic of each above prescription includes the phrase “tell them” in it. Further, notice that you control the information and facts. There will be little room for rumors or inaccurate interpretations of fact (or fiction). I have never seen an executive or manager hurt by over communication with their staff.

And finally, if you sense that your team or staff harbor basic misunderstandings of fact or intent that will lead them to future unreasonable expectations, trust your “gut” because you are probably right. Act quickly and get out in front of the problem. Assure everyone is on the same page before the situation potentially explodes—all over both of you. You truly have nothing to lose.

So when in doubt, tell them.

Wilkening & company has assisted clients for over 30 years with setting, meeting and rewarding employee and stakeholder expectations. Having trouble aligning expectations with reality. Give us a call at (847) 823-5090.

The challenge of offering bonuses to nonexempt and lower-paid employees

Can incentives or bonuses be effectively applied to lower-level blue-collar or white-collar nonexempt jobs (or those that generally are eligible for overtime pay)? The short answer is yes, but the rules to follow and methods of application are different.

Most employees with bonus or incentive plans are executive, managerial or professional level.  They are most often classified as exempt (jobs generally not eligible for overtime pay under applicable US Department of Labor rules). But when it comes to non-exempt employees, we have found that the use of variable-pay plans is generally more restricted. Consequently design options are more limited. Here’s what creates these limitations:

1. Most incentive-pay plans are anchored with performance metrics that can be easily tied to the results of an individual professional (i.e.: a sales rep, manager or executive). On the other hand, outcomes for and the performance of nonexempt employees are generally less easily identifiable and measurable. Their contributions are often more recognizable within the context of a larger work unit or team, or on a company basis—and seen as contributory to success.
   
   This does not mean they do not make a difference, they do—but, loyalty, hard work, perseverance and reliability may be their real measurable contribution to success. So, bonuses based upon team or company results are most often best used with nonexempt-level employees. Individual incentives generally will not work; team or company bonuses do.
   
   
2. We all have a very individual risk tolerance. What this means is that some of us are more comfortable with taking reasonable risk than others. This is a basic personality characteristic and has a strong influence on one’s career or reward choices.
   
   A sales person, manager or executive will generally have a higher-than-average tolerance for risk. These types of employees are comfortable with incentive plans where pay may vary up or down from year to year based upon their individual results, and salaries are only a portion of one’s monthly or annual compensation. Commission or incentive plans are common where a large portion of annual pay may be “at risk.”
   
   Nonexempt employees tend to be much more conservative when it comes to risk. This will be obvious in their selection of job or career. The jobs sought and selected often have a highly-structured work routine and limited individual direct accountability or risk of failure. These types of jobs are typically salary driven—and if pay is not exclusively salary, any bonuses are pretty small (a week’s pay or two at the most). These bonuses are a little like the cherry atop a sundae.
   
   Always remember that nonexempt and lower-paid employees may be living on their weekly pay check, much more so than higher-paid employees. Hence, expect them to have a very different view of at-risk pay, and pay in general.

While performance measurement issues and employee risk tolerance limit what can be done when considering bonus pay for nonexempt and lower-paid employees, do not forget to consider the restrictive impact of governmental regulation as well. While pay discrimination and minimum-pay regulations apply to all employees, lower-paid jobs will always present a greater target for regulatory scrutiny.

Consequently, any incentive or bonus pay delivery system that rewards an individual or group based upon performance must clearly demonstrate the opportunity for all participants to succeed or fail—but, this is good incentive or bonus plan practice for any employee. Further, bonus practices that can vary overall pay widely by week or month for lower-paid employees must be very sensitive to governmental regulations regarding minimum pay and perhaps the calculation of overtime pay (in select cases). The Feds and states can make this all a bit tricky.

OK, so how should a company approach the issue of bonuses for its nonexempt employees? Consider the methods and possible solutions we offer below.

First we suggest that you answer the same basic (or positioning) questions with nonexempt and lower-paid employees that you would when considering and designing higher-level manager or staff incentives or bonuses:

• Who should be eligible and why?
• Why are incentives or bonuses being proposed for use used with these employees—what is the value proposition for both company and employee?
• How will the value of an incentive or bonus be determined? [Paying for what and why?]
• How much should be paid to get the attention of the employee while also making economic sense to the company?

Next with the above answers in mind, be practical with what you can accomplish with a new bonus plan for this level of employee. If history is any indication of the future, you will most likely: 1.) Group all nonexempt employees into a few affinity performance groups or consider the whole company as the group, 2.) Pay bonuses annually based upon a single discreet measure of unit or company performance [i.e.: profit, productivity, etc.], 3.) Denominate payouts in weeks of pay or $100 bills, and 4.) Assure that the range of relative bonus pay amongst employees displays only modest variations and the reasons for these differences quite clear; if you decide to pay different nonexempt employee groups differently based upon their results.

Last, communicate plan methods and results at every available opportunity. You want to make plan participation and the bonus plan itself a force that binds employee and company together in a common goal of doing better.

Now some might say that I have just described a typical profit-sharing bonus plan above. I am guilty on that charge. While profit sharing is only one of a number of bonus solutions, it generally works pretty well and fits nicely into the limits and restrictions we have outlined.

Do you want to install a bonus plan for your nonexempt employees? Follow the simple steps we have outlined above and know your limitations. If you are concerned about or want to better understand applicable Federal or state pay regulations [like overtime calculations], or you have a union workforce, pick up the phone today and have a chat with your legal counsel before you do or say anything. If you do not have one, I can recommend one.

In closing remember this is not just a bonus plan, but a force that binds employee and company together in a common goal of doing better.

[Wilkening & Company wants to thank John Larkin for his help with this article.]

Wilkening & Company has helped many clients design incentive or bonus plans for executives, managers, professionals and hourly staff. If you want to speak about building new pay plans for fixing current ones, give us a call at (847) 823-5090. We would be happy to speak with you and share our experiences.

The Power of Segmentation

When asked to name the most powerful tool or business process available to the executive, I will always answer without hesitation: “segmentation.” In fact, I would go as far as saying that segmentation is the foundation of most good marketing and operational decision making.

What? You mean I would pass up such luminary management tools as spreadsheets, social media, advertising (again, please tell me which ½ of my advertising expenditure is wasted?) and cost accounting (for those in manufacturing, that is) for the simple parsing of customers, markets or assets into logical affinity groups? In short, yes!

So why is segmentation such a powerful tool?

• It allows an executive or a company to decide what is strategically important about individual customers or assets—size, profitability, potential….;
• It allows groups of specific strategic importance to be removed from the “average”(the dreaded average) for critical examination or analysis; and
• It stops management from treating broader-group averages as important strategic information—which is seldom the case. For example, say your average active customer may annually buy $2,400 from you, is profitable and receives 1.4 live sales calls each year from the field sales force each year. Is that information helpful? Unlikely.

What do we mean by segmentation and how does it work? Let me provide a few examples (and how to’s) to help answer that question.

1. “Our sales representatives have 220 accounts, on average”. But more importantly, what do you want your sales representatives to do to increase individual customer sales and guard share of market with their assigned accounts? To answer that question the first task at hand is to segment all your customers into categories based upon such measures as revenue size or other strategic factors. For example, perhaps all your top 100 customers (in descending revenue order) generate 50% of annual company revenue. These can be considered strategic accounts (the “A” customers)—and treated to high sales-force attention. High sales-force attention may mean that a sales representative will call at least monthly (and in person) on these key and high-potential accounts. Using similar rules and methods, sales force time and energy can also be applied to other groups in the customer base—say the B, C & D accounts. Hence, there will be different sales-calling rules for each customer segment. In this real example, simple segmentation helps the company focus the attention of its sales force on the “right” accounts with real opportunities, and also helps them determine if enough sales resource exists to meet all known customer needs.
   
2. “It is an “A” account so we must give them what they want.” But, how much is too much? A photo-finishing and supply client once asked us to segment their account base into strategic groups reflecting current and historical sales volume. When completed, we found that very few top accounts were clearly the most important players when only considering historical revenue. As I recall, the top 20 customers (of 500) accounted for more than 50% of company annual volume.
   
   But, this same company also was experiencing a stubborn problem with profitability. It seemed the top 20 were slightly less profitable (before overhead was applied) than other accounts, on average, but that difference did not seem to explain the company’s lack of profitability.
   
   As a further step in our segmentation analysis, we suggested that an activity-based-cost analysis be done on the top 100 company accounts. In such an analysis cost items generally considered overhead (e.g.: free pick up or delivery charges—and there was plenty of that, or the cost of the sales force) are traced to and applied to each account that required services or sales-staff support. When we applied delivery, pick-up and other servicing costs directly to the company’s top 100 customers we were shocked to find that 19 of the top 20 revenue accounts were big money losers. Clients always want to know where they make or lose money—well we just found out!
   
   In this second real example, simple segmentation (with a little fancy cost accounting thrown in) helped this company raise its prices for top-tier accounts and begin to better manage (and charge for) out-of-pocket delivery and pick-up services and support cost as a whole. But more importantly, they developed a whole new appreciation (and love) for those slightly smaller and less demanding—yet profitable—customers.
   
3. “We cannot seem to assemble and ship customer orders on schedule because of a lack of assembly parts.” Demand was soaring and so were customer backorders. This was a hot topic for the VP of Sales & Marketing in the weekly President’s staff meeting, but the newly-minted (and unmanned) Director of Materials could not see how this could be happening. His 1950’s legacy inventory-performance reports dutifully supplied by the MIS department showed inventory balances for the 80 top highest-usage parts or assemblies (the “A” items as reported as a single group) as having two-week’s supply of inventory, and lots of shop orders were issued for more to be made. Hmmmmm……., it seemed it was time to dig deeper.
   
   As a next step, these same 80 top parts were segmented into 3 groups based upon descending usage & cost. The real top group was comprised of 12 parts that accounted for over 30% of product material value added. Of these 12 parts, all 12 were out of stock and their expedited replenishment was taking up a disproportionate amount of company machines & resources (i.e.: clogging the shop)—are you familiar with the concept of “order sizing” and “machine-center capacity?” No more analysis was required.
   
   In this final example, management thought that they were looking at the right universe of parts to make manufacturing and scheduling decisions, but were not even close. When the inventory was segmented and analyzed more deeply and the true drivers of trouble were identified, appropriate actions could be taken to get back on schedule. In the end, on-time delivery was returned to customer requirements while both inventory and manufacturing variance were drastically reduced—resulting in increased profit. The daily status of those 12 parts was never far from the desk of the Materials Director in the coming months and years.

We have tried to show in these three examples, methodologies and techniques effectively used or seen in the past. Perhaps you have used one or two yourself.

If you like or are intrigued by what you have seen but are unsure how market or asset segmentation might help your company, ask yourself the following three questions—

• Do you know on which accounts you want your sales force to spend 80% of their time each year?
• Is it clear where you are really making or losing money (on a customer-by-customer basis), and why?
• What few elemental manufacturing parts, assemblies, or activities are getting in the way of company success or profits, and why?

If you do not have good answers to the above, we suggest that getting these answers should be a priority this year. I would be mighty surprised if segmentation is not part of finding answers and solutions.

And if a member of your staff or a colleague uses the term “on average” to describe an important metric or issue in the future, stop the meeting and tell them to dig deeper.

Wilkening & Company has assisted clients with the segmentation of customers, products, assets or processes and the formulation of indicated solutions during the past 25 years. Do you have a problem or profit impediment where you think this might apply? Call us at (847) 823-5090, or write at bob@wilkeningco.com.

Four questions that will help improve the effectiveness of your Board

There are a number of structural factors or processes that can improve the effectiveness of an enterprise Board of Directors. These generally will focus upon how business is conducted and establishing both clearly-stated roles and responsibilities and a well-developed decision-making process.

It has been our experience that a firm can find out much about the effectiveness of its Board of Directors by asking itself four (4) elementary questions—and answering each:

1. What is the role of Board in company decision-making and policy creation? While this may seem obvious, do not be so sure.
   
   A firm should have policy documents and/or operating agreements that outline the role of the Board and its members regarding authority and the limits of its decision-making—and how such authority compares to (meshes with) that of the executive team. This encourages the Board not to delve into micromanagement as the role of the Board and its limits will be clearly delineated. There will be a clear line in the sand. Such outlines and agreements also assure that your EVP of Sales & Marketing (who may also serve as a Board member) knows that when the Board convenes they have a very different role to fill.
2. Is it clear when the Board will convene and generally what subjects will be discussed at scheduled meetings?
   
   The answer is a simple as determining whether you have an annual schedule of meetings and required subjects or action items to be considered at each. I serve on a Board as President where a four-annual-meeting schedule is published as policy and the preliminary agenda of each item is outlined at the beginning of the fiscal year. There is no confusion over when and what materials management must prepare for the Board to consider and approve such matters as operating budgets, capital investments and budgets or key-supplier agreements.
3. Is your Board best organized to effectively utilize its resources and ultimately do its job?
   
   I have recently interacted with a municipal Board with a very large annual budget and several hundred employees. It currently faces a series of very difficult and capital-intensive issues—the stove is pretty hot (and hotter by the week), and decisive action is required by midyear. 
   
   The president of this Board has chosen to historically conduct all business in a committee-of-the-whole format where all discussions, advisory input and deliberations are considered by the entire Board during scheduled meetings. This process has delivered little progress and the frequent Board meetings are absorbed with more random discussion and posturing than decision making. Why is this happening? Simply, the whole Board is not getting clear, well-thought-out and properly-vetted alternatives for consideration.
   
   Another way for this Board to operate would be by using a committee structure. With such a structure the Board forms committees (like a Finance Committee) with the charter of considering specific (say finance-related) issues and bringing researched and reasoned recommendations to the whole Board for discussion and action. I have worked within a committee structure in the past and find that it can deliver pretty solid results. Should our municipal Board use a committee structure? I sure think so.
   
   Is a committee-of-the-whole, or committee structure more effective and ultimately better for you? That depends. It is often a function of such factors as company size, complexity of issues to address and composition of the Board (i.e.-who are the directors and what are their preferences?). We also find that savvy companies and Boards often employ both approaches—depending on the circumstance. There may be no “right” answer to which is better, and it can vary with circumstance. Considering the above alternatives, does your Board organizational structure facilitate effective decision making? Or, are you bogged down like the Board I have described above?
4. Does the Board have sufficient talent, expertise and experience to make decisions regarding the issues that it will be facing? This is the testy (yet crucial) overall competency and breadth-of-knowledge question.
   
   The purpose of a Board is to focus the best minds a company can harness on addressing enterprise strategy, policy and operating issues. When assembling or assessing its Board, ownership and other stakeholders should carefully select directors who best match the complexity of enterprise operations and the future challenges the Board will face.
   
   Considering the role and responsibility of the Board, private and public companies often require and seek experienced “outside directors” (independent of the company) to augment the expertise and experience of shareholder directors or the family. Outside directors are becoming more common in private companies every year, and generally appointing or electing outside directors is considered a best practice in larger or public firms. How do you select your directors today? Do you have or believe you need outside or independent directors?
   
   Also do not forget that you can never “inventory” enough broad-ranging competence and experience on your Board to cover all of the issues you must tackle. Know your limits, and strongly consider retaining expert advisors for those areas and times where specific knowledge is required but once a year (or less frequently). This practice is quite common when considering such areas as investment policy, risk management and policy, executive pay, benefits or taxes. Can you name your Board’s retained expert advisors, other than your CPA?

Now that you have asked and answered each of the above four questions, what are your conclusions regarding the effectiveness of your Board and its operating practices?

While you are not looking for a “score” (say 0-10), clearly the more questions you can answer in the affirmative the better your Board likely works and the better its ability to make effective and tough decisions.

If you do not like some of the answers above, consider the following 2-step action plan—

• Communicate your findings (regarding the four above questions or other added benchmarks you select) to the whole Board; and
• Then, ask the Board to examine its organization and practices to determine what should be done to improve its effectiveness. Get outside help, if needed.

Some Boards form a committee or working group called a Governance Committee to focus attention upon improving the way the Board does business. Do you also need one? If you think so, do not be shy.

Wilkening & Company has assisted clients over the last 30 years improve governance processes and outcomes. Have a question or concerns, call or write us at (847) 823-5090, bob@wilkeningco.com.

Are you satisfied with your performance goals?

Over the years I have worked with many clients to create incentive and bonus plans based upon the achievement of individual, unit or company goals. In such cases, a goal is simply a pre-set expectation of performance—say 5% revenue growth. The achievement (or sometimes partial achievement) of that goal or expectation will allow the employee-participant to earn an incentive or bonus. It is a relatively simple and well-tested concept (and tool).

I have often had the opportunity to speak with clients who had just implemented a sales-employee or manager incentive plan where payouts were now determined by the achievement or revenue or other annual goals. While the plans generally seem to work as intended, there is often surprise on the clients’ parts regarding the complexity of goal setting, reporting and maintenance. This is a particularly common feedback and observation when a company begins using performance goals to determine employee pay for the first time.

What creates such mixed satisfaction with both pay-based goals & goal-setting? In my experience, most dissatisfaction is the result of the perception of inaccurate (or bogus) performance-goals, and ultimately employees perceiving they are being paid unfairly --largely as the result of those company goals. Generally this is the result of three culprits. Let me explain each and how some companies adjust or cope:

1. The long-hidden problem syndrome—“You coded that breakeven customer into the wrong account, again! It does not belong with my accounts—it belongs to Jerry! You always do it wrong!” But, it did not really matter until you started to have a territory profit goal, and you are going to be paid on it. In fact, the miscoded revenue (albeit unprofitable) may have increased someone’s pay in the past.
   
   So, when you set the year’s sales & profit goal, this long-standing error was undermining the quality of the goal from the first day (or transaction, that is). While some will complain that the goal-setting was at fault, it really is record keeping.
   
   Experienced companies realize that these type of errors exist and the new performance goals and pay plan are simply bringing them to the surface. Generally at the 6-month mark, it is strongly suggested that all “errors” be identified and fixed. Then, steps may be taken to adjust the annual goals, as required. [After these 6-month adjustments, no more discussions on the subject of goal adjustments are tolerated.]
   
   
2. "We never really meant it before"—many organizations build extensive business plans every year. Some are laboriously built by staff or the sales force from the ground up—customer by customer. The well-thought-out outcomes of this process generally (often) are used to set annual performance goals throughout the organization.
   
   While these goals may be considered “solid” within the organization, they are really untested until tied to the outcomes of a pay plan. Missing plan or a goal by a percent or two generally does not really mean much until it starts to cost somebody a $10,000 bonus check.
   
   While the goals and goal-setting can be blamed for a lack of “fair” employee bonuses, they may be just reflecting (and reporting) performance patterns that have occurred historically for years. They only seem “unfair” because this time there are consequences to less-than-stellar performance.
   
   Smarter companies will sternly ignore employee requests for the inevitable goal adjustments during the year (unless caused by acknowledged serious errors), and admonish managers or the sales force to pay more attention to your goals when they set them next year. [“But, do not dare get caught sandbagging.”]
   
   
3. One size fits all—some companies chose to set all annual goals at the same performance level. This is most often seen in the case of the sales force. For example: a company may simply say every territory is going to grow by 5% in net revenue this coming year. This generally is the result of the lack of a process or technique that allows goals to be accurately or uniquely set. The all-territory goal will often be a reflection of whole-company expectations—and is really a pretty simple way to do it.
   
   The outcome of such a goal-setting process is that about ½ of your sales reps will see their goals as too soft (and OK with them, but not the company), and the other 1/2 will see their goals as (much) too hard and therefore unattainable. Neither situation is good for the company and can lead to constant grousing about bad goals by part of the sales force. In reality they are not bad goals, they were just never actually set.
   
   The solution to this problem is straight-forward but will require management’s time to correct in the form of more thorough business or account planning. But realistically, that will not happen until next year or in the next business-planning cycle.
   
   As a more direct solution, some astute companies can employ an interim shortcut to setting sales-territory (or operating-unit) goals. First, many management teams should be able to immediately group sales territories into three broad categories:
   

1. Type I—territories or units with higher than average potential to grow;
2. Type II—territories or units with average or moderate potential to grow; and
3. Type III—territories or units with clearly below-average potential to grow.

Then, if 5% net revenue growth is the whole-company expectation for the coming year, set Type II & III territory or business-units revenue growth goals at 5% (with a rare exception below that for a “Type IV,”) and set Type I territory or business-unit net revenue goals at say 8-10%. Now Type III’s may still grouse about bonus fairness, but that is the least of your problems. And, you can always adjust pay for keepers, if needed. This should buy you a year or so to make future goals more reflective of true potential—i.e.: precise & fair. [Stay tuned to these pages in future months was we talk more about goal setting.]

Are you satisfied with your performance goals? If not, recognize that some of factors that create goal dissatisfaction have little to do with the actual goal itself or its accuracy. Notice how much employee perception plays a role.

Take the lessons of savvy companies that have both overcome and adapted by continuously improving the quality of their performance goals while also managing employee perceptions of fairness.

But enough wing-flapping about “bad” goals. It is January, goals & expectations are set and every employee should be driving toward hitting their numbers—no more excuses or discussions regarding how high the pole is set.