Bob's Blog: The Corner Office Gazette

Making a quick start for 2012: Creating "First Quarter BUZZ"

2012-01-31T10:26:00.000-08:00

I want to share with you a key finding from the recent Pepperdine University 2012 Economic Forecast released this month. It contains the insights of over 3,100 small to mid-sized business owners. When asked which strategies would be used in 2012 to increase the value of their businesses, nearly 80% of respondents said it would be through increasing company revenues.

Expense control was a distant runner up. As is the case in most business downturns, you can only shrink a company to success (or survival) for a year or maybe two at the onset of the cycle. And when that cost-cutting gas tank is empty, you must return to your sales roots. Sounds to me like many (if not most) business owners expect the sales force to take center stage once again in 2012. I am not surprised, are you? And, if your competitors do, so must you—right now. So how do you create sales buzz in 2012 that will help you gain a competitive advantage and increased market share?

Some would say that the sales year is often won or lost in the first quarter. For in the first 90 days of the year (and no later):

Sales plans must be made and understood;
Resources (people & products) must be secured and tasked; and
Intense and sustainable energy must be applied to the needs and wants of key accounts.

If you are not ready to go and are not doing it by the end of March, your sales year will surely not be the success it should.

Over the years we have seen or used a variety of tools and methods for creating sales buzz in the beginning of the year that will build a foundation for annual sales success. Try a few or all of these tried & true actions.

Focus on the big guys. Whether it is sales calls, planning or marketing, put you and your staff’s attention on those few accounts (or prospects) that can make or break your year. I suspect in a typical company, that group of key accounts will amount to no more than say 100 companies. Do you ignore the smaller accounts? No, but you have plenty of time after March to deal with them after the trajectory of the big guys is properly set.

Why does this help? Because it puts the vast majority of all your resources—sales and other—on those accounts who will make or break your year, a good strategy any day of the year.

Make every senior executive a sales representative for a day. There was a legendary CEO of a major hospital-supply company who began his weekly executive staff meeting by asking each of his top executives: “How many sales calls did you make last week?” How many sales calls did the members of your executive team make last week?

While again focusing on the big guys (Catch the theme?), get your top executive team out into the field to build relationships with key customers and also show how important that account is to your organization. The customers will be impressed and your senior executives will be more engaged in generating revenue. Make sure they are making at least one or two sales calls a week, working with (“respecting”) your existing sales representatives and acting as part of the sales team.

Now some will tell you they do not have time for such things, but helping close a $1 Million sale is always more important than just about anything else they had planned next week. There is always plenty of time to catch up in the office after March 31st, anyway. And, the CEO should also be making a sales call each week. I would love to sit in on your staff meetings and hear your newest sales reps talk about pricing, availability and mix!

Why does this help? By having your top executive team on sales calls, it demonstrates the importance your company places on its accounts and makes every executive in your company a sales person—and they should be anyway.

Make sure you have seen a written sales plan for all of your top accounts. (Those big guys again). Be sure the sales force has the discipline and knowledge to outline--for all to see--how they plan to meet their annual sales goals with each key account—(e.g.:) milestones, product mix, big events, profitability. In short, if your sales force does not have a written plan for meeting their annual numbers for each major account (and a takeoff plan for 1st Quarter 2011), they may not have a clue as to how annual account sales and profit goals will be accomplished—other than ascribing it to luck. Do you want to take that risk?

Why does this help? Some managers and professionals notoriously do not like to put things in writing—it's that accountability thing. It is our opinion that if a written plan exists, the chance of achieving your sales goal is 100% greater than when there is no plan—other than anecdotal ideas and directions. If you do not agree, try it.

New products must be in the box and ready to sell by March 31st. Do not rely upon new products that are promised but not available until later in the year to contribute to the 2012 bottom line. If your product development people do not have this year’s new product roster ready to sell (and deliver) by March 31st, redo your annual sales and profit plans without the missing new products—and see where the chips fall. Then ask your product development folks what they plan to do for the last nine months of the year.

If the yet-to-be-introduced new products ultimately contribute to 2012 annual results consider it a bonus. But do not sell an empty box (promise) to your customers and waste the sales force’s time explaining why we have failed to deliver the new “best thing since sliced bread” this year.

Why does this help? A new product boxed and ready to sell in the distribution center is worth 100 ideas on the drawing board or in testing any day of the week. Your sales force does not have time in 2012 (or in any year) to sell future smoke on the horizon.

The entire plan as outlined above is designed to create sales buzz early in 2012 that will carry through to year’s end. For the 1st Quarter 2012 this plan can have effectively doubled the company’s normal energy focused upon the company’s sales mission and meeting the needs of each account, and more sales activity will be focused upon the right accounts. The increased energy (the buzz) should be evident across the entire company and provide momentum for the rest of the year.

Do you like what you hear? Try it. Do you think it is too late to start for 2012? It is never too late. Start tomorrow and end on April 30th. I bet you get the same results—buzz, that is.

2012 by the Numbers

2012-01-31T10:16:00.000-08:00

2012 forecasts for salary increase budgets show slight increases over the levels actually seen in 2011. Annual pay (salary) structure increases remain unchanged from 2011. These results were reported by five national sources of compensation information. Information and findings reflect all sources combined.

2012 salary-increase budgets are forecast to be .1% higher than the actual amount reported for 2011. Overall salary budgets are forecast to be 2.9% for 2012. Executive salary increase budgets are forecast to be slightly higher than for all employees at 3%. Three percent (3%) budgets—and higher—is a return to those levels seen before 2007.

2012 annual pay (salary) structure increases are forecast to be 2.0% across all employee levels. This is the same structure change actually reported in 2011—and experienced for the past several years.

(We would like to thank Andy Mosko of Organizational Research Forum for his assistance in the preparation of these findings.)

Holiday Bonuses—why or why not?

2011-12-24T13:19:00.000-08:00

The subject of holiday bonuses always seems to generate much interest, generally right about this time of year.

In past years and decades, holiday bonuses were quite common. It was not unusual for many, if not most, employees to get a modest-sized extra payroll check at the end of the year. I once worked for a large steel maker in the early 1970’s and each year I would get an extra check for about two week’s pay. No one ever told me why I received the bonus or how the amount was determined. It just appeared—a bit like Santa in the night. I am sure we were not the only company with such practices at that time.

These types of holiday cash bonuses have become much less common in recent years as employers respond to tightening financial conditions and also confusion over the role and objectives of the holiday bonus.

Should your company adopt or continue such bonus practices? To help with that decision, let me answer three common questions we hear most often asked about holiday bonuses.

1. Is it compensation or an employee benefit? If the company grants the bonus as my former employer did, it is hard to argue it is anything but an employee benefit. Now, both pay and benefits are valuable to employees, but they are very different animals. If the bonus is treated and viewed as a benefit, it can become an entitlement that is expected (as in the past), must be faithfully paid (good company results or bad) and can never be reduced without major angst.

However, if the bonus is treated and perceived as extra compensation (based upon something—like company results) there is no entitlement created. In my book, a bonus must be seen as extra compensation earned for a reason. For example: “If the company hits its profit goal this year, I get a $500 year-end bonus. If they do better or worse, I get more or less. If things are really lousy, I will get nothing.”

2. What purpose can (should) a holiday bonus serve? A holiday bonus can give an employer the opportunity to pay a little extra compensation to a broad group of employees in recognition for their contribution to success. Most of the employees who participate will never see, nor be eligible for, annual performance-based incentives or bonuses—other than in the form of a year-end bonus. Also, market data tell us that even lower-level employees will generally earn some amount of bonus compensation annually. A holiday bonus program can make perfect sense, and may even (silently) address the pay expectations of the 80% of your employees who are never considered “bonus eligible.”

3. If there is a bonus program, should everybody in the company get one? If you give it to one, you should give it to all. It is often best to offer everyone a year-end bonus of, say, between 0-3 week’s pay, based on company financial results. But, do not mistake a holiday bonus as a substitute for performance-based incentives for executives, managers or professionals. Normal incentives for executives, manager or professionals should then be layered atop the bonus.

We believe that a holiday bonus can be used as an effective compensation tool, if you follow a few basic rules of application:

Tie the bonus to something collectively achieved—i.e.: company success (“Why am I getting this?”);
Communicate the general relationship of the bonus to current or future success (“If the company does well I benefit, but I may not get this every year.”);
Apply it fairly across all employees and groups (“The VPs and I are all on the same deal.”)

But, do not start or continue such a bonus program with good intentions and then let it devolve to an employee benefit. Once started (as you know), benefits historically can be very difficult to terminate.

The Effective Use of "Non-Financial" Goals in Annual Incentive Plans

2011-12-01T21:21:00.000-08:00

We are used to seeing executives and sales representatives annually rewarded for meeting their direct sales or profit goals. They are often rewarded with an incentive or bonus determined by performance versus management or ownership’s expectations. While these direct incentives and rewards are obvious there are also an entire series of incentives that can be also employed to these executives and employees that are based upon less direct measures of performance.

These components (in terms of goals or metrics) are often used with and as a complement to direct sales or profit incentives in order to let the company also focus upon (and pay for) the “building blocks” of sales and profit success in this and future years.

What are examples of these types of indirect goals or metrics? Sales success building blocks include:

Focusing sales force time and attention on those customers with the highest potential;
Convincing current customers to buy and use more of your most profitable and important products;
Assuring that the company’s share of market is constantly growing or in line with strategic objectives;
Closing ratios for deals (e.g.: 50% of proposals written); and
Getting the highest price possible on each and every transaction (e.g.: gross profit of the revenue stream).

Similarly, executive (or business-unit) success building blocks include—

Getting your sales force to get the highest price possible on each and every transaction (e.g.: gross profit of revenue stream);
Productivity of capital employed;
Aggressive product development and introduction (keep the product pipeline full);
Control of overhead and cost;
Improving productivity in all aspects of business operations; and
Managing exposure to product, process and people risk and obsolescence.

While you are regularly paying executives for sales and profit success, you are generally also asking them to do the above tasks every day—so why not include some of them in the annual incentive plan, if you do not already do so?

This suggests that a company should rewards its leaders and operators both for those things that happen and can be measured this year (financial quantity and quality), and those things that are building the foundation for this and next year’s success (sustainability).

One way to do this is with a mix of pure financial (direct) along with indirect goals and metrics in the annual incentive plan. This trend in incentive design has increasingly gained traction over the last decade. The following are real examples of two such plans:

“The use of these types of indirect incentives can be controversial.”

In the sales force—The sales representative is paid an incentive of $0 to $60,000 per year for the growth of their book of accounts versus management’s pre-established expectations for success. If the annual goal is achieved, $30,000 is earned. In addition, the sales representative can earn another $0 to $40,000 in the year if they—

Sell over $500,000 of the company’s newest and most-profitable product to the sales rep’s top 6 volume accounts.
Increase the gross margin of their account portfolio by 2% (nominally), or increase total account profit contribution by $200,000, or more.

In the executive suite—The top divisional executive is paid an annual bonus of $0 to $90,000 based upon the pre-tax profit of the business unit. An amount of $45,000 is earned if $1,000,000 in pre-tax profit is achieved. 2% of pre-tax profit is added to the executive’s bonus for all pre-tax profit over $2,000,000. In addition, the executive can earn another $0 to $60,000 in the year if they—

Reduce company general and administrative overhead from 15% of sales to 12% of sales by year’s end.
Complete implementation of a new direct sales channel that accounts for (as a running rate) of no less than 10% of company volume by year end.
Introduce a new specific technologically-based product by mid-year and achieve $1,000,000 in sales orders by year’s end through all sales channels.

These incentives are sometimes called “non-financial.” We prefer to use the term “indirect,” because the metrics are generally both financially-based and readily measurable by normal accounting practices and systems. You are simply measuring sales and profit success in a different and more elemental way.

The use of these types of indirect incentives can be controversial. Three basic objections are most often heard.

“These are really discretionary bonuses.” Clearly, the examples above are all designed to be quite objective and clear in terms of expectations and reward. Further, simple pay and performance tables can be developed for clarity of communication and ultimate year-end bonus calculation. However, we have seen indirect incentives that do fit the description discretionary. In our world, more objective and measurable metrics are better for everybody.

“They are just too complicated.” Well, guilty on that charge! They are clearly more complicated than calculating a percent of sales or percent of pre-tax profit each month. But, your business is surely also much more complicated than the above-stated calculations. In my experience, we have found that we can describe an indirect executive or sales incentive plan on a single (and one-sided) page with accompanying payout rules. I generally also throw in a second page with an example or two, as needed. It just isn’t that complicated once you take the plunge.

“Management and ownership will need to spend all of their time on plan administration.” It’s true only if they like doing plan administration—and some do. The payout tables and rules I described above (combined with a little common sense) make incentive plan administration no more time consuming than a traditional commission plan, and likely less time consuming in the end.

So how do you put these ideas into action for 2012? Try this.

Consider both your sales force and your key executives. Choose three annual goals or metrics for each, (other than enterprise, unit or portfolio sales or profit) for 2012. A hint—start by focusing on improving margin, product mix, quality, or productivity. Tell the sales rep or executive where you will be looking this year and explain your expectations. Then measure and talk about your expectations every month. In our experience, you do not even need to attach money to get results and their attention.

Then, select the same or new indirect goals or metrics for 2013 and do it all over again. But now, make it part of their existing bonus plan, with dollars attached.

Remember, in the end, you are building annual incentives to focus your operators on three imperatives—quantity, quality and sustainability. If you ignore any one of the three you will eventually get into trouble.
If you have questions or seek other examples regarding reliable-indirect incentive structures or techniques, call me at (847) 823-5090.

Did you know...

2011-12-01T21:09:00.000-08:00

…that making seemingly simple changes to long-standing organization or business processes can create significant opportunities for improved productivity?

Over the last 30 years we have redesigned a number of client sales territories to reduce travel time and provide a better focus on key-account contact. In every case, we have found that the potential for at least 15% more sales calls is possible. This is the equivalent of adding one new sales representative to your sales force for every five you currently employ—at no cost.

Further, we have found that this 15% improvement ratio will almost always hold true with other types of well-reasoned change in organization or work process. It even is present when you start to merely measure performance and activity in areas heretofore considered un-measurable (by humans) or simply exempt from review. I call it “the 15% rule.”

Do 15% gains in employee or functional productivity sound good to you? Then, it could be worth taking a second look in 2012 at how things are done within your organization. Can I guarantee an across-the-board 15% improvement? No, but I will guarantee you have everything to gain.

How to help your average seller be more successful in 2012

2011-11-01T13:23:00.000-07:00

We often ask clients if they can name their best sales representatives or account managers. Frankly, that is generally pretty easy to do. But, can you segment your sales force into their 3 natural groups: Top-tier (best), Mid-tier (average) and Lowest-tier (challenged) categories?

We suggest that companies look at their sellers in three such performance (and developmental) groups for purposes of future planning and investment. These sales-force groups or segments can generally be described in the following terms:

Top-tier performers—Sales representatives and professionals who consistently can be expected to deliver high-levels of both absolute and relative performance. These sellers are both highly self-motivated and directed. [The top 1/3]
Mid-tier performers—Sales representatives who provide adequate performance considering market circumstances. From time-to-time they seem highly motivated but you can never be sure whether they are on “their game” when it is needed. These are your average performers. You know they are capable of more. [The middle 1/3]
Lowest-tier performers—Sales representatives who are consistently operating below expectations based upon any standard applied. Motivation is consistently low and it is often hard to get their attention. They often owe their continuing employment to the perceived difficulty and high cost of replacement. [The lowest 1/3]

Experience tells us that the greatest sales performance improvements can almost always be had by focusing upon the developmental and the motivational needs of the Mid-Tier, or the average seller. Can you complete the above segmentation with your own sales force? If so, stop and do it. It will make the following discussion more meaningful and useful in improving future individual and company sales performance.

2012 is a mere two months away. We believe there are a series of actions a CEO or top-sales executive can take in the coming months to make an average seller more successful in 2012. While we are focusing on the mid-tier performer, the following comments can generally (and selectively) be applied to the entirety of the sales force. We suggest four actions be taken in the next 60 days.

1. Shake Up your accounts—A sales force can become complacent and call upon the same (comfortable and unproductive) accounts, month in and month out, unless the company steps in to disrupt the “spiral.” Change this “spiral” by reassigning 5-10% of your top-level accounts for 2012. Target making account changes where sales volume is flat and accounts are seemingly unhappy or ignored—you know who they are. It may likely cause a bit more travel, but who cares? (Of course, set some limits regarding seller productivity and client relationships, but remember, without some dislocation nothing will happen.) The reassigned accounts will see a new company face with some fresh ideas and approaches, and the sales force will need to prepare for sales calls (on “new” accounts) all over again. This is a little like increasing cold calling. It is an approach that can be effective with both top- and mid-tier sellers.

2. Re-focus your sales management team to productive tasks and sellers—It is not unusual to find that sales management is spending the majority of its time attending to performance, account or employment issues that relate to its lowest-tier performers—maybe up to 3/4 of their time. Now, take a minute and go back up the page and look at our sales-force segmentation rules, definitions and ratios. Is it not reasonable for you to expect your sales management to spend the majority of its time (2/3) with the issues of the Top and Mid-tier performers in the sales force—i.e.: in sales-force planning, coaching and developing? But, the reverse is often true for pragmatic reasons. Stop this misallocation of resources immediately and refocus your sales managers to spend their time with the sellers who can deliver the highest return on the investment of manager’s time (ROI). This will clearly not happen by putting much of their energy into the Lowest-tier. [More on the Lowest-tier at the end of this discussion.]

3. Change the sales-measuring stick to “growth”—Typical sales-force performance is often measured (and incentives paid) based upon sales or a volume-related goal of some type. Turn that direction by 90º in 2012 and measure performance based upon salesgrowth—year over year. You can still use your legacy goals and goal-setting processes, but the real currency and acknowledgment for the sales force performance should become growing their portfolio of accounts over the prior year. Of course, management will assure that any sales growth achieved meets company standards for profit—or I assume you won’t book the order anyway. Now you may ask: “But, each sales territory is different and $100,000 in growth may much harder in one territory than $100,000 in another.” This is correct, but is irrelevant for 2012. You want rapid growth in 2012 and if a seller does so they are successful. [Now that begs the issue of market share, but let’s keep it simple in 2012. By the way if you do not already calculate territory market share, stay around in the coming months and Wilkening & Company will discuss the how-to’s of estimating market share.]

4. Finally, reward sellers who really grow their accounts—If you are going to focus upon growth, pay for it. We suggest a new sales-growth bonus where incremental (new) bonuses are awarded for both relative and absolute 2012 sales growth. It should be funded with “new money” that is the result of the new profit contribution resulting from sales growth (in addition to price increases). While the current sales pay plan should remain in place, we would scale it down size to highlight the importance of growth and the new growth-based bonus. The growth bonus becomes the cherry atop the sundae. For the plan to get its intended results, the math and rules should work something like the following:

Seller with top growth gets (say) $20,000 or ½ target annual incentive;
Next two sellers get (say) $10,000 each or ¼ target annual incentive;
A handful of the next-performance group gets (say) $2,000 each; and
Lower half of performers get no bonus.

We have not spoken much about the Lowest-tier performers. You know, no one speaks much about this group. They are often ignored as orphans, and that is an expensive strategy to adopt. As noted, these are generally the sellers with the lowest chance and probability of success. Training investment generally will yield a low ROI and this is the group where your sales management team is drawn to spend most of their time. If you have identified current sellers who fit into this segment, we suggest you aggressively:

Closely watch their assigned accounts (or territories) for competitive threats;
Find ways to off load the personnel and remediation tasks required of such performers to company specialists other than your line sales managers; and
Build a plan to begin replacement of your worst performers—and do it starting today.

So, with 2012 approaching, take 4 steps within the next 60 days that will help your average (and other) sellers get on the road to being a better (happier) and more confident producer. And, do not forget to measure success and progress every month (or week)—make sure you are winning.

Notes on Managing: Investing without IRR

2011-11-01T13:15:00.000-07:00

Most CEOs and senior executives are familiar with making most or all investment decisions based strictly on the internal rate of return (IRR) of the project or investment. IRR is the annual rate of return on an investment considering its original cash outflow and its ultimate outcomes (in terms of cash inflow) over time. Such an analysis allows an investor to compare any investment to other similar investments or to a market-based standard. This is a common method used to make investment decisions of all types. IRR is a common part of the executive’s lexicon and tool box.

IRR has a tendency in some companies or situations to be used as a rigorous test for any and all investment decisions. Further, if the future return outcomes cannot be easily or reliably quantified, an investment may not even be considered. As a result, many investments are never made nor considered. Uncertainty becomes a disqualifier—and aren’t all financial outcomes uncertain, in reality? I once worked in a company where $100 wasn’t invested without a 2-inch thick (single-spaced) analysis being properly completed and approved by Corporate Finance. You had better “show” an IRR of a zillion %, or forget it.

While rigor is important when making an investment, we believe that as one gets higher in the organization the executive is expected to make some investments—of both small and large scale—without the benefit of a reliable outcomes’ analysis and forecast. Let me give some (recently-heard) examples of such investments and opportunity—

“Let’s start a new marketing & advertising initiative that we think will give us increasing client mindshare. The cost is $25,000 per year but we may never know if it gives us a single new sale or project. But, it feels like the right thing to do.”
“Our competitor is having quality (and ultimately financial) difficulty. Consequently, they are very vulnerable in New England. If we hire 2 new sales representatives and go after 20 of their biggest accounts we could (possibly?!) take a few away. The cost may be $250,000 per year and it may take 2 years to get a $1 back. It’s just too good an opportunity to pass up.”

The examples are numerous but you get the idea.

A CEO or senior executive is expected to make such decisions or judgments each year—with or without the information required for an IRR analysis. The ability to make such abstract decisions is part of what qualifies one for the job and title. Are you using your intuition when faced with such a decision, or are you relying too heavily on the Controller’s spreadsheets?

One way to find out is to take a little 1-year test. Budget a pool of annual investment—say $100,000 (clearly an arbitrary amount) at the beginning of the coming year. [I usually tell CEOs to put it in cash in a coffee can and place it in their lower desk drawer.] If by the end of the year, you have not spent most of your fund on non-IRR supported projects something is wrong. Most likely: 1.) not enough good and intuitive projects are making it to your office, or 2.) you or your staff may have too little tolerance for the inherent uncertainty within your business. Either possibility should allow you to take pause.

While no one is advocating reckless decision making, intuition does have its place. So begin 2012 with that coffee can full of cash in your desk drawer. How much to put in it is up to you. I know mine has less than $100,000 in it, but it will be there.

Trends in the use and size of executive long-term incentives

2011-10-03T09:46:00.000-07:00

I was recently asked by a client about the use and size of long-term incentives (LTIs) when applied to executive positions below the top level of the organization (Chief Executive Officer). To help answer that question we referenced information from a nationally-known survey of executive pay practices—The Towers Watson survey. Our findings are briefly discussed below.

Long-term compensation plans are unique pay arrangements generally reserved for senior executives. These plans are designed to both retain top executives for the long-term and also allow top (and other select employees) to share in long-term enterprise success with stockholders or other stakeholders.

Long-term incentives are generally paid for multi-year (three years or more of) performance. They typically use performance/pay vehicles such as stock options or restricted stock in for-profit companies, and cash-valued arrangements in other firms or institutions.

The use of long-term incentive vehicles for the retention of services is generally reserved for a handful of top executives—often the CEO and their select direct reports. On the other hand, using long-term incentives for “enterprise-success sharing” is more widely used amongst executives, managers or other employees. So while long-term incentives can be experienced anywhere in the organization, they are most often highly focused on senior executives—where both retention and success-sharing objectives are readily achieved

To answer our client’s inquiry, we looked at the prevalence of long-term incentive usage at various levels of executive (CEO through select functional executive [say VP]), and the comparative value of those LTI annual awards.

As a practice, executive participation in such plans is common at the CEO level and with their key direct reports—such as Executive Vice Presidents (e.g.: CFO),but then drops rapidly below these levels. This finding is very supportive of our experience with historical LTI eligibility.

However the biggest differentiator found amongst executives occurs in the size of LTI awards where the value of annual awards can drop 50% (or more) from level to level, below the CEO.

The table below (drawn from recent 2010-11 survey data) Demonstrates these findings by organizational level.

What does this analysis say? We suggest you take away two conclusions as you look at the use of long-term incentives with your executive team.

It is very common to offer long-term incentives to the top-2 levels of the organization—both to the CEO and the jobs directly below them. Below that level, inclusion is often the exception.
The CEO will always get the lion’s share of LTI award value—nearly double that of anyone else in the organization.

This is a clear case where less is more. Put your value-creation chips on key players and let them do their thing. That is an easy decision. Expanding LTI’s below top jobs should be very carefully considered and justified based upon need and dilution. In the end, most decide not to do so. Are your needs and objectives different? We doubt it.

Are sales forces really getting smaller? It depends…

2011-10-03T09:45:00.000-07:00

When I speak to groups regarding sales-force effectiveness and pay, I am often asked about changes that we have observed with sales forces over the last 30 years.

Questions asked often touch upon the following issues:

Are sales forces smaller today than in the past?
Has the job of the average sales representative changed in the last three decades? If so, will that trend continue?
Are there some parts of selling or the sales force that will never change?

The answer to all of the above questions is both, "yes" and "no." Let me explain by focusing upon three trends we have observed with sales-force growth and employment over the last several years.

Trend #1: The role of the inside-sales group has drastically changed

In past years, a sales representative was most often defined as someone out in the field calling upon (and traveling between) current and potential customers in their territory. This was the classic direct sales channel. The sales force was generally supported (directly or loosely) by an order desk and a dedicated customer service group—they were often called “inside sales.” The thought was that if we kept sales reps away from the order book and the warehouse expeditors, they would not be distracted by administration and be able to make more sales calls. And, more sales calls must mean more sales. This model was employed for decades and seemed to work.

With the advent of internet commerce and ordering, it was no longer necessary for the inside sales group to exist (at least on the order-book side). Consequently, inside-sales positions were eliminated in situations where ordering could now be done directly by the customer—with fewer hands touching the order and fewer chances for error. Also, as the supply chain has become increasingly more transparent to the customer, fewer phone calls are required to find out what happened to “my last order?”

We believe this trend will continue as more-complicated sales processes and the delivery of product advice and support are simplified by expert-systems that allow the customer to place more and more complicated orders, without intervention by a company order taker. This trend has generally reduced the size of the sale force—largely through inside seller attrition.

Trend#2: What has happened to the “traditional” territory field sales force?

This field sales job has generally evolved from the product expert operating at the customer’s location—small or large—to a product and business expert consulting with both current customers and prospects of strategic importance. Consequently, some sales forces now physically call upon 50-70% less customers today than they did 10 years ago—in the same territory and geographic area. The sales forces’ call list (portfolio) now consists of customers or prospects with significant growth prospects. Smaller customers (those whose collective sales have historically accounted for less that 10% of the entire customer base) get little, if any, attention. Today, many smaller customers have been cut loose and directed to use web-based services and support tools (in the absence of inside-sales [or any sales] support).

So, how have today’s sales forces filled the 50%+ of their freed up by the absence smaller-customer sales calls? On paper there is a newly-found focus upon prospective or new customers in the sales force’s day-to-day activity.

Increasingly, companies are asking the sales force to spend the time they used to spend with small accounts calling upon new prospects [Cold calling: Holy rejection, Batman!].

One would expect that there would be a direct replacement of sales calls from former small-accounts to cold calls on future high-potential prospects. In reality experience says that seldom happens, hence, annual company-wide sales calls required and made have likely fallen—in aggregate. Consequently, the sales force is either being allowed to be less productive or is now smaller. Note that this “downsizing” may have been allowed to occur—leaving scores of possible productive sales calls sitting on the table. In the 1980’s getting a field sales rep to call upon prospective customers was like pulling teeth—and it still is.

Trend#3: Where is the demand for talented sales professionals growing?

There are two areas where we actually see growth and stability in the sales force.

Major-account executive (or national accounts manager) ranks continue to grow as companies increasingly focus upon major and strategic account sales channels. This area of focus and expertise barely existed in 1985, but today it is often the driving force of company sales growth and investment. And as major-account strategies expand, so too will the roles and number of major-account specialists. I had a large client who created a major-accounts group a decade ago—in parallel with their field sales force. Within 3 years, the sales volume attributable to the major-accounts group was nearly 50% of all company sales, in addition to continuing growth from the field-sales channel.
There continues to be no better or cost-effective way to reach out to small business or individuals than by picking up the phone and calling them. Whether the subject of the sale is continuing education, financial services or business services, telemarketing continues to be a steady and safe niche as a sales channel. We are sure that in this economy telemarketing has continued to grow and is adding new positions (and businesses). Some would say that this growth is simply a repositioning of former inside sellers to telephone sellers. But, experience tells us that these two jobs require very different and distinct skill sets and personalities. Inside sellers almost never become successful (outbound) telephone sellers. Today’s ranks of telephone sellers are the successful major-account and sales representatives of the future as they build selling and relationship skills—the hard way.

During three decades, we have seen the traditional field sales-force practices of the past quietly evolve by the virtual elimination of inside sellers (as order writers) and the refocusing of the territory sales force to larger and more strategic accounts and prospects. These trends have generally reduced the number of sales positions required to call upon and service the same universe of accounts.

Countering these trends to smaller sales groups is the growth in major-account positions as companies redefine sales channels and priorities, and the apparent growth of tele-sales channels and jobs to better manage the cost of business development (cold calling) and account relationships.

In summary, we believe sales forces have generally gotten smaller on average in the last 30 years primarily through better management and increased productivity. But, pockets of growth do (and will always) exist. Interestingly, some of this downsizing could (should) have been foreseen and avoided.

What does this all mean to the sales executive of today and how will it impact decisions that they will make tomorrow? We think three evergreen truths are clear.

If technological trends in areas of order taking and customer service have not yet impacted your business, it is because you just have not looked. Your competitor is counting on you being surprised by the obvious.
If your sales force continues to waste their time on the wrong accounts (defined in any way you please), your cost of selling will be double what it should be and you are asking for mediocre performance. As we have asked our readers many times before: Do you know where your sales force is today?
If over 15% of your sales calls are not on new and prospective accounts you are losing (or are about to lose) market share—whether you know it or not. Sales calls on new accounts are the life blood of any business.

Either effectively use your sales resources or you will eventually lose them to a budget analyst. Do not wait for these trends to overtake you. Get out ahead of them and beat your competitors.

Are there other trends in the market you believe must also be addressed? Write and tell me about them at bob@wilkeningco.com.

Revisiting the Importance of CEO Succession Planning

2011-09-04T15:02:00.000-07:00

In a recent announcement Steve Jobs said that he is stepping down as CEO of Apple and has asked to be appointed chairman of the Board of Directors. He had signaled that this decision was likely coming earlier this year (January, 2011) when he took a leave of absence as Chief Executive.

At that time, we used his announcement as a reason to discuss both the importance of and methods for effective CEO (or other key executive) succession planning in an article in the January 2011 edition of the Corner Office Gazette E-Notes entitled: “Will Your CEO Be In Tomorrow Morning?” If you did not have an opportunity to read it at the time, a link to the January Corner Office Gazette follows [click here].

One of the questions that will always arise regarding succession planning and its value is: How will we know we have succeeded? In our January 2011 article we outlined a number of constituencies that are served by (benefit from) effective succession planning. These are:

Investors
Lenders
The executive team
The broader group of employees; and
Customers.

If I was a member of Apple’s Board, how would I know we had done a good job of succession planning? I would start (and stop) by looking at the sustained and rising value of the company (as measured by stock price). For even in the face of the recent market correction, Apple’s market value has shown great and continuing strength. I suggest the Apple Board take comfort in the market’s confident response to the handling of this year-long transition to a new CEO.

In truth, no one can replace Steve Jobs. He has was one of handful of people who created an industry (and Apple in the process), and the only one who continued to be able to reinvent his business (again and again) to avoid a slide down the slope to a commodity statue with its corresponding loss of profit and market value.

We hope Steve Jobs goes on to find the time and energy to invent yet another industry and company or two. Good Luck.

Now's the time to build better incentive plans for next year

2011-09-04T14:57:00.000-07:00

2011 is passing quickly. In no more than 90 days, it will be time to approve the 2012 edition of your executive and manager incentive plans. So how should you use the next three months to improve those incentive plans for the coming year? We suggest you consider the following.

First, ask your executives and managers what they like and do not like about their plans. You can gain such input in either one-on-one participant confidential chats (with a company outsider) or with a confidential 6-10 question survey (administered by a 3rd-party) providing plenty of “white space” for comments. Ask questions like these—

Is your plan fair, why or why not?
Does the plan drive you to do the right things? By the way, what are the right things?
Does your plan have appropriate levels or risk and reward for the job you are doing? If not, what would you suggest is more appropriate?
Do the best executives and managers in this company get the highest rewards and recognition? [Some would argue that executives or managers should have no idea what others make—but, they often do.]
What drives incentive payouts in this company? Is that right or wrong?
Do incentives and goals get in the way of you or others doing a good job? How so?
What should the company do differently regarding incentives in the next 24 months? How will that make you and the company more successful?

Often a great way to ask such questions is by using a 7-point scale that ranges from: greatly agree (1) to greatly disagree (7). Comments should also be encouraged to allow each participant to fully state their thoughts.

Then, conduct an analysis of incentive results or payouts versus typical quantitative metrics of performance such as: growth, profitability, quality, cost savings or innovation. However, a metric we have found that often is the best measure of incentive effectiveness is qualitative. In short, take your executives and/or managers and rank them from top to bottom amongst their peers in terms of (or, using your assessment of their) effectiveness, success and contribution to the company—yes, top through bottom, without any ties.

Compare this ranking to their annual incentive earned (or to be earned). In other words, did your top-ranked executives and managers earn the most under the current plan—why or why not? We suggest that you look at this analysis over two years, if you can. This may also tell you something about the consistency of the incentive plan and its goals.

It should take you about a month to collect the information and data outlined in the above two steps.

Last, promptly convene a three-person panel comprised of a top-level executive, a vice president or mid-level executive (who does not report to the other) and a third-party outsider (say an advisor or Board Member). Titles aside, I think you can see who should on this panel.

One member should be appointed lead and another will be responsible for presenting and organizing the information for discussion—but all should have an equal vote in the outcome. The panel will consider the findings of the research conducted above—and add any additional findings or input opportunistically collected. At the conclusion of the session, 1-2 recommendations regarding the design of executive and/or manager incentive plans for the coming year should be prepared and forwarded to the CEO for review and consideration.

If the panel finds that one or two recommendations are not enough to “get it right” in 2012, we suggest that a two-year maintenance plan be proposed with actions for both 2012 and 2013. Another week or two of analysis by your CFO should test the validity and soundness of the proposed changes.

Announcement and implementation cannot be far behind.

So, what have you accomplished in 90 days?

You have asked participants what they like or do not like about their incentive pay plan;
You have actually tested incentive results (in payout $) versus participants ranked in order of value or importance to the organization—an exercise usually full of surprises;
You have asked three-high level thinkers to look at the above data and suggest a few 2012 changes that make most sense for future company success; and
You were able to implement change for 2012 well before year end, and can tell participants that their opinions were the driving force of this change.

If you plan to follow our above advice, you had better start collecting data tomorrow.

Does your sales force have the summertime blues?

2011-07-29T13:24:00.000-07:00

I do not have to tell you that we are now being visited by the hot and lazy days of summertime. The calendar says so, and signs are all about. And just like the weather, sales forces can have a tendency to get a bit lazy and rudderless when summer is in high session. I call it the "summertime blues."

Here are a few sure signs to watch for—

The number of physical sales calls drop like a rock—"you know, no one is ever around during the summer anyway, and they really prefer to speak with me by telephone."
Prospects and potential customers get virtually no attention.
It takes nearly 48 hours to personally get in touch with anyone from the sales force.
The number of sales representatives meeting or exceeding their sales goals or quotas drop by half from the prior couple of months.

There is no need to look at the calendar if the above is occurring, it is summertime and your sales force has a case of the blues.

What causes this to occur? There is a long-held belief that sales forces are generally self-directed and only need financial motivations or rewards to be directed to achieve expected sales results. In such a world who needs a sales manager? Our theory is that while sales forces are more self-managed than other employees, job structure, high expectations and planning are still (and always) required to assure sales force effectiveness.

Summer is a quiet time for managers as well as sales forces. It is our experience that normal expectations for the sales force become lax (or loose) during those months and sales representatives can tend to readily and quietly wander off task while no one is looking. It is a bit of a tradition, but does not have to be. And, such behavior is not isolated to only the sales force.

What should the prudent company do? We think the cure is simple: double down on your summertime sales-force expectations! Here are four examples for how to improve sales energy level and focus for the months of June through August:

Summer is a wonderful time for cold calling. Double your physical cold-calling quota for the summer months. If you expect 5 per month, increase the number to 10. Give your sales force the lead information required to support this effort and set a 3-month goal for closing business with new customers. Throw in a $1,000 bonus check or two to spice up the process and reward the people really doing the work.
If you expect your sales force to make 15 calls per week on select customers, then they must continue to expend that same effort during the summer months. If a client is on vacation and unavailable, find then another client to call upon. No excuses, just plenty of hot-weather sales calls completed. [I actually like summer sales calls; I find one can be more productive.]
Realign your monthly and quarterly sales goals at the beginning of the New Year and ask for more sales production and closes during the summer months—if you do not already. Having to reach a little higher makes people work a little harder. [Now, I do not want any cards or letters next year from any of you saying that you tried my idea in 2012 and all it did was create a bad case of "the spring blues."]
Make summer a prime time for passing knowledge and skills from senior employees to those new to the company or sales force. Many call this process mentoring. As such, pair a senior sales rep with a rookie for a month or more—in either a territory or to develop and service client portfolio. We believe that it is a valuable exercise for both parties. Particularly, it makes the senior sales rep think about:

What is important about each step the sales process;
How they must execute each; and
Most importantly, how do they explain this mystery of life to a rookie?

While some would argue that there could be a loss in productivity in such a pairing, we believe that the formation of this loose team will likely both increase productivity and sales force focus. And, neither party is ever alone to get lost in those summer weeds.

In short, keep your sales force busy during the summer and they will get more done. It may take a bit more work for the sales managers, but it will pay dividends for the employee and company.

Is your sales force experiencing the summertime blues? If you do not like my work plan, create your own—the secret is acting before you lose the attention of the sales force for the next couple of months.

Will employers be dropping health-care coverage for employees in 2014 as the result of The Patient Protection and Affordable Care Act? New information is emerging.

2011-07-05T12:36:00.000-07:00

In August 2010, Wilkening & Company discussed our view of the landscape facing both employers and employees as the result of enactment of the 2010 Patient Protection and Affordable Care Act (PPACA) in the coming few years. In short, we felt that employers would have strong incentives to drop long-standing employee health-insurance coverage for major groups beginning in 2014. Consequently, it can be expected that many will do so.

It was our assessment that employers will be highly motivated to drop employee-sponsored insurance (ESI) in 2014 because insurance pools will become available as a ready alternative to company-sponsored employee health insurance, and new rules and financial penalties (incentives) will present cost-savings opportunities for employers. The economics were (and remain) quite compelling. However, our intuitive conclusions seemed to run contrary to the original Congressional Budget Office (CBO) estimates that stated only 7% of employers (representing 9-10,000,000 estimated employees) would drop coverage. We just seemed to disagree, at the time.

In early June 2011, the consulting firm of McKinsey & Company published the findings and conclusions of a study it recently conducted on the subject. It was entitled: How US health care reform will affect employee benefits. The report is the result of opinion and proprietary research. In their work, they surveyed 1,300 employers across industries, geographies and employer size. They interviewed each regarding such matters as: their current understanding of PPACA provisions, what they planned to do at its advent in 2014, and why.

The reported results of the McKinsey survey were more consistent with our earlier analysis and in stark contrast with 2010 CBO estimates.

There were many findings of the study, but we believe two were very material to the actions employers must take or consider in the coming months.

McKinsey's survey results found that on average 30% of employers plan to drop ESI coverage for some or all of their employees in 2014 and that ratio could be as high as 60%. (It appears that those survey respondents that are more familiar with the provisions of PPACA today said they are more likely to drop employee health-care insurance.) That is nearly eight times the CBO estimate and suggests 70-80,000,000 employees may involuntarily be moved to government insurance pools. The term "drop" is used above to describe ceasing employee health insurance coverage, but it does not mean you can (or will) wash your hands of the employee and the cost of health-care insurance. It is widely believed that companies that drop ESI will also use compensation dollars to bridge the part of the new employee insurance cost that is not picked up by the Feds. Also it is believed that when employees are in a position to select their own coverage, they will select more cost-effective alternatives tailored for individual need.
Contrary to what many employers assume, the McKinsey report concludes that 85% of employees would remain at their jobs even if their employer stopped offering them ESI—and not go to another employer who retains insurance coverage. As we said above, dropping ESI does not mean a clean break with your employee—they are very likely to remain with you, company-sponsored coverage or not.

The McKinsey survey has proved to be quite controversial during the last month in some parts of Washington DC for obvious reasons. [They must not have read my August 2010 E-Notes.]

As you may recall In our August 2010 article, we made broad recommendations to our employer-readers regarding what they should do to prepare for 2014. We still believe these actions remain quite valid (and likely even more so in light of the McKinsey survey findings). Let me again reprint these below.

The prudent company will begin to develop its future employee healthcare strategy and corresponding compensation strategy as soon as possible. While we have only discussed a well-paid employee in our example, also recognize that lower-paid employees may be eligible for federal subsidies through exchanges that will impact your cost and decision making in a variety of other complex ways. We recommend that you strongly now consider—

A full analysis of your work force and healthcare costs and demographics;
An analysis of cost scenarios under current PPACA rules;
Development of 2011-2014 healthcare and compensation strategies in light of PPACA requirements; and
Creation of an action plan to respond quickly and implement required changes in the event of inevitable PPACA rule and deadline changes.

While you technically have plenty of time to consider and act, we suggest you anticipate that changes will surely occur in this arena that will negatively impact your company if you are not ready to respond and act in your own defense—what do they say; the prepared will survive?

As an employer, you should also begin to anticipate questions from your employees regarding health-care economics and decision making. Many have never had to do this in the past and will likely need your help and guidance throughout the process. The greatest benefit you can provide is to support and restore the employee's peace-of mind as they transition through the uncertainty that 2014 will certainly bring—to everyone. Clearly, while you may choose to drop their ESI (and send them to the pool), they may still very likely remain your employee. You must assure them that dropping ESI does not mean being fired or enduring a large pay cut. (Help!)

A year ago we said that time was of the essence for employers wanting to prepare for 2014. Today nothing has changed, only you have a year less to do so.

Wilkening & Company has developed information and methodologies to assist clients in the selection of 2011-2014 insurance and compensation strategies. We will continue to cover this evolving and changing mandates for our readers in future issues of the Corner Office Gazette.

Planning to Improve the Effectiveness of your Compensation Committee

2011-07-05T12:23:00.000-07:00

Wilkening & Company believes that it is essential that the Compensation Committee (or any other Committee) of the Board of Directors plan and allocate its resources to address those issues or decisions that they will regularly face each year. In addition, the Committee must leave time for those last-minute emergencies that always arise. This is a challenge that any Committee or Board can successfully address if it looks ahead.

By planning ahead, we mean that the Board should:

Establish or identify all known annual agenda items for the Compensation Committee to consider or act upon each year; and
Place each on an appropriate Committee meeting agenda.

Agenda items can either require action or merely provide background, information or updates to the Board or its Committee.

As an example of what we suggest, let us assume that the Board of (a fictitious) XYZ Corporation establishes four meetings each year for its Compensation Committee. This is a common meeting practice and frequency that is often tied to the meeting schedule of the full Board. Then, let us create a possible draft 2011-12 planning calendar for the Compensation Committee arranged by meeting. That example is shown below.

Draft Compensation Committee Planning Calendar for XYZ Corporation
2011-2012

Committee Meeting	Action Items Planned	Subjects for Board Consideration or Briefing
November 2011	Approve goals for 2012 annual and long-term incentive plans Approve salary structure and pay increase budgets for 2012 Approve benefit plan structure for 2012	Review year-end 2011 incentive forecasts and projected profit reserves Review of HR budgets, staffing & investments Review HR and compensation "dashboard"
February 2012	Approval of 2011 incentive payouts Approval of profit-sharing/benefit contributions for year past (distributed) in 2012 Selection of Board advisor(s) for 2012	Evaluation of current incentive plans versus best practices & select benchmarks
June 2012	Establish CEO compensation plan for coming 12 months Approval changes to 2013 compensation strategy or incentive plans, as recommended	Report on officer succession planning by CEO Report on CEO succession planning by Chair Annual evaluation of CEO performance Review HR and compensation dashboard
August 2012	Re-approve and acknowledge all compensation contracts (non-LTI) over pre-set limit	Compliance briefing on all federal, state or local regulations impacting people or pay Informational briefings, as selected by Board

Note that in the proposed November meeting subjects for Board consideration and briefing (last column); we include an agenda item called: "Review the HR and compensation dashboard." In our example it occurs in both November and June. This falls into the category of reviewing standard information and metrics regarding productivity, cost or risk. We find it helpful for management to discuss these metrics with the Committee at the opening of every (or every other) meeting. In our experience, such a report is brief (one page) and contains such matters as—

Trends in employee retention or turnover;
Trends in employee productivity—sales per, units per, profit contribution per;
Trends in compensation and benefit costs in aggregate and per employee;
Open and unfilled positions in key job titles; and
Known and imminent risks to company impacting employees, pay or benefits.

Some may consider this too much detail for a Compensation Committee to see. Maybe, but I would suggest that a bit of forewarning could be an actual cost and time saver for the Board, and the company.

The proposed planning calendar presented above does not leave much time for the unknown issues that arise and will require the rapid attention of the Compensation Committee. In our experience, 25% or more of the Committee's time can be taken by those unknown problems that always seem to roll in over the transom. There is no way to plan for this other than to allocate extra meeting time. In short, more time than planned may be (will be) needed to conduct all of the Board's business. At least your planning calendar will determine the baseline requirement of work to be done at each meeting.

Does your company have a planning calendar somewhat like the one we have drafted for XYZ Corporation? If so, I am sure you will agree that it helps in improving the productivity of the Committee. If not, put one together before the next meeting and see what the Board thinks—bet they like it.

Clearly, a planning calendar can have benefits for all Board Committees, or the Board as a whole. I use one just like this for a Board on which I sit. Sure helps the Chair (me) be sure the Board and management are getting everything done—as agreed and on time.

Designing incentive plans for sales territories with “lumpy” demand

2011-06-01T18:22:00.000-07:00

In last month's edition of the Corner Office Gazette E-Notes we discussed sales territories with "lumpy" demand resulting from the selling of disparate products to the same customer base, and the impact of such sales demand upon goal-based incentive pay plans.

We used as an example a distribution company selling specialized printing supplies to smaller art and print shops. The typical supply buyer purchased $2,000 to-5,000 in supplies annually. The supply orders were relatively small, ordering was frequent and the underlying business demand was stable. Hence, supply revenue was very predictable.

The same sales force also sold modestly expensive capital equipment in the form of printing presses and drying/curing units to their customer base. The average purchase could be up to $50,000 per unit, or above. The presses could represent a very large "lump" in the typical territory revenue plan, and a handful of printing-press sales could drive a sales territory well over its goal for the year—or drive it well under plan if press sales did not come in over the transom. The demand for presses was believed to be unpredictable by the sale force, and equipment profit margins were much lower than those of supplies.

In an environment of predictable sales volume and demand (like that of printing supplies), one can successfully reward the sales force based upon achievement of each sales rep's territory annual sales goals using goal-based incentives. In other words, the sales representative earns an incentive or bonus based upon their annual results versus the territory's annual sales goal. A competitive incentive (say $30,000) is earned when the annual sales goal is achieved. Then more or less annual incentive is earned for achievement of results above or below the territory goal. But below a certain level of annual performance versus goal, no annual incentive is earned. An example of the workings of a typical goal-based incentive plan is included in our April 2011 E-Notes.

Goal-based incentive plans are most often successful if the year's sales (or profit) results can be expected to fall within a range of ±25% of the expected goal--i.e.: 75% to 125% of goal. When results outside of that range are routinely experienced, the plan will become high maintenance for company management and ultimately devolve into discretionary payouts. That was precisely the impact of throwing printing press sales into a steady stream of supply orders.

While this is an interesting example, let us stop for a minute and ask the question: Do you also have sales territories with lumpy demand? Use three criteria to try to answer that question. If you answer yes to two or more of these, you may qualify.

An order for the diverse product (printing presses in our example) is 10+ times larger than the average territory order (for say, supplies);
The demand of the diverse product is not part of the annual sales forecast—upon which compensation goals are based; and
The sales demand for the diverse product can amount to 25% of annual territory sales volume, or more.

So if you think you have this problem, read on. Otherwise, read on anyway—we are about to offer a solution with broader applications.

We suggest using an alternative incentive approach that recognizes the two discrete streams of income with very different demand characteristics through the use of supplemental sales bonuses. With such an approach, the sales force will have a "normal" goal-based incentive plan for supplies (only) designed to work well in that supply-buying environment. Then as an extra or add-on (like a cherry on a sundae), there will be a special bonus paid for the sale of each press or other select pieces of capital equipment. The amount of this special bonus will generally vary by such factors as: number of machines sold annually (and dollars), type of product (i.e.: profit margin), key customer or strategic product placements. But, it must be a big sale to qualify. Also remember that a bonus (or any payout) must be material in size to get the attention of the seller. Hence if selling a press or other big-ticket item is a big deal, the bonus paid should be north of $1,000.

You can get pretty creative with such a bonus. It can both drive sales and simplify the communication and application of sales incentive. However, be sure that you now also insist that every sales territory and sales rep has an annual equipment goal in units and dollars. This bonus is just not gravy for the sales force; it recognizes important strategic actions in a straight forward way. And bonus or not, the sales team is responsible for achieving their equipment goals too. Further, if they begin to be able to reliably forecast these sales, you have not only solved an incentive-plan problem, but also a core business problem.

The incentive approach outlined above also can apply to any outlier product or service. We find the use of these types of add-on bonuses is very useful in solving real world marketing/sales problems and making sales pay plans more effective.

I would bet you can find a use for bonuses in your sales pay plans. Just look around a bit.

The Employee Policy Manual—Shorthand Version

2011-06-01T18:07:00.000-07:00

When I worked for a Fortune 500 public company our corporate policy manual was at least 4 binders thick. I was told everything you needed to know about the company was written down in that book—right down to the furniture brand, model and color that the Sales Manager in our Burlingame CA office rated. While I was in a position where policy compliance was important (and was part of my job to assure), I do not remember ever opening or using this august 4-binder document as a reference or guide. I did not even know who had a copy. In short, the document was pretty useless to the conduct of business and to the average employee. In today's world I assume the 300+ pages of the above-mentioned manual would be available to employees on-line. It may be much more accessible today, but just about as useful as it was 30 years ago.

I have also seen situations where policies are not written by a company and are only available verbally when a question or problem arises. Whether 4-binders thick or unwritten, neither version is much assistance to an employee trying to do their job. Not a good situation in either case.

The reason I bring this up is because I strongly believe that every employee should know the key existing company policies, rules and resources that impact their job and conduct on a daily basis. And, they should be able to lay their hands (or eyes) on a summary of these within no more than 5 minutes. Let me refer to such a summary and document as: The Employee Shorthand Policy Manual. "Shorthand" means that it should be simple and be no more than three-pages in length—electronically or not. In my experience, it should address the following questions—

What are the terms of my employment?
What does the company expect of me?
If I have questions or issues to resolve, what do I do or who do I see?

Let me summarize what definitions, directions or answers might be contained in each.

1. What are my terms of employment?—

What is full and part-time employment? What does that mean to me?
For what actions can I be discharged? [in short, a definition of "cause"]
What are the company's policies regarding performance and promotion?
How does the company generally compensate employees and how do I determine what benefits are offered for my job?

2. What does the company expect of me?

How can I determine the formal duties and responsibilities of my position?
What are the company's policies regarding safety and ethical behavior?
What are the hours of business and what constitutes professional dress and presentation in the work place?
How should I conduct myself as an employee regarding other employees, customers and suppliers?
What type of behavior is not allowed on company premises or in the conduct of company business, and what should I do if I observe such behavior? [How will my comments or outreach be handled—i.e.: confidentiality?]

3. If I have questions or issues to resolve, what do I do or whom do I see?

Where can I receive information regarding the reporting relationships within the company—my boss, my boss's boss, etc.........?
In the event of a voluntary termination ("I quit"), who do I tell and what should I do?
In the event there is a question regarding my pay or benefits, who should I ask and what should I do?
In the event I observe or believe there is an unsafe condition in the company impacting me or others, who should I tell and what should I do? [How will my comments or outreach be handled—i.e.: confidentiality?]
In the event disagreements with other employees or managers arise affecting my job or the company what actions should I take?

Well, I think I did it. I got all of the salient stuff (I think) an employee might want to know in three pages or less.

Now an attorney might say that we must cover (write) much more to be prudent in such a document. I would respond to their comment by saying: give every employee the shorthand version, and in it, you can reference the more detailed multi-binder document that resides in HR or on-line (if you think it is necessary)—that no one will ever read anyway.

Notice that in the 3rd section ("Whom do I ask or see?"), we provide a series of potential issues or questions and then refer the employee to the appropriate company executive who will answer specific questions or resolve problems. Also note that I have brushed up against the issue of confidentiality in a couple of points. In our experience, this can be a serious issue or employee dilemma. Employees infrequently may need to raise an issue or ask a question that should "land" on the desk of a third party (non-employee) serving the company (perhaps your CPA). It is important to give them a path to do so.

Do you like this approach to policy writing? If you do not already have one, try writing your own Shorthand Policy Manual in the coming week. Can you readily answer the questions I have posed above—or provide a simple path to an answer? If you cannot, where does that leave your employees?

Cold calling: Are they really doing it?

2011-05-07T13:51:00.001-07:00

On more than one occasion we have discussed the necessity and virtue of cold calling in this increasing-difficult (and here to stay) economic environment. Your goal should be to capture market share while adding enough new clients to your rosters to both grow and replace any defections you incur. [You can reasonably expect your competition to employ the same market-share sales strategy that you do.]

It is a difficult and time-consuming sales strategy to pursue, and most members of your sales force simply do not like to do it. I do not know anyone who likes to be told "No," do you?

When a company tells its sales force to do more cold calls, it generally expects that this will be done as part of the normal and routine daily sales activity—somewhere between solving vexing and high-profile customer problems, calling upon a favorite client for lunch in a far-away place or meeting with Marketing regarding the latest in new products. In short, cold calling has a tendency to get lost in the demands of today's clients. There are always 100 excuses—resulting in zero new customers.

We would always advise that a way to make any activity a success is to both focus and segment. If you want your sales force to be more successful at cold calling try this:

Do not overwhelm the sales force with pages of useless (yes, useless) leads. They should always each have 2-5 active actionable and higher-potential leads that are being worked. Little ones do not count and frankly get in the way.
Make cold calling a discrete weekly activity: "We cold call for new accounts on Tuesday!"
The sales force needs to answer for Tuesday's results on Wednesday. Do not allow the day-to-day get in the way. You have a customer service group—use it to keep your sellers in the field.
Lastly, appoint a company-wide "Executive-In-Charge" for cold calling. [An up-and-coming sales manager is a good choice.]

Is your sales force having problems getting cold-call traction? Try the above steps starting next week. Then, come back in about four weeks to assure that Cold-Call Tuesday remains in place and real results are being seen. If not, appoint a new executive-in-charge.

For more discussion of cold calling, reread our October 2009 E-Notes article entitled: Let's talk about cold calling.

Limiting Payouts Under an Annual Incentive Plan—Why Some Companies Use Payout Caps

2011-05-07T13:51:00.000-07:00

I have likely designed well over 100 annual incentive plans for sales forces, operating and staff managers and executives over the last 30 years. Many of these plans are goal-based in design and are generally built to reward the participant for meeting and exceeding management's expectations (i.e.: their goals).

Goal-based incentive plans are often designed to pay increasing amounts of incentives for increasing performance. In most cases, the participant is paid for partial progress between stated levels of performance (e.g.: threshold, meets expectations, greatly exceeds expectations, WOW...). A typical payout vs. (say sales) performance function looks a bit like the chart shown below.

As you can see in the above chart, a $20,000 incentive is earned beginning at a performance level of $1,000,000 (at threshold)—nothing is earned below that level. At the expected or goal level of performance ($1,600,000 in the example) a $40,000 of incentive is earned. And at a level well above goal (or $2,200,000 in this example or 150% of expected performance), a $60,000 incentive is earned. $60,000 may be the top level of incentive to be earned by a participant in the plan, or not.

There are dozens of ways to design such a plan, but my chart describes a very common structure and practice. The payout vs. performance relationship is commonly called an "incentive table." But, what happens when performance exceeds $2,200,000? Is it "capped" at $60,000 in annual incentive? Would that be de-motivating to the participant?

When such questions regarding incentive payouts and limits are asked (and they often are), the answer is not always a clear yes or no. In truth, it depends. So let's spend a few minutes talking about why we have found that some companies have chosen to limit annual incentive payouts at the top of the table.

Generally, there are three primary causes:

The company has difficulty in setting reliable performance expectations (goals) based on history, experience or information available at the time.
The company regularly experiences "lumpy" demand for its products.
The plan participant has limited impact on the end results for which they are being paid.

The three points stated above also represent reasons why (and situations where) goal-based incentive plans do not work. Let's briefly discuss each of the above in turn.

Difficulty in setting reliable performance expectations or goals—This may mean that the company has been historically unable to set performance goals whose outcomes cannot be predicted with some reasonable probability of success. For example, a company may not have a transparent portal into its sales process and customer base. Consequently, its sales results may fluctuate unpredictably up or down from year to year and only the sales force seems to know why—not the company. Or, the participant may have historically been allowed to understate what they and their account base is capable of producing in any given year to assure that goals will be comfortably met and consequently incentive payouts will always be well over target payouts. In either case, it is quite likely that there will be all-too-frequent cases where the achieved performance levels cause earned payouts at or over the top of the incentive plan "table."
In a well-designed goal-based incentive plan, maximum payout levels should be only be earned 5-10% of the time (yes, once every 10 years or more). But, I have seen cases where the reverse is true. As a result, companies that do not have confidence in these probabilities of achievement will often impose incentive limits to avoid payouts that are strictly an artifact of bad or unreliable goal setting.
Irregular "lumpy' demand is experienced—I once had a client who sold specialized printing supplies to 10,000 or so small art and print shops. It was a very predictable demand environment where the typical supply buyer purchased $2-5,000 in supplies annually. The supply orders were relatively small, ordering was frequent and the underlying business demand was very transparent—to anyone that looked. It was a great new-customer environment where new accounts (and price increases) made for predictable increased supplies revenue.

The territory sales reps were paid an annual incentive based upon achievement of revenue versus annual goal and could potentially earn two times target annual incentive for achievement of up to 120% of goal—not an unusual performance/incentive range in a highly predictable demand environment. But there was a wild card. The sales force also sold capital equipment in the form of printing presses and drying/curing units to their customer base. The average purchase could be anywhere from $10,000 to $50,000 per unit. So the presses represented a very large "lump" in the routine revenue plan. It did not take too much more than a couple of printing presses to drive a sales territory well over its goal for the year, and often off of the incentive table. The sales force also claimed (with some support) that it was quite difficult to predict press orders—"they are only replaced when they break down." Plus, the profit margins on the presses and equipment were much lower than those of the mix of supplies. When presses entered the calculation of incentives, this client chose not to pay more than the maximum plan incentive at 120% of sales goal.

The impact of the participant on the end results is limited—It is not uncommon to see annual incentives paid for group or collective results, or for results not directly within the control of the plan participant. An example of this is having an annual goal-based incentive for company managers and employees based upon enterprise or business-unit profit contribution. This is often done to provide a collective focus on (or responsibility for) the key measurement of enterprise success. But, no single mid-level manager or employee is likely driving company profit one way or the other. Clients will often limit incentives earned under these type plans. Why? --because it is felt that the participant is benefiting from and not driving performance. However when performance is truly exceptional, the CEO or Board will often step up and elect to pay more than the plan's posted limit. And as employee gestures go, that is generally a pretty good one.

Are these good reasons to limit or cap incentive payouts? Is there ever a good reason? Some CEOs and Boards think not. What do you think?

When looking at incentive plans and payout potential, use this simple rule of thumb to consider whether you should consider caps: If you, the CEO or Board believe that you will ever be put in a situation where there is a perception that an incentive paid (or to-be-paid) is not an incentive earned, be assured that such feelings and discussions will surely become broadly known and that will be very damaging to individual relationships and company culture. The last thing you want to do is have your incentive plan and practices create such conflict. If you think this can happen, it is time to rethink the design and pay-out limits of your incentive plan.

Questions: Has your organization ever chosen to limit incentive payouts? Why have you chosen to do so? If for different reasons than mentioned above, please tell us and we will pass it along to our readers.

Lessons in Leadership

2011-03-31T18:02:00.000-07:00

I have always had an interest in history and have been known to read a military-history book or two. Just before the demise of our friends at Borders (we covered that ground last month), I purchased a hardcover book entitled: Neptune's Inferno; The US Navy at Guadalcanal by James D. Hornfischer.

For those of you that do not know, Guadalcanal is a dismal island in the south Pacific and part of the Solomon chain. It was the first major island battle of the Pacific war and was a bloody struggle with grave consequences for the loser. It began in August 1942 with a Marine landing and raged on for nearly a year. The US Navy played a pivotal role in the campaign by protecting the Marines ashore and securing the sea lanes around the island. It is not a tale or book for the faint of heart. I am glad that I know how it came out—it wasn't always that clear.

In October the results of battle were not going well for the US Navy and it was decided to replace the theatre commander (Admiral Robert Ghormley) with Admiral William F. Halsey (aka "Bull").

The author is quite knowledgeable of the US Navy during that period and its senior commanders. Halsey is no exception. About half way through the book, he wrote a paragraph to describe the incoming admiral and his qualities with stunning clarity. That paragraph follows.

Halsey was neither a genius nor even a working scholar in any academic or technical field, but he had a quality of brilliance that may have been even more important in a combat capacity. He was, it was said, "brilliant in common sense." He knew that battles and wars were not won most principally with well-drafted paperwork or subtle diplomacy or high materials and engineering ratings aboard ship, but by something quite simple and direct: placing ordinance on target. He knew, working backward from there, the quality of the mind and spirit of the men distributing the ordinance was at least important as the mechanical state of the weapons themselves. And he knew that small and simple acts, trivial themselves but intangibly powerful, raised and perfected that quality; sometimes those things were as prosaic as showing up and listening to people.

That is one of the best descriptions of a leader I have ever heard or read. I had to read it three times when I first came upon it because it was so striking.

What does Hornfischer say about Halsey and leadership?

The mission is generally pretty simple to define. I have found that if you cannot articulate your mission in a handful of words you do not understand it in the first place, or you do not have one (e.g.: ordinance on target).
Planning is a wonderful thing, but it means absolutely nothing if it does not aid in operational execution, or worse, gets in the way.
People operate enterprises and the quality of their execution is crucial to end results. Machines and processes generally do not operate themselves—I do not care what your engineers try to tell you. So, do everything in your power to enable and prepare the executors.
Most people look for (crave) a leader to help inspire them to go that extra mile. Further, they expect their leader to be standing with (and engaging) them when there is a tough job at hand. Sometimes engagement is as simple as walking the shop floor and stopping to talk with a machine operator or forklift driver, and showing an interest in their job and their lives. I am often surprised at how predictably people perk up and smile when you show an interest in their job or just say hello. Halsey knew what he was talking about.

There are no great management secrets noted in the above paragraph; just some common sense and an understanding of what makes people want to work for and with you.

We went on the win the battle of Guadalcanal. Halsey turned the tables by picking his time and place of battle and sending his fleet out to fight. And fight they did in some of the most historic and costly naval battles ever fought. Those sailors were remarkably brave by any standards, and so were the Admirals standing next to them at battle stations. They were our fathers, grandfathers and uncles who faced mortal danger and put ordinance on target.

Next time you see one of those guys, thank them.

Is setting annual incentive goals each year a requirement?

2011-03-31T17:56:00.000-07:00

As long-time readers probably know, I am a strong believer that an employee, manager or executive should have annual performance metrics and objectives, and these should be measured against annual expectations or goals for each defined performance metric. Our rationale for such goals is that if you do not employ such performance metrics and expectations you cannot tell if you are winning or losing. And, winning is the name of the game in a successful company.

We often advise clients to link their annual incentive or bonus plans (or portions thereof) to achievement of an employee's annual goals. Hence, the company will pay the employee, manager or executive based on performance. (Now, that also has a familiar ring.)

In such a reward environment, it is generally a requirement to set (and reset) annual goals and expectations each year—across the organization. However, it is also possible that employee expectations can be stated on a multi-year basis and results can be measured on a longer-than-annual cycle. However in truth, you will usually "settle up" on an annual basis for purposes of bonus payouts.

We like goal-based annual plans because of their clear communication value regarding pay and quantifiable performance. The linkage is clear. But with that clarity comes increasing complexity in the form of goal setting, payout tables, calculations, reporting, communications and measurement. This clearly takes management's time and attention and is one of the main reasons we often see push back from senior executives regarding the use of annual goal-based incentive plans. And, recall that simplicity is one of the top design criteria to achieve in the design of any effective incentive plan. During the last few months we have been involved with the evaluation and design of a different type of annual-incentive plan that is simple in nature and may not (always) require the use of explicit annual incentive goals. Let's talk about it.

The annual incentive design we refer to is the creation and sharing of a cash bonus pool that is allocated among managers or key executives. In our experience, these pools are mostly created as a percent of enterprise or unit profit—however defined. These types of annual-pay arrangements (pool-participation plans) are most often reserved for executives or very senior managers—including the top operating executive. But, they can work at lower organizational levels, if properly designed.

They generally work something like this—

A pool of cash is created at the end of the year based upon pre-determined levels of (say) pre-tax profit. The pool is then created as some agreed-to percent of the annual pre-tax profit. (e.g.: 10% of $2 Million) There is sometimes also a threshold of performance below which the pool is not funded, and incentives are not paid.
The pool is then allocated among a select group of executives or managers based upon rank, responsibility or performance. "Pecking order" is too strong a term to describe it, but it can work that way. For example, the Vice President of Marketing may get 10% of the pool, and other executives or managers will get more or less determined a priori.

OK, so what are the differences between this and an annual goal-based plan? The main difference is that you might not have to set or reset your goals each year. For example, you could decide that a profit pool be set up for multi-year period (say 3 years) with same percent(s) of profit, same thresholds (if any), same metrics, same executive allocations; each year. Technically you do not have to reset your annual incentive goals in that circumstance.

In fact, what you have just done is set a "goal" that will last for (say) 3 years and made an agreement with the owners (or management) regarding how much they are willing to share with the executive team for that same multi-year period—at various levels of performance. While you have actually set a goal, you are just not changing it every year. Of course if the deal is to just pay the participants their share of a set percent of all profit, the only goal or expectation established is that the company makes money.

Is a goal-based plan or a profit-participation plan better? That is like asking whether you like a blue or red car better. It really depends on the application and circumstance.

The profit-participation plan is generally much simpler to understand and explain. Further, it clearly links the interests of the management team with the owners—simply more profit equals more pay. On the downside, you should certainly expect more from an executive than what is described in a single collective metric like pre-tax profit. We believe profit-participation plans are best applied when combined with other annual incentives and where goals, thresholds and rates reflect ownership expectations on an annual, or generally timely, basis.

So must you set annual incentive goals every year? No, it is not necessary. But, if you do not, we believe that you are leaving important tools from the manager's toolbox lying on the table.

Reflections on the Demise of Borders—Is there a lesson to be learned?

2011-02-22T11:58:00.000-08:00

I was saddened to hear of the long-awaited bankruptcy filing by Borders, the book seller, last week. They will be closing the Mt. Prospect (Illinois) store where I have spent many evenings slowly exploring their many shelves for book, periodical and music titles of interest. I usually found what I wanted, and Borders probably has me on a list somewhere as a good customer—or at least oft-present.

I found their stores pleasant places to visit with an unhurried atmosphere, helpful staff and thousands of on-hand and colorful titles. I liked them much better than their competitor although they looked a whole lot alike.

Pure and simple, Borders was book store before anything else. And what made it a pleasant place may have ultimately been their Achilles' heel. I understand they grew from the Walden chain that populated mall spaces for many years and at one time they had over a thousand stores. They started as book stores, but as often happens in such situations; they likely found that they had evolved into a pretty large book merchant that also had a bunch of stores. As they grew, they would have started to exercise significant power over publishers and large distributors, and newly-hired company marketing experts surely began to use such foreign terms as "sales channels," "virtual," "branding" and "brick and mortar." Pretty heady stuff.

At some point in time it is likely that Borders had to make a business-changing decision—what are we: a book merchant or a chain of book stores? Based upon their decision, the next actions and the future would be quite different. For example:

If I am a book merchant, I recognize that the book stores are merely a single sales channel for the core-merchandising business. That channel must perform to set standards, or be modified, shunned or closed. In this case, marketing is a more important function than chain operations.
If I am a chain of book stores, I must operate my chain in an effective & profitable manner, get books from the best outlets and sources available (including the Borders' book buyers, or not), survive with lower margins and broaden the product line to appeal to (and leverage upon) my walk-in customer. [Their coffee was pretty good.] In this case, chain operations rein as the top company function.

Now I have never studied Borders and know nothing of their internal operations (other than as a customer), but I sense is that they came to that fork in the road and "took it," as Yogi Berra used to say. And since being a bookstore was in their DNA, they became a chain of book stores by default. This is somewhat supported by the fact that a decade ago Borders gave up control of its "virtual" (internet) sales channel to Amazon for a couple of years before they realized its error. (Borders who?)

Those of you who interface with Wilkening & Company or regularly read these pages know that I am a strong believer that every company should develop a brief one-page statement of strategy (intent) that unambiguously states four truths about the direction of that company:

Products or services to be offered;
Customers to be served;
What the company would like to be known as now, and 3-5 years from now; and
How will we know we have won?

While I was not there, I sense that if someone on the Borders' Board of Directors had asked the CEO to rigorously decide (and defend) whether Borders was a book merchant or a bookstore, there would not have been a bankruptcy filing last week. And, I could still go to my favorite book store in Mt. Prospect and rummage through the titles. If such a Board meeting happened, I wish I had been there!

I hope Borders survives in the long run, but my interest is academic for they closed my bookstore.

How to Price Those Unique Multi-Role Jobs

2011-02-22T11:57:00.001-08:00

How do you pay a unique and multi-role job? That is one of the biggest challenges that faces a company when it comes to the equity and effectiveness of its compensation practices.

But first, what type of job are we talking about? We see these in the real world all of the time. They are those unique jobs filled by one person who will often tell you they are wearing "two hats." For example, I have seen an executive fill the jobs of both top sales officer and top engineering officer for a manufacturing firm. Or in a lower-level job, a single incumbent was both warehouse manager and also purchasing agent. But, do not confuse these with a senior job where multiple functions generally report—like a chief operating officer or top logistics officer. Those are single-task jobs.

Multi-role jobs are common in smaller companies where the firm may not have the critical mass to have two discrete executives or managers to fill as many important jobs, and assigns second-job tasks to someone with available time or who has the knack (or desire) to do the second job. Notice we are using the terms "first" and "second" jobs here.

These are also often seen in family-run firms and are frequently used with family members to create a job of some importance (and perceived value) while a family member is being mentored or learning the ropes of the business (under close oversight), or both. Of course, sometimes, a job is created for a family member that is an eclectic collection of tasks that adds up to something perceived to be enough to keep them busy or interested.

We often come across these types of situations when approached by a client to determine company and job pay competitiveness for both salary and annual incentives. So how should determining the right pay practice for these unique jobs be approached?

First, you want to determine what the incumbent really does. What is on their business card and what they actually do can be quite different. Also, their definition of the job (say CFO) can be quite different from that of the rest of industry. Usually, an hour of talking with the incumbent will give you a true picture of the job—title aside.
Second and in concert with the first above step, find out where they spend their time. This will tell you what the first (primary) job actually is. Do not fall into the trap of going along with the argument that one person can completely do two real jobs. Generally without exception, one of the two jobs will get short shrift. Be sure to find out which one it is.
Then, determine the market pay for their first job, or the one they actually do. We have discussed this process in the past, but generally we suggest two approaches: A) using title matching versus market data or B) a reliable guide chart profile method of job sizing (and market data linked to the profiling method used). Both are reliable and the data is readily available for both salary and annual incentive. By the way, you will find that in about a third of the cases the incumbent will suggest that because they wear "two hats" they should be paid the salary (and bonus) of both of the two jobs they fill combined. I generally reserve a broad smile and a hearty laugh for such debates. They always lose.
Also be prepared to consider another pay strategy. I have seen truly conscientious executives who really try their best to do two jobs when there is no alternative to the situation. In such a case, you might consider adding an extra 10-15% to the salary when no salary premium exists. But a better solution is to make an upward adjustment in any annual incentive or bonus payment as recognition. But watch out for these true overachievers burning themselves out in the name of the company & loyalty.

If you are analyzing such a "two-hat" job, you can provide your CEO with some organizational advice along with your pay recommendations. If you observe that one of the two real jobs is not getting the attention it requires you should tell the CEO. Further, if someone is over their head in either or both jobs, a gentle nudge to the top executive will likely be much appreciated.

Do you have executives or managers on your team that wear two hats? Do you know what they really do, and the basis for their current pay? If you do not know, you should.

Will Your CEO Be In Tomorrow Morning?

2011-02-03T14:59:00.001-08:00

"There is an old Wayne Gretzky quote that I love: 'I skate where the puck is going to be, not where it has been.' And we've always tried to do that at Apple. Since the very, very beginning. And we always will."
--Steve Jobs

The recent news regarding Steve Jobs' continuing health problems sent a shudder through the financial markets and investors alike. Steve Jobs is the co-founder and long-time Chairman and CEO of Apple, Inc. He is largely the face and chief strategist of the famed computer maker.

On January 17th he announced that he would be taking a leave of absence from his operating duties as Apple's CEO to focus on his health. In 2009, he had an organ transplant as the result of a bout with cancer. Tim Cook, Apple's COO, will assume Jobs' day-to-day responsibilities. We all hope Mr. Jobs will soon return.

The CEO position is a unique position in a company and the economy. It is the single crossroads where company strategy, policy, values and governance come together, and are uniquely embodied in one person. The CEO is often the face and voice of the company to all constituencies. Mr. Jobs may be the best example ever created of the position's value and its inherent risk. Hence, the sudden loss of the CEO and the planning for CEO succession and transition is crucial to any enterprise.

Succession planning is one of the primary responsibilities of the Board of Directors and is often managed and evaluated within the Compensation Committee. Succession plans, in our experience, are often two-dimensional documents that discuss how to handle a routine and orderly transition of executive power within the company at the departure of the CEO or other key executive. Most companies have or claim to have a succession plan. Some are very good; others are nothing more than a fill-in-the-blanks exercise. Some companies do not have a plan for CEO succession (or say they plan to do it in the coming year after other more pressing priorities are handled). Where does your company stand on this spectrum?

Let's try a little exercise today: Your CEO has abruptly called the Board Chair and informed the Chair that he or she would ask for (and take) a leave of absence for health reasons beginning tomorrow morning. How would your succession plan stand the test of such an abrupt and disorderly leadership transition?

To address this issue, we suggest that the Board (or its appropriate committee) roll up its sleeves and honestly answer the following 4 questions regarding its CEO succession plan and its support infrastructure:

Do you know everything the CEO does and directly touches today? Is it fully documented and what tasks, relationships or transactions would fall through the cracks if the CEO exited tomorrow?
A CEO has often selected an executive who should become CEO when they leave. Is that selection known and agreed upon by the Board? Is the named executive really up to the job—tomorrow morning or have you accepted the CEO's choice out of consensus or courtesy? When will that person be ready, if ever?
How does the Board plan to oversee a new or "rookie" CEO? Will Board processes or Committee assignments and responsibilities need to change? Will a Board member need to mentor the new CEO? Who?
Does your CEO (and other members of the senior executive team) participate in a full annual health evaluation? An annual physical is a common perquisite for a senior executive and is good way to protect the executive, while also protecting the interests of the shareholders.

So why is this important? Consider what could happen if your CEO unexpectedly departed tomorrow and the transition was indecisive and/or their replacement is perceived to be a step down.

What will your investors think? If they perceive that the event has increased their investment risk, they will have lost value and will perhaps look for a better place to put their money.
What will your bankers think? Again, if they perceive their risk has increased, your cost of capital will begin to rise.
What will the executive team think? You have likely spent much time and energy developing, binding and retaining your top executives. That can all evaporate with appointment of a weak CEO replacement or indecisiveness by the Board. In my personal experience, it takes about six months to begin losing key players when that happens.
What will employees think? Employees often look up to the CEO as their leader. They will watch very carefully the Board's decisions and rapidly (and accurately) evaluate the future of the company. A bad choice or Board indecisiveness will dim that evaluation. [See point above]
What will customers think? If you own an Apple product, you have probably begun to wonder if the brand will continue to be the leading industry technology/application innovator—without Steve. That is a direct challenge to market share.

In short, effective CEO succession planning is important to both reduce and manage company real and perceived risk, and retain the other company key players who will drive your company successfully into the future.

If your company does not have a succession plan for the CEO and other top executives, you are very vulnerable and ought to do something about it starting today. Feel free to use the above outline as a starting point.

Get Off To A Quick Start For The Year

2011-02-03T14:56:00.000-08:00

It has long been my belief that one of the primary reasons that companies and individuals fail and are generally unable to meet their annual goals is because they waste the first half of the year.

Wait, how can anyone waste six months? Well, it is not really wasting the time but it is more accurately a lack of urgency and focus. "Hell, I have the whole year to hit my numbers." It is an insidious process, and the results are often quite predictable. What can be done in January to avoid this trap?

We assume that yours is like many other well-run companies that have a series of sales, profit or other goals assigned to individual or groups of sales reps, managers or executives. Normally, such goals are defined on an annual basis and achievement is typically measured at year's end—for purposes of both recognition and pay. But, often little emphasis or focus is placed on the year's goals, early in the year.

We believe the solution for a "quick start" is as simple as the source of the problem—remove the built-in 6 to 9-month cushion. In short, break your year into four 3-month "years"—with a beginning, an end—and a performance expectation or goal for each of the four discrete "years" (yes, we mean the quarter).

But to make it work you must have more than a calendar and a pencil, you must also reinforce the importance of each quarter ("year" that is) by changing your feedback and recognition processes. For example try this:

Tell your sales force and management team that the "world" comes to an end every three months; no more waiting around (or, more accurately milling around) until nearly the end of the calendar or fiscal year before getting serious. And, you can make the cycle every month if your business demands it!
Have your finance department measure sales, profit contribution and or other denominated goals against quarterly expectations at the end of every week and month. Make sure your key contributors and managers have the results in their mailbox within 48 hours of the end of the period. Call them directly to talk about their results—and do not accept "BS" excuses for under achievement. They will eventually learn to anticipate your rapid feedback, questions and hot buttons.
Be transparent and broadly post quarterly results for all to see. There is nothing like a little recognition (good or bad) to pep up the coffee break discussion.
Finally, link achievement throughout the year to sales rep, manager or executive pay. Perhaps, you should add a 15% bonus on top off the annual incentive or bonus for anyone who makes and exceeds their goals for both the first and second quarters.

To be effective with such a program, you need to start immediately. You have plenty of time to be rolling and measuring by the end of February. Do not accept any administrative or IT excuses about too much work or scads of elusive data taking weeks to track down. Make them solve the problems immediately—the newly-developed (faster and better) reporting processes will also pay great dividends to the company in the areas of business development, customer service and competitiveness.

Some will argue that this approach cannot be used in a business that lives and dies on the big order, with a sales force (and support processes) built to expect and handle "lumpy" demand. How can one "quick start" in such a big-order business environment? Try this:

Identify all of the "closable" big orders (say the top 50 known for the year at January 1st);
Ask your sales force and management team for each closable order to—
- Identify the probability of closing the business this quarter—and the yield in revenue and profit to be achieved;
- Ask what must happen to close the business as scheduled, and then supply what is needed to your field operators (information, support, products, pricing...) to get the job done; and
- Expect a 15-minute weekly briefing from each seller on Friday morning regarding each closable deal—closing date, next steps, schedule revisions (accelerations, we hope) and abandonment.
Encourage the sales force and executive team to close as much big stuff as possible early in the year. And then require them to add 50 more new big orders by year end (as one goes off the list a new prospect goes on). If done correctly, everyone loses sight of the year end.

Of course, these processes can become exercises in deception and half-truths if the company and senior-executive team allows it to happen. Again, transparency does wonders to avoid this.

As you can see from our description of the above "quick-start" tools and processes, there is nothing technical or tricky here. It is merely the consistent application of pressure to perform and book business starting the day after New Years'.

If you let your sales force slack off in the beginning of the year, your chances of being successful as a company will go down dramatically. So, do not let it happen—it is within your control.

Get ready for an exciting spring this year.

Improving Employee Productivity on Christmas Eve... Or, An Exciting Christmas Eve at Corporate

2010-12-20T14:24:00.000-08:00

It was a Christmas Eve in the mid-1970's. I was a senior IT auditor in the corporate offices of a large publicly-held corporation based in the northwest suburbs of Chicago.

It was the typical lazy day before a holiday break, without a whole lot to do on deadline. In fact, I was usually out at a remote divisional location and did not spend much time at headquarters. The workday was particularly dead for me and the 20 or so other staff members who were not taking the day off. It did not appear that there was anyone onsite with a title north of "Manager" and we all were pretty much on our own best behavior. The only background excitement that day was the weather which was a mixture of rain and snow with plummeting temperatures. It was the kind of day where pilots earn their pay.

The weather was of particular concern for me. It was a family tradition for my wife and me to jump into the car on Christmas Eve and drive to my parent's home where we would celebrate Christmas. It was a long drive to the south side of Chicago (the East Side of Chicago to be exact which lies in the land between the refineries and the steel mills). My office was still another 30 minutes away. In bad weather it was a particularly testy adventure. And in the dark no less.

Lunchtime passed without any particular notice, and everyone began to wonder and comment regarding when "they" would close the headquarters office and let us venture into the wintry mess outside to celebrate the holiday. A few brave souls were even talking about taking matters into their own hands and leaving early. Who would know anyway?

My desk was right outside the office of the Corporate Controller. It was still another year before they would give me my own. At about 2:00 PM I turned around to hear a commotion and saw the President rushing up to the Controller's secretary. Before she could turn he demanded: "Where is Jerry?" Ginny slowly turned and told the President that the Controller was in fact on vacation that week, was 1,000 miles away and unavailable by phone.

Not liking that answer, the President asked to now speak directly to the Chief Financial Officer. The CFO news was even worse. Ted was 2,000 miles away (rank has its privileges) and was less available than even Jerry. He turned around and left in huff. Ouch!

I technically was the senior on-site employee in the finance department that afternoon (that rank had no privilege), and thought that perhaps I was about to be summoned to the 10^th floor where I would be required to answer some esoteric accounting or finance question for the Operating Committee or Board of Directors. I was ready. Ginny and I chuckled at the very thought of it, but after about 15 minutes we figured the crisis (and danger) had passed. We never did find out what had caused the stir.

Just then who appeared but the Corporate Office Manager carrying an official-looking clipboard with a legal pad. She looked troubled to say the least as she rapidly walked past. Pausing to say hello, she told me (in a tone that anyone within earshot could hear), that the President was upset that the office was open for business on Christmas Eve, and nobody had showed up. So she was sent to take attendance, but was unsure what would be done with her findings. She was to bring the results back to the President's office promptly (I think his secretary was 3,000 miles away that day), and he would handle it. In passing, I asked what would have happened if I had gone to the restroom during her audit (always the wiseass when bullets are flying); she smiled and mumbled something about my career—or lack thereof.

A hush fell over the assembled corporate masses, and all thoughts of sneaking out early passed for fear of some unspeakable punishment. Who knows, maybe they would take attendance again? Heads went down and people went back to work doing whatever they were doing before, only looking more sincere.

Time passed slowly and the weather worsened significantly. Now it was dark. I called my wife to tell her I would be a bit later than expected.

Corporate headquarters closed officially around 5:00 PM, but no one was taking any chances that day. As I recall, the Office Manager once more appeared about that time and told all 20 of us to go home. ("But do not be too far from a phone.") We all saluted and promptly left.

From that point on, the evening and holiday was uneventful. The drive was indeed testy, but the visit with my parents and the old neighborhood was very special as always. I miss those visits as the years have passed.

Is there a moral to this story? Why, yes indeed! If you are scheduling your employees to work on Christmas Eve, do not tell them the office will close early (let them guess) and then, without warning, take attendance at about 1:00 PM. In my experience they will work real hard until dismissed at quitting time. (And yes, you will probably have to tell them to leave.) Of course, their afternoon's work product will likely be gibberish. But who cares, it's the holidays.

But better yet, skip steps two and three and give them (and yourself) Christmas Eve off.

The Cost and Cure for Lack of Civility in the Work Place

2010-12-01T08:56:00.000-08:00

I was recently sent an article from the New York Times entitled: Incivility Can Have Costs Beyond Hurt Feelings (Nov 19, 2010).

The article generally discusses rude or offensive behavior in both a personal and a business environment. How can such rude behavior be defined? A few examples were mentioned:

Ignoring employee or peer requests or outreach for assistance;
Not acknowledging a colleague (actually ignoring them) when meeting or passing in the workplace (such as in a hallway);
Denigrating an employee or peer behind their back verbally or in writing; or
Showing general disrespect for an employee or peer—their person, their opinions or their property.

It seems that there is a consensus that this type of rude behavior has been sharply on the rise for the last two generations; although not all quoted in the article seemed to agree. It seems fairly obvious to this frequent walker and long-time operator of a motor vehicle.

Research on this subject was also presented in the article. I found three findings of particular interest to the CEO:

Many workers have reported to researchers that they have left companies and jobs because of continuing incivility, but rarely report it as the reason for leaving;
60% of disrespectful behavior observed comes from above (organizationally—the boss) while the rest is split equally between peer (the same level) and subordinate (from below); and
Half of affected employees said that they had generally decreased their efforts on the job after experiencing ongoing rude behavior—and further have declined putting in any extra effort for the company.

In short, bad behavior reduces productivity (and profit) and it seems to be highly controllable from the top of the organization.

As with most corrosive situations within an organization, the top executive can either cause it or stop it. Let me suggest five things you can do starting today to avoid or stop it (without writing any new policy statements).

Smile and your employees will smile back at you and at other employees.
Listen to your employees as a demonstration of their continuing worth and importance to you and the company.
Get out of your office and go to where the money is made or lost. Touch each employee and take an interest in their job and lives—at all levels of the company.
Drastically limit the use of electronic communications (What!—reverse 2 decades of "progress"). If you have something important to say speak directly to your employees, even if (and particularly if) it is bad news.
And if someone in your organization is disrespecting another employee (and particularly a subordinate or another powerless to punish the offender), the top executive must act to stop it—with the same tact and elegance used to put down a coup d'état in Central America.

We were thinking about writing a series of articles earlier this year on the subject of leadership. Perhaps the five above actions is our way of starting to speak to the subject.

Leaders understand the cost of incivility, do not allow it and know that their employees will follow their example. Are you a leader?

So, Your Sales Bonus Plan Has Not Paid out for Two Years. What to Do in 2011?

2010-12-01T08:50:00.000-08:00

I guess the above title line says it all. It has been a tough two years for many companies and their sales forces. During that same period Wilkening & Company has provided ideas and advice on what to do when your sales compensation plan is not working due to lower-than-expected results, or other factors. But many of these steps have been exceptional (or discretionary) in nature and provide little direction on what to do to restart your sales-pay plan (and your sales force) for 2011. Let's look forward today.

So why not leave all of your current sales processes in place? Won't the market just recover like always and everything will work again in due time? We do not think so. We believe that it is quite possible that markets and customer needs and requirements, have drastically shifted during this most-recent recessionary cycle (more in every box, faster delivery, hold more inventory, lower cost, better than theirs...). We now see some of this in our business and we would bet you also do in yours. Further, we also believe that there is a greater focus than ever on Big-account marketing, and intense competition to steal your Big accounts from you. This is what we believe you will face as this recession winds down.

It sounds like 2011 will be a good time to retool both your sales processes and sales pay systems—under any circumstances. And, you also should take the opportunity to begin to rebuild the confidence of your sellers. What should be done? We suggest a two-step plan—re-plan & pay.

First, re-plan your market and accounts.

Identify the accounts that you want to own (and we mean own). Generally, these will be the market leaders and current or prospective buyers with the greatest upside opportunity.
Decide what you need to do to retain, grow or gain their business. Define such actions in discreet and measurable actions or steps—sell them new Product A, improve delivery performance, double order size, become the specified supplier on their new line of business...
Put 2011 annual sales or profit-dollar amounts on each action taken in the above step, and develop a real (we mean achievable and likely uncomfortable) sales forecast for each and all accounts in your portfolio.

By doing this, you are breaking the standard-operating-procedure mentality and are zero-basing your sales book. Have each sales representative create their own sales plan (as above), and then commit to do what they have just said. By the way, if everything is scheduled to happen or be completed in the Fourth Quarter, it likely won't happen at all.

We have talked about sales planning in the past and we urge you to go back to basics for 2011. Use our approach—or any other approach—but you need a 2011 plan and the commitment of the sales force to execute it. No less is acceptable.

Then, let's gently put a wrench and screwdriver to your 2008-10 sales-pay plans. How so?

Only make changes in salaries or draws if you believe that they are significantly under the market, are undermining the efforts of your sellers, or risking the loss of key players to competitors; at the first sign of an upturn. If salary changes are needed, there are simple actions that can be taken to fix the problem. But, it will cost some money (but who cares, if we sell more in 2011 than last year and keep our key people in place).
Many sales-pay plans primarily compensate based upon annual (or more short-term) sales or profit results. Often these are commission-based or incentives with or without annual goals or objectives affecting the total amounts to be paid. A large portion of the sales-representative's compensation is generally tied up in this type of pay arrangement. Commissions or incentives can account for anywhere from 30% to 200% of annual salary. If you use such a model, and it currently pays out (say) 50% of salary when the sales representative meets company expectations—however defined—cut the incentive amount in half (to say 25% of salary) for 2011. Be calm, we did not just tell you to cut pay; only to redirect it. Read on
Take what you have just removed from the traditional annual incentive or commission component of your sales-pay plan and channel it into a series of two or three bonuses for the sales force that are tied directly to their newly-written sales plan. Pay them to achieve the 2011 objectives, goals or events they said they would. A few examples that we have seen used are (of course, ultimately adapted for your metrics and goals):
- Number of new accounts with over $100,000 in potential acquired by year's end and having active orders;
- Total number of all accounts with over $100,000 in potential having active orders at year's end;
- Sales growth from total account portfolio at or exceeds 10% year-over-year;
- Gross margin (in dollars) at or exceeds $1,500,000 for the year;
- Sales of product A for the whole account portfolio is at or exceeds 20% of all sales;
- Average order size is increased by 10% by year's end; and
- …………

There is no magic in the above listed examples, but they generally represent things that can be done to help the company succeed; whether total sales goals are met or not. This does not diminish the importance of the sales goals, but recognizes the need for the sales force to do a variety of things to succeed in the long term; and compensates them for it.

Traditionalists will likely reject our prescription for changing your sales pay for 2011 out of hand, but may fail to recognize that it focuses on paying the sales force for doing the "right" things and gives them a half-dozen ways to be a success in the coming year. While we are recommending this "new" and revised approach for 2011, we are also finding that balanced plans of this type are becoming more common and may represent a path you want to take beyond 2011 as well.

If your sales force and its sales-pay plan have been struggling since 2008, consider making the changes of approach we have outlined. You may have little to lose. Or, if you just do not like your sales plan for other reasons, consider this roadmap for shaking up your sales force in the coming year.

Wilkening & Company has designed and implemented over 75 incentive pay plans for the sales force and sales managers. Feel free to call or write as you look at your sales-pay challenges. You can bet we have seen your problem in the past.

"Eighty Percent of my Sales Force are not making their numbers! No one will earn a bonus this year! What should I do?"

2010-11-19T13:43:00.000-08:00

As we reach the end of 2010, the difficult economy continues and times are generally tough for sales forces. As with 2009, we are hearing that some sales forces and representatives are again not achieving expected results and will not receive normal incentive payouts. In this environment, we are reminded of some advice on this subject we included in our June 2009 Corner Office Gazette. I thought it might be a good idea to revisit it again.

From 2009

In a recent workshop that I taught on the subject of sales force compensation at the University of Wisconsin, one of the participants outlined a dilemma he faced—80% of his sales force would not earn a bonus due to factors beyond their control. His question: What to do?

Many executives are facing similar situations today and while the "rule" says that no bonus should be earned, common sense suggests another course of action.

We recommend that executives faced with such a dilemma make a conscious decision to write new sales-payout rules for 2009. These new rules should assure that the top players will all get a payout—in spite of bad luck or poor economic times. It should work something like this:

Top 1/3 of the sales force earns a uniform bonus payout (say $15,000—the amount is your choice—but usually less than a "par" bonus)
The next 1/3 will earn half of the top 1/3 (say $7,500); and
The bottom 1/3 earns no bonus.

What is the benefit? You have told your best sellers that they mean a great deal to the company and we want then around in 2010 and beyond—and you can be assured that they will be inclined to stay. And, you have also sent a message to the poorer performers.

We have often told clients that a badly-designed sales pay plan becomes a discretionary plan in the end. Well, I guess this fellow has a discretionary plan this year.

Can you rank your top performers high to low? I bet you can. Do it today!

What To Do Now That You Have Written Your Strategic Statement.

2010-11-19T13:40:00.000-08:00

During the last two months, we have discussed the strategic-planning process. We have previously outlined:

Using unique and tested methodologies for determining what your company is today and what it can be (September); and,
How to create a clear and concise statement of your company's strategy (August).

Once you have been successful with the above two steps in the planning process, it is now time to actually put pen to paper and write the company's strategic plan. With some companies, writing the strategic plan becomes a long-winded exercise wrapped in flowery prose and spreadsheets. Wilkening & Company believes that—like any other successful business enterprise—it should be short and to the point.

We believe that a successful plan will be divided into only four simple sections. Let's look at each in terms of the questions to be answered:

What are the key things that need to be done? Generally there are never more than four to six major actions that need to be taken to achieve a successful business outcome; if that many. It may be an acquisition, an expansion of manufacturing capacity, development of new technologies or staff expansions in such areas as the sales force. These should be simple and easily described—use the 50-word rule (i.e.: if you cannot describe it in 50 words then you do not know what you are trying to do.)
Who is going to do it? Each of the above items should be assigned to an executive-in-charge (other than the CEO; unless unavoidable), who works toward a hard completion date (within the next two years) and who has a funded-capital budget to finish the work. This is an obvious but often overlooked step.
How will we know we have succeeded with the strategic plan? As steps toward achieving its strategic goals are achieved, a company will begin to see and measure results and progress. We believe that a company and its management must decide on the onset how it will know its plan is begin fulfilled; or not. What are the metrics, and when will the results be seen? The best way to do that is to establish a multi-year measurement scheme. As an example, consider the company whose statement of strategy you read about in the August Corner Office Gazette. Their "strategic" metrics are shown below.
What must we do to build the foundation for future strategic success? We believe that one of the most important things a company must do in creating its strategic plan is not to lose sight of its continuing need to improve its productivity, its quality and the strength of its people. We consider this part of any strategic plan.The last section of the strategic plan should outline what the company will do and invest in to improve productivity, quality and its people. Some purists would not consider this part of a strategic plan. Wilkening & Company considers such a discussion and outline essential to the plan.

One of the pivotal challenges in creating a true strategic plan is avoiding the compilation of a thick set of successive annual budgets (with all of their underlying spreadsheets and charts); and calling it the strategic plan. We find the trick is to keep it simple and say it in words. That is what the above format tries to accomplish.

During the last few months we have tried to provide assistance and help to the company preparing for and creating its strategic plan for the coming years. I hope we have done that. However, what if you are not in the strategic planning process this year? How can you apply these ideas and recommendations? Well, just take the dip.

We suggest you do the following. Take our planning outline—as shown above—and write your own plan before year's end. (Of course, feel free to modify it if you like.) Do not worry about research. Do not convene a bunch of meetings with the usual suspects. Just sit down and write your own four-step 2011-14strategic plan—and call it a draft. It will be a very revealing exercise and well prepare you, your company and the Board for future strategic planning.

We think you will enjoy doing it.

Wilkening & Company has assisted clients in the formulation and implementation of business strategy. If you like overall assistance with your strategy or want to write your plan (today), give us a call. We would be glad to help.

It's Salary Planning Time Again..........

2010-10-08T13:42:00.000-07:00

In October, most companies begin to plan and budget for the coming year. Two questions are always asked:

How large should salary-raise budgets be for the coming year? and
How much should salary ranges increase this year?

To help answer these questions, I asked two colleagues who are experts in this area—Andy Mosko and John Larkin—their forecasts for 2011. Additionally, we collectively reviewed reliable published sources of market information for guidance. These forecasts follow.

Salary-raise budgets—After a couple of years of salary-raise budgets of 2.5 to 2.7% (or less); it appears that most sources now forecast pushing or reaching 3.0% for 2011. Remember this is a budget, and some raises will be higher and others lower based upon merit-increase criteria. Further, we are not seeing historically forecast salary-raise premiums for executives when compared to other employee groups. We have not seen budgets in the 3's since 2007-8.

Salary range (market job rate) increases—Salary ranges typically increase at a rate slower than that of salary-raise budgets. Again, after slow progression in grade increases for 2009-10, it is forecast that structures will increase 2.0-2.2% in 2011. It should also be noted that executive positions were particularly hard hit during 2009-10 and small salary-range increases were seen. In 2011, executive salary ranges are forecast to increase at the same rate as other jobs.

As noted, the last two years have generally been quite disruptive and negative—both pay structures and physical employee salaries have been held back. As you go into 2011, we suggest that you take the time to insure that your pay practices and salary ranges remain competitive with the marketplace. Our advice: take 12 key jobs and compare both salary ranges and actual salaries to valid and appropriate market practices (no internet surveys, please). It is a bit like testing a convertible top for leaks after the big storm.

Make sure you have no leaks as you begin to plan for 2011!

Employee Participation in your Strategic Planning Process

2010-10-08T13:40:00.000-07:00

In our August 2010 E-Notes we spoke about the need for a clear and concise statement of a company's strategy. We consider writing such a statement to be the middle of the strategic planning process. At the point the statement of strategy is written, you are at the midpoint of strategy creation. We believe that because—

Before you can write the strategy statement, you must decide what your company is, what it can be and what it does well; and
After you write it, you must figure out how you are going to do all of that stuff you wrote—i.e.: getting from today to Point B.

Let's talk about the first step in understanding "today" and creating your firm's future strategic direction. Many people call this work the "strategic planning process." There are very well documented steps in the process. Go to the business section of your local bookstore and you will find 20 books on the subject. They pretty much say the same routine, but correct, things about what needs to be done—

Identify opportunities and current and perceived markets of interest;
Understand strengths and weaknesses—in general and regarding defined market opportunities;
Know your customers;
Know your competitors;
Understand your resources;
.................

It is often the case that a very select group of executives and "experts" participate in a company's strategic planning process. It is seen as a high-level exercise, and indeed it is. However, it can become elitist in nature and may lose touch with the company's most important assets—its managers and employees. We call them the "fingertips" of the company. Ignore your sense of touch at your own peril.

Managers and employees are often excluded from the strategic planning process because some experts believe it is not a good idea to allow strategy creation to be influenced by the implementers. This is because some say that the employee-implementers view the world in limitations, where a strategy should only consider opportunity—without much regard for possibilities and limits. That is technically correct, but never a very practical approach. Limits have a tendency to define capabilities and companies, and who better to honestly know and state these limits than your non-executive employees.

So how do you ask employees what they think and then mesh those opinions and observations into a strategic-planning context? We believe that the best way to accomplish this goal is by using a simple opinion survey instrument. In our experience, the following elements are essential to the design of a strategic-planning survey instrument for employees (all employees):

Gather information from a broad cross-section of employees and policymakers—Board Members to sales reps;
Include managers and employees who regularly touch customers and products—do not be afraid to send out too many surveys, but do not just send one to anyone;
Ask about where the company is strong;
Ask about where the company is weak;
Ask what strengths and products are crucial to future success;
Who are the tough competitors and what do they do better than we do;
What is missing from the product line that customers require;
Make the survey as quantitative as possible with forced scales and ranking;
Also, use a hand full of open-ended questions to allow the participant to say their piece, without structure; and
Assure that all participants know that the responses are strictly confidential.

We have also found that the best survey results occur when a professional is used to help design the survey, analyze and report the results with a statistical discipline.

Some clients also like to expand this same enquiry to key customers. This is an excellent idea, but significantly increases the complexity of the survey analysis and feedback. If you choose to not survey your top 50 customers, we suggest that you alternatively interview the top 5-10.

You have completed the employee survey and analyzed results. What do you do with it?

An effective way to focus the strategic planning process is to get all of the decision makers into the same room and do not let them out until there is a consensus to write a statement of strategy, or schedule another meeting to continue the dialogue and close.

To kick off such a session, we always believe it is good idea to first have the group leader present all the facts, information and knowledge need to make key strategic decisions to the group. This will generally include secondary market research gathered from available information and primary research you have created (i.e.: your employee strategic survey). We have found that it works best if you first present the survey findings and then validate or challenge them with available market facts, research and opinion. For example if all employees surveyed strongly agree that the company is the "market leader," but Marketing says we have only a 3% share of market, more work is required to reconcile these findings. In one instance, we found a client's executive team had a completely different view of its "best" products when compared to those of most of its employees—who lived with the "clunkers" daily. That was eye opening.

Leading with the employee survey is a very powerful step and often sets the stage for the entire planning session and process from that point forward.
If you are a CEO or a Board member and have just sat through the feedback of an employee strategic survey, what have you typically learned while viewing the company through the eyes of its employees?

What the company can do and cannot do;
Whether the company can fulfill its strategic vision with its current foundation of products and people;
The differences in perceptions and knowledge between various employee groups—say the executives and the customer service representatives;
The effectiveness of past investment and communications; and
That what you do not know can misdirect and ultimately hurt you.

However, the most important thing that you will learn is that your employees can be pretty smart and articulate folks.

Armed with that information, your company can set out to make better strategic decisions and only pursue initiatives that can be implemented with the resources and employees at hand—or make the additions required. In our view that is a lot of value received at a relatively small cost.

Are you doing strategic planning this year or next? If so, consider the value that can be provided by a focused employee survey. Call me, and I will share some strategic survey "tricks and traps" with you.

Next month we will discuss what to do after you have finished your strategic planning process and written a strategy statement. It is now time to make it happen.

A call to Action: How will PPACA motivate you and your employees to cancel their health insurance?

2010-09-02T18:04:00.001-07:00

The Patient Protection and Affordable Care Act (PPACA) was enacted in March 2010. In an earlier edition of the Corner Office Gazette we described some of the impacts of this legislation on employers, employees and citizens in 2010.

One of the key provisions of this act will not take effect until 2014 (as currently written or understood). The act creates government-sponsored exchanges which will provide the ability (requirement) for all citizens to purchase health-care insurance coverage from exchanges or insurance companies without regard for individual pre-existing medical conditions or any other restrictions. So, if you are an employer, and already have employee health-care insurance, why should this matter to you?

Employers and employees will both have options when exchanges arrive. The two separate or joint choices will be—

As an employer (with 50 employees or more), you will pay a $2,000 free-rider penalty for every employee (who works over 30 hours per week) that you do not insure or whose coverage you terminate. Further, if your employee has to pay more than 9.5% of their household income, your plan is deemed unaffordable and the employee will be able to go to the exchange for coverage. Your penalty in this case increases to $3,000.
As an individual, you will pay a non-coverage penalty of 1% (starting in 2014 and with a $95 minimum) to 2.5% (by 2016) of your household income if you do not purchase health insurance—supplied by company or exchanges.

Let's look at a "back-of-envelope" analysis of the situation for employer "ABC" in 2014 considering both a single employee and a married employee with 3 dependents with identical household incomes of $80,000 each. The 2014 estimated premium data is forecast using Kaiser Family Foundation information.

The above example is an interesting result if one only considers employer annual cost. This would seem to indicate a potential situation where both parties may be highly motivated to mutually drop coverage. This is because the cost savings for both parties is quite favorable and the individual can reapply (without any apparent penalty) just before or at the time they need some type of medical procedure and someone to pay for it. Let's call such coverage (payment arrangements) sick-party coverage [or SPC].

Four questions present themselves when you look at the back of the envelope and think of the implications of the analysis for both employer and employee.

What would an employer do with future premium savings (if real)? In the end, we believe that most employers know that the health and welfare of employees is their concern and hence the current benefits will somehow be preserved. The employer will likely decide to provide supplemental insurance to cover their sick employees when the employee must rely on the SPC—and bridge the coverage gaps that will surely be built into SPC or exchange coverage by 2014 (just look at the history of Medicare). Also, many would argue that health insurance coverage is just another form of compensation. Hence, some of this apparent employer cost savings may also go back to the employee in the form of pay raises—but not everyone would agree with that thinking. Will there still be employer savings left to do any of this; who knows?
What will be the fate of the private insurance companies if employers and employees begin to systematically and mutually drop insurance policies in lieu of SPC? I expect that private insurance companies will lead the way with packaging premium SPC policies to cover the gaps or restrictions (such as continuing access to your physicians or healthcare systems), just like premium Medicare coverage. Also, who do you think is going to process and pay the claims—a bunch of clerks in the basement of Congress?
Will both employers and employees be motivated to cancel all their current health insurance policies, when possible? Yes, history (and Massachusetts) says both parties will act in their economic interest and reduce these costs by dropping all coverage as soon as possible. Why not; what is the risk? We are not entirely sure what the value proposition for exchanges will be by the time 2014 rolls around.
What should a prudent employer do about this situation in 2010-11?

Wilkening & Company believes that the prudent company will begin to develop its future employee healthcare strategy and corresponding compensation strategy as soon as possible. While we have only discussed a well-paid employee in our example, also recognize that lower-paid employees may be eligible for federal subsidies through exchanges that will impact your cost and decision making in a variety of other complex ways. We recommend that you strongly now consider—

A full analysis of your work force and healthcare costs and demographics;
An analysis of cost scenarios under current PPACA rules;
Development of 2011-2014 healthcare and compensation strategies in light of PPACA requirements; and
Creation of an action plan to respond quickly and implement required changes in the event of inevitable PPACA rule and deadline changes.

Wilkening & Company has developed information and methodologies to assist clients in the selection of 2010-2014 insurance and compensation strategies. We will continue to cover this evolving and changing mandates for our readers in future issues of the Corner Office Gazette.

Effective Strategic Planning—first, let's clearly state your strategy

2010-09-02T18:03:00.000-07:00

Wilkening & Company has participated with clients in the strategic planning process, and has used client strategic plans for a number of purposes such as market planning and goal setting.

We have found a wide diversity to what is called a "strategic plan." In many cases we find that a strategic plan is merely a multi-year financial plan and forecast—presented in a series of spreadsheets. As said, its purpose is essentially financial in nature and it is often used as the "top end" of the budget. While these tools may be effective for future planning, we would like to present a different definition or format for the strategic plan.

In our experience, we have found that there are two characteristics of a successful strategic plan and the planning process. These generally are—

Development of a clear and concise statement of strategy; and
Active participation by employees (and other constituencies) in the strategic-planning process.

In this discussion we will focus on the first characteristic, or the statement of strategy.

Wilkening & Company believes that a strategic plan should be a clear statement of direction articulated in a one-page document with no more than two or three numbers (we will allow you an extra page if needed) that declares the following:

What products or services a company will offer;
What markets or customer groups will be served with these products & how will they be reached;
How does the firm want to be known by all of its customers (its proposition of value); and
How will we know we have succeeded?

Let me give you a very brief example of a statement of strategy for a small industrial manufacturing company that was once a division of a Fortune-500 holding company.

The company will offer hand-actuated tools to skilled tradesmen to assist with the cold working and fitting of thin-wall copper, steel and stainless steel tube in diameters from 3/8 inch to 1-1/2 inch with generally low-pressure fittings, valves and connectors. These tradesmen will generally work within the plumbing, refrigeration and heating and air-conditioning industries.

We will sell our tools in both US and foreign markets. The company will sell through exclusive arrangements with channel partners that will stock and distribute our products to the 5,000 worldwide sellers who sell to targeted tradesmen. Additionally, the company will sell directly to the 8-largest US tool marketing firms and the US government.

All products will be sold under the brand name of ACME which has been a recognized market brand for the past 75 years. We are currently the oldest and most recognized brand in the market but have mixed perceptions of value amongst end users as the result of recent cost cutting and adverse channel-partner actions. However, end users know they can rely on ACME's unlimited lifetime guarantee for all products. This type guarantee is offered by no other competitor. In the future, we want our all of our products to be known by our end-user customers as the highest quality and the second highest-priced product in the marketplace. Further, all end-users will know that any new ACME product is always available on their seller's shelf. Our channel partners will know the company as having the highest commitment to service and quality in the market with premium margins for successful partners.

The company has steadily lost share of market for its major products because of a lack of manufacturing capacity and inconsistent quality during the last two years. By reliable industry estimates the US and foreign demand for company products in applicable markets is $280 Million in 2010—65% in the US. Market growth is estimated to be roughly 2% per year. We now have 6% of that worldwide market. By 2015, the company will have gained a share of 15% worldwide which is 1st in share by 5 percentage points, and have no more than 70% of sales in the US market. During this period, the company will have a return on net assets employed (RONAE) of 32% or more. However, RONAE will be lower for the next three years, but never below 26%.

We have just stated a 5-year plan in 360 words and less than one page. Whether you like the plan or not, you understand it. But more importantly, what does this statement of strategy communicate to anyone that reads it?

Each major discipline of strategic implementation (engineering, marketing, sales, operations…) knows its role and how to allocate resources.
We can probably name our 150,000 worldwide end users and know how to find them.
The value proposition is clear.
As important as knowing what to do, management knows what not to be doing—i.e.: what "adventures" not to undertake.
If we are going to succeed, we need to have the capacity to do so, and the continuing quality of product.
Company (and individual) goals are clearly outlined and include crossovers with sales, profit, cash flow and the balance sheet—both quantity and quality.

Notice in the plan we have not talked about how the company will fund any necessary (and certain) capital spending. I am not sure that discussion belongs in a statement of strategy. If the Board and management agree to a direction (as stated)—it seems to me that capital-funding needs are implicit. Otherwise, you cannot agree to the strategy. What do you think?

With such a statement agreed-to by management and the Board, the company can then begin to build the organizations, systems, plans, annual budgets and spreadsheets that will provide the path to achieve its stated strategy. And if management or the Board (or your banker) is ever in doubt about what you are trying to accomplish and why, the one-page statement of strategy is always a quick and handy reference and guide.

Do you have a statement of strategy? If not, could you complete one in a single page? Try it.

Next month we will discuss active employee and other constituent participation in your strategic-planning process.

Wilkening & Company has assisted clients with the formulation and implementation of business strategy. If you would like to discuss of share your statement of strategy, feel free to contact us.

Are you considering a Customer Relationship Management (CRM) system? HERE'S WHAT to do first.

2010-08-09T11:20:00.000-07:00

Customer Relationship Management (CRM) is again all the rage, and has been so for the last 10 + years. These systems and the underlying software are seen by company and sales management to be the key to applying technology to their sales force operations and making sales forces more effective with the turn of a key (or, the writing of a check). The problem is that in reality CRM has often not achieved the expectations and hopes of the users. Wilkening & Company believes there are a number of factors that influence the success of these type systems. In our experience, if you get three things right (at the start), the rest will flow. But first, let's define what a CRM system is by describing what it does.

A CRM system is a database and connected series of software tools that do (or should do) the following—

Collects all demographic & planning information about accounts, prospects and buyers in a single comprehensive database;
Collects all activity information about an account regarding such matters as: sales plans, sales calls or customer contacts, order history and bookings;
Tracks future order activity and the progress of orders or requirements through the company's sales process;
Provides comprehensive reporting of past sales activity, future orders (pipeline), sales performance and the raw materials required for account, portfolio or territory forecasting;
Provides a tool for the sharing of information with company management, members of the sales force, customer service staff and technical resources; and
Provides the sales force and customers with a tool to access sales-order and customer-service processes.

It has been our experience that because of the relative complexity of the tasks at hand, CRM users have a tendency to rush forward without a proper foundation in an effort to get rapid (and promised) sales-force productivity gains. This often leads to failure, frustration and the waste of thousands of dollars in sales-force time and unopened boxes of software.

Let's beat the odds!

Assume that you have just been charged with designing and installing a CRM system for your company. What should you do first? Three things.

Write a statement of requirements—this is a one-page written document that describes what you want the CRM system to accomplish from the perspectives of company, sales force and customer. Use the six points (above) as a reference, but your requirements may be quite different or more specific. Also consider how these requirements will change both 2 years and 5 years into the future.

Good advice is to start small and simple and build a CRM-based foundation for growth. Remember to keep your requirement statement to only one page in length. (For example: "For 2011, we want a system that will be used remotely by the sales force, will have 18 sales force users and 12 customer service users. We cannot use the current company IT infrastructure. The purpose of the system is to store basic and current information on all clients, keep track of all sales force contacts with clients, prepare simple call reports for management review and effectively distribute leads. Further, the sales force (and client) will be able to see and review all active client orders.)
Now you have a foundation and a starting point stated in less than 100 words.

Step back and match your current sales process with your statement of requirements—you certainly do not want to spend money to make a 1970's sales process more productive when you really should move to a sales process more in line with the 2010 account and buyer. A CRM system is a tool to help you accomplish such a change and should be used accordingly. We often find that companies will use outside expertise & counsel to conduct this process "audit."

Don't forget the sales force—this is an obvious statement, once said, that reminds me of the time a large distribution company with a 1,000 person sales force asked me to "test market" a Wilkening & Company sales-logistics and planning tool for the company and sales force. My first meeting was with a crusty regional manager in Kansas City—I was in full selling mode. After about 5 minutes of discussion with the regional manager, I realized I was trying to sell him a product that was absolutely of no value to him or his sales force. The only winner was the company, and the sales force did all of the work to keep the tool current. Oh well, back to the drawing board.

Don't make the same mistake I did. Make sure that complying with and contributing to the new CRM system is in the sales force's interest—more money, sales success, more time with the family. Decide how you plan to sell it to your sellers.

When you have addressed three above issues, then you can turn to the selection of the best software and technical tools required to succeed.

As a sidebar, many users pick the software and technical tools first, and then spend several months fitting the proverbial square peg into a round hole. That is a costly enterprise by anyone's measure.

Do it right and do it once.

Wilkening & Company has assisted clients in the design of successful sales processes and their integration with client CRM systems.

Trends in 2010 People Investment

2010-08-09T11:11:00.000-07:00

In past issues of the Corner Office Gazette, we have stated that one of the major issues for the CEO and Board of Directors in 2010 is retaining key executives and employees for the long-term so they will be there at the time of recovery. In parallel, we believe it is also crucial to keep all employees increasingly involved with your business (i.e. - keep their heads in the game while all of this economic flak is flying around them).

This is to insure that your work force is productive and as stable as possible in this difficult market. This is called "employee engagement" by the HR profession - and is a subject of much interest and research. A very common way to measure "employee engagement" is through employee-attitude surveys. Focus groups and online forums can also be sources of this information for the employer. In past lives we would simply call this "morale".

In April of this year, Mercer Consulting conducted a survey of more that 320 employers in the US and Canada on a number of subjects including employee attraction, retention, engagement and workforce planning. It is called the Mercer 2010 Attraction and Retention Survey. The employers surveyed generally have used the survey methods discussed above to gather data & trends on employee attitudes and morale. The most common vehicle used appears to be the traditional employee survey applied in parallel with other quantitative and less rigorous techniques for data collection.

The Mercer survey results are interesting and provide some possible insights regarding:

What employers found to be the most powerful tools in the battle for employee retention and engagement (hearts & minds); and
On a different subject, what surveyed employers expected and planned to do in the hiring market for the coming year.

Two survey results are shown in the following charts.

Many people will always say that money is the most basic motivator of employees. While there is some truth to such comments, Wilkening & Company has advised its clients that perceived fairness by the employee and their belief that the company has their long-term interest in mind will always have the larger motivational and bonding impact on most employees. That is why we have consistently warned clients against increasing employee uncertainty and risk by broadly freezing or reducing salaries (and all pay) in the face of company economic difficulty.

The Mercer survey seems to support our position by stating that most employees find salary the most important decision factor driving retention and morale (41% of respondents). It also suggests that if an employer tries to substitute a dollar of new salary increase for a dollar of new variable pay, such an exchange will not be seen positively. We are also not surprised by the relatively low perceived impact of training and career development in this market. As is the case in most business downturns, this is a year for surviving, not for discussing careers and skill development.

In some quarters it is believed that the economy is recovering and signs of workforce expansion is either beginning or is underway—in the face of lingering (and unprecedented) 9%+ unemployment. The Mercer survey results suggest that there now may be guarded optimism in the market as 45% of employers are actively hiring employees to replace those they may be losing to the market or other forms of attrition. This can be compared to last year when many companies were actively reducing staff levels—and rarely hiring.
The fact that 27% of surveyed employers are planning to broadly expand their workforce is also a change from last year—and perhaps the more striking 2010 statistic.

What should your take away from these survey findings be? We think two conclusions.

Make sure you continue to take care of your key employees—if you want them around in 2011-12. And, do not "fool around" with their salaries, or offer promises of making up salary loses with the new bonus.
Start to rethink or reinforce your 2010 staff-reduction and hiring strategies. Your competitors may be starting to (re)invest. Can you afford not to consider the same? This is particularly true in the sales and marketing areas.

We believe that the above findings reinforce our long-standing belief that the companies that attract and retain the best and most-experienced employees will emerge from this economic downturn quicker and stronger. How are you positioned to emerge from 2010?

You and Health-Care Reform— The Emerging Short-Term Landscape & Issues

2010-06-29T23:33:00.000-07:00

This is the first of a series of Corner Office Gazette E-Notes to provide perspective and information about the impacts of the recently passed heath-care reform legislation (Patient Protection and Affordability Care Act—the Act), on you, your company and bottom line.

As summer 2010 begins, we have identified three emerging issues or trends that will require your vigilance or action this year: [This information is gathered from information available at the time of writing. As this legislation is now being implemented, changes and revisions are possible.]

A key date emerges for employers—on the six-month anniversary of the passage of the Act or September 23rd, 2010—when several new requirements for those offering health-care benefits will go into effect. Some of these are:
- Lifetime coverage limits are abolished;
- Annual limits will be restricted to federally-defined amounts until 2014, then prohibited;
- Pre-existing conditions for children under 19 are prohibited;
- Dependents may remain on the parents plan until age 26;
- Specified preventive-care services are required without cost sharing; and
- For emergency services, network restrictions and prior-authorization practices will disappear.
As an employer, your current health-insurance plan may be "grandfathered." If you have a group health plan in place on March 23rd, 2010, your plan is grandfathered and you are generally exempt from some of the requirements outlined in #1 (above), such as those related to preventative care, choice of providers or outside review of claims. However, if you make certain plan changes prior to September 23rd, 2010, you may jeopardize this "grandfather" status. Changes that can lose your exemption status include:
- A change in insurance carrier;
- Cost sharing changes;
- Changes in coverage relating to specific conditions;
- Changes in deductibles; and
- Some co-payment terms.
Insurance company medical loss ratios [MLR] will be tightly limited or monitored beginning September 23rd, 2010. Medical loss ratios represent the amount of premium income used to pay medical claims. For example an 88% MLR means the insurance company is paying 88% of premiums for medical claims and using the remaining 12% for plan administration or profit. MLRs will be limited to 80% for individual plans and small groups and 85% for larger groups. Reporting begins September 23rd, and we assume compliance will soon be required. This requirement will put pressure on your insurance carrier to rapidly cut their internal and claims-processing costs.

And you thought nothing was going to happen until 2014!
What do the requirements and features of the Act mean to the typical US company voluntarily providing health care benefits to its employees? There are three ramifications or market shifts we believe you can soon expect.

You can expect that your insurance company will begin to raise your premiums (in excess of normal medical-cost changes) to cover the new requirements, the uncertainty of the expanding and uncontrolled risk pool and MLR restrictions. Also remember, you are not going to be able to change carriers without losing your grandfather status. Early group plan-renewal increases are now reported to be over 15%. How do you plan to cover these new costs?
You must proceed with caution when making any changes to your current health insurance plan. We suggest that you do not revise your plan (other than allowing normal enrollment), to avoid the risk of losing your current grandfather status. Expect your insurance company to make compliance changes for you before September. As the smoke clears regarding what is possible and not possible, your ability to change your current plan and the value of grandfathering should become more apparent.
Expect that your current brokerage relationship may change in the next year or two as insurance companies try to manage their MLR through reduced marketing costs (read commissions). In the past, some of those savings may have found their way to you, but not in the future. If your broker is your current primary health-care insurance advisor, you might need to find a different way to get such counsel & services in the future. Much may rapidly change in this time-honored sales channel.

In some ways this whole process reminds us of the Y2K event of 1997-2000 where companies needed to rapidly meet new technical standards to avoid an enterprise risk of technology failure. To do so, they needed to find and retain very specialized expertise during a 3-5-year window to assure that the company would survive and prosper. There are some similarities here.

OUR SUGGESTION: start building your strategies to deal with the Act during the next 60 days. September is closer than you think. Do you know where you need to be on September 24th? Stay tuned for our continuing analysis and perspectives of the Act and its impact on you and other employers.

Wilkening & Company is committed to help its clients navigate the new and uncharted waters of health-care reform. Call us if you need additional information, have any questions or would like to sit down to chat about the challenges of the coming months & years. [(847) 823-5090 or bob@wilkeningco.com]