The Salary Sage

MEASURE OF THE MONTH – Process Improvement

This month, we are featuring Process Improvement. As you prepare for a new year, an important measure of success can be making sure your internal processes are running efficiently. Here are some guidelines on how to make Process Improvement a successful incentive plan measure.

 

DEFINITION

Ensure current processes are efficient and well documented and that managers understand these processes and can use them effectively.

 

WHEN TO USE THIS MEASURE

Use this measure when you want to encourage employees and managers to focus on improving the overall efficiency and effectiveness of departmental systems and processes. This measure is often considered a precursor to a full-fledged service measure as it is necessary to ensure the department is functioning efficiently before it can provide excellent service to customers or other departments.

CALCULATION

Performance on this measure can be quantitative or subjective depending on the nature of the process. If the process involves manufacturing, then the obvious factors of volume, quality and timeliness apply. If the process involves service, then it is likely that success will be more subjective. When measuring service-oriented processes, volume, quality and timelines remain relevant, but instead of being determined empirically, results will depend on input from those using and benefitting from the process (i.e., customers, users, managers, peers, colleagues, and subordinates.)

HOW TO USE THIS MEASURE

When Process Improvement involves subjective elements, it is useful to think of it as a six-part process:

Part 1 -- Determine the necessary/desired improvements.

Part 2 -- Develop a detailed plan for implementing the desired/necessary improvements.

Part 3 -- Get the plan approved by whomever will be judging its ultimate success.

Part 4 -- Implement the plan.

Part 5 -- Communicate improvements to users in writing and/or face-to face training as appropriate.

Part 6 –- Determine if desired improvements have actually occurred.

Each of these six parts should be included in a well-designed incentive plan measure and associated goals. For example, Threshold could be achieving Parts 1 & 2, Target could be achieving Parts 3 & 4, and Outstanding could be achieving Parts 5 & 6.

WHO IS THIS MEASURE BEST FOR?

This measure can be used virtually anywhere since every department, regardless of its purpose and size, has processes that can always be optimized.

CAN THIS MEASURE BE GAMED?

If you follow the recommendations above, there is little concern that this measure might be gamed or abused in some manner.

MEASURE OF THE MONTH -- Appointments

DEFINITION

Scheduling, preparing for, attending, and following-up on sales calls.

CALCULATION

This measure involves some or all of the following elements:

1. Identifying the lead.
2. Scheduling the appointment.
3. Preparing for the appointment.
4. Conducting the appointment
5. Following up after the appointment
6. Closing the business

WHEN TO USE THIS MEASURE

Certain types of sales processes lend themselves very well to this measure. These are processes where it has been determined in advance that the sale is a "numbers game;" that is, where a certain number of phone calls generates a certain number of appointments, which leads to a certain number of meetings, which results in a certain number of proposals, which ultimately produces a certain volume of sales. In these situations, it is essential that sales people "make their numbers."

That said, many people, including me, shy away from measures like these, favoring instead measure that focus on the desired outcome (i.e., the sale itself) rather than the steps along the way. In addition, experienced sales people don't appreciate being "micro-managed" and may perceive such measures as demeaning. It is important to recognize that not every sales person approaches the sales process the same way.

That said, there are certain situation where measuring and paying for key sales milestones works well:

1. When you have an inexperienced sales force
2. When you are certain that following a certain process will maximize sales
3. When you have a large and/or geographically diverse sales force making consistency important.

HOW TO USE THIS MEASURE

When you use this measure, remember to:

1. Specify in detail what constitutes a "qualified lead" and only give credit for these leads.
2. Couple process measures (like appointments) with results measures (like closed business) on the incentive plan.
3. Weight the results measure (the sale) higher than the appointment since that is what you are really after.

WHO IS MEASURE BEST SUITED FOR?

This measure is best suited to new or inexperienced sales and/or marketing people as a way to motivate them to follow a particular sales process and to reward them when they successfully achieve certain milestones.

CAN THIS MEASURE BE GAMED?

If you pay for appointments, you will get appointments. But you may not get the type of appointments you really want. We have all heard stories of sales people padding their calendars with friends, neighbors and relatives just to show activity, even though it is not likely to produce business. When using this measure, be certain to define in detail what constitutes a "qualified lead" and only give credit for those leads.

It is also important to make sure that sales people document their appointments and that the sales manager follows up to make sure that not only did the neeting happen, but they happened the way the sales person said they did. You don't want to give credit for an appointment that lasted 5 minutes because the prospect had to leave or one that didn't happen at all because the prospect called to cancel.

I may sound cynical, but these are the kind of issues that come up when you decide to measure the process rather than the outcome. If you use these types of measures, you should be fully aware of the behavior they can create.

MEASURE OF THE MONTH -- Leadership Effectiveness

Not long ago I wrote what turned out to be a very popular blog entry detailing some of the characteristics of ineffective leaders. I followed that up with another entry on the type of leader progressive companies are after. I am now adding to the discussion an incentive plan measure on Leadership Effective found in Incentive Plan Builder.

DEFINITION

The ability to attract, retain, develop, and motivate others to achieve results that contribute to the company's overall success.

CALCULATION

This measure is frequently selected without much consideration as to how it will be measured. It is essential when selecting this measure to clarify in advance the desired improvement, how they will be measured,and who will do the measuring. For a more complete description of how to do this, see Even If you Can't Measure It You Can Still Use It.

WHEN TO USE THIS MEASURE

Use this measure when you have a manager who has leadership potential but has not yet realized their full potential. If you use this measure, expect to give regular feedback and coaching. Do not just create the measure, drop it onto an incentive plan, and forget about it until the year ends. This will lead to frustration and ultimately failure. This should be considered a discretionary measure in that it will not be measurable but it will be observable. Success will be determined by the participant's manager, perhaps with input from others.

HOW TO USE THIS MEASURE

Consider using some or all of the following elements:

• STRATEGIC THINKING -- Takes a broad business perspective and creates effective plans and strategies for accomplishing critical objectives.
• KNOWS THE BUSINESS  -- Understands the complexities and key factors impacting the business.
• COLLABORATES -- Builds effective trusting relationships with staff and co-workers. Models proper behavior for others to follow in how to work as a team. Resolves disputes rapidly and effectively.
• LEADS CHANGE -- Supports company direction and effectively communicates this direction to staff.
• ENGENDERS TRUST & RESPECT -- Emphasizes the importance of ethical decisions and actions. Goes beyond self-interest for the good of the group.
• HIGH PERFORMING TEAM -- Recruits develops coaches and manages staff to high levels of performance. Helps team members understand how their performance effects the business. Quickly addresses issues that are inconsistent with the company's vision and direction. Makes good hires and selects candidates with appropriate skills and qualities.
• INSPRITES AND MOTIVATES -- Articulates a compelling vision of the future, builds confidence that goals will be achieved, talks optimistically and realistically about the future.
• DEVELOPS PEOPLE -- Helps staff identify areas of improvement, unique needs, and aspirations. Works closely with them to achieve these goals. Approaches performance management as an important ongoing day-to-day process that involves regular feedback reward and recognition. Provides constructive specific feedback (both positive and negative.) Takes time to provide one-on-one coaching.
• LEADERSHIP INTEGRITY -- Demonstrates ethics and integrity adheres to a core set of values and holds staff accountable to same. Consistently models behaviors that are in the Company's best interest. Follows through on commitments to others. Is honest and forthright. Accept responsibility for mistakes.
• BREAKTHROUGH THINKING -- Encourages others to look at problems from various angles, challenges assumptions, seeks and provides differing perspectives.
• RELATIONSHIP BUILDING -- Develops effective relationships and alliances within the company as well as outside the organization. Gains collaboration and support from others.
• ACCOUNTABILITY -- Takes personal responsibility for driving outstanding business results. Sets challenging but achievable goals for self and others. Maintains commitment in the face of obstacles and frustrations. Accepts responsibility for the quality and integrity of work. Demonstrates a strong sense of urgency about solving problems and achieving goals.
• MANAGES DIFFERENCES -- Creats an environment that recognizes the value of differing points of view, incorporates cross-cultural and diversity concepts into everyday business activities.

This should be considered a discretionary measure in that it will not be measurable but it will be observable. Success will be determined by the next level manager with input from others.

WHO IS THIS MEASURE BEST SUITED FOR?

This measure is useful for any person who has leadership potential but has not yet realized their full potential.

RELATED MEASURES

• Employee Development
• People Management & Development
• Performance Reviews
• Workforce Diversity
• Employee Satisfaction
• Teamwork
• Creativity & Innovation
• Decision-Making
• Performance Management

MEASURE OF THE MONTH -- Lifestyle Goals

The results from a recent experiment at General Electric Company caught my eye. In it, they found that workers who were paid up to $750 to quit smoking were three times more likely to stay off cigarettes than those who were left to their own devices. GE was so impressed with these results that they plan to expand the incentive program nation-wide next year. They estimate that it will help the company reduce the $50 million spent annually on extra health and other costs for smoking employees.

These results don't surprise me at all. In fact, I have been a proponent of adding lifestyle goals to incentive plans for years. Toward that end, I have included lifestyle goals as one of the measures in my on-line incentive design tool, Incentive Plan Builder.

But helping employees quit smoking is not the only way you can assist them with the achievement of personal goals. There are many other interesting approaches.

DEFINITION

The achievement of specific personal goals that the Company wishes to encourage and promote (such as community service, quitting smoking, losing weight, saving for college, getting an MBA ,etc.)

CALCULATION

Depends on the goal chosen. The more specific you can be, the better the outcome.

WHEN TO USE THIS MEASURE

More and more these days, businesses are realizing that employees have lives outside of the office and what they do at home influences their work and vice versa. There is considerable talk about work-life balance, healthy lifestyles, stress management and contribution to the community. Many businesses feel uncomfortable crossing the line between an employee's personal and professional lives. But more and more, companies are realizing the importance of blending the two. Lifestyle goals encourage employees to do things for themselves that also benefit the business. The two most obvious examples are quitting smoking and losing weight but others are discussed below.

HOW TO USE THIS MEASURE

Below are several examples of what might fall under the general category of Lifestyle Measures:

• Personal Financial Goals
• Intellectual Achievements
• Professional Development
• Artistic Pursuits
• Health and Fitness Goals
• Work/Life Balance
• Lifestyle Changes
• Spiritual Pursuits
• Personal Travel

WHO IS THIS MEASURE BEST FOR?

Proposing lifestyle goals to an employee can be a delicate matter. It is usually better to discuss them with the employee in advance rather than including them on the incentive plan without the employee's prior knowledge or support. However there are times when an employee needs a little push. Highlighting the issue in the incentive plan and tying some money to it might be just the push they need.

MEASURE OF THE MONTH -- Borrowing Base

If you are a business owner or CFO, you already know that the company credit line is the life blood of the business. This provides availability to additional cash when the company's own cash flow (accounts receivable) don't line up with expenses. Nothing quite alarms a CEO like not having cash in the bank to cover payroll or critical purchases. Without an ample credit line, businesses can get in trouble fast. The recent credit crunch has made getting and keeping credit lines a real challenge since many banks just aren't lending.

With so much emphasis being placed on credit these days, it seemed appropriate to make lending the subject of this month's Measure of the Month. As you begin to craft measures for your 2009 management incentive plans, you may want to consider this one for your CFO and/or Controller. It brings several measures of a business' financial health together into a single measure that will help ensure the people responsible for making sure your business has ample cash keep their eye firmly on the ball.

DEFINITION

Normally established by the bank, Borrowing Base is the portion of the maximum allowable monthly lending limit that the company is able to borrow in a particular month based on the financial condition of the company at the time.

CALCULATION

([Accounts Receivable Control Base] + [Gross Sales for the Period] - [Net Collections for the Period] - [Past Due Accounts]) x [Lending Factor]

Accounts Receivable Control Base = Total accounts receivable at the end of the prior month

Gross Sales for the Period = Total gross revenues generated from operations during the prior month

Net Collections for the Period = Total dollars collected on outstanding invoices during the prior month

Past Due Accounts = Total dollars on accounts that are delinquent beyond a certain date, normally 60 or 90 days

Lending Factor = the portion of the available funds that the bank is willing to loan. For example, most banks are willing to lend up to 80% of receivables (the idea being that if the company defaults the bank would not be able to recover 100% of what is outstanding -- this is akin to the 20% down payment you need to have to buy a house).

HOW TO USE THIS MEASURE

When banks set up a line of credit, they analyze the business' finances and arrive at the maximum figure that they are willing to lend each month. But this is actually a theoretical maximum. Just because the bank says they will lend, let's say, $1 million per month doesn't mean you actually have access to all the money. The million is the maximum amount they will lend, but the actual amount is the result of the above calculation. Another way to say it is that the bank will lend $1 million or the result of the calculation, WHICH EVER IS LOWER.

In order ensure that your company has access to as much money as possible, you need to maximize the elements of the above calculation. This means that sales must generate as much revenue as possible, accounting must minimize bad debt and keep Days Sales Outstanding (DSO) within acceptable limits, and credit line usage must be controlled since money already lent reduces the amount that remains available.

WHEN TO USE THIS MEASURE

Because cash management is so critical to every business, someone in your company should have this measure (or something similar) on their incentive plan at all times. Of course, this measure does not apply to companies that do not have or use credit lines. For such businesses, other cash flow measures should be used instead.

WHO SHOULD USE THIS MEASURE?

This measure can be a mainstay on incentive plans for Controllers and other finance managers and executives. When modified to include available loan balance (i.e., the difference between the Borrowing Base and credit line usage) it becomes a very powerful measure of the overall effectiveness of cash management.

MEASURE OF THE MONTH -- Defensive Interval

This month's Measure of the Month is a sign of the times. With so many companies on the brink of extinction, one common question is how long can they hang on? This measure answers that question.

DEFINITION

The number of days a company can operate on existing cash balances.

CALCULATION

Defensive Interval = [Cash Reserves] / [ (Annual Operating Expense)  -  (Depreciation)] X 365

WHEN TO USE THIS MEASURE

Although this is typically not a measure healthy companies focus on, it may be useful for businesses on the brink of extinction. Running out of money to operate is analogous to being backed up against your own end-zone in football -- your main focus is scratching our a little room to operate. That said, if you are involved in a turn-around situation, before you can even begin thinking about the future, you have to secure the present. In such instances, you may want to encourage leadership to create a little financial breathing room. If that is your goal, this measure will do it.

WHO IS THIS MEASURE BEST SUITED FOR?

This measure is best suited for leaders involved in a turn-around situation who must secure the present before they can even begin thinking about the future, In such instances, this measure can encourage and reward managers who help create a little financial breathing room

MEASURE OF THE MONTH -- Company Valuation

 

This month, we are featuring Company Valuation. At the end of each year, perhaps your first and best measure of success is increasing the value of the business. Here are some guidelines on how to make Company Valuation a successful incentive plan measure.

DEFINITION

The economic value of an owner's interest in the business.

CALCULATION

In publicly traded businesses, the company value is easily calculated based on share price. However, in privately owned businesses a different approach is required. In such circumstances, calculating the value of  the business is approached from several different angles in order to arrive at a reliable figure. This includes:

1. Multiples of earnings
2. Discounted cash flow analysis
3. Book value
4. Sales price of comparable companies

Because there is often so much riding on the actual valuation, it is almost always essential to rely on accredited valuation professionals.

WHEN TO USE THIS MEASURE

Valuation is used to determine the price that a buyer might pay to purchase the business. In addition, valuation tools are often used to resolve ownership disputes and to estimate the value of a partner's ownership interest for buy/sell agreements and other business and legal purposes.

Increasing company valuation is a primary goal for most business owners. It is rarely used in incentive plans, however, because acquiring a formal valuation is a time consuming and expensive proposition. The one exception to this is ESOP companies. Companies owned by their employees under an ESOP are required by law to secure formal annual valuations by accredited valuation professionals. And since increasing the value of the business is fundamental to the success of an ESOP, company valuation is an ideal measure to include on all incentive plans in ESOP companies.

HOW TO USE THIS MEASURE

Incorporating company valuation into an incentive plan is simple -- you merely estimate the desired year-over-year increase and add it to the prior year's valuation to create the target for the new year.

WHO IS THIS MEASURE BEST FOR?

This measure is suitable for any employee in an ESOP company, but it should be weighted most highly for executives (i.e., 40 to 60%). It is also useful for lower-level employees, but since they have little influence over the final valuation, it should not be highly weighted (i.e., 10%).

CAN THIS MEASURE BE GAMED?

There is some potential for gaming this measure. Assuming you are dealing with an ethical and honest valuation professional, there are two likely possibilities. The first is that the company may have consciously or unconsciously withheld critical information that might effect the valuation. The second is that the owners of the business might do things which have an adverse impact on the valuation (such as taking out a loan, making major purchases, taking cash out of the business, etc.). It is important when setting valuation goals to take these things into consideration up front so they don't have an adverse (and unexpected) effect on employee incentive payouts.

MEASURE OF THE MONTH -- Customer Satisfaction

Each month, The Salary Sage features a performance measure from Incentive Plan Builder. These measures are intended to offer you on a wide range of options suitable for including in your company's incentive plan programs.

This month, we are featuring Customer Satisfaction. Every business has customers, and how satisfied they are with your products and services determines the success of the business. Here are some guidelines on how to make Customer Service a successful incentive plan measure.

DEFINITION

The likelihood that customers will return to purchase additional products/services and/or recommend these products and services to others.

CALCULATION

Customer Satisfaction can be measured directly (by calling the customer, conducting surveys and/or focus groups) or indirectly (by tracking referrals and/or positive references to other customers/prospects. If you use a formal survey, once you establish a performance baseline, it is possible to set goals based on measurable improvements against this baseline.

WHEN TO USE THIS MEASURE

For a company that already has a Customer Satisfaction survey and a baseline of historical performance, all that is required is to set goals to improve this performance. For companies that have not yet developed a survey (or have not administered it long enough to have a reliable baseline) this must be done first. But that doesn't mean you can't set goals to get these things done. In fact, many companies in this situation develop a 3-year plan:

• In the first year they set goals to develop the survey.
• In the second year they set goals to establish the baseline.
• In the third year (and beyond) the set goals to improve performance against the baseline.

HOW TO USE THIS MEASURE

There are ten commonly accepted elements of Customer Satisfaction:

1. Quality
2. Value
3. Timeliness
4. Efficiency
5. Ease of Access
6. Environment
7. Teamwork
8. Service Behaviors
9. Commitment to the Customer,
10. Innovation.

Measuring Customer Satisfaction usually involve a survey where the customer ranks the company's performance on a number of these elements using a scale (i.e., from 1 to 5).

WHO IS THIS MEASURE BEST SUITED FOR?

This measure is equally useful for employees directly involved in customer service. Many companies use this measure for executives and senior managers in order to ensure they never lose sight of the importance of keeping customers happy.

MEASURE OF THE MONTH -- Environmental Responsibility

Each month, The Salary Sage features a performance measure from Incentive Plan Builder. These measures are intended to offer you on a wide range of options suitable for including in your company's incentive plan programs.

This month, we are looking at Environmental Responsibility. Businesses are becoming very interested in encouraging managers to focus on doing everything they can to protect the environment. One excellent way to do this is is to add a measure to management incentive plans. Not only will this encourage managers to focus on the issue, it will reward them when they do. Here are some guidelines on how to do it.

Definition

Reducing the company's environmental footprint

Calculation

Calculating environmental responsibility normally involves some or all of the following elements:

1) Developing environmentally sustainable processes and products.

2) Reducing energy, chemical and raw material consumption.

3) Minimizing the business’ carbon footprint.

4) Making responsible decisions about outsourcing products and services.

5) Tracking the costs and savings associated with implementing environmental policies and practices.

When to use this measure

As businesses proliferate and grow to meet the increasing product demands of the world's growing population, countries are challenged to establish regulations to protect their environments. Throughout the world, environmental regulations are emerging at unprecedented levels. Companies unaware, unable, or unwilling to respond proactively to these demands may find themselves confronting substantial fiscal risk, market closures, or even criminal prosecution. Companies that deal effectively with these challenges have found that they can reduce their impact on the planet while simultaneously improving financial performance.

How to use this measure

Effective deployment of this measure involves the following key steps:

1) Questioning wasteful practices and implementing programs and processes that promote profitability and benefit the planet.

2) Providing detailed and actionable engineering, legal, facilities and product-specific recommendations.

3) Collaborating throughout the organization to meet environmental goals.

4) Measuring and monitoring results.

Accomplishing these improvements requires the involvement of the CEO and other members of the senior leadership team to define the business benefit of environmentally responsible business practices, then helps them form a commitment towards accomplishing these practices. Furthering the commitment to environmental responsibility requires training multi-level teams aimed at identifying wasteful processes, unnecessary materials, and business opportunities.

Who is this measure best for?

Every company has the potential to both reduce its environmental footprint and save money at the same time.

MEASURE OF THE MONTH -- Regulatory Compliance

Each month, The Salary Sage features a performance measure from Incentive Plan Builder. These measures are intended to offer you on a wide range of options suitable for including in your company's incentive plan programs.

This month's measure is Regulatory Compliance.

Definition	The company's ability to successfully conform its operations to applicable specifications, standards, or laws.
Calculation	Effective regulatory compliance normally includes some or all of the following elements: Oversight by appropriate personnel. Due care in delegating decision-making authority. Effective communication to all levels of employees. Reasonable steps to achieve compliance which includes systems for monitoring auditing and reporting suspected violations without fear of reprisal. Consistent enforcement of compliance standards including disciplinary measures. Reasonable steps to respond to and prevent similar offenses upon detection of a violation.
When to use this measure	This measure should be used for organizations and positions where there is substantial risk of fraud, environmental waste discharge, tax offenses, anti-trust offenses, food and drug violations, infection, or contamination. This is particularly true in industries closely regulated by the government such as health care, food, and pharmaceuticals.
How to use this measure	Recent highly publicized cases of regulatory violations have dramatically increased awareness of and concern for regulatory compliance. This has spawned complementary efforts by a number of regulatory and law enforcement authorities and  executive agencies (such as the Environmental Protection Agency, the Department of Health and Human Services, and the Department of Justice's Anti-Trust Division).  Many of these agencies have developed (or are developing) model compliance programs. Industry and peer organizations are forming to share best practices for compliance training and awareness. Effective compliance usually involves taking advantage of these types of resources and not attempting to go it alone.
Who is this measure best for?	In highly regulated industries there should be at least one executive who has a major portion of her/his incentive plan (i.e., 20% or more) tied to effective regulatory compliance. It is often prudent to supplement this with a smaller weighting (i.e. 10%) on most or all of the other members of the executive team. You should also consider which of your lower-level managers' and directors' incentive plans should also include this measure.
Can this measure be gamed?	The problem with this measure is that it tends to be all or nothing. In years when there are no violations payouts can become almost automatic and in years where a problem arises it doesn't get paid at all. This situation can be avoided by defining measures around initiatives that consistently improve your organization's state of readiness and reduce risk. This is usually a better approach than measuring infractions after they occur.