The Upwardly Mobile Monkey

I was reminded of the "other" monkey parable at a recent national Summit of Chief Executive Boards International. Here's a link to the first one: http://www.chiefexecutiveblog.com/2008/02/parable-of-monkeys-persistence-of.html

This article has to do with upward organizational mobility of monkeys. Ever have someone come into your office or stop you in the hallway or on the plant floor and tell you about a problem? And ever leave that conversation with yourself owning that problem? Happens all the time, doesn't it?

Or maybe it doesn't happen to you, but to one of your managers -- accepting upwardly-delegated problems from his subordinates. Perhaps you can use this story with him.

Next time that happens, turn on your imagination for a minute. Visualize that problem as a monkey on the back of the employee. He's been carrying that monkey around for awhile -- ranging from a few minutes to several days or weeks. He's tired of it, and may not know how to get it off his back & returned to the floor where monkeys belong. Or he's tried a few things to get rid of it, and it's just kept its furry little monkey arms firmly clasped around his neck. Got that picture in your mind?
Having not been able to unload that monkey, the employee is now looking for someone else to carry it around for awhile (he doesn't really care whether the monkey ultimately gets dropped to the floor -- just that it won't be on his back any more).

And then a magical thing happens. In your "go-to-guy", problem-solving way, you say something like "I'll take care of that." And that monkey leaps off the employee's back and onto yours! And then his furry little monkey arms are clasped around your neck. And the monkey is thrilled. Now he gets to ride around bigger offices, fancier cars, better clubs, etc. than he ever would have seen riding on the employee's back! He's moved up the organization!

And if this is a general habit of yours, he's even got company. There are other monkeys also on your back, and he's got a play group.

Most of us are looking for less stress and more free time to enjoy the rewards of business ownership. These monkeys get in the way of that. Monkeys are actually supposed to be downwardly mobile, handed down from yourself through your senior managers, and ultimately to be returned to the floor by people farther down the organization. If monkey handling is taking up more time in your life than it should, practice putting them on other people's backs.

Here's an article on a way to do that: http://www.chiefexecutiveblog.com/2008/02/want-your-employees-to-be-independent.html

If you have some ways you eradicate monkeys from your back, would you click "Comment" below and share them with us?


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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Competing Against Time

I first heard George Stalk, at the time a Boston Consulting Group Director, speak about time-based competitiveness in 1990. This was shortly after his article "Time -- The Next Source of Competitive Advantage" won the 1989 McKinsey award for the best Harvard Business Review Article of the Year (1989) and the publication of his 1990 book "Competing Against Time". Subsequently, forty-five books have cited this work.

And yet it's still a profound lesson today. Briefly, the premise is this: There are a number of things you can measure and try to manage. In fact, sometimes so many that a manager just gets overwhelmed. The one big thing you can measure and manage that will affect all others positively is the duration (total elapsed time from beginning to end) of any business process.

For example:

• Time from Order Entry to Shipment
• Time from Shipment to Billing
• Time from Billing to Collections
• Time from beginning of development to first production delivery

Note that there's nothing in this list about man-hours, about productivity, about utilization of manpower or machinery. It's just about the hours, days, weeks or months of elapsed time it takes from the start of an activity to the end.

Think about it. Have you ever had a sales cycle stretch out, and the outcome get better? Ever had a building project stretch out and the costs go down? Ever had a manufacturing process that got longer and the quality improved?

Actually, there's a decent argument that taken down to the basics, there are really only three levers on a manager's control panel:

Quality, Time and Cost -- sometimes translated as "better", "faster" and "cheaper" (the mantra of the electronics business and the metrics of Moore's Law).

Stalk asserts (in my experience, correctly) that if the only one you pay attention to is time, the rest will take care of themselves.

Projects of shorter duration are less likely to take on additional scope & baggage, less likely to suffer from the effects of project team turnover, and less likely to lose focus on the original goal. As a result, they cost less and deliver more of the intended benefits.

Let's talk about inventory -- have you ever seen anything good happen to something that sat in inventory longer? In fact, the common metric of "Inventory Turns" is just the reciprocal of "average days on the shelf". Days Sales Outstanding (DSO) is a measure of average days in accounts receivable.

What about work in process? One of the things I look for when visiting someone's factory is the number of wire baskets full of parts sitting around on the floor. By definition, wire baskets sitting still are not getting better. They're waiting to get damaged, lost, or for 1 or 2 to go "missing", whereupon the final production run will be 1 or 2 finished items short. In an ideal world, a part never stops and waits anywhere from the time it arrives from the supplier until the finished product is headed out to the customer. This is the origin of the concept of manufacturing cells, an idea that's dramatically reduced cost, improved quality, and shortened cycle time in thousands of factories.

How can you reapply this time-proven principle? Look at your business processes. There's surely one of them that your customers (or you) wish happened faster. Go back to the basics. First, chart it -- what are the steps and sequences of steps required to get the process accomplished? Now, here's the important part. On the flow chart, write in the "do-time" for each of the steps (the actual time a part is being "touched" or worked on in the fabrication or assembly process). Then, write in the "wait" time between steps. You'll likely find that the total wait time is 2x to 100x (yes, 100x) of the total "do time". Draw a laser-beam focus on reducing that wait time.

Examples include machine changeover time -- totally lost production, manhours and machine capacity that you'll never get back. We'll never again get to produce the parts we could have produced during those lost hours.

How about the time a sales order waits in a basket for approval, order entry, technical validation, etc.? Time that a customer is waiting and wondering what's become of his order. And, in almost every case, time to make a mistake, lose the paperwork, for the customer to change his mind, or a competitor to stop by and make a sales call.

So, if you have to choose which of several balls to juggle, make it time. Look at everyday processes within your business, measure the total elapsed time of each from beginning to end, and then set a goal to reduce that by half. In many cases you'll find you can reduce it even more than that. You'll be amazed how many other things will get better by having done so.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Ignore the Scope Definition -- Pay the Price

Ever had a project that wildly exceeded your estimates of either cost, time, or both? There are lots of reasons that happens. In my experience, however, one of the most prevalent is failure to define the scope of the project before starting, and then finding that you're too far down the road to either reduce the scope or get the project done on budget. Otherwise known as "biting off more than we can chew."

Here's a metaphor, or word picture, you might use with your own management team as a memorable parable. It's about something familiar to almost everyone -- building a house.

Let's say you have a $200,000 budget to build a house (you already own the lot). Depending on the part of the country, a "starter home" can be built for about $100 per square foot. So, a rational person who understood construction costs would lay out a 2,000 square foot foundation (about 50 feet by 40 feet) and begin building.

A person less knowledgeable might, on the other hand, go out to the site and lay out a 50'x 60' foundation -- 3,000 square feet. So he starts building and gets the walls all framed up. At that point, he has either a house with no roof and he can afford to finish the interior OR a house with a roof and an unfinished interior. He's unwittingly put himself in an impossible position -- he can't shrink the "footprint" of the house, and he's $100,000 short of what it will cost to finish a 3,000 Square foot house. Then what??

How often does a project go down that same road? And it's generally for the same reason -- failure to scope the whole project, resulting in failure to estimate the full cost of execution. So, the project starts off with overly-ambitious goals and in midstream we discover that the few choices available include bailing out with nothing finished or slugging it on to the finish line with massive cost and time overruns.

The outcome of these projects can be disastrous. Best case, they get finished and deliver the expected benefits despite their huge cost overruns. Worst case, they break the bank, don't get done at all, and the entire project becomes a sunk cost (sometimes with a sunk career or two included). The middle ground is more common -- cost-cutting at the end compromises most of the project goals and objectives, resulting in a finished product that's not only expensive but also ineffective. Think about trying to finish that 3,000 square foot house on 2/3 the necessary budget.

Again, this parable is about the failure to define scope. Just how ambitious is the project at the outset, and do we really have the budget, the talent and the time to do everything within the defined scope?

What are some good practices in scoping and estimating longer-term projects? A friend of mine who had just remodeled a kitchen (notoriously vague scope) told me what he learned: "Ask three contractors what they think it'll cost, and add them all together". Hopefully you can't personally relate to that experience. Seriously, when you're talking about investing any amount of money into the business that you consider "large", whether that's $10,000, $100,000, $1 million or more, stop and put together a rigorous description of the expectations, plus a rigorous estimate of the cost and schedule. "Rigorous" means talk it through with others knowledgeable of what you're planning to do, and build a line-by-line listing of expectations, tasks, cost per task and time duration per task.

You'll find, I believe, that it's not the mis-estimation of a task that kills an estimate. It's a missing task -- something you forgot entirely. In my experience with analyzing errors in construction estimating, it was never that it took 3,000 feet of conduit and we'd estimated 2,500. It was that we left out the conduit line item (including all the associated labor, of course) entirely!

If you do similar projects regularly, take the time to build an estimating check list -- a rigorous listing of all known possible costs. Just the "reminder" value of that exercise will save you a multiple of a month's pay some day.

So, set your internal threshold for the dollar amount of a "large" project , and whenever one of those comes up, insist on a rigorous, structured, carefully reviewed scope definition and estimate.

If you have experience with a large project overrun, click "comments" below and share your story with us. What would you do differently, knowing what you know now?

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Are You in Leadership Gridlock?

Another recurring theme in Chief Executive Boards International meetings is the difficulty of developing successors and subordinate leaders.


In working with mid-sized businesses over the long term, it's not uncommon to see a syndrome I call "leadership gridlock". This generally happens over a long period of either flat sales or moderate (single-digit %) growth. Symptoms include:

• You have some senior or middle managers below the CEO or owner


• They've been there a long time


• They've succeeded mostly through hard work, knowing the business, and tenacity


• They're undereducated -- they don't have the educational background you'd now require if hiring a new person


• They're doing OK


• They're pretty much "maxed out" as far as performance is concerned


• They're unpromotable -- they don't have the horsepower to take the next step up the organizational chart


• They're not developing their own subordinates as replacements for themselves
  

The toughest part of this situation is that they're actually doing OK -- they're not failing, they're not doing badly, they're just not promotable. And you don't have a good reason to do anything about them.

Or do you? Here's the gridlock part. If you ever want to step away from the day-to-day operation of the business, you're going to need a successor to manage some or most of these managers who are your direct reports (let's call them "senior managers"). Yet none of them are candidates -- you know that. You don't have a need for another Senior Manager (at least not yet), so you don't see it as practical to add a new person at that level.

And you may be in the same position with respect to their subordinates -- the managers or supervisors that report to them. That 's the second half of the syndrome. "Just OK" managers are typically consumed with keeping their own heads above water -- they have neither the time nor the talent to stretch themselves to bring someone else along.

See the "gridlock" part? You've backed yourself into a position of having zero degrees of freedom -- the "just ok" senior managers are, by their very existence on the organizational chart, blocking the promotability of junior managers or supervisors who report to them. So you can't promote anybody. You can't develop anybody. Worse yet, everyone sees that, which actually drives away people of ambition, promise and talent further down the organizational chart. They see the gridlock of non-promotables ahead of themselves and decide to go elsewhere, rather than try to bull their way up through the organization.

I've used the word "gridlock". The obvious metaphor is a large city traffic jam with cars stuck across several adjacent intersections. Nobody can move because nobody can move.

Another metaphor for this condition is that little 4 by 4 puzzle game we used to play in the back seat of the car (my age showing here). I'm sure there's an electronic version, but once upon a time it was a field of little plastic chicklets that you manipulated through the one open square in the 4x4 matrix, until you got all the 15 numbers arranged in order. The key to that game is the open square. Take that away, and the game is unplayable.

The end game of a gridlocked organization isn't pretty. You probably can't grow it, since the key players are already operating at capacity. You can't exit it, either, because you know there isn't anybody in line to succeed you. And what if you suddenly became ill or had an accident that prevented you from running it yourself? Would the business, in fact, survive that situation?

So, what can you do if you find yourself in "leadership gridlock"? First, you must redefine the problem. The problem is breaking up the gridlock, rather than running the company "as is". You have to create an open square. Probably by juggling the organizational chart to make room for someone else. Sometimes this necessitates dropping someone back a level -- perhaps putting a struggling manager back into whatever he was really good at that got him promoted in the first place.

Secondly, you'll have to bite a bullet or two. You have to either replace one of the current players or add a player, dividing up some of the current responsibilities to make a place for him. Granted, adding a manager you don't think you need will be a hit to the profit statement. Perhaps you can teach yourself to look at that as an investment, rather than an expense. And then you have to go find that person, probably engaging some help to do a thorough search for the right player. And then you have to make sure that the existing mediocre players don't convince the new player to slow down to their pace (see: Parable of the Monkeys -- The Persistence of Organizational Culture ).

You don't really have an option -- leadership gridlock is a slow, painful death by a thousand cuts. If this describes your situation, you won't like the result of inaction.

If you find yourself (or have found yourself in the past) in leadership gridlock, click on "Comment" below and let us know how you solved (or are solving) that problem.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Disability Insurance in Mid-Sized Companies

In a prior post, I shared the all-too-common dilemma of business owners with a now-disabled employee and no disability insurance or company policy on disability: Disability Insurance -- CEBI Member Feedback

This was such a meaningful response, I thought I'd share it as its own post. It's from a long-time friend of Chief Executive Boards International, John Robie, of Benefit Plan Alternatives. Here's what John had to say:

"In our practice we have this issue come up frequently. No one seems to make the decision on company policies...employment policies (not insurance policies) until they are faced with the dilemma of an employee being off work. The decision they make is frequently made based on the personality of the disabled person..."we like this person", or "this is someone that we'd like to get rid of." Hence the past practices policy begins to form.

"If the disabled is a key employee or someone that is liked, there is an inclination to continue their wage. It might be a bit of a burden but after all...the disabled person is important and "liked". Two things usually happen. Most often, they return to work and all is well until the next time someone is disabled. Or, the person isn't coming back and the gut wrenching decision of when to stop the paycheck has to be made. Many business owner crumble when faced with telling the spouse of a disabled employee that they can no longer continue wages to the family...,contrary to popular belief, many tough business owners are softies in disguise.

"The offshoot of the first thing happening...returning to work and all is well...is that the next employee to become disabled is the guy that you were ready to fire for incompetence. Now what do you do? You have set the stage to continue his wages since you established your ad hoc/past practices disability policy that says you will continue wages to disabled employees. After all you continued wages for the guy you "liked" so now all employees will expect similar treatment. You think employees don't know you did that but they do...everyone knows...you just think they don't. You tell Mr. Incompetent that his wages are done and the first thing he does is go to the lawyer. Not just any lawyer, but the one on the back of the telephone directory. How do you think this is going to work out? Oh, I forgot to mention, Mr.. Incompetent was in a drunken car accident , is a quadriplegic and will never return to work. Since you continued to pay the pervious disabled employee until his disability ended, Mr. Incompetent expects his wage to continue until he is better...he thinks he will get better with the right medical care. (Read that sentence as CATASTROPHIC CLAIMS ON YOUR INSURANCE EXPERIENCE AND THE RATE INCREASES THAT FOLLOW).

"Our recommendation always is to make decisions about disability wages before the fact, before personalities cloud the decision and when cool business-focused heads can prevail. From there, decide what the business can afford in the way of insurance. We mostly recommend insuring the catastrophe (long term disability) and self-insuring the nuisance (short term disability). If funds are an issue, I would suggest Long Term Disability coverage with a 90 or 180 day waiting period and communicate to employees exactly what they can expect if they become disabled. Many clients then will offer a Voluntary Short Term Disability plan (fully paid by employees) to the group. Employees that feel the need will cover their risk with the voluntary plan. Employees that can go 90 or 180 days without a paycheck (until the LTD begins to pay) do not buy the voluntary plan. Everyone makes the appropriate decision for their needs with a full understanding of what to expect from the company. No guilt, no hard feelings, no tough decisions. This kind of fore thought to the issue really takes the monkey off the back of the business owner.

"The issue that comes up even more frequently is when to terminate disabled employees or laid off employees from the medical plan. That is another issue that is best decided now rather than in the heat of the moment. A little proactive planning would make life so much easier."

Thanks, John, for this excellent "how-to" on the subject of disability insurance in mid-sized companies.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Reframing the Whole Thing in My Own Head

A Chief Executive Boards International member made a profound comment in a recent Local Board meeting.

He was talking about his challenge of handling a business downturn, requiring that he cut capacity (equipment) and staff (people) to do the right thing for his business -- take it down to fighting weight to survive a (hopefully temporary) reduced level of revenue.

Add to that the currently skittish nature of lenders and surety (bonding) companies, both of whom have made a fine art of closing barn doors after all the horses have left. Faced with a few non-performing customers, they generally want to withdraw financial support of those still standing. This member decided to take that position head-on, making the case that reducing credit lines and reducing bonding capacity would be exactly the wrong thing to do with a customer taking a proactive approach to a general industry downturn.

So, he needed a script that would sell to both employees and outsiders (bankers and bonding companies). Not to mention suppliers and customers.

The profound thing he said was "I found I had to REFRAME the whole thing in my own head before I could properly frame it for anyone else." Fascinating observation. He realized that if he hadn't fully come to grips with the current situation, internalized it, and gotten himself 100% believing it, he wasn't going to make any credible presentation at all to anyone.

How often does that happen? We fail to "reframe the whole thing in our own heads", thereby resulting in non-committal, non-convincing statements to employees, customers, suppliers and financial entities. On the other hand, all of those folks have trusted us before. Does it not follow that if we approach them with conviction and commitment, they'll trust us now, even if the realities of "now" are causing the business great stress?

The happy ending to this story is that this member successfully persuaded the bank and bonding company to maintain his credit and bonding capacity, laid off some employees, and planfully sold some excess equipment to raise cash. He's now conserving, rather than burning cash while seeing his market begin to stabilize and improve.

What is it right now that you need to reframe in your own head to be successful? Have you been kidding yourself about the market, an employee, a customer, a successor? Click "comments" below to let others know of something you reframed in your own head and then were successful in handling.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Disability Insurance -- CEBI Member Feedback

Within the past 3 weeks, three different Chief Executive Boards International members have asked their fellow members for a suggestion on how to handle the same thing -- an employee (generally long-term) who is currently on sick leave, and not likely to be able to return to work.

This is a real ethical, emotional and financial dilemma. One thing members are curious about is "what's the standard?" for most companies, and "what's right?" In polling CEBI members and mid-sized companies in general, the standards shake out like this:

1. In general, more mature (>10 years in business) and larger companies have Short-Term Disability insurance (STD), generally effective after 1 week's missed work. They also have Long-Term Disability (LTD) insurance, effective at either 90 or 180 days. This coverage goes hand-in-hand with a clear-cut Company Policy that specifies when an employee moves from Sick Leave to STD and then to LTD.
   
2. In general, less mature and smaller companies have no standard disability insurance at all. Unfortunately, most of these companies have no Company Policy on Disability, hence the quandry about how to deal with the question once it arises.
   
3. For those companies who want to do something about disability coverage, the first move is generally to add Long-Term coverage, which is far less expensive than Short-Term, due to the reduced likelihood of its being used.
   

Regardless of where your company falls in this spectrum, one thing you can do today is write a company policy on Disability. Remember, you don't need a major Employee Manual effort to get this done. All you need is a policy statement, similar to what you might have for sick leave or personal leave, that spells out what you will and won't do in the case of a disabled employee. You will, of course, as you probably do now, want to hand a hard copy of those policies to new employees, including a cover letter enumerating same, and requiring their signature to acknowledge they've received them.

If you're not ready to add the expense of company-paid disability insurance, you might also consider (I did this once in my own company) calling an agent, and asking him to write individual quotes for all your employees, for at least LTD and perhaps also STD. At that point you've at least done your part -- advised them of how long you'll carry them on sick leave, and offered them an easy option by which to cover themselves with almost no effort. Should they decline, when it happens that one of them becomes disabled, you'll at least be able to feel that you did your part.

There are variations in Disability Coverage. The "gold standard" of disabilty coverage is 60% of the employee's base salary. A huge consideration is "own occupation" -- will the person be covered if he can't do what he's been doing, or only if he can't do anything at all? Longer waiting periods, of course, are less costly. One cost-saving variation is to offer a "standard" (company-paid) LTD policy capped at a fixed benefit amount -- say, $2,500/month, with an option offered in the 125 ("Cafeteria") Plan to step that up to the full 60% at the employee's expense.

Important note: Remember that if the company pays the premiums, any future disability benefit payments are taxable to the employee as ordinary income. If, on the other hand, the premiums are deducted from the employee's pay after tax, any future disability benefit payments are tax free, since it's insurance the employee paid for with after-tax dollars. You stretch the value of the benefit a long way by making sure it's an after-tax deduction on the payroll, rather than company-paid.

I hope these thoughts are of some value to you. If you have or know of companies that have Disability coverage substantially different from any of these predominant styles, please click "comment" below and let us know what that is.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

The #1 Incentive Compensation Plan Design Mistake

This is a summary of a topic that a member brought up in a Chief Executive Boards International meeting. Confidentiality rules preclude any details about the city or the member, but the lesson is solid, even in generic terms. The issue was designing and installing an incentive compensation plan for sales people -- something managers have wrestled with from the beginning of time.

In an earlier article, I emphasized that the foundation of a good incentive compensation plan is its alignment of the employee's self-interest with the company's interests. Said another way, "Figure out exactly what you want an employee (or group of employees with like responsibilities) to do, and then figure out exactly how to pay them for doing just that.

As a friend of mine says, "Says easy, does hard." But this is important work that counts as working on rather than in your business, and you'll make the time to work on it if it's important to you.

Then, the question is how to make the numbers work. That's the subject of this article. In my experience there's ONE single mistake plan designers consistently make. What is that? I call it the "sensitivity" factor. We generally have an idea of where we want to be "on average" -- what we're willing to pay for "good" performance. In our example case in the meeting, a member said he was thinking of paying his inside sales people 1% of the gross margin on their monthly sales. 1% is not a lot, but inside sales people are generally paid a base salary, and this was conceived as a "kicker" on top of an existing base. So the AMOUNT of the compensation seemed fair, especially when we drilled down into the numbers.

The board asked him if he planned to pay that 1% from the "first dollar" of sales -- in other words, if a sales rep sells 1 thing for $100 GM, does he get $1? The member said "I guess so -- why wouldn't I?" In general "first dollar" plans have the fatal flaw of lacking an important factor -- "sensitivity". In other words, once "in the money", does the plan pay enough for incremental performance to appeal to the self-interest of the employee?

How do you examine the plan's sensitivity factor? Graphically is the best way, and using some real number examples is a good way to build the graph. First, decide what "good" is. I sometimes call this the "par" value of the plan. If a rep is doing well, what might you expect for a typical month's sales? Maybe $100,000 in total sales with an average 40% gross margin, resulting in $40,000 in gross margin. At "par" what does the sales rep earn? In this example, 1% or $400. See how long that took to convert into words and for you to parse through and absorb? A graph says it in a second.

So, let's graph the same thing. Start with two axes -- Sales on the horizontal, Commission on the vertical, with some units that match your example, then put a point at "Par":


Now, draw a line from zero through Par:


What does this tell us? We pay something to anyone who sells anything -- it's a classic "first dollar" style commission plan. These work for full commission jobs. They don't serve us very well in jobs like inside sales, where there's a base salary, and we expect some base performance.

So, this is the the interesting part -- Does this match what we're really trying to do? Is the objective to pay the "par" sales rep $400, or is the objective to motivate the "par" sales rep to do, say, 10% better? So, let's look at what 10% better performance does for the sales rep:



Disappointingly (if I'm the sales rep), if I put out enough effort to increase my sales 10%, making the company $4,000 in additional gross margin, what do I get? A lousy 40 bucks.

Worse, If I let my sales slip by 10% for a month, it only costs me 40 bucks. Who cares? This totally fails the sensitivity test.

How could we fix this? One way would be to make the plan richer and pay, say, 5% of gross margin. Here's what that looks like -- either re-draw the line, or change the scale on the commission axis:



Then if the rep increased his sales 10%, the company still makes an additional $4,000, and the rep makes make two hundred bucks -- about 10% of a month's salary! This starting to sound like something he might be interested in doing. But wait! If we start paying at first dollar, that means $200 on top of $2,000! Wow, this is starting to get expensive. I'm now paying 5x what I wanted to pay, and at "par" I'm paying $2,000, rather than $400. If I put this on top of an entry-level inside sales base salary, it's almost a 100% raise.

Is there a better way?

Again, what are we trying to do? We want to incentivize improvement and disincentivize slacking, right? And we think it'll take about a 5% slope in the commission line to be sensitive enough to get their attention, right?

How about NOT paying from first dollar? After all, these people have a base salary. Shouldn't I expect something from them for that? Of course.

So, let's take the 5% "sensitivity" line and lay it over the 4% at "Par" pay point. Completely different answer. What I have to do is set a "quota" below which I'll pay NOTHING, and then I'll pay 5% on anything above that. How does that look?



So, if everyone sells at "par", I'm even. Of course if they all take off like rockets, it's going to cost me. Would I be happy with, say, an additional $10,000 in gross margin that cost me only $500 in commissions? Probably so!

And how does this work out in terms of overall costs? Not bad. First, for those reps who don't make quota, I pay nothing. For those who do, I'm paying LESS than the "first dollar" formula until they hit Par. Look at it this way -- for every $1,000 UNDER Par a rep falls, I SAVE $50, and that goes to the rep that does $1,000 over quota. That's a breakeven, and I got the effect I wanted -- a noticeable change in the pay envelope (both ways).

Then we apply the "sniff" test. Would $50 motivate a rep to upsell an order by $1,000 GM? Seems a lot more likely than $40 motivating him to upsell an order by $4,000.

OK, what if someone really hits the ball out of the park -- sells fifty percent over quota in a given month:



Under Plan A (first-dollar), beating quota by 50% is worth a lousy two hundred bucks. Again, "why bother?" Under Plan B, beating quota by 50% is worth an extra $1,000! Now, would I happily pay $1,000 commission for an additional $20k in GM? All day long! If everyone did that, I could cut my inside sales force by 1/3!

The two important variables in this model are the % and the quota. This gives you the flexibility of setting a lower quota for new sales reps. Maybe the first-year quota is 1/3 of the "standard", second year is 2/3, etc. Now, moving quotas is a major sales rep dissatisfier, so be careful in setting quotas that work, rather than to save money. I wouldn't suggest tinkering with both the quota and the percentage. Get the percentage right for the business model and lock it down.

What can go wrong? The most likely is that a rep sees himself without a prayer of making quota, and just gives up for the month. How might you solve that? First, you might apply a secondary annual bonus to overall % of quota performance -- if he's close to quota a couple of months and over the rest, those close months help out in hitting the annual target.

Another pitfall is the setting of the quota itself. Keep the carrot in sight!! We actually want to be paying some incentive comp, right? If that's not the case, nothing works. So, make sure the quota-setting process meets the "SMART" goals test:

• Specific - Yes, sales are usually rep-specific. You may find a need to introduce a "split-credit" mechanism for larger sales requiring reps to cooperate with each other.


• Measurable -- What's more measurable than sales?


• Achievable - This is the critical success factor for a quota-based bonus -- the carrot has to appear to be within reach, almost every measurement period.


• Relevant - Measuring revenue or profits surely qualifies.


• Time-Based -- Specific timeframe for achievement is identified -- usually a month or a quarter, depending on the sales cycle and frequency of sales. Annually is too long for most people -- again, the carrot is so far away it's almost invisible.

This also meets another litmus test of incentive compensation: "Can the sales rep explain the plan to his wife over no more than one martini?" Not a bad question to apply to any plan.

Designing compensation systems is not simple, and not a one-pass process. In a future article, we'll explore how to use modifier factors to minimize employees "gaming" the system to the disadvantage of the organization.

This prototype addresses a method of taking base salary into account while at the same time making the plan "sensitive" enough to motivate incremental performance. The concept is that above par, the employee is covering his costs by >10x, and we'll pay well for any performance above that point. Try this on for size in your own organization and see if it fits. And let us know some of your ideas for effective incentive compensation design.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917

Do You Have Too Many Direct Reports? -- Six Questions to Consider

This is a topic that came up in a recent Chief Executive Boards International meeting. A member said he was just "burned out" by the continuing pressure of "fire fighting" and "having to do everything myself". He said he had trouble "holding managers accountable" and getting his key managers to do handle their responsibilities themselves, rather than delegating them upward to him.

When asked "How many people do you have reporting directly to you?", he answered "Ten". Bingo. Few, if any, managers can manage ten people -- let alone more. And if, in fact, you can manage ten people, what will you do when the company reaches twice its current size -- manage twenty people? If you're having trouble growing your company or seeing too many things falling through the cracks, have a look at the span of control at each layer within your company.

Span of control (how many people report to a given manager or supervisor) varies, inversely with the complexity of the job being supervised. See a great Wikipedia article on this topic here: http://en.wikipedia.org/wiki/Span_of_control.

In short, the more diverse (less homogeneous) the functions managed, the fewer people most managers can manage. At the top tier of a mid-sized company, that number should be no more than five or six. Functions like Sales, Finance, Marketing, Operations, HR, etc. are highly diverse -- being a CEO and looking after 8 or 10 such functional managers is a job Superman wouldn't sign up for.

On the other hand, as the jobs being supervised become more homogeneous, such as a group of delivery drivers, machine operators, etc., a span of 10 or 20 is not beyond imagination. The work is routine, the exceptions few, and the "face time" between the supervisor and the work is minimal.

What happened to this CEBI member was that he was trying to manage ten managers, each with substantially different responsibilities -- a span of control beyond most CEOs' abilities & energy levels. This super-human effort caused him to be unable to spend enough "face time" with each to define expectations, and as a result their accountability slipped. To solve that problem, our member found himself fighting fires -- reaching around his managers, making diving catches of things falling through the cracks. A downward spiral, resulting in his feelings of burnout and overload.

He's presently reassessing his organization, considering breaking it up into three or four smaller units, managed by his three or four most capable managers. This strategy repositions him to grow, as well. It's easy to imagine extending this structure to handle double the amount of business by adding 1 or 2 additional managers at the top level and still maintaining a reasonable span of control for himself.

As a quick "check up" on your own organizational chart, look for situations where spans of control exceed six. Are those situations working, and are they explainable, perhaps because those supervisors are managing highly homoegenous jobs? Or is there, in fact, a "superhuman" manager (perhaps yourself) in a position where he's become irreplaceable? Would it be better to break that job into parts that a couple of "ordinary" managers could handle?

Here's a checklist you can use:

1. Is it really clear to each person in my company who they report to?


2. Is it really clear to each person in my company what their direct manager/supervisor expects?


3. Where do I have more than 5 people reporting to a single manager or supervisor?


4. Could he handle twice as many? If not, it's a growth bottleneck that will soon need a second manager to share the load.


5. Do I have more than 5 people reporting to me? If so, what would happen if our business doubled? What do I need to do to plan for that and build my management team's capacity?


6. Do I do lots of fire fighting myself -- catching things "falling through the cracks"? Do I have enough time to hold my key managers accountable, instead of myself?

An always-useful organizational design question is "What would the organizational chart need to look like if our business doubled"? Putting the question this way makes "we'll work harder" an unlikely answer. Yet, if you ask "what would happen if our business increased at 15% per year?", "we'll work harder" is a more-than common answer. At that rate, a business doubles in only 5 years, and generally overwhelms a management team that hasn't planned for it. It takes awhile to grow and develop a management team, and running them at their maximum span of control is a subtle, yet inevitable limitation to growing the business.

Take a hard look at the way your organization is structured and at spans of control at each level. You may discover one of the things that's getting in the way of your growth and perhaps also getting in the way of your own satisfaction with the way the organization works.

These kinds of ideas surface at every meeting of Chief Executive Boards International. If you have an interest in ideas that will accelerate your business and provide you more fulfillment, more wealth and more time to enjoy it, contact me at: terryweaver@chiefexecutiveboards.com

To forward this to a friend, Click Here

Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917