Behavior Matters!

Harnessing the power of behavioral science to improve how organizations, leaders, and people work

Tag: Incentive Compensation (Page 1 of 2)

Top 5 survival tips for small businesses – guest blog by Paul Schoening (2 of 3)

The following is the second of 3 posts from our guest blogger Paul Schoening, President of Plan C.  He is bringing a unique perspective on what it takes for a small business to survive.  In his first post (here) he talked about the difficulty of starting a business based on passion and how that passion is both good and bad.  He discussed how entrepreneurs need to look at building a sustainability plan and not a business plan.  In this blog are his next two tips.  Over the next few weeks, the final post will outline the final two survival tips.  Enjoy!

2.  Show me the money:  When starting a new business, oftentimes entrepreneurs focus on sales revenue or profit figures to assess how they are doing.  I know I did.  In fact, we had record sales in our final quarter as a business and yet we couldn’t make it last.  money

While it is good to be profitable and increase sales – it is absolutely critical to have a positive cash flow!  You need to have enough cash flow to give yourself time to get off the ground and pay your ongoing bills. Fast growth and increased sales are great, but this can create a sense of overconfidence that can skew your decision-making especially with early business success. Conversely, when times are challenging and a business owner is under pressure we can easily make rash decisions fueled by emotion, not logic (i.e., “how the hell am I going to pay for this?”).

One example of cash flow issues was custom cabinet seller M&J Kitchens – who had survived the Great Recession even when its revenue from homeowners and builders dropped by more than half in 2009.  They weathered the storm.  Then, late in 2011, with sales almost 42 percent higher than the prior year, they were unable to pay their bills and owner Drew Davies was forced to shut the  26-year-old company down. What happened?  M&J highlights how important cash flow is.  The issue was a “cash-flow crisis precipitated by his bank and trading partners, who Davies says, abandoned payment agreements that had been in place for decades.”  M&J’s cash inflows were coming in slower and it’s payments still needed to be made. In this instance “M&J had to float their customers—builders, architects, and home remodelers—who had slowed their payments, typically from 30 days to 60 or 90. At the same time, his own suppliers changed agreements that had been in place for decades by cutting credit lines or requiring deposits, which Davies says could tie up between $60,000 and $120,000 per month.”  After more than 25 years of business, the company was forced out of business, not because sales were down, but because it couldn’t cover its cash flow.

Source: Businessweek.com February, 2011

What happened to M&J is not atypical.  It can happen to all of us.  Which is why we need to have cash flow plan.  One way of looking at this to think about how much cash is required to make payroll, pay suppliers, and cover other expenses each month – then figure how many months of cash reserve you will need to have if things don’t go smoothly.  In my case with the bike business, I usually looked out 3 to 4 months.  I should have been looking out 6 to 9 months.  Each business is different – so think hard about what a downturn or change in situation would mean to you.  How fast do your customers pay?  How long can you push out your own payments.

One way to avoid these mistakes is by finding a great accountant or financial consultant and using them to map out a plan for this.  Look at ways you can collect money faster by offering discounts for payments early or requiring a deposit.  See how you can restructure payments on goods and services that you use.  Look at payroll differently – offset high bi-weekly pay by using quarterly or annual bonuses that provide flexibility for you and rewards your employees for great work.  If  you can’t afford to hire an accountant full-time, there are many firms that you can outsource part of the accounting of the business to or hire in for consulting.  The voice of reality (a shrewd accountant) will keep you in check.

3.  Double the time you think it will take:  Time is a resource that is often underestimated when starting a new adventure.  In the passion of developing out this great new idea, we forget about how long things can take.  Particularly the little things.   You can celebrate that you are the President or CEO of your business and be very happy to have the title. But you are also the janitor, the sales person, marketer and customer service rep. You need time to handle all of these responsibilities, take time to do research and to ensure that you are continuing your education and staying on top of the latest trends and facets of the marketplace.

Here are a few examples of some rough time estimates that an entrepreneurial friend put together for me for some of the things that he does that are not part of his core business.

  • Accounts payable: 2 hours per week
  • Accounts receivable: 1 hour per week
  • Payroll: 1 hour per week
  • Social Media Outreach: 3 hours per week
  • Developing marketing campaign: 2 hours per week (varies, but this is an average)
  • HR: 1 hour a week (up to 8 hours a week when issues arise with employees or when hiring)
  • Scheduling: 1 hour per week
  • Responding to sales requests: 1 hour per week
  • Networking: 2-4 hours per week
  • Miscellaneous (IT trouble shooting, equipment purchase/repair, responding to solicitations, etc..): 2 hours per week

This totals up to over a day and a half out of the week for work doesn’t even include business development, sales, or anything that has to do with the work that drives value for his customers (granted, he could probably reduce his Social Media Outreach – I mean really, 3 hours on Twitter, Linked-In and Facebook?).

One way to overcome this time crunch is to look at outsourcing some of the functions of your business so you can focus on the areas of which you have immediate control and greatest value-add. This might require you to increase your outflow of cash (which can be troublesome – see #2) but if it can allow you the time to focus on the important things for success, then it is worth it.  Another option is to think outside of the “box” and look at creating partnerships and alliance where you can trade services or leverage each others core competencies.

How using a 9-iron isn’t the answer to a 540 yard par 5 – just like incentives aren’t the only answer to employee motivation

The Approach

A few weeks ago a number of factors all convened so that I spent 5 days playing 99 holes of golf (see here).  It was fun, but I’m ok if I don’t hold a golf club in my hands for a little while.

Let’s preface by stating that I’m not an avid golfer nor am I a very good golfer.  I’m average.  I usually get out 3 to 4 times a year.  I can talk the talk, I do some things well, and others not so well.  One of the things that I was doing well during those five days was hitting my 9-iron.

And I was hitting it well.

On a pretty consistent basis I was hitting the ball between 140 and 170 yards with my 9-iron – and they were mostly straight (which is a big deal for me).  And once* I put one out there about 185 yards (*it was downhill and the wind was behind me).  Put this in perspective, according to Brent Kelly at About.com the average men’s 9-iron distance is between 95 and 135 yards.  You would need to move up to a 5-iron to reach the average distance I was getting with my nine.

Of course I was hitting most of my other clubs poorly.  I’d top my driver and it would bounce out 30 yards.  I’d slice my 3-iron into the trees.  I’d hit my five iron, but it would fade left and only go about 100 yards.  I’d totally duff my 3-wood.

So what did I do?

I ended up just playing with my 9-iron and putter.  Honestly.  It didn’t matter if it was a par 3 140 yard hole or if it was a monster 540 par 5 – I’d pull out my 9-iron and shoot.

And you know what…I played better than I usually do.  We used many of my shots in the scramble competition.  I won my head to head match.  Overall, I did pretty well using just my 9-iron.

Therein lies the problem…

I did pretty well for me – but I definitely wasn’t one of the top golfers playing.  Sure I did better than I usually do, but I know that using my 9-iron on a long par 5 is not the optimum solution.  Yes it improved my game – but I wasn’t going to be able to match the top golfers I was playing with if I only used two clubs.

I often see companies that use incentives like I use my 9-iron.  It becomes the only club in their bag.

Therein lies the problem. 

We find that we have some success with an incentive program/reward program/new initiative and we think, “hey, we’re doing pretty good here.”  Then we use the same thing again and again – regardless of the issue we are trying to address.  The problem is that using that approach, we will never be at the top of our game.  We will never be able to fully motivate and engage our employees.  We will get to the equivalent  of a 540 yard hole, which requires a creative new approach – and we pull out the “9-iron incentive” instead because, hey, “I can hit it 170 yards.”  But that probably won’t ever get you a par.  And it certainly won’t get you an eagle.

There are a number of clubs that we have to use to help drive motivation.  We need to engage people with challenging jobs, build great interpersonal connections, create a culture that people are proud of, make sure that people have opportunities to grow and excel.    But these are all harder to master, take longer to build, and have a higher probability of a major slice or hook – so we too often just fall back on the old faithful 9-iron incentive plan.

The Driving Range

So I need to go out to the driving range and start working on my other clubs – maybe starting with the 8-iron and moving down the line**.  That is the only way that I will ever improve my game and become a “good” golfer. 

The only way a company will ever become really good at motivating its employees is to start developing their skills with other methods of engagement besides incentives.

We can look at the 4-Drive Model of Employee Motivation and know that we have to engage people in bonding, learning and defending as well as in acquiring.

Get out on the proverbial driving range and see what works for you.  Add a little more job rotation.  Change the goal setting system.  Maybe some more team building.  How about a more open and communicative culture.  It takes practice.  It takes time.  There will be a few shots that go in the water…but in the end, its what is required to become a scratch golfer or a great company!

(**Of course, I think I’ll take a few more weeks off from golf to fully recover…I mean 99 holes in 5 days is a lot!)

Let us know what your favorite club is – leave a comment!

The lost art of sales incentive communication

“The new compensation plan is only as good as the sales representative’s understanding and acceptance of the plan.”

This quote is from the December 2010 issue of World at Work’s Workspan journal.  I found it very familiar as we’ve been using the following line in our proposals since 2003 “You can have the best incentive plan in the world, but it doesn’t make a difference if your people don’t understand it or buy into it.”

I believe this with all my heart.

In fact, much of our business is built around this belief.  We work with many of our clients creating communications campaigns that drive understanding and help build buy-in to their incentive plans. We tend to think about this in a holistic way with many touch points along the way.  We don’t just craft a cool looking brochure and leave it at that. Our ideal process involves upfront analysis with interviews of participants and managers to better understand how the current plan is perceived and used.  This analysis also provides us with much needed information as to some of the barriers that we will face in trying to communicate the plan.  Then we need to think about how to break through the deluge of information that a typical sales representative is bombarded with.  We also work very hard at trying to craft words and visuals that explain the incentive plan in a very easy to understand manner – crafting multiple messages, charts and images.   The overall flow needs to be right or the impact is lost.  It is important to understand what medium the message is going to be presented in and where it comes in the continuum of communication touch points – is it the first message that is intended to generate excitement in a flash e-mail; the main presentation at the National meeting that needs to show how a sales rep can maximize their payout with this plan; or the detailed plan books that are the legal documents that contain all the minutia that an incentive plan has?    We then look at follow-up interviews and focus groups  to make sure the message got through and that we didn’t miss anything.  Throughout the year we want to communicate to the field using quick reminders and little teasers to keep the plan top of mind.

It is both an art and a science.

Which gets us to the title of this post. 

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Repost: We are NOT rational beings so why do we try to make rational incentive programs?

Take the blndfolds offTake off our rational blindfolds…

Dan Airely, Richard Thaley, Cass Sunstein, Daniel Kahneman, Ran Kivitz, and many more psychology and behavioral economics  researchers have shown that while we like to think of ourselves as rational, thinking human beings who are out to optimize our well being, we aren’t.

In fact, we are very far from it.

Sharon Begley at Newsweek wrote this interesting blog “The Limits of Reason” in it, she states, “But as psychologists have been documenting since the 1960s, humans are really, really bad at reasoning. It’s not just that we follow our emotions so often, in contexts from voting to ethics. No, even when we intend to deploy the full force of our rational faculties, we are often as ineffectual as eunuchs at an orgy.”

We see this all the time.  I wrote about it in my earlier post from today “5 Lessons from the Maze.”  We tend to act and behave in very non-rational ways.  There are lots of irrational types of behavior and thinking and lots of theory’s about them (i.e., Loss Aversion, Status Quo Bias, Gambler’s Fallacy, Hedonistic Bias, Anchoring, Reciprocity, Inequity Aversion, etc…).

Here is what is interesting – we tend to still design our incentive programs and our motivational strategies based on believing that people act in a rational manner. We create programs that have 10 different ways to earn, with multipliers, qualifiers, and ratchet effects.  We create programs with multiple components and factors that we think will drive specific behaviors and elicit particular performance results.  We believe we know what people want and use only extrinsic rewards to drive our results.

Ouch!

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You have more than me! Thoughts on fairness and 4 ways to make it better.

by Timblair

My four year old son was playing trains downstairs with two of his friends last week.  It was going great until one of the friends somehow ended up with 5 train cars while my son only had 4.  This sent my four year old into a tizzy in which he stomped out of the room and sulked on the floor in the kitchen.

“He has more than me.” was the response I got when I asked him what was wrong.

So trying to think quickly and forgetting that I was dealing with a four year old, I asked him if he had been having fun playing with four trains before he realized that his friend had five?  “Yes…but it’s not fair.  He won’t share and he has more.

My equally “way-too-old” for a four year old response was, “but right now you have none – which is more fun, playing with four or playing with none?” I thought I had him here….

He looked at me with a quizzical stare and held up his hand with all five fingers out – “Five!” he said in response with 100% conviction.  Ahh yes, I’m dealing with a four year old mind.

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Rethinking the 4-Drive Model of Employee Motivation

I have been touting the 4-Drive Model of Employee Motivation since I first read the 2008 Harvard Business Review article “Employee Motivation: A Powerful New Model” by  Nohria, , Groysberg, and Lee.   It is a powerful theory on human motivation in general, and in particular, employee motivation.  First presented in the 2002 book, “Driven: How Human Nature Shapes Our Choices” by Lawrence and Nohria, the model outlines four main drives of motivation.

At the Lantern Group, we’ve been working with this model for almost three years now.  We’ve posted on it several times in this blog (see 4-Drive Model here, Impact on Leaders here, and other info here, here, here, here and here for just a few examples).

It’s  good – but not perfect.

Right away we realized that it needed to be tweaked.

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Myths on communicating compensation plans…

Olivia Mitchell is one of the best experts on the web when it comes to presentations and public speaking.

She gets it.

I have been following her for over a year now and have been constantly amazed at the quality of her posts and her use of research to back up her statements.  In this post, she talks about three myths of public speaking – read it and let me know if you don’t change your mind after reading this.

After reading it, I started to think about how these myths often get in the way of effectively communicating incentive and compensation plans to people as well…

Myth #1: It’s not what you say, it’s how you say it

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Unmotivated and staying that way

Are there certain people who just can’t be motivated?  Are there Wally’s who render the motivation fairy powerless?  While I would like to believe that isn’t the case, I have to wonder…

Motivation is Personal

One of the core beliefs that I have is that motivation is very personal.  People are individuals with different motivational triggers and drives.  While there are basic underlying motivational drives (see 4-Drive Model), those drives impact each of us differently and create a unique motivational profile.

This implies that if one can understand that motivational profile of a person, one should be able to understand what to do to motivate them…right?

That is the implication…however I believe reality is a little different.

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The Story vs. The Analyst: How good communication gets ruined!

The largest part of our business is developing communications for sales incentive plans.  We create presentations, develop plan books, and design flash and other forms of communication. We got into this work by accident (one client many years ago asked us to create a “meeting in a box” for his IC plan – the rest, as they say, is history), but now we embrace it and have carved out a niche.  That niche is taking highly analytical and dry plan data and making it more interesting, more engaging, and more motivating for the sales representative.  Over the past 10 years we have done just this for thousands of plans and hundreds of thousands of participants.

We strive to tell a visual and emotive story with our work.  We work hard at capturing the vital information that is important to a sales person and making that information understandable and engaging.  I like to think we do a good job – when our clients allow us to.  You see, telling a story about incentive compensation and creating captivating visuals to convey that information isn’t easy.  It requires that we make choices about what information we share.  It means that we may have to simplify the message.  It may mean changing how we present and what types of communication that we use.  This, for some clients, is easier said than done.

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3 tips to increase the Drive to Acquire & Achieve

Four Drive Model

The first drive in the Four Drive Model of Employee Motivation is the drive to Acquire & Achieve. This is typically the drive that most organizations focus on when they are trying to find a lever to influence employee motivation.

However, companies often get too caught up in the financial aspects of this drive (i.e., how much of a raise can we give, what is our targeted incentive/bonus payout, etc…).

The following are three quick tips to help you think about how to impact this drive and increase employee motivation.

1. It’s not just about the money. It is so much more…This drive also includes the drive to achieve. Achievement takes on a number of different forms. Think about this in terms of grades – there is no monetary component to this, yet we are driven to try to get an A. In organizations, recognition is a very powerful motivator because it recognizes individuals or group achievement (kind of like a report card). Organizations can tap into the drive to achieve by focusing on ensuring that recognition is done correctly (e.g., timely, relevant, and appropriate to the effort/result).

Achievement is also about setting realistic goals that can be achieved. Short-term milestones are elements to use to help keep this drive up. One way to think about this is to think about the need to reinforce achievement on at minimum every 5 weeks. If you don’t have a milestones set up that fall within that time frame, you will tend to lose people. Make sure that you celebrate those milestones as well.  One thing that we are trying to get better at The Lantern Group is celebrating when a project or milestone is done. We get so caught up in the next project or next event that we don’t take the time to stop and congratulate ourselves on a job well done.

2. Add Some Perks. While we tend to focus on the big items like pay and bonuses with this drive, some of the more powerful levers that we get to pull are smaller “perks” such as office space, titles, parking spots, flexibility to work from home and other things that help satisfy the Achieve drive.

In addition, there are a number of small perks that also tie into the Acquire side of the equation, such as pizza Fridays, movie days, lunch seminars, discounts on classes, days off, foosball or pool in the office, employee of the month/quarter/year… You will notice that a number of these also contribute to the other three drives of Bond & Belong, Challenge & Comprehend, and Define & Defendsee also Four Drive Model

3. Improve your Total Rewards Communication. Too many times we’ve worked with companies that offer fantastic total rewards – not just their base salary, but their benefits, bonus programs, culture and recognition opportunities; however, no one at the company knows about these programs!  This is because they are outlined in a legal terms in a five different 50 page HR documents. It is vital that you market what you are providing to people in a way that will capture their attention and convey the big picture.That means that you have to overcome silos within the organization and market your Total Rewards as a comprehensive program that highlights the offerings from across the organization.

Also, make sure that your Total Reward communications are not just a one-time effort at the beginning of the year, but instead a campaign that highlights various aspects of your offering throughout the year and keeps people engaged and charged up.

While the concept behind these ideas is simple, the implementation of them isn’t always as easy. If you need help, please give us a call. We can help you work through the issues and improve your employee’s motivation!

Kurt

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