Case 4: The Best-Laid Incentive
Plans*

Hiram Phillips finished tying his bow tie and
glanced in the mirror. Frowning, he tugged on the left side, then caught sight
of his watch in the mirror. Time to get going. Moments later, he was down the
stairs, whistling cheerfully and heading toward the coffeemaker.
“You’re in a good mood,” his wife said, looking
up from the newspaper and smiling. “What’s that tune? ‘Accentuate the Positive’?”
“Well done!” Hiram called out. “You know, I do
believe you’re picking up some pop culture in spite of yourself.” It was a
running joke with them. She was a classically trained cellist and on the board
of the local symphony. He was the one with the Sinatra and Bing Crosby albums
and the taste for standards. “You’re getting better at naming that tune.”
“Or else you’re getting better at whistling.”
She looked over her reading glasses and met his eye. They let a beat pass
before they said in unison: “Naaah.” Then, with a wink, Hiram shrugged on his
trench coat, grabbed his travel mug, and went out the door.

Fat
and Happy

It was true. Hiram Phillips, CFO and chief
administrative officer of Rainbarrel Products, a diversified consumer-durables
manufacturer, was in a particularly good mood. He was heading into a breakfast
meeting that would bring nothing but good news. Sally Hamilton and Frank
Ormondy from Felding & Company would no doubt already be at the office when
he arrived and would have with them the all-important numbers—the statistics
that would demonstrate the positive results of the performance management
system he’d put in place a year ago. Hiram had already seen many of the figures
in bits and pieces. He’d retained the consultants to establish baselines on the
metrics he wanted to watch and had seen various interim reports from them
since. But today’s meeting would be the impressive summation capping off a
year’s worth of effort. Merging into the congestion of Route 45, he thought
about the upbeat presentation he would spend the rest of the morning preparing
for tomorrow’s meeting of the corporate executive council.
It was obvious enough what his introduction
should be. He would start at the beginning—or, anyway, his own beginning at
Rainbarrel Products a year ago. At the time, the company had just come off a
couple of awful quarters. It wasn’t alone. The sudden slowdown in consumer
spending, after a decade-long boom, had taken the whole industry by surprise.
But what had quickly become clear was that Rainbarrel was adjusting to the new
reality far less rapidly than its biggest competitors.
Keith Randall, CEO of Rainbarrel, was known for
being an inspiring leader who focused on innovation. Even outside the industry,
he had a name as a marketing visionary. But over the course of the ten-year
economic boom, he had allowed his organization to become a little lax.
Take corporate budgeting. Hiram still smiled
when he recalled his first day of interviews with Rainbarrel’s executives. It
immediately became obvious that the place had no budget integrity whatsoever.
One unit head had said outright, “Look, none of us fights very hard at budget
time, because after three or four months, nobody looks at the budget anyway.”
Barely concealing his shock, Hiram asked how that could be; what did they look
at, then? The answer was that they operated according to one simple rule: “If
it’s a good idea, we say yes to it. If it’s a bad idea, we say no.”
“And what happens,” Hiram had pressed, “when you
run out of money halfway through the year?” The fellow rubbed his chin and took
a moment to think before answering. “I guess we’ve always run out of good ideas
before we’ve run out of money.” Unbelievable!
“Fat and happy” was how Hiram characterized
Rainbarrel in a conversation with the headhunter who had recruited him. Of
course, he wouldn’t use those words in the CEC meeting. That would sound too
disparaging. In fact, he’d quickly fallen in love with Rainbarrel and the
opportunities it presented. Here was a company that had the potential for
greatness but that was held back by a lack of discipline. It was like a
racehorse that had the potential to be a Secretariat but lacked a structured
training regimen. Or a Ferrari engine that needed the touch of an expert
mechanic to get it back in trim. In other words, the only thing Rainbarrel was
missing was what someone like Hiram Phillips could bring to the table. The
allure was irresistible; this was the assignment that would define his career.
And now, a year later, he was ready to declare a turnaround.

Lean
and Mean

Sure
enough, as Hiram steered toward the entrance to the parking garage, he saw
Sally and Frank in a visitor parking space, pulling their bulky file bags out
of the trunk of Sally’s sedan. He caught up to them at the security checkpoint
in the lobby and took a heavy satchel from Sally’s hand.
Moments later, they were at a conference table, each of them
poring over a copy of the consultants’ spiral-bound report. “This is great,”
Hiram said. “I can hand this out just as it is. But what I want to do while
you’re here is C7C8to really nail down what the highlights are. I have the floor for
40 minutes, but I guess I’d better leave ten for questions. There’s no way I
can plow through all of this.”
“If
I were you,” Sally advised, “I would lead off with the best numbers. I mean,
none of them are bad. You hit practically every target. But some of these,
where you even exceeded the stretch goal. …”
Hiram
glanced at the line Sally was underscoring with her fingernail. It was an
impressive achievement: a reduction in labor costs. This had been one of the
first moves he’d made, and he’d tried to do it gently. He’d come up with the
idea of identifying the bottom quartile of performers throughout the company
and offering them fairly generous buyout packages. But when that hadn’t
attracted enough takers, he’d gone the surer route. He’d imposed an
across-the-board headcount reduction of 10% on all the units. In that round,
the affected people were given no financial assistance beyond the normal
severance.
“It
made a big difference,” he nodded. “But it wasn’t exactly the world’s most
popular move.” Hiram was well aware that a certain segment of the Rainbarrel
workforce currently referred to him as “Fire ’em.” He pointed to another number
on the spreadsheet. “Now, that one tells a happier story: lower costs as a
result of higher productivity.”
“And
better customer service to boot,” Frank chimed in. They were talking about the
transformation of Rainbarrel’s call center—where phone representatives took
orders and handled questions and complaints from both trade and retail
customers. The spreadsheet indicated a dramatic uptick in productivity: The
number of calls each service rep was handling per day had gone up 50%. A year
earlier, reps were spending up to six minutes per call, whereas now the average
was less than four minutes. “I guess you decided to go for that new automated
switching system?” Frank asked.
“No!”
Hiram answered. “That’s the beauty of it. We got that improvement without any
capital investment. You know what we did? We just announced the new targets,
let everyone know we were going to monitor them, and put the names of the worst
offenders on a great big ‘wall of shame’ right outside the cafeteria. Never
underestimate the power of peer pressure!”
Sally,
meanwhile, was already circling another banner achievement: an increase in
on-time shipments. “You should talk about this, given that it’s something that
wasn’t even being watched before you came.”
It
was true. As much as Rainbarrel liked to emphasize customer service in its
values and mission statement, no reliable metric had been in place to track it.
And getting a metric in place hadn’t been as straightforward as it might’ve
seemed—people had haggled about what constituted “on time” and even what
constituted “shipped.” Finally, Hiram had put his foot down and insisted on the
most objective of measures. On time meant when the goods were promised to ship.
And nothing was counted as shipped till it left company property. Period. “And
once again,” Hiram announced, “not a dollar of capital expenditure. I simply
let people know that, from now on, if they made commitments and didn’t keep
them, we’d have their number.”
“Seems
to have done the trick,” Sally observed. “The percentage of goods shipped by
promise date has gone up steadily for the last six months. It’s now at 92%.”
Scanning
the report, Hiram noticed another huge percentage gain, but he couldn’t recall
what the acronym stood for. “What’s this? Looks like a good one: a 50% cost
reduction?”
Sally
studied the item. “Oh, that. It’s a pretty small change, actually. Remember we
separated out the commissions on sales to employees?” It came back to Hiram
immediately. Rainbarrel had a policy that allowed current and retired employees
to buy products at a substantial discount. But the salespeople who served them
earned commissions based on the full retail value, not the actual price paid.
So, in effect, employee purchases were jacking up the commission expenses.
Hiram had created a new policy in which the commission reflected the actual
purchase price. On its own, the change didn’t amount to a lot, but it reminded
Hiram of a larger point he wanted to make in his presentation: the importance
of straightforward rules—and rewards—in driving superior performance.
“I
know you guys don’t have impact data for me, but I’m definitely going to talk
about the changes to the commission structure and sales incentives. There’s no
question they must be making a difference.”
“Right,”
Sally nodded. “A classic case of ‘keep it simple,’ isn’t it?” She turned to
Frank to explain. “The old way they calculated commissions was by using this
really complicated formula that factored in, I can’t remember, at least five
different things.”
“Including
sales, I hope?” Frank smirked.
“I’m
still not sure!” Hiram answered. “No, seriously, sales were the most important
single variable, but they also mixed in all kinds of targets around mentoring,
prospecting new clients, even keeping the account information current. It was
all way too subjective, and salespeople were getting very mixed signals. I just
clarified the message so they don’t have to wonder what they’re getting paid
for. Same with the sales contests. It’s simple now: If you sell the most
product in a given quarter, you win.”
With
Sally and Frank nodding enthusiastically, Hiram again looked down at the
report. Row after row of numbers attested to Rainbarrel’s improved performance.
It wouldn’t be easy to choose the rest of the highlights, but what a problem to
have! He invited the consultants to weigh in again and leaned back to bask in
the superlatives. And his smile grew wider.

Cause
for Concern

The next morning, a
well-rested Hiram Phillips strode into the building, flashed his ID badge at
Charlie, the guard, and joined the throng in the lobby. In the crowd waiting
for the elevator, he recognized two young women from Rainbarrel, lattes in hand
and headphones around their necks. One was grimacing melodramatically as she
turned to her C8C9friend. “I’m so dreading getting to my desk,”
she said. “Right when I was leaving last night, an e-mail showed up from the
buyer at Sullivan. I just know it’s going to be some big, hairy problem to sort
out. I couldn’t bring myself to open it, with the day I’d had. But I’m going to
be sweating it today trying to respond by five o’clock. I can’t rack up any
more late responses, or my bonus is seriously history.”
Her friend had slung her backpack onto the floor
and was rooting through it, barely listening. But she glanced up to set her
friend straight in the most casual way. “No, see, all they check is whether you
responded to an e-mail within 24 hours of opening it. So that’s the key. Just
don’t open it. You know, till you’ve got time to deal with it.”
Then a belltone announced the arrival of the elevator,
and they were gone.

More Cause for Concern

An
hour later, Keith Randall was calling to order the quarterly meeting of the
corporate executive council. First, he said, the group would hear the results
of the annual employee survey, courtesy of human resources VP Lew Hart. Next
would come a demonstration by the chief marketing officer of a practice the CEO
hoped to incorporate into all future meetings. It was a “quick market
intelligence,” or QMI, scan, engaging a few of Rainbarrel’s valued customers in
a prearranged—but not predigested—conference call, to collect raw data on
customer service concerns and ideas. “And finally,” Keith concluded, “Hiram’s
going to give us some very good news about cost reductions and operating
efficiencies, all due to the changes he’s designed and implemented this past
year.”
Hiram
nodded to acknowledge the compliment. He heard little of the next ten minutes’
proceedings, thinking instead about how he should phrase certain points for
maximum effect. Lew Hart had lost him in the first moments of his presentation
on the “people survey” by beginning with an overview of “purpose, methodology,
and historical trends.” Deadly.
It
was the phrase “mindlessly counting patents” that finally turned Hiram’s
attention back to his colleague. Lew, it seemed, was now into the “findings”
section of his remarks. Hiram pieced together that he was reporting on an
unprecedented level of negativity in the responses from Rainbarrel’s R&D
department and was quoting the complaints people had scribbled on their
surveys. “Another one put it this way,” Lew said. “We’re now highly focused on
who’s getting the most patents, who’s getting the most copyrights, who’s
submitting the most grant proposals, etc. But are we more creative? It’s not
that simple.”
“You
know,” Rainbarrel’s chief counsel noted, “I have thought lately that we’re
filing for a lot of patents for products that will never be commercially
viable.”
“But
the thing that’s really got these guys frustrated seems to be their ‘Innovation
X’ project,” Lew continued. “They’re all saying it’s the best thing since
sliced bread, a generational leap on the product line, but they’re getting no
uptake.”
Eyes
in the room turned to the products division president, who promptly threw up
his hands. “What can I say, gang? We never expected that breakthrough to happen
in this fiscal year. It’s not in the budget to bring it to market.”
Lew
Hart silenced the rising voices, reminding the group he had more findings to
share. Unfortunately, it didn’t get much better. Both current and retired
employees were complaining about being treated poorly by sales personnel when
they sought to place orders or obtain information about company products. There
was a lot of residual unhappiness about the layoffs, and not simply because those
who remained had more work to do. Some people had noted that, because the
reduction was based on headcount, not costs, managers had tended to fire
low-level people, crippling the company without saving much money. And because
the reduction was across the board, the highest performing departments had been
forced to lay off some of the company’s best employees. Others had heard about
inequities in the severance deals: “As far as I can tell, we gave our lowest
performers a better package than our good ones,” he quoted one employee as
saying.
And
then there was a chorus of complaints from the sales organization. “No role
models.” “No mentoring.” “No chance to pick the veterans’ brains.” “No
knowledge sharing about accounts.” More than ever, salespeople were
dissatisfied with their territories and clamoring for the more affluent,
high-volume districts. “It didn’t help that all the sales-contest winners this
year were from places like Scarsdale, Shaker Heights, and Beverly Hills,” a
salesperson was quoted as saying. Lew concluded with a promise to look further
into the apparent decline in morale to determine whether it was an aberration.

The
Ugly Truth

But if the group thought the mood would improve
in the meeting’s next segment—the QMI chat with the folks at longtime customer
Brenton Brothers—they soon found out otherwise. Booming out of the speakerphone
in the middle of the table came the Southern-tinged voices of Billy Brenton and
three of his employees representing various parts of his organization.
“What’s up with your shipping department?” Billy
called out. “My people are telling me it’s taking forever to get the stock
replenished.”
Hiram sat up straight, then leaned toward the
speakerphone. “Excuse me, Mr. Brenton. This is Hiram Phillips—I don’t believe we’ve
met. But are you saying we are not shipping by our promise date?”
A cough—or was it a guffaw?—came back across the
wire. “Well, son. Let me tell you about that. First of all, what y’all promise
is not always what we are saying we require—and what we believe we deserve.
Annie, isn’t that right?”
“Yes, Mr. Brenton,” said the buyer. “In some
cases, I’ve been told to take a late date or otherwise forgo the purchase. That
becomes the promise date, I guess, but it’s not the date I asked for.”
C9C10
“And second,” Billy continued, “I can’t figure
out how you fellas define ‘shipped.’ We were told last Tuesday an order had
been shipped, and come to find out, the stuff was sitting on a railroad siding
across the street from your plant.”
“That’s an important order for us,” another
Brenton voice piped up. “I sent an e-mail to try to sort it out, but I haven’t
heard back about it.” Hiram winced, recalling the conversation in the lobby
that morning. The voice persisted: “I thought that might be the better way to
contact your service people these days? They always seem in such an all-fired
hurry to get off the phone when I call. Sometimes it takes two or three calls
to get something squared away.”
The call didn’t end there—a few more
shortcomings were discussed. Then Keith Randall, to his credit, pulled the
conversation onto more positive ground by reaffirming the great regard
Rainbarrel had for Brenton Brothers and the mutual value of that enduring
relationship. Promises were made and hearty thanks extended for the frank
feedback. Meanwhile, Hiram felt the eyes of his colleagues on him. Finally, the
call ended and the CEO announced that he, for one, needed a break before the
last agenda item.

Dazed
and Confused

Hiram considered following his boss out of the
room and asking him to table the whole discussion of the new metrics and
incentives. The climate was suddenly bad for the news he had looked forward to
sharing. But he knew that delaying the discussion would be weak and wrong.
After all, he had plenty of evidence to show he was on the right track. The
problems the group had just been hearing about were side effects, but surely
they didn’t outweigh the cure.
He moved to the side table and poured a glass of
ice water, then leaned against the wall to collect his thoughts. Perhaps he
should reframe his opening comments in light of the employee and customer
feedback. As he considered how he might do so, Keith Randall appeared at his
side.
“Looks like we have our work cut out for us, eh,
Hiram?” he said quietly—and charitably enough. “Some of those metrics taking
hold, um, a little too strongly?” Hiram started to object but saw the
seriousness in his boss’s eyes.
He lifted the stack of reports Felding &
Company had prepared for him and turned to the conference table. “Well, I guess
that’s something for the group to talk about.”Should Rainbarrel revisit its approach to
performance management?Read the case study and answer 2 questions above for a posting in Discussion. Does not need cover page or anything. So That is the most I will pay as is easy but have a severe Migraine




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