Performance Incentives For Your Managers - Doing it Right.
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Our Business Growth Model seminar and video incorporates manager compensation as a tool to facilitate business growth. Getting the compensation right for each individual, however, is key to making your business growth plans work. You can’t be everywhere at the same time, so getting someone in who you can trust over time will require understanding what it will take to motivate him/her to do that which you trust him/ her to do over (hopefully) the long-term.
Whether you are a one-unit owner aspiring to own multiple businesses, or are already operating multiple businesses, this article presents practical information on assessing and providing compensation models that work for different individuals.
Every owner planning to insert managers into their businesses and then backing away from the day-to –day operations must have an intimate knowledge of that individuals’ motivating factors that will compel him/her to operate the store optimally, strive to meet performance metrics, and desire to maintain positive customer relationships. The individual should understand the PR benefits to customer service both in times when the customer is happy and when the customer is for some reason unsatisfied. In each case, how the individual performs should result in a happy, returning customer.
So with so many different personalities out there, how do you assess the best compensation model for your manager(s)?
All managers have needs or desires, and it’s up to you, the owner, to establish what those needs/desires are and determine, if it’s reasonable to do so, how to utilize those needs/desires to sustain his/her motivation. For most, monetary compensation will keep them motivated, but this is not the case for all. Others will appreciate a free dinner, or an expenses paid trip. The answer to what motivates individuals is as diverse as the individuals themselves.
There are, however, some accepted compensation models that are widely used, and that have a causal motivating effect, if applied consistently. The most popular one we’ve seen in practice incorporates short-term (ie: yearly) revenue increases with net income levels.
In other words, performance bonuses are provided to the manager upon a percentage increase in revenues, but that bonus is tied to net income levels. This compels managers to monitor costs as well as revenues, and also forces the managers to assess to probability of success of a marketing effort given its’ cost.
If revenue levels are realized, but net income levels fall, the bonus paid out is less on a percentage basis – and at times is zero - than it would be had the manager realized net income goals to accompany the increased revenues. The amount paid out in this scenario is based on the reasons for the net income decrease. If a marketing campaign has substantial up-front costs that decrease the net income, but that will not be repeated in future years, then rewards can be given for the revenue increase with the understanding that increased net income will follow next year. If managers disregard expense control, or try to increase revenue without considering the cost of doing so, then compensation may be withheld,
Owners successful in creating a profitable business group invariably put marketing responsibility in the hands of their managers. For those managers who thrive on autonomy, this is a winning formula, but not for those who just want an operations job and who want to put in their hours and go home. In the latter case, the possibility exists that the wrong person is managing the store. Performance bonuses in part compensate those managers for their additional hours worked.
The ultimate purpose of compensation models for your managers is to assist in attracting and retaining top performers, and motivating them to achieve individual and business-wide performance objectives consistent with creating value and growth for the business.
Nicholas Kilpatrick is a partner at the accounting firm of Burgess Kilpatrick in Vancouver, B.C. He concentrates his practice on assisting business owners with accounting services, tax and estate planning and overall business development.