Last issue, I talked about
the process of creating a profit based incentive plan. This issue, I give a case study of an
plan created for a real client. But before
getting into the specifics of the plan let's review the principles.
- Any incentive plan not based on increased
profit is a gift. A good incentive plan
always results in increased profit for the company. It is from that increased profit that you fund
need to know your costs in order to calculate the increase in profit. Your real cost isn't usually
the face value number. There are all of the hidden costs as well.
focus on the small stuff. The 80/20 rule
applies universally. Identify the items
that have the highest bang for your buck.
small and don't promise too much until you have well documented benchmarks. You can always increase the payout later if
the real profits justify it. But it is very
tough to reel in a system that isn't producing the profits to support it
without disappointing your people.
- Keep it simple but not simplistic. If
the plan is too complicated, your people will think you are playing them. If it is too simple, they will figure out how
to game the system.
So with this groundwork, let's
look at the case study. The client was a
roofing contractor. If you think of
his business, he sold fixed price projects - say a new roof for
$25,000. But his employees were paid
by the hour. What was the incentive for
the employees to work quickly and to move on to the next job? NONE!
At best, the contractor could watch them like
a hawk and badger them to work harder.
But he always
had more than one job going
and he couldn't watch them
simultaneously. When he was not around to
cajole, the effort level had a tendency to drop. He had a team leader on each job but that
person never carries the weight of the owner with his crew. So how do you get the team to perform when
the owner isn't watching? We created an
incentive plan that included all five of the principles above.
Every fixed price project
must include a contingency factor because Murphy's Law is universal. That contingency factor became the profit source
for the incentive plan. It they didn't
use it, it is profit to the bottom line.
If the project came in on time and on budget, then the contingency fund
was used to fund the team that performed the work. The business owner needed to know what his
true costs were in order to know what the contingency fund was. That ground work was done in advance.
Since labor costs are the
single biggest variable cost, it did represent the biggest bang in terms of
profit impact. Starting small meant that
the costs were conservatively calculated.
As a profit sharing program, the owner got his cut of the pie first and
that cut also took into account G&A costs as well.
The system was simple. Each job had a labor hour budget. If they met or beat the budget, the plan
was funded with the employee portion of the cost savings. But here is where the plan addressed the "gaming"
issue. You can always finish faster if
you do a slipshod job. The trouble with
a roof is you don't know if it leaks until the first big rain. Compounding the problem is the fact that
where the water appears in the house usually is not where it came in. Finding the
leak and fixing it is non-trivial. To combat this problem, the profit sharing
fund is set aside for 90 days to make sure that the team had done a quality
job. If a leak was found, the repair
crew was paid out of that fund. This was
a huge incentive to get it done right the first time.
This system had a number
of great benefits. One of which was that the teams
were self-policing. The other team
members would not put up with slackers.
a 2 hour lunch break. The other team members kept
that from happening. Lunch breaks actually turned
out to be shorter
than allowed. This
less time the job took,
the bigger the pie. They worked together
as a team to get the job done quickly and quality was insured.
I don't have the final
numbers on the impact this plan had on the business. But early indications showed that it
accomplished all that the owner had hoped for and more. The 80/20 rule tells us that once you have
solved one problem, you now have the 80/20 rule applying to what remains. The next issue for him to attack was
materials costs. But that is another incentive
Can you see how an incentive
plan might improve your business? I
would be happy to help you design it.
What do you think?
Let me know at
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