This is a cautionary tale of what can happen when a senior leader plows ahead with a bad compensation idea, and other leaders, including the HR Business Partner do not push back.
Earlier in my career, I worked for a large regional convenience store chain. In addition to my duties as a division HR manager responsible for supporting several hundred stores, I wore the additional hat of corporate compensation lead. In that compensatin role, I administered the organization's quarterly bonus program applicable to the entire store management and sales management teams.
As is the case with any well-designed bonus plan, the bonus was metric-driven and tied to key performance indicators related to store performance, and was intended to drive performance in support of the organization's goals. Developing the bonus plan for the upcoming fiscal year started with several meetings with our CEO, a veteran of the business and the industry. After reviewing the organization's performance in the current year, he became convinced the key to building the bottom line was sales growth. If we could incentivize our store managers and sales managers to drive sales, the higher sales volumes would certainly lead to higher profits...or so he believed.
As we began developing the details, I created versions of the plan that incorporated both sales targets, budgets, and profitability performance factors. After all, a balanced approach often works more effectively in achieving results. At least that seemed to make sense to me. Our CEO would have none of it. He insisted on a bonus plan 100% tied to meeting or exceeding sales goals. As a result, we designed the plan to his specifications and rolled it out to the field.
So, what happened? Well, the plan worked splendidly in achieving the desired performance. The first two quarters of the year were record-setting in terms of sales, and the sales management team exceeded the CEO's expectations by a long shot, with maximum bonuses paid in both quarters. So, was the CEO giving everyone high fives at the end of the second quarter? No. He rescinded the bonus plan for the remainder of the year and paid out not another dollar in bonuses.
Why did we shut down a bonus plan that exceeded expectations for sales growth? Because as anyone with a background in retail knows, you can typically sell as much as you want if you drop your prices enough. Our sales managers knew that, and worked diligently to reduce prices enough to hit every sales target. They had no incentive to watch margins and optimize volumes. Unfortunately, that meant our margins went into the tank and the company actually lost money in the first two quarters of the year.
What did we learn from that painful experience?