How to Build a Compensation Program (Part 3 – Implementation)

SUMMARY

You decided that you need to create, update, or realign your #Compensation Program. Now what? You know what you want it to do, but where to begin? That is what we will cover in this 4-part series. We will cover the steps needed to create the program, how to align it with your business goals, factors to consider, things that can go wrong, as well as Best Practices for developing your Compensation Program.

Previously, we went through an overview of the program, the Initiation Phase, and the Design Phase. If you haven’t seen them already, it makes sense to review that before continuing with this article. You can find them here:

https://www.dhirubhai.net/pulse/how-build-compensation-program-part-1-john-main

https://www.dhirubhai.net/pulse/how-build-compensation-program-part-2-design-john-main

We are going to deviate from our original plan and only cover the Implementation Phase in this article, due to its length. Next week, we will wrap up the series with the Rollout and Monitoring Phases.

In the first two parts we could talk in fairly generic terms. We are now in the final stages, where we have to get into a lot of detail. Every business is different – very different. It isn’t feasible to cover every possibility of every business type, so we are going to stick with simple examples for generic businesses for this section. Other business types will follow similar steps as described here, but they will be tailored to their needs.

IMPLEMENTATION

This is where we get really specific on your KPIs and data sources. Given that every business is different and uses different tools and data sources, I’ll have to be a bit generic here and provide the high-level steps.

TOOLS

Most companies have their KPIs spread out in multiple sources. E.g., an inventory system, a CRM system, an accounting system, End of Month Reports, etc. Business Intelligence (BI) Tools are wonderful for pulling data from these disparate systems together, but it can get complex quickly. It also requires a specific skill set and an intimate knowledge of the company’s data.

In the spirit of keeping it simple, don’t hesitate to put the initial, working versions of the Scorecard in a spreadsheet. This makes development and changes fast and easy.

Best Practice: If you use a spreadsheet, separate the data input, the formulas, and the final Scorecard on separate worksheets within the spreadsheet.

PHASED IMPLEMENTATION

If you are on a tight deadline or don’t have all of the data that you need to build the Scorecard, then consider a phased implementation.

For example, we discussed having to develop a quality program to balance quality with the time and cost KPIs. Similar to a Compensation Program, it takes time to develop a quality program, and the employee training aspect of a quality program should not be underestimated. Or, if you are implementing a new inventory system, there may be KPIs available in the future that are not available today with your current system.

We will talk more about this in the Rollout Phase, but it is ok to have a phased implementation, IF you define up front what will change, when it will change, and document and communicate it to the staff.

KPI MATRIX

We started the KPI Matrix in the Design Phase and added the data that we had at the time. Now, we are going to build it out further. From the Design Phase, we have the following fields in the matrix:

1.????KPI

2.????Goal Satisfied

3.????Is it tracked?

4.????How often is it tracked?

We are going to continue to add columns to the matrix to give us the information that we need in the calculation. In the interest of brevity, we are going to hit the highlights here. Depending on the KPIs and the metrics that are appropriate for your company, there may be more columns that we add.

• Target – Define the target for the KPI. The number is usually going to have a < or > in front of it. E.g., revenue >$1,000,000.
• Minimum for Compensation – This is the minimum amount which will be compensated. E.g., if we have a sliding scale for revenue and the goal is $1M, then maybe the minimum revenue for which employees are compensated is $900K. (See the Sliding Scales section below.)
• Maximum for Compensation – Conversely, this is the maximum amount which will be compensated. This happens if we have a KPI that shows diminishing returns once it reaches a certain level. E.g., Utilization rates in call centers usually don’t want to be higher than 80%. So, we may say that anything above 80% gets compensated as if it was 80%, because we don’t see a business benefit to a 90% Utilization rate.
• Component – The KPIs may be grouped by their level. There may be a Corporate component, a Department component, and an Individual component. This is just a way to organize the KPIs.
• Role – The role(s) that this KPI impacts. E.g., a revenue KPI likely impacts a sales person’s compensation, but might not impact a warehouse forklift operator’s.
• % Compensation – The percentage of the overall compensation that this KPI comprises. We discuss this more in the next section.

Again, there are many other columns that we could add for different industries, but these are the basic ones that most companies need.

CHOOSING KPIs AND WEIGHTS

There is the old project management adage: Cost, Time, and Quality… Pick Two. If you aren’t familiar with that, it says that you, as the project owner or stakeholder, can only have two of the three. E.g., if you want low cost and a fast implementation, then quality is going to suffer. If you want fast implementation and high quality, then the cost is going to be high. Etc.

The challenge with compensation programs is that you need all three. The cost has to be within a certain budget, the time that employees take to do their tasks has to remain low (or go lower), and you must maintain (or improve) the quality of your product or service.

Balanced Scorecards

What is the solution? Balanced Scorecards.

The more metrics-driven your industry is, the more important it is to properly balance the factors. I am not aware of an industry that has more metrics that Contact (Call) Centers. Just about EVERYTHING can be measured, given the right tools and technology. The 3 key metrics in that industry that representatives control directly through their actions are:

• Average Handle Time (time)
• First Call Resolution (cost – the cost goes up dramatically if the customer has to call back)
• Quality (was the agent polite, courteous, follow the process, etc.)

I have not yet seen a business that can totally ignore any of the 3 metrics. At some level, all 3 must be considered when calculating the compensation. They don’t necessarily have to be weighted equally, but all 3 should be part of the calculation. E.g., if you are in an industry, like wireless telecom, that focuses on minimizing customer churn, you are probably going to weight FCR and Quality more than AHT, because it is more important (and probably expensive) for you to lose a customer than to spend another minute or two on the phone with a customer. However, you can’t ignore AHT, because your agent cost will eventually increase to a point beyond what you are saving by reducing churn.

As we mentioned in the KPI section, you can also put caps on how much staff can earn on each factor. In this example, having a FCR rate above, say, 90%, does not provide any more financial benefit to the company, so the calculation caps the payout at 90%. That leaves the staff to focus on higher Quality and lower AHT to earn a higher payout.

Sliding Scales

As you are working through the calculations, consider sliding scales for most KPIs. I.e., we tend to want to avoid hard cutoffs to avoid defeatist attitudes with the staff. “The goal is $1M in revenue this month, but we have $750K with 3 days left. We aren’t going to hit it, so let’s sandbag and save the revenue for next month.” That is probably not the approach you want the staff to have. One way to fix it is to compensate the staff some for hitting $800K. E.g., if $1M is the goal, then pay 25% of the payout for hitting $800K, 50% for $900K, etc. Similarly, you can put sliding scales for exceeding targets, where appropriate, but be careful that you run scenarios, while testing the calculations, to make sure that you don’t get unexpectedly high (out of budget) payouts.

CALCULATION WORKSHEET

This is where it all comes together. We have the KPIs, we have the data, we have the weights, now it is time to put it in a worksheet and do some math.

The Tool

As we mentioned earlier, it is best to get in an Agile mindset with a simple tool and perform multiple iterations to perfect the program.

That is most often facilitated by a simple spreadsheet. The end goal may be to have program in a BI tool, but that generally slow things down during this step.

Create a worksheet with the information from the KPI Matrix.

Create a second, separate worksheet that has the calculations. This is obviously a very detailed step, which is highly dependent on the industry and organization, so we won’t chase a lot of different trails here. However, there are a few guidelines to follow:

• Do any calculations at the corporate level first. They are generally simpler and usually come from someone else. E.g., revenue or gross profit come from the Finance department.
• Then, do any team- or department- level calculations that are not a rollup of the individual calculations. (We’ll cover that in one minute.)
• Next, do the individual calculations. These are usually the most complex. Organize the factors so that an individual can clearly see and understand how each KPI contributed to the payout.

Best Practice: Show the KPI value, the weight, and the payout for each KPI. It is challenging to do this in an organized manner, but it is key to getting buy-in and showing transparency to avoid some of the pitfalls that we discussed in the Design section.

• Finally, roll up the individual calculations into team or department level summaries.?These usually aren’t part of the payout, but they are very useful in comparing the performance of team members and determining team-level budgets for compensation.

As you go through the calculations and test them, it is common to find things that don’t change the payout the way you expected them to change it. As you are adjusting weights, mins, maxs, and targets, make sure to go back and update the documentation in previous steps. One of the worst things that can happen is when the documentation doesn’t match what comes out on paychecks.

Finally, if the calculation worksheet looks cluttered and confusing, create a third worksheet that is organized and presents the data on the calculation worksheet in a clear and concise way.

Once you are confident with the calculations in the spreadsheet, implement them in the BI tool of choice. We talked about it in the Design section. Automate as much of this as possible.

LOGISTICS

Now that the calculations are finished, there are only a few things left to do before we are ready to roll this out.

Define who is responsible for each step, the dependencies for each step, and the timing around those dependencies. Of course this, too, is highly dependent on the organization, but here is a very generic, simple example for a warehousing company that pays a monthly bonus based on revenue, overtime (lack of it), and on-time shipping.

DOCUMENTATION

Staff Guide

This is a document, usually a few pages with screenshots, that provides an overview of the program to the staff. It includes information on eligibility, the KPIs that are used, the calculations, when the payout is calculated, and when the payout hits the staffs’ checks.

In addition to explaining the program, make sure to explain how the staff can monitor the progress throughout the payout period to see how they are doing. Revenue may or may not be easy to track on a daily or weekly basis, and gross profit is difficult to track on a granular basis. Be transparent where you can with that type of data.

However, it is important to provide as granular information as possible for the KPIs that are part of the individual’s calculation. Again, the call center environment is an easy example. Average Handle Time can be calculated easily on a daily basis, so provide access to that data to the staff. They should have a general understanding of their progress and what to expect for at least the individual portion of the payout throughout the payout period.

Administrator Guide

This contains everything in the Staff Guide, plus tactical information on who, how, and when the tasks for preparing the reports are done, approving the payout, and getting the payout into the staffs’ checks.

PROGRAM REVIEW

Remember that conversation about having a Labor Attorney or local HR Professional review the program? This is your last chance to do that, so take advantage of their expertise in your local labor laws – especially, if you didn’t do it in the Design Phase.

I had a friend, who is a business attorney, tell me once, the absolute worst conversation that he has with clients is when they ask him to review a document that they just signed. Don’t be THAT guy or girl!

ARTIFACTS

Administrator’s Guide. Documentation on the goals, KPIs, calculations, roles & responsibilities, and timing of the program.

Staff Guide. Documentation of the goals, KPIs, calculations, and timing of the program, covering only the details relevant to the staff.

KPI Matrix. The completed KPI Matrix as described in this section.

UP NEXT

This phase was about pulling it all together and getting down to some numbers. We will pause here to take time to review the payout for good times and bad times, as that is often where things do not work as we intended. The next phases are the Rollout and Monitoring Phases, where we will complete the development of the Compensation Program. You can find that article here:

How to Build a Compensation Program (Part 4 - Rollout & Monitoring)

If you are interested in the remainder of this series, please follow us on LinkedIn.

John Main, Founder, COO, Principal

Inner Dynamics Executive Advisors, LLC.

If you would like to discuss your company’s Compensation Program, please message us in LinkedIn.

Also, watch maven.com for our upcoming training series on Compensation Programs.

BACKGROUND

John has developed, overhauled, or updated over a dozen Compensation Programs in his career, both in his own company and corporate organizations, as well as for clients in other environments, like SaaS, warehousing, and call centers.

With a focus on Operations, Strategy, Cash Flow, Integrations, and Technology, John is an entrepreneur, COO, and a Principal at ExecHQ, an executive advisory firm that serves the needs of clients ranging in size from startups to mid-market private companies, non-profits, family offices, private equity firms, venture capital, and multi-generational businesses.

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