Right Incentive

“Best Buy says it will change its employee compensation model to revolve around customer service and business goals.”

Best Buy recently announced that it lost $1.7 billion in its Q4 ending on March 3rd.   The Minneapolis-based electronics retailer also revealed its plans for ambitious cost reductions and US store closings associated with its “Transformation Strategy”.  The earnings announcement highlights that significant restructuring charges have already impacted the company’s results.

Did Best Buy’s employee compensation model adversely affect its operations?  While we will leave that question for Best Buy to answer, the implication seems to be just that.   As reported by CE Pro, the header statement above may speak volumes and definitely provides for transition to our latest beyond-the-bottom line destination. 

From Clear to Obvious 

Let’s start with clear and work toward obvious.  What business in today’s still-brutal economy, let alone within the highly competitive arena of consumer electronics, can afford to pay its employees in a way that doesn’t encourage the right behaviors with respect to customer service and business goal attainment?  Answer: one that is extremely lucky or one that will not be around for very long.

It probably goes as far back as the stone ages that employees will tend to do things today that they understand will result in future rewards.  So, it becomes extremely critical for smart business leaders to identify the right behaviors and link them to the organization’s business objectives.  Conversely, companies who identify the wrong behaviors or struggle with strategic articulation may be headed for a whole heap of trouble.

Delicate Balance

Take sales and profits for example.  Both are without question good things, right?   However, try either one without the other and things can head the wrong way fast.

On the one hand, too much focus on rewarding revenue generation can spell big trouble.  It’s not too hard to imagine a scenario where sales associates are heavily commissioned on their sales while the bottom line suffers.  Absent a margin-based metric as a governor on this type of incentive, discounting can seriously erode profitability.

On the other hand, let the bean-counters rule with too much of an iron fist, and a company can wind up turning away all but the most enormously profitable of business opportunities.   Danger looms here.  Great profit margins on low sales can lead to maintaining a company address somewhere South of Breakeven Boulevard.

Marathon vs. Sprint

It becomes just as important for the Board and top management to determine for employees whether the race will be a marathon or a series of sprints.  Will consistent results over the long-term be rewarded?  Or is it a win at all costs mentality that is rewarded with each quarterly close?

It is well documented that excessive focus on short-term results can incent the wrong behavior. Here’s one classic example.  In its March issue, CFO Magazine reports a view that the Big 3 automakers may have several years ago intentionally over-produced and applied absorption accounting to store production costs in balance sheet parking lots.  Short-term incentives at work again?  Hard to tell for sure.  Gets kind of dark along these streets sometimes.

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About Thomas W. Smith
Bizsinc - Bringing Business to Life

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