Cafe Classic: Is Your Incentive Plan a Strategy Killer?

Are your incentive plans designed to support or defeat your organization's business strategy?

It's a fair question.  And a passage about tradeoffs from Clayton Christensen's book How Will You Measure Your Life? illustrates just how fair -- and realistic -- a question it can be.  In the passage, he shares the story of SonoSite, founded more than a decade ago to make handheld ultrasound equipment -- equipment positioned to make the diagnostic advantages of ultrasound technology affordable and convenient enough for primary care providers to use in their practices.  The company had two product families: it's principal product, the Titan, which was about the size of a laptop computer, and a smaller, more portable and lower priced product called iLook.  While Titan was the more profitable product, the iLook was the more disruptive and, ultimately, more promising one.

Excited about the possibilities of the smaller product, which had generated thousands of leads even before being formally launched, Kevin Goodwin, SonoSite's CEO, accompanied one of the company's top salespeople on a sales call in order to see how customers reacted to the iLook.  The results are instructive.

The salesman sat down with the customer and proceeded to sell the Titan -- the laptop ultrasound.  He didn't even pull the iLook handheld out of his bag.  After fifteen minutes, Goodwin decided to intervene.

"Tell them about the iLook," Goodwin prompted the salesman.  But he was completely ignored.  The salesman continued to extol the virtues of the Titan.  Goodwin waited a few minutes, then leaned over again.  "Take the handheld ultrasound machine out of your bag!" he insisted.  Again, the salesman completely ignored him. Goodwin asked one of his best salespeople three times to sell the iLook -- in front of the customer.  Each time, he was completely dismissed.

What was going on? The CEO of the company couldn't persuade the employee to do as he asked?

The salesman wasn't deliberately trying to defy Goodwin, In fact, he was doing exactly what the company wanted him to do -- sell the product that provided the highest return.

As Christensen notes, the CEO thought he was providing clear instructions to the salesman, but the sales compensation system was shouting the opposite into the employee's other ear.

This problem, which Christensen explored deeply in his earlier classic The Innovator's Dilemma, illustrates the tensions that surround strategy and innovation, when the things that make sense for the long term make no sense for the short term, when the right decision can seem like the wrong one, and when it can appear that "the most important product to sell makes little sense to sell at all."

For those of us who work in the HR and rewards fields, this dilemma is one we need to pay particular attention to in incentive design -- and not just for salespeople.  We need to be sufficiently well-informed about business strategy and objectives that we can identify the tensions and challenges that are inevitably present, and then we must figure out how to bring some sense of balance to the performance levers we tie to incentive awards.  I had this conversation recently with leaders of a client company pushing for growth into new product and customer markets, where another advisor was making a strong case for focusing management incentives solely on net income.  While net income (or comparable measures of profitability) can and typically does play a critical role in plan design, tying awards to net income performance alone can tilt choices and decisions toward legacy products, customers and services in situations where an organization's long term survival may demand moving beyond its legacy.

While incentive plans don't (and certainly shouldn't) manage or execute strategy for us, it's our job to ensure that there is sufficient balance in plan measures to alert employees to the challenges and tradeoffs the business faces in executing its strategy and to communicate the need for balance in their choices and decisions. 

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time.

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