Our previous publication on this topic contained THE MOST HARMFUL advice, describing fatal and nearly fatal errors in building a FISP.
There also exist less dangerous errors, less-than-mortal sins, so to say, that drastically reduce the useful effect of FISP implementation, nevertheless.
And usually lead to quite unexpected consequences.
The most frequent error among these is the developers’ reliance on derivative indicators (as opposed to in-kind ones).
This virtually always results from a ‘sophisticated plan’.
For example, we decide to motivate our personnel towards a higher average receipt amount (rather than sales volume or things like gross profit).
So let them do their best, cultivate each client to the bitter end, and our sales volume, profit and all the rest will multiply with the average amount spent.
Alas! In the medium and long run, such motivation will result in (a) a larger average purchase and (b) all the other indicators going down.
Or at least a slower growth than organic one, not affected by motivation innovations from unsavvy administrators.
The main guideline for designing financial incentive systems is: an average person does exactly what he is actually paid for (‘people respond to incentives’).
Actually, Carl! And not what his stupid day-dreaming employer expects him to do.
This is why fixed salary systems are so inefficient – for whatever the unlucky boss may think (‘I give them dough so they work’), a salary is actually paid for getting on your organization’s payroll.
And nothing else.
Consequently, if you pay them for the growth of the average purchase, you’ll get a bigger average receipt. Mainly through all sorts of more or less innocent tricks by your interested personnel – like billing several customers as one.
But what should really be of interest for a good manager – sustainable growth of profit in the long run – will certainly suffer.
Here is another version of the salesmen’s motivation case, to additionally illustrate the methodology.
Suppose that a company’s commercial director wants to make his salesmen search for new clients more actively, i.e. the more new clients, the higher the eventual sales volume.
Motivation is modified accordingly – e.g. only profit from orders placed by new customers will be taken into account.
Our reader must have already understood what the result will be. That’s it: there will become noticeably more ‘new clients’ (new counterparties will be bred in the database), while the sales volume, profit etc. will not grow – at best.
The above clearly points to the main principle of choosing KPIs correctly:
select ones as similar as possible to the in-kind indicators of interest to your shareholders.
Virtually always this is either (а) profit — for a stable business, or (b) sales volume — for a business striving for extensive growth.
And your grassroot personnel will find these far more difficult to massage than derivative fantasies like the number of calls answered in an hour, an order’s average profit rate, or similar products of miracle-working managers’ creative urge.
Remember that the most efficient financial motivation is that of a private businessman: A business receives what it earns. Income = 100% of profit. The closer your final motivation formula is to this benchmark, the greater effect your will get from implementing a FISP.
Anticipating your possible objections/questions, we must say that NEITHER profit NOR sales volume is a universal basis for motivating any employee of your company.
For example, they are perfectly inapplicable to the motivation of a warehouse man – for obvious reasons.
However, both profit and sales volume are only particular cases of more general KPIs that are, in turn, virtually universal and efficient as applicable to the motivation of any employee of your company’s line units, if properly interpreted. See the next part for details.