Some years back I had an interesting experience interviewing leaders at a California-based retail chain. They had bought an incredibly sophisticated piece of compensation software to handle store manager incentives, and spoke enthusiastically about the capabilities of the software.
When I finally got around to asking what factors the incentives were based on, they said it was revenue and profits. I did a double take. If you have 20 stores and 2 pieces of data per store then that is 40 data points per month; 480 each year. At that scale you can do incentives with a spreadsheet, so why buy expensive specialized software?
The lure of incentives
It turns out the retail-chain leaders had believed there were a great many things the store manager ought to get right. I never got them to list all the factors they considered important, but you can make your own guesses. I imagine that like other retailers they’d consider issues like conversion (how often someone who comes into the store buys something), average size of the sale, customer satisfaction, employee engagement, shrinkage and so on. These factors do matter, but being a manager is a complicated job and there are many things – some measureable, some not so much – that deserve a share of their attention.
The leaders also believed that reward drives behavior, so if they wanted to drive behavior on all these important factors, they would have to include all of them into the incentive formula. As a result, the plan had been to implement software capable of handling such a complex situation.
What happened when they rolled out this complex incentive plan is no surprise. Store managers couldn’t understand it, and so in the end it motivated nothing but discontent. The retailer reverted to a much simpler system that only used a tiny part of the software’s capability.
The error of their ways
We can see the management made a number of errors. The first error was the idea that the leaders in HQ could be the puppeteers, pulling the strings of the store managers. The leaders wouldn’t have described it that way, but I feel it’s exactly what they were hoping they could do. HQ wants to drive appropriate behavior, but leaders must treat store managers as humans who can be inspired, guided, and supported, not as puppets to be pulled around by the strings of incentives.
The second error was taking an idea that is true in a simple case, and presuming that it would remain true in a complex one. For example, it is true that giving an incentive around a retail metric such as “average size of sale,” will help improve performance on that metric. But that doesn’t mean that if you have 20 incentives on 20 metrics, each of those measures will improve.
Even rewards need limits
We need a healthy sense of the limits of reward. It can be hard for reward professionals to tell leaders “Sorry, our set of tools can’t do that,” but that is exactly why companies need reward professionals who know what does and doesn’t work.