After a decade of easy living in the business lane, many electrical distributors now face the challenges of managing a business in a slowing economy. When competing in harder times, managing performance takes on increased importance.
Performance management means creating the right kind of measures and the right kind of rewards. As countless studies have shown, people behave as they are measured, and drive action as they are rewarded.
Organizations that effectively manage the right performance measures achieve superior business results. Those that don't, struggle.
Of those electrical distributors that actually administer performance reviews, most attempt to quantify what is basically a qualitative judgment. For example, common qualitative performance criteria used by electrical distributors on performance reviews are: knowledge of job, quality of work, communication, customer relations and initiative.
Reviewers are burdened with stacks of evaluation forms that lack correlation to company goals. They are asked to rate the person on a one-to-five scale. It's difficult to place a quantitative rating on what is essentially qualitative performance criteria.
The average annual performance appraisal attempts to do too much — rate performance, provide feedback, coach, determine pay decisions and conduct legal documentation. Feedback, whether it be criticism or praise, is squirreled away for months before an annual review. Many employees come to their reviews with a sense of dread. They experience sweating, racing hearts and quickened breathing.
But how does an electrical distributor create the right kinds of performance measures and the right kinds of rewards? The first questions I ask electrical distributors are: What are your company goals? How are you going to get there?
Most distributors fumble with these questions and respond with sales, gross profit and operating profit or net profit figures. This is a good starting point, but managing business results solely by a financially oriented measurement system is too limiting.
Research shows that performance management is really a balancing act. If profit is the company's sole goal, the company will not prosper. If customer satisfaction is the company's sole goal, the same holds true. Companies need to broaden their performance measures that matter equally to their customers, their employees and their shareholders. No single measure or group of measures, such as financial fitness indicators, can provide a clear view of business performance.
It takes a balanced and timely view of employee satisfaction, service performance indices, customer satisfaction and financial fitness measures to be successful in today's business environment. High employee satisfaction will result in high internal service quality. High internal service quality, in turn, will result in high customer satisfaction. High employee satisfaction, high internal service quality and customer satisfaction will result in strong profitability.
Good use of performance measures begins with company performance goals, then moves to department and branch goals, and then to individual performance goals. All must be achieved in order for the company to attain its corporate goals.
Company Objectives and Performance Goals
Let's take a look at ABC Electrical Supply Co. of Dallas. In meeting with the owner, we crafted the following 2001 company objectives:
Build a “customer for life” with each transaction.
Achieve a competitive advantage with employee knowledge and skills.
Develop a competitive advantage with order fill rates, order accuracy and on-time delivery.
Company objectives relate to outcomes, but where “the rubber meets the road” means translating these objectives into specific, measurable, achievable and time-bound performance goals.
For ABC Electrical Supply, the following company performance goals were quantified:
Achieve average customer satisfaction index (CSI) rating of 80 percent based upon all criteria measured by a 2001 customer satisfaction study administered on Dec. 1, 2001.
Achieve total knowledge and skills employee satisfaction index (ESI) rating of 80 percent measured by a 2001 employee satisfaction study administered on Dec. 1, 2001.
Achieve continuous order-fill rates (OFR's) of 94.6 percent, order-accuracy rates (OAR's) of 99.7 percent, and on-time delivery rates (OTDR's) of 98.4 percent measured by ABC's service perfection information system.
Improve net income before taxes (NIBT) from 3.2 percent FYE Dec. 31, 2000 to 4.2 percent FYE Dec. 31, 2001 measured by ABC's year-end financial statements.
ABC's performance goals weren't difficult to create. A customer satisfaction mail survey was administered to ABC's active customers. The customer satisfaction index (CSI) rating of 80 percent is a J.D. Powers and Associates benchmark for high customer satisfaction. A similar benchmark was applied to the employee satisfaction questionnaire administered to every ABC employee. Order-fill rate, order-accuracy rate, and on-time delivery rate benchmarks were derived from The Logistics Institute at Georgia Tech surveys. Using their computer system, ABC was able to provide continuous order-fill rates, order-accuracy rates and on-time delivery rates, and based on corporate expectations strive for the performance goals cited. The NIBT measures were based on ABC's past performance comparing it to NAED's Performance Analysis Report (PAR) for benchmarking.
Department/Branch Performance Goals
After company goals are finalized, every department and branch develops their own performance goals that result in the accomplishment of all of the company goals. The following is ABC Electrical Supply's Austin branch performance goals:
Achieve average branch customer satisfaction index (CSI) rating of 80 percent based upon all branch criteria measured by quarterly customer satisfaction report cards.
Achieve total branch personnel “Knowledge and Skills” employee satisfaction index (ESI) rating of 80 percent measured by quarterly employee satisfaction report cards.
Achieve continuous branch order-fill rates (OFR's) of 94.6 percent, order-accuracy rates (OAR's) of 99.70 percent, and on-time delivery rates (OTDR's) of 98.4 percent measured by ABC's service perfection information system.
Improve branch net income before taxes (NIBT) from 2.8 percent FYE December 31, 2000 to 4 percent measured by ABC's quarterly financial statements.
Carl Widget, Counter Salesperson's Individual Performance Goals
Carl Widget works at the Austin branch as a counter salesperson. Upon completion of branch goals, individual performance goals are developed that will aid in accomplishing all of the branch performance goals.
One goal might be to achieve branch counter salesperson customer satisfaction index (CSI) ratings of 80 percent for being friendly, responsive, knowledgeable and thankful, measured by quarterly customer satisfaction report cards.
You can see from the example that the right performance management system is built on quantifiable measures that link individual goals with department/branch and company goals.
To “raise the bar” in such areas as employee satisfaction, customer satisfaction, service performance indices, and financial results, an electrical distributor must develop a goal-setting and feedback process to ensure that individual, department and branch performance goals all focus on aspects of work that are controllable and measurable. Without this process in place across the entire company, it is very difficult, if not impossible, to link performance to rewards.
The end result is that every employee will have a crisp understanding of how their behavior affects the company. Every employee will know company goals, how their department or branch goals affect the overall company goals, and how their individual performance goals affect their department or branch as well as overall company goals.
Employee scorecards (see example below) should be developed stating goals for the company as a whole, as well as goals specific to the employee's department or branch. All performance goals need to be balanced to reflect employee satisfaction, internal service quality, customer satisfaction and financial fitness measures.
Pay For Performance
Once company, department, branch, and individual performance goals are finalized, the electrical distributor can now establish a reward system tied to the employee's scorecard.
Let's look at how Carl Widget's goals were translated into a reward system in his compensation plan to the right. It sets aside $2,400 quarterly ($9,600 annually) in incentive pay and links that pay to a “balanced” individual performance, coinciding with his business unit's goals, as well as company goals. In addition, his three individual performance goal incentives are all within his “line of sight,” or in other words, he directly controls their outcomes. Gain-sharing programs like this give employees a regular shorter-term monetary reward for meeting specific performance goals for which they are directly responsible. In the case of ABC Electrical Supply Co., everyone receives a quarterly monetary incentive for accomplishing controllable and achievable goals
Carl receives his employee scorecard at the beginning of the year, listing company performance goals, department/branch performance goals, and his individual performance goals. He also receives and signs off on his compensation plan. Employee buy-in and ownership is thus achieved. This shared-destiny reward system motivates employees to meet individual, department or branch and company performance goals.
Management delivers quarterly reports to employees on how well the company is performing against its company, department and branch targets. Next, Carl's manager holds a formal quarterly performance goal review to report how well he achieved his individual performance goals against his targets. His manager then calculates Carl's incentive compensation reward payment. In addition to these quarterly meetings, Carl's manager holds monthly coaching sessions to evaluate Carl's progress on his individual performance goals and to communicate critical business information to him.
Once company-wide reward systems are in place with quarterly incentive pay-outs for all employees, and employees are reaping incentive pay-outs for performance employee satisfaction and motivation skyrockets. Employees learn to think more like owners of the company.
After one or two years of variable-based compensation success, electrical distributors can begin to reduce base pay throughout the organization, for greater potential incentive rewards. This becomes well received by both employers and employees because employers are struggling with attracting, motivating, and retaining employees without greatly increasing fixed costs, and most employees want an opportunity to earn more money. As long as they have experienced incentive plan success, most are very willing to sacrifice some fixed dollars for more incentive earnings.
Tom O'Connor is a consultant on performance management systems for wholesale distributors. He can be reached via phone at (860) 676-7876 or via e-mail at firstname.lastname@example.org.
ABC EMPLOYEE SCORECARD
Name: Carl Widget
Date: January 2, 2001
Department/Branch: Austin branch
It is important for me to understand company goals and my department or branch goals because my individual work contributes to the accomplishment of these goals. Therefore, I must clearly understand the expectations and priorities. I also understand that my goals and expectations may change throughout the year, as the goals of the company and my department or branch change in order to meet evolving business needs.
Company Performance Goals:
- Achieve average CSI of 80 percent
- Achieve total “Knowledge & Skills” ESI of 80 percent
- Achieve continuous OFR of 94.6 percent, OAR of 99.7 percent, and OTDR of 98.4 percent
- Achieve NIBT of 4.2 percent
Department/Branch Performance Goals:
- Achieve average branch CSI of 80 percent
- Achieve total “Knowledge & Skills” ESI of 80 percent
- Achieve continuous branch OFR of 94.6 percent, OAR of 99.7 percent, and OTDR of 98.4 percent
- Achieve branch NIBT of 4 percent
Individual Performance Goals:
- Achieve branch Counter Salesperson CSI of 80 percent
- Achieve daily sales-order writer average of 35 orders and 140 lines
- Achieve branch NIBT of 4 percent
ABC ELECTRICAL SUPPLY CO. 2001 COMPENSATION PLAN
Name: Carl Widget
Title: Counter Salesperson
Effective week ending January 6, 2001 Hourly wage of $14
Quarterly incentive based upon achievement of:
Branch counter salesperson CSI ratings of 80 percent for being friendly, responsive, knowledgeable and thankful measured by quarterly customer satisfaction reports cards. Pays $800.
Daily sales-order writer average of 35 orders and 140 lines measured by computer system. Pays $800.
Branch NIBT is 4 percent of branch net sales measured by quarterly financial statements. Pays $800.
The following sliding scales will reflect the percentage of quarterly incentive pay-outs:
- 95 percent of goal pays 95 percent of incentive compensation
- 90 percent of goal pays 90 percent of incentive compensation
- 85 percent of goal pays 85 percent of incentive compensation
- 80 percent of goal pays 80 percent of incentive compensation
- Below 80 percent pays no incentive compensation
Quarterly incentives are paid by the fifteenth day after each quarter.
Termination of employment will result in forfeiture of future quarterly incentives.
This compensation plan will supercede any previous compensation plans and will be subject to review and revision in December 2001.