Last Updated Jan 10, 2010 6:36 PM EST
That's one of many reasons why non-cash incentives work better, according to Dominic Toledo, general manager at The Mint Organisation. In today's BTalk Australia he explains the techniques that create effective incentive programs.
We look at the case of Audi Australia, which has used rewards to improve the sales of its cars. Its Quattro Club program gave travel and merchandise rewards, helping to contribute to 56 months of growth up to August 2009.
Do non-cash incentives work in your company? Add your observations about performance programs in the Talkback section at the end of this post.
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Well, we know it's good to incentivise staff. For most people the best way to do that is with cold, hard cash. And maybe giving the occasional celebratory slap on the back for a job well done. But maybe cash isn't always king. The Mint Organisation provide employee rewards and sales performance programs. And Dominic Toledo is their general manager. So Dominic, if you're doing a good job, why wouldn't you just give them the money?
Dominic Toledo: It's an interesting proposition and if you ask participants about the rewards they prefer, chances are they'll choose cash over non-cash rewards in preference. But the question really is will cash fully motivate them to work harder firstly and achieve more secondly. And a whole range of behavioural and clinical research indicates that whilst the majority of participants state a preference for cash, in fact the use of non-cash rewards tends to drive performance more effectively.
Dobbie: So is any of this research telling us why that's the case?
Toledo: Fundamentally, what the research is saying is that cash is a predominately left brain function. And the left brain as you know is responsible for analytical and rational impulses. The alternative to that is non-cash rewards. And these tend to be the domain of the right hemisphere of the brain. The right side of the brain is connected to muscle. And the left side is not. So in order for us to engage in any kind of behaviour in a sustainable manner, the right side or our emotional part of our brain needs to be able to visualise it and as such non-cash rewards tend to be more effective.
Dobbie: Alright, so you're saying the muscle which actually gets stuff done is the bit that's more closely linked to emotion. So I guess that's almost going back to our caveman instinct isn't it really?
Toledo: It's very, very fundamental and the most interesting thing about this is that we're all hardwired that way, regardless of race, creed, culture, gender or any other background.
Dobbie: Right, but what if you're not earning enough money, and you actually need the money to make ends meet. You're not going to be able to pay the mortgage with a set of golf clubs are you?
Toledo: Well cash works wonderfully well as a compensation to pay your employees. And I think that's defined by when we look at the bell curve distribution for average performance. So your cash compensation defines your bell curve of performance inside a company which means that 90 percent of your employees will be sitting on average performance. And that is the price you pay for leasing their head space for eight hours a day.
And really the use of non-cash rewards that sit alongside that well-designed incentive programs drive incremental performance, which is really what we're talking about in terms of outperforming our competitors.
Dobbie: Right, so what you're saying is if you were to try and increase the cash, you're just not going to see the same returns. Cash is, as you say, like paying the rent. It's not going to drive spectacular performance beyond that.
Toledo: Quite right and one of the primary challenges around cash is that if it's paid out as a bonus, eventually it is perceived as part of your income. So all too commonly, it is easily confused with your base compensation such that if you do not achieve a cash bonus in one particular quarter or a particular month, then you feel like your salary has been reduced, which can have obviously distance associated with it and negative goodwill.
Dobbie: So let's have a look at a case study. Let's have a look at Audi Australia. Here's a car company selling luxury cars at a time when a lot of us are not been buying luxury cars, but they've been doing fairly well. And so staff incentives had a large part to pay in that have they?
Toledo: Well Audi, not unlike other car companies, had very specific challenges that they faced. And one of them was competing against other luxury brands in a mature automotive market being Australia. The need for them to continually drive up their sales volumes in order to justify the ongoing investments in the dealer network, being a luxury brand. And also keeping the dealer network energised in terms of elevating the brand in the eyes of the consumer, who experienced the brand, of cours, from the moment they walk into the showroom. So what Audi has done is that they have very progressively embraced the use of incentives and predominately non-cash incentives as a way of focusing their dealer channel and providing really that unique differentiating sales focus accompanied obviously by great customer service and a very strong product.
Dobbie: I imagine one of the problems with incentive schemes is people not obtaining anything at all. I guess you've got your top sellers who are always going to get good prizes and good rewards. What about the people who are perhaps a little less adept? I guess you've got to make sure you've got something for everyone. But that also sounds expensive.
Toledo: That's a really good point. And it's really about looking at the individual, segmenting your audience to understand what individual performance is today. By segmenting your audiences, you can create stretch targets at an individual level which means that individuals start competing against their own prior performance as opposed to each other. And what that does is it allows the top 20 percent to continue to stretch, but also allows the middle 60 to compete against their own performance and the top 20 hopefully to move up into the middle 60. And so effectively what you're seeing there is incremental performance at each individual element, which when summed up and correlated, provides top line performance and top line growth inside of an organisation.
Dobbie: Right, so everyone's moving up a little bit. So how are they managing that in terms of what they're offering though? In the case of Audi, what sort of incentives were being given?
Toledo: Yes, in the case of Audi, it's actually a fantastic example because Audi has been very sophisticated in overlaying a number of different incentives which speak to the segmentation that I just referred to. But without sacrificing the stretch that you want out of your top achievers. So effectively what Audi has done is they have mixed a range of incentive travel and experiential rewards with a range of merchandise awards that are underpinned by points-based currencies.
Now the overriding metric within the Audi incentive programs is unit sales of cars, not surprisingly. And what that issue is that it keeps people very, very focused. We know that if you have too many measurements, then people become goal diffused. So the first rule is keep it simple. So sales as the predominate metric and the other point is that Audi effectively grouped their dealers according to their size and according to whether they're, for example, a regional dealer or a metropolitan dealer. Which means that you have dealerships like to like competing against one another, which is very, very important.
And the third element is that the dealerships within themselves are segmented by also the dealer principle, who is effectively the owner of the dealership, the sales manager and then the sales consultants who report into the sales manager. So each of those audiences have a unique and specific incentive which drives their performance and as that correlates up, then effectively you have incrementality. And the secret here is that it's the incremental return that funds the rewards. So that in a well designed incentive program as is the case with Audi effectively becomes self funding.
Dobbie: So if I'm an Audi dealer in a wealthy part of town where there's a lot of people buying and driving their Audis, it's going to be easy for me to sell, well easier anyway for me to sell a lot of cars even in an area where there might be an Audi dealership but sales are generally a lot lower. If I can show in that area that I've increased sales maybe not to the same extent but proportionately, I'd be receiving the same incentive as the sales guys in the richer part of town? Is that the way it works?
Toledo: The segmentation will determine that but effectively there are two things we look at. One is your current baseline or today's run rate. That's what you're doing today based on the market size or market opportunity that's available to you. The other thing that we look at then is your ability to grow that. And effectively what we know is that a larger dealership may not have the same percentage growth as a smaller dealership that's coming off a lower base. However, in volume terms a 1 percent lift in a large dealership might be substantially more in nominal terms than a 1 percent shift for a smaller dealership, of course. So in effect, what it's doing is that you balance out or you design the incentive to insure that you're stretching according to what the prerequisites are and the market opportunity is for particular dealerships. So you're not disadvantaging. What you're really doing is you're focusing people on over achieving against what they've done previously.
Dobbie: Now is this being used in conjunction with cash or is the, in the Audi case, is it entirely incentives or was a cash bonus being paid as well?
Toledo: No, in the Audi case it is entirely non-cash incentives. And the incentives that are being used are also segmented by audience. So Audi has very progressively used travel incentives or incentive travel for their dealer channel. And that's normally geared at dealer principles who are obviously individually or in their own right wealthy individuals. And often the design of the incentive is around providing money can't buy experiences. So for a person who's financially well off, the material items might not offer as much stimulation as an offshore trip with their partner, which provides a very unique experience they can't acquire off the shelf themselves. And that's what effectively motivates that type of genre. Having said that, sales managers and sales consultants may well be more incentivised by merchandise rewards, whether they be plasma TVs or whether they be other forms of electronics, which they can subsequently have durability, they can use, they have emotional recall and they can share with their family. So we've been very, very careful about researching the audience, understanding the need and then developing the rewards around that.
Dobbie: Yes and I guess that's crucial isn't it? Because you say that you know you give me the idea of travel and I'd say that's great, but I want to take my partner along with me because you know it's a holiday, I want to go off with her. But I guess some of these incentives are your partner doesn't go. And for a lot of people that might not be a great incentive. For some people it might actually be a really good incentive, of course.
Toledo: Quite right and it's really about understanding the audience. And part of what Audi do extremely well is segmenting or understanding their demographics. If you have perhaps a younger generation sales consultant working in a dealership who potentially is single, then the attributes and motivating factors of that individual differ dramatically from a dealer principle who is in fact married and relishes the prospect of having quality time with their partner at an offshore event. And so we have very carefully worked with Audi to understand what the key drivers are.
Dobbie: So this is key though, isn't it? If you get this wrong, if you give the wrong sort of incentives that people are just not interested in, then obviously the whole things goes off the rails. So how do you actually find out that? How do you find out what people really want?
Toledo: Well, there is a methodology to designing incentive programs. The three elements to designing an effective incentive program are really firstly establishing the correct goal and goal setting methodology is not unique to incentives. It's unique to a number of different performance settings, but having a goal is actually a behaviour and many people don't realise that. Since without a goal there can be no commitment. Without commitment there can be no action. Without action no outcome.
So setting a goal is really the first point. And setting an incremental goal is important because the incrementality funds the reward. The second element that has to be present is emotional engagement. And emotional engagement means that people internalise the goal and make it their own. Now that is a very important distinction particularly when we look at the way that goals are traditionally communicated within an organisation. A manager mandating a goal to a subordinate may qualify as yes a target has been set, but has the goal been internalised and the target been accepted by the employee? Perhaps not.
One way to achieve emotional engagement is by providing emotionally engaging rewards. So we effectively simulate that by providing non-cash rewards. And the third element that's extremely important is an unrelenting focus on the goal until it's achieved. And we tend to simulate that by having shorter program durations and more frequent communications. And that's effectively because sales people don't really have an attention span of 12 months. In fact, most of them don't even have attention span of 30 days. Which is natural when you're moving in the fast moving sales cycle. Whereas an owner of a business will have a 12-month to 36-month and 60-month attention span.
Dobbie: So does that mean you should tier the incentives? You know have some short term goals and some longer term goals with different values of incentives?
Toledo: Spot on. And effectively what we do for the sales consultants is we would create, for example, four quarterly incentives which when added up compromise a sales year which is what their dealer principle is measured on. However, we have the ability every 90 days to reconnect with the sales consultants whom we know have the shorter time frame and that effectively re-energises, refocuses and re-communicates the goal.
The other thing that it does is that if you have a sales consultant with a 12-month goal and they've had a slow first quarter, they might give up which means you forfeit nine months of potential performance. But if the sales consultant can bounce back every 90 days, then effectively what you're doing is you're re-energising your channel. And that's something that Audi has done extremely well and explains some extent their sales performance.
Dobbie: Now I imagine for a company that's wanting to introduce this for the first time, the person who's going to be most difficult to convince is going to be the CFO because he's the guy who thinks almost exclusively with the left side of his brain and particularly he's not going to see any incentives himself. He's just going to see all of this as a cost exercise, isn't he?
Toledo: Well, the ROI that underpins any incentive program is absolutely pivotal. And a lot of work goes into designing an ROI model at the outset to insure that the appropriate business case is furnished back to the CFO or the key decision makers within an organisation. And the way to do that really is to insure that you are mapping the financial case on the basis of what's being achieved today and what is being proposed to be achieved tomorrow. So what are the incremental sales targets and that can be done either on the top line sales number or it can be done on a gross profit number.
Regardless of what it is, a proportion of the incrementality needs to fund the cost of running the program as well as the rewards and have something left over for the organisation. And provided that the incentive is designed according to those parameters, that's a very good prerequisite for it being accepted and having comfort at the CFO level that this is a good investment.
Dobbie: Yes, and you've said it a few times, incrementalism is the key isn't it really? I mean it might be as much as 25 percent or 50 percent of the total cost but if that's all incremental revenue, then the other half or the other 75 percent is bottom line for the business.
Toledo: Precisely, you're getting an additional 50 percent of a dollar that you didn't have today.
Dobbie: Yes, absolutely. Ok, well it makes a lot of sense and appealing to the emotion of sales people. I mean I've always thought sales people are very emotional people so it makes a great deal of sense. Dominic Toledo, thanks for your time.
Toledo: Thank you.