Performance Based Rewards: The Way To Win The Salary War!

Are you losing staff due to higher alternative salary rates on offer in the market? Then offering performance based rewards will assist you to retain staff and improve your bottom line!

Research indicates Generation Y has high earnings expectations and wants rewards based on performance. To implement an effective performance based rewards program, your staff needs to have input and agree to what is expected of them (“deliverables”).

Establish the deliverables for both individuals and team positions. These can include a range of quantitative (objective) and qualitative (subjective) assessment criteria. Once the deliverables are agreed, you will apply a weighting to each criteria. This will depend on the strategic and operational objectives of your business (grow sales, new customers, better productivity etc). A staff member’s result determines the amount of their performance bonus. The more they deliver the higher their rewards. It’s a win for both owners and their staff.

Case Study

David needs to grow sales and improve profitability. David’s concern is his staff costs are increasing and profits are declining. He has now implemented the Staff Value Program and agreed to pay Tom, a key staff member, a maximum bonus of $20,000. The payment of the bonus is conditional upon Tom meeting specific performance targets. Below is his bonus score card.

The qualitative assessment process allows business owners to assess the achievements of their staff and the criteria are measurable by observation. It provides a proactive approach for addressing subjective performance matters that are otherwise usually left unresolved.

Once the Staff Value Program is implemented by your business, you then need to ensure you have the systems and procedures in place to measure your staff’s performance on a timely basis. As performance bonuses are paid as a result of exceeding budgeted profits, business owners are beginning to realise they can compete with apparently higher alternative salary rates on offer in the market and retain their staff by paying a sufficient bonus based on performance.

The business advisory team at MGI have specialists who have helped businesses like yours develop a performance based reward program. A business coach from MGI can help you to implement a similar scheme and help improve your staff retention. We always have a clear focus on managing costs and improving profitability. We offer expert business growth support and can also assist with business benchmarking and analysis to ensure your business remains competitive.

You’ve grown your business gradually and now your minds turn to collecting your reward from your investment capital, know-how, and years of effort. Achieving the most for your business requires the same diligence it took grow it. This is where having a business succession plan becomes vital.

So how can you ensure you receive a return for your efforts?

Developing a effective plan for business succession is the key protecting, growing and realising the maximum value for your business. It is a strategic process that allows you to smoothly transition the ownership and/or management for your business.

Research shows that business value can be impacted by a  number of issues including:

• Complacency of business owners in addressing succession
• Business owners often being unaware of all their succession options
• Generation Y lacking the aspirations to be a business owner
• Increased house prices restricting the funding options for successors

Why is business succession a key issue now?

Times change, markets change, and so does the business environment. Not long ago, business entry costs and competitive forces were lower and business growth could be funded by borrowing against increasing house prices.

Business success demands focus by you on the operation, but ultimately, issues of success and retirement will creep up. By then, getting the price you need could be elusive.

The next generation of business owners, Generation Y, face a completely different business environment. Start-up and acquisition costs are higher, regulatory barriers are higher, and competition has increased. Business funding opportunities are also more limited in comparison.

You’re a business owner and you understand the driving forces behind competition, supply and demand.

So when do you need to start developing a plan for business succession?

• More business are for sale – lower prices result
• With fewer qualified buyers – it becomes a Buyer’s market
• In a Buyer’s market – they can be selective and value driven

Thus, it is important for you to start planning your succession now. Talk to the business advisory team at MGI about our succession planning services and let us help you start the process.  We can help you benchmark your business against others in the market, strategic planning planning, wealth management and business valuations.

You might also be interested in our previous blog about business exit strategy.

What are the key factors to optimise business value?

Value optimisation is all about growing business value. Value optimisation factors are issues within the business that can be planned for and addressed prior to selling that will assist in a smooth sale transaction at the optimum price. The key value areas for your business are growth, performance and succession. By focusing on optimising these areas, your business value will improve.

The path to value optimisation

The following illustration demonstrates the path you can take to optimise the value of your business.

Confused? How do I address these factors in my business?
Take a look at the following table that provides an indication of some of the industry best practice strategies that can be implemented to address these key value factors.

By addressing all of the above value factors, you will improve profit, improve the value of your business, and maximise your position when it is time to sell.

Some of the barriers to improving the value of your business and achieving your desired sale price could include:

• Business being too principal reliant
• Not spending enough time working on your business
• Expenses out of control
• Lack of client segmentation
• Poor systems and processes
• Unrealistic expectations about the value of your business

If any of these barriers are relevant to your business, these should be addressed. Contact your MGI advisor should you require any business coaching or help with business planning.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Bstar accepts no responsibility for any loss suffered as a result of any party using or relying on this article.

PPPM spells happiness.  According to a recent course (University of Texas) ROI and Happiness:

Pleasure
Positivity
Purpose
Meaning

This all leads to happiness in the workplace.

An esoteric concept, no not at all, but one to easily diminish if you don’t care about your people.  Remember how you treat your people tells everything about you. We are not talking about avoiding negativity at all costs and pretending to be happy (note: high performing teams cannot carry passengers). Happiness leads to success not the other way around. It’s about being optimistic and resilient, employees are as responsible as employers to achieve workplace happiness.  Attitude becomes a more important attribute than skill.

So, what does the science say:

• Happier people are physically healthier so take less sick leave (16 days less).
• Retention improves dramatically.
• Happier people are also more collegial, so they are better team players.
• Happier people are more creative and make better or more objective decisions.
• Organizations with happier employees are more productive and profitable. (outperformed S&P top 500 14 times)

This is why investing in employee happiness is a very smart thing to do.

To start with it would be useful for organizations to gain an understanding of the five main determinants of employee happiness: basic needs, autonomy, mastery, belonging and abundance culture.  The issue is having balance, all are important and people perform best when they are in the ‘flow’, their competence is matched to their challenges.

Employees can do even more for their own happiness. In fact, the employee should be encouraged to take the lead.

The health of our relationships at work is more important than physical health in relation to happiness. The science shows, the more you genuinely care for your co-workers, the happier and more successful you are likely to be. Culture is an important determinant of happiness because culture is a feature of the environment and the environment wields a powerful influence over our behaviors.

Simple things the employer can do:

• Create equality among employees.
• Treat external stakeholders, particularly your suppliers well.
• Hire based on values.
• Make mastery part of performance review.
• Give $200 to your employees to personalise their workspace.
• Make employees take their leave.
• Reduce face time at work.
• Reduce too many rules.

Simple things the employee can do:

• Make the effort to stay well (healthy lifestyle).
• Express gratitude.
• Seek happiness outside of work.
• Don’t do work on leave.
• Use your most productive time to be creative.
• Maintain a desire for learning (mastery).

In conclusion, a word of caution, you will be happier at work and hence, more successful. This is good, but if you are not careful, the success can sabotage your happiness.  Wealth seems to be especially potent at relationship spoiling. Studies show that the wealthier we become, the less we prioritize our relationships over things like making money and being even more successful.

Are we paddling in the same direction at the same speed (scope, budget and schedule) and not up S##t Creek? How do you build team engagement and what makes an effective team?

Team is a common term that is not practiced well.  Some of us have had the good fortune to have been in high performing teams and the memories and relationships are still important to us. Our memories connect us to doing a good job, exceeding expectations, learning, celebrating and having a sense of meaning and belonging.  Teams just don’t happen, are often less effective than a group of individuals and can be terribly inefficient.

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Basics first, what are the attributes of a team:

• Complimentary skills
• Common purpose
• Shared performance goals
• Mutual accountability

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What makes an effective team?

• Purpose
• Clear goals
• Complimentary perspectives and skills
• Process and timings are clear
• Reflective learning and celebration

Problem solving: trust and communication

Tactical: clarity/ directive style

Creative: Freedom/ autonomy

Questions to ask your team regularly:

• How did you feel?
• What did you learn?
• How were you affected?
• What inter-discipline issues should you consider?

A leaders willingness to discuss learnings and openness to constructive criticism will over time, develop team engagement.  This social exchange develops trust and a reciprocation of benefits.  In the eye of the beholder, perception of mutual obligation develops and how an individual interprets cues and signals from their leader.  No cues and signals, no teamwork, failure to deliver on cues and signals is worse than having no cues and signals at all.

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In summary, our personal reflections on actions for team-work and what makes an effective team (Bold=Bang for Buck):

• Equal recognition for contribution
• Goals should be measurable and defined for those responsible for achieving them
• Achievement, however big or small, should be recognized and celebrated
• Deal with issues face to face
• Commit fully to goals set
• Act emphatically all the time, but don’t carry passengers
• Reduce the documentation you need to justify delivery
• Simplify language
• Reduce the time it takes to get something approved
• Set expectations around quality, time and cost, then trust your team to find the best way to do the work.
• For long-term growth, focus on new ways of behaving, not new ways of working.

These are not new principles.  Check out the biography on Napoleon Bonaparte and one of his quotes was:

‘morale is to physical as three is to one.’

Team engagement and alignment is one of the elements to improve overall performance & offers practical and effective solutions.

You might also be interested in our recent blog on performance based rewards.

It’s usually easier to look back after a business has failed and identify why, than it is to save a struggling business from failing in the first place. In my view there are a number of reasons for this, not the least of which is the fact that everyone is always wiser with the benefit of hindsight.

However, it begs the question of what a business owner can do if their business is struggling? After all, they have a lot of their heart and soul invested into the business (as well as their capital). It’s their “baby” and they are convinced they’re onto a winner, even if it isn’t working out.

The answer is – it depends.  It depends on many variables including what type of business they’re in, what industry it’s in, where it’s located and what size the business is and what stage it is at in its lifecycle. In my experience, scale can often play a huge part. There are many struggling business owners out there – some might call them micro businesses.

But there is hope. Here are my top four tips to get your business back on track.

Do you know your breakeven point?

When I walk past retail outlets (clothing shops for example), I often wonder if the owner knows how many (or what dollar value) of clothes they must sell each and every day in order to simply breakeven.

One thing many businesses fail to do before even setting up business is a simple breakeven analysis. A business broadly has two types of costs – fixed and variable. As the name suggests, fixed costs are largely fixed in nature. This means you’ll have to pay these whether you sell one item or one million. Whilst all costs are variable over time, rent might reasonably be regarded as a fixed cost. You will have this cost even if no customers walk in the door.

Variable costs are simply those that vary with your sales volume. If you are a wholesaler or retailer, the cost of your product might be a variable cost.

So, tip number one would be to understand your breakeven sales point (on a yearly basis) and then break this down to a daily or weekly basis i.e. how many items do you have to sell each day or each week. Then develop and implement strategies to help you sell more than this quantity.

Can you afford to grow?

A struggling business might be able to grow its way out of trouble, but do you have the necessary cash to fund that growth? Do you know how much cash you’ll need to fund your desired growth?

In order to answer that question you need to know one critical measure – your working capital burn rate. If you don’t know this you’re flying blind. I often see businesses targeting a certain percentage increase in sales. When I ask them how much working capital they’ll need to fund that growth they often don’t know. Sales generally don’t fund themselves.

For some businesses their working capital burn rate can be quite high. These businesses will struggle to fund rapid growth. For others it can be quite low, in which case they will have an easier road.

You need to know yours.

What are the financial drivers of your business?

Every business has what I call financial drivers. If you don’t know yours you may as well be driving a car without an instrument panel on your dashboard.  You don’t know how much fuel you have, whether your engine is overheating or whether your oil is getting low. It’s the same with your business.

Various businesses respond differently to a given intervention. In other words, some businesses are volume driven – they perform better the more goods they sell. Others are margin driven – they don’t necessarily need to grow at the same rate, but they make more profit on the items they sell. Once again, how your business responds will depend on a number of factors including the current size of your business and your breakeven level.

Some businesses require large amounts of working capital e.g. stock and debtors, and can therefore respond well to small improvements in working capital management. Others may have what is called a lazy balance sheet, with a number of underperforming assets.

The key is to understand your key financial drivers – changes in these areas will give you the biggest bang for your buck and potentially turnaround a struggling business.

The key measure of business performance

Finally, you need to focus on my one key measure of financial performance. In my view, this is Return on Capital Employed (ROCE). Understand how much capital you have invested in your business and focus on deriving an acceptable return on that.

If your ROCE is not acceptable, you’ll know where to focus your attention.

• Is your profit margin too low?
• Do your sales need to grow?
• Are your expenses too high?
• Do you have poor working capital management?
• Do you have a lazy balance sheet?
• Are you paying suppliers too quickly?

The answer is usually there somewhere. You just need to know where to look.

Often business owners let their heart rule their head but unless they remember that they also have capital invested in the business and act in a mercenary way, they could end up with a broken heart and zero capital.

If you would benefit from support for your struggling business, we have a number of specialist business advisors who can help with business benchmarking, business growth and business funding. Contact us today for a coffee and an informal chat.