Most employees take satisfaction in knowing that they are contributing to the success of the company. Setting up an incentive program that rewards them for work that exceeds expectations provides tangible evidence of success.
However, business owners may struggle to find ways to incentivize their employees for jobs that are not sales related. Most jobs can be tied to some key performance measure that has financial impact and if they cannot, consider updating job description to include other responsibilities. I’d like to share one real-life examples.
I started working with a distribution company in the home building industry about two years after the economic downturn. Their sales had plummeted to half of what they had been in their peak. They cut back staff to bare bones, moved to less expense warehouse locations, cut back benefits and made changes in product lines and pricing. Now starting to show a small profit again, the owner wanted to find a way to reward those backroom and warehouse employees who had weathered the bad times with him and asked me for ideas.
As I combed through their financial information, I kept coming back to freight. It was the one item that we hadn’t been able to budge during the turn around. In fact, as a percentage of sales, it was increasing. Whenever we discussed what could be done, the response was that it was just a cost of their business. Their product was heavy. Freight was expensive and increasing faster than they could raise prices.
Yet, I would overhear comments from the warehouse guys or the back-room staff that made me think there was more that could be done. Comments about sending out separate shipments instead of waiting a day for a back-ordered item, shipping out of two different warehouses on the same order, not choosing the least expensive method of shipping, not charging customers for freight and other such “under the breath” mumblings.
The Freight Team:
No single person could control freight costs. The warehouse could manage the packing and shipping, but the inside sales person could decide whether or not waive freight, even though the order may not meet the minimum level. The purchasing manager managed inventory levels by moving product between warehouses, but never saw the cost associated with doing so. And, no one had established relationships with the common carriers.
So, we came up with the idea of the “freight team”.
The team consisted of the warehouse employees, the purchasing manager who was also responsible for moving product between warehouses, the billing clerk who could monitor the invoices for freight charges to customer, and the accounts payable clerk who could monitor the freight invoices. We gave the accounts payable clerk the additional responsibility and title of Freight Manager with the authority to work with freight companies to try to reduce rates. Then, set up an incentive plan around reducing freight costs.
We asked the controller to review the expense coding to verify that we only direct freight related costs being coded to the freight line items. We included these pieces for the incentive measurement:
- Freight transfers – cost of moving freight between warehouses
- Shipping costs to customers
- Shipping charges to customers (which would offset the cost of the freight when charged)
- Other deliver costs ( a van and related costs that was used for delivery in one of the warehouses)
The plan went into effect in January, 2013. For the previous year, the combined freight costs using our formula totaled 7.8% of sales.
The incentive plan provided for two tiers of results and would be paid out quarterly. Each person on the team would receive a bonus if the combined freight costs for the previous quarter were reduced to 6% or less and a higher bonus if they dropped to 5.5% or less.
The results were immediate. For the first quarter, the team met the first tier goal and brought the freight costs down to an average of 5.7% for the quarter. In the second quarter freight costs were down to 5.2%, meeting the second tier goal. By the end of 2013, the total freight costs for the year were at 4.8%, a 38.5% reduction over the 7.8% costs of the previous year.
While the company owners realized the benefit of significantly reduced costs and the employees received some extra cash in their pockets, the unexpected benefit was the improved working relationship between the departments. They were helping each other, instead of criticizing.
Not all incentive plans will be successful or have such a dramatic and immediate effect. But, there are many ways to incent employees that will impact a company in a positive way.