by Charlie Dietz, CIO at SMB Value Partners, Inc.
I had a very wise boss once, and I remember his point many years later: “Beware of what you reward, as you will get a lot more of it”. Sounds trivial doesn’t it, but this is an important business concept. It’s a corollary to the “you get what you measure”.
Consider these examples:
Net results are often an increase in overall company cost / lower profit.
Proceed cautiously when setting measures to monitor your business. But, “beware of what you reward, as you will get a lot more of it”.
Click HERE to see the next post in this series.
I had a very wise boss once, and I remember his point many years later: “Beware of what you reward, as you will get a lot more of it”. Sounds trivial doesn’t it, but this is an important business concept. It’s a corollary to the “you get what you measure”.
Consider these examples:
- The Sales team’s compensation is often significantly based on gross sales hurdles. The old saying still often repeated, “We’ll sell it at cost, but make it up on volume”. And every year when the new Sales Comp Plan is issued, the first thing the Sales team members do is figure out how to maximize their bonus.
What really counts is the bottom line. Compensation for all of those with a “seat-at-the-table” needs significant focus on PROFIT. And, more of the Sales team effort needs this same focus.
The issue is often around a company’s ability to fully evaluate every new deal, ongoing contracts, services, etc. based on the profit generated. Get a couple of smart accounting / finance / IT people together, and with properly configured ERP and reporting applications, you can have a dashboard or reports that give you a reasonably accurate “P & L” view of every customer. I know those of you selling lots of SKUs to retail have a complex environment with the pay-for-space, promotional deals, etc., but it CAN be done, and is a very worthwhile investment. - Many Manufacturing companies have a financial process of “overhead absorption”, which GAAP requires for external reporting. In a nutshell, all of the non-direct costs, or overhead associated with manufacturing a given item is broken down and assigned by cost accountants to the total standard cost of each product. So, some products have a higher absorption rate than others.
Often, the Manufacturing leaders have part of their incentive pay tied to producing products with a total absorption that covers the expected non-direct costs for the period. As can happen with the proper focus on production to the forecast / sales consumption, manufacturing may get near the end of a period with absorption-to-date below their goal. If the immediate needs of customers are covered, often the production is shifted to produce items that absorb proportionally more overhead to meet the hurdle. That can create a few problems:
o The high-absorption items produced may already be well above their desired inventory levels.
o And / or these same products may consume scarce raw materials, labor or other resources that would be better applied to other products, and / or create additional costs.
Net results are often an increase in overall company cost / lower profit.
Proceed cautiously when setting measures to monitor your business. But, “beware of what you reward, as you will get a lot more of it”.
Click HERE to see the next post in this series.
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