Difficult economic cycles can lead individuals and organizations to practices which, in better times, were unacceptable. Most of the time, this isn't the result of some overt change in the corporate value or mission statement. Rather, it comes more often in the form of revised expectations that can only be achieved if something is given up. Too often in such cases, what is surrendered are good profits.
In his book The Ultimate Question, author Fred Reichheld (director emeritus and fellow at Bain and Company) explains it this way:
"Too many companies these days [especially during recessionary periods] can't tell the difference between good profits and bad. As a result, they are hooked on bad profits.
"...Whenever a customer feels mislead, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value...
"Good profits are dramatically different. If bad profits are earned at the expense of customers, good profits are earned with customers' enthusiastic cooperation. A company earns good profits when it so delights its customers that they are willing to come back for more--and not only that, they tell their friends and colleagues to do business with the company." (The Ultimate Question, Fred Reichheld, Harvard Business School Press, Boston Mass., 2006, chapter 1)
How can effectively engineered rewards strategies help an organization avoid bad profits?
It starts with a philosophy statement that defines what kind of performance the company will reward. Such a philosophy should lead the business to develop both short-term and long-term incentive plans that mirror the immediate AND sustained results the organization seeks to achieve. Metrics for both plans reflect the performance standards required for a sustained increase in shareholder value. Short-term rewards create a sense of urgency now while long-term incentives keep the performance "honest"--so key talent stays focused on consistent, prolonged execution that moves the customer from awareness to acceptance to advocacy.
This approach also allows the company to "flex" with the economic cycle it's experiencing. When the economy is soft, employees are told that annual incentives will likely be minimal if paid at all. However, performers can be assured of increased value credits to their long-term incentives (typically not payable for three to five years or longer) if they perform in a superior fashion. Ultimately, determining which incentive plan should be used (ones that increase shareholder value through sustained good profits) is a key CEO decision that will deeply impact the ability of the company to avoid the bad profit syndrome.
Using compensation as a strategic tool, then, becomes a critical way organizations reinforce vision, strategy, roles and expectations to their workforce. Taking time to address these issues properly is key to generating good profits instead of bad.
