Incentive pay... Are you rewarding the right behaviors?

A few years ago the bank I worked for handed me our incentive plan and asked me to find out why we paid out more than ever, but our revenue and profit did not justify that level of payout. In the review I conducted I discovered that the plan could be and was being leveraged to maximize incentive pay without actually doing much work. The reason this could happen was that the plan did not reward the right behaviors. So as you get set to pay your 2009 incentive plan, ask yourself does my plan reward the right behaviors??

The quickest way to tell if your plan is rewarding the right behaviors is to look at how much you paid out in 2008 and how much you are paying out in 2009? For most of us the incentive payout should be lower this year than last year, because well, this year was terrible for most of us. However if you did manage to have a better 2009 than 2008 here are a few more questions you should ask about your incentive plan.

1) Is your plan too simple? This question could better be phrased "Are you paying people to simply do their job?" The key to an effective incentive plan is that it should reward effort above and beyond the normal job description. If you have a sales goal, it is fine to reward an employee who meets the sales goal, but you should be rewarding the employee who exceeds their sales goal by 100%, 200%, etc. more.

2) Do all the behaviors you are trying to incentivize work together? It sounds silly, but if you are incentivizing more than just sales you should make sure that everything else you provide an incentive for works together to maximize the benefit to the organization. For example if you incentivize sales volume and sales margin, make sure the bigger incentive payout is on the sales margin. This prevents your sales team giving away the business just to make a sale. In this way the behaviors work together because making more from each sale is more important to the success of the organization than sales volume

3) Are sales and service being rewarded equally? If sales and service are equally important to your organization than you should be incentivizing both behaviors equally. All to often an organization provides incentives only for increasing sales but has a slogan or mission statement that touts excellent service. If service is your mission, it should be part of your incentive plan in some way.

4) Lastly, is your plan too complex? A successful and effective incentive plan should be easy for your employees to understand. An effective plan allows your employees to know and predict what their bonus is at any given point during the year. If a plan is too complex or too confusing for an employee they are less likely to put in an effort worth incentivizing.

As you answer these questions about your incentive plan you should get a view into where it may be improved. If you make the improvements, you may find that you get more effort from your employees and are spending less to maximize that effort. If that happens than you are rewarding the right behaviors and giving your organization a better chance for success in 2010.

Customers... Do you really know who they are? Part 2

Knowing who your customers are will only get you so far. Once you know them, you have to keep up with them, or rather stay one step ahead of them so that they stay your customers for a lifetime. You can accomplish this in 3, easy (okay not so easy, but totally doable) steps!

1. The first thing any small business owner should do once they get to know their customers on a personal level is continue to build and gain their trust. As mentioned in part 1, the more customers trust you the more they will reveal about themselves personally (as it pertains to your products). One way to do this is through the use of a "loss leader" or a "freebie". This helps solidify to your customer that your interactions are more than transactions, they are a collaboration of "friends." In my industry, I do not want the Chief Marketing Officer of a Fortune 100 company to consider our relationship a transaction. I can't afford for that to happen so I always make sure to invite them to other conferences for free as my guest, not as a speaker or panelist. In this way I can demonstrate my personal relationship with them by offering them a chance to come to an event on a topic that they expressed interest in during our casual conversations. Most times they accept and even when they don't they appreciate me focusing on them, going beyond "good service" and closer to "good friend." This way I can continue to tap them as a resource to continue to gain personal insights about them as customers. As a small business owner you can use yourself as an example of how important trust is. The next time one of your "suppliers" comes by for a sales visit, see how you feel about opening up personally. If you feel like you are willing to open up to them, you can provide first hand validation of my point, and you can also see just how effective some salesman really are.
2. After you build trust with customers and have gained a personal relationship with them, you need to use that information to reach new customers. The most effective way to reach new customers is through the creation of a single global marketing message based on similar personal factors. By this I mean using the personal information you mined from your customers to create one consistent message that never changes at its core. For example, in my organization, putting on high-level corporate events is what we do, but we market that only high-level corporate people will be in the audience, which makes our events more peer-to-peer than our competitors. Therefore we focus our marketing message on this peer-to-peer aspect based on the idea of like minded people wanting to interact with other like minded people. Despite the fact that we put on events that span all aspects of business and every inch of the country our message is that it will always be peer-to-peer. While this may seem like a simple task because our target group is so focused, it is no different than what McDonald's does with its "I'm loving it" campaign or Nike did/does with "Just do it".
3. By now you may be noticing that a key to effective marketing is understanding that customers are similar. This "key" is both true and false because while human sensibilities are diverse, but what consumers want is not. A global theme like "I'm loving it" or "peer-to-peer" plays to the similarities, while how we convey that message plays to the diversity. In this way you can bring back in the dynamics of personal customer information and continue to break it down into smaller and smaller units. For example Nike manages to market shoes to older people by focusing on the quality of their product and how durable it is so that you can always "Just do it." While at the same time they can market to younger people by focusing on individuality and allowing them to "Just do it" their own way. In this way they market to two completely dissimilar customer segments with the same single message. However in order to reach these groups they have to know that young people are personally motivated by uniqueness, while older people are more likely to be focused on quality.

As a small business owner you may never be able to market as effectively as Nike or McDonald's, but getting to know why your customers come to you, may get you closer to "over a billion sold!"

Customers... Do you really know who they are?

With all the things small and medium sized businesses must focus on, it is easy for things to get overlooked. One of these is knowing exactly who you are selling to. If you ask most small and medium sized business owners, they would likely give you a target group, demographic or market segment. However, if you asked them to describe in detail a target customer by combining more unique or personal factors of specific customers, they would be hard pressed to do so. This lack of pinpoint focus on who an organization’s customers will sure to limit their ability to market even the most life altering, must have product, effectively.

In my position of coordinating conferences, I interact with some of the most influential Chief Marketing Officers in the country on a daily basis. Knowing who their current and potential consumers are is one of the key points that we always end up discussing. This involves a very complex process that most small and medium business owners cannot afford to do at the level it needs to be done at; however, it does not mean it should be ignored. Reaching out to your customers and building relationships with them, so they are open to sharing personal information process will allow you to gain an insight in to their behavioral trends and psychographics in the same manner Fortune 500 companies do on a mass scale. While this sounds like a daunting process that most small and medium sized businesses don't have the skills, resources, and human capital to delve that deeply into (congratulations if you do though), getting to know your customers can be done by every business.

Furthermore it must also be remembered that getting to know your customers is an ongoing process. Throughout your organizations life span, the product or products you sell, along with the needs, wants and interests of your consumers will change. However a successful company will maintain enough flexibility in its marketing so that it can grow and accommodate the changing demands of their consumers. This can only be accomplished by reaching out to them and by building relationships with them. By considering the interaction between your business and you customers as more than just a sales transaction, you will afford yourself the chance to learn your customers. It is pivotal to develop a relationship with them so that you are able to ask customers honest questions about their spending habits, current interests and what they are noticing about your business as an outsider looking in. Obtaining this type of personal information will allow you to gain an insight in to their behavioral trends and psychographics in the same manner Fortune 500 companies are able to do on a mass scale, but for a lot less.

Brian Dershowitz Background

This week we have the first guest contributor, Brian Dershowitz. In keeping with the theme, I am posting his background and qualifications as a contributor to a Small Business consulting blog.

Brian Dershowitz is in the unique position of working as a senior content associate for a small conference company through which he interacts with the senior management of Fortune 500 companies. In this capacity, Brian coordinates the editorial and sponsored content of high-end business conferences, in every major metropolitan center, geared towards Chief Marketing Officers, Chief Legal Officers and Chief Human Resources Officers. This experience has allowed him to gain a keen insight in to the inner workings of the largest companies in the country while dealing with the challenges of working for a start-up. Brian holds two Master of Science degrees in Sport Psychology from Purdue University and Sports Management from New York University. Currently residing in New York City, Brian is also the co-founder and Associate Editor of an internationally distributed urban lifestyle and graffiti magazine which also includes a clothing line and sneaker brand.

Decisions, decisions... why we are bad at making them and what we can do to make better ones for our businesses. (Part 2)

Have you ever made a decision that you felt in your gut was right? Has that decision ever ended up being wrong? Have you ever made a decision that went against the evidence? How about that time you made a decision because all the alternative decisions someone else put together just weren’t good enough? If you answered yes to any (and all) of these, you have fallen victim to your own cognitive shortcomings. In a more scholarly sense, the things that made you be you tend to all come together to give you biases in your decision making process. The ability to perceive options, choose between two scenarios and even sifting between good and bad information are all a part of the cognitive process in the larger process of decision making. Unfortunately these same abilities are tainted by past experiences and are enhanced when a “bad” decision ends up being a “good” one.

More than this, the cognitive process gets even more complex than could ever be truly imagined. The whole field of psychology is dedicated to understanding it. To simplify it for this blog, suffice it to say that your cognitive skills are impacted upon by things from your mood to your ethics and all points in between. Essentially all the things that have anecdotally but not empirically been proven to impair or cloud your judgment really do have an impact on decision making. As a result the strategic decisions we make are rarely ever made to the highest effectiveness possible. The idea of fully evaluating information, comparing alternatives, and selecting the best option is nothing we can truly achieve.

That said there are a few tips which can help you make the best of your personal cognitive shortcomings:

•The first thing that can be done is to know that these biases exist. Realizing the strategic decision you are making is more about controlling your cognitive process than it is about accurately evaluating pertinent information is half the battle.

•Secondly, simple cognitive mapping, making a linear sketch of how you arrived at your decision, can mitigate the risk of your biases. It should, when done effectively, be a road map to the decision which anyone could pick up and lead them to the same conclusion given the same information. If the cognitive map is done less than effectively there will be points along the map which you will still be justifying to yourself. If that is the case than somewhere in that gray area is where your biases have taken root. If possible revisit the information later to fix the map and make the best decision. If that isn’t possible and I will concede it often isn’t, know that your strategic decision will hinge on your evaluations in the gray area.

•Finally, make your decision. While cognitive mapping of the decision may take time, it is not meant to lead to paralysis by analysis. If you can eliminate all your biases that is great, but even if you eliminate 25% of your cognitive biases in the decision making process you will increase the chances of achieving a positive result on your strategic decision.

Decisions, decisions... why we are bad at making them and what we can do to make better ones for our businesses. (Part 1)

One of the most important aspects about being a leader in business is making decisions. In the hierarchy of decision types the pinnacle is a strategic decision. These are the decisions that make or break the business. These are the ones that impact the future immediately and often bind substantial resources of the company. The importance of the decision is often palpable and as a result strategic decisions are often the hardest ones for even the most seasoned business people to make.

Considering that no one can 100% accurately predict the future every strategic decision starts out as a 50/50 coin flip. However, there are numerous tomes and pages of research dedicated to the topic of making better strategic decisions. Interestingly, none of the things I have read or any of the research I have seen works in all instances. The main reason for this is that most research is based on case studies and hindsight that prove the researchers point, or on experiments that limit “real world” variables. I don’t know about you, but I have never been able to go back and make a decision, nor have I been able to change the variables surrounding my strategic decisions. So is there anything we can do to make better strategic decisions? Yes there certainly is.

Research shows that the only constant in strategic decision making is the human element. However, as you may figure, it is hard to ever really consider the human element a constant. We all have different experiences, moods, emotions, etc. which research shows impacts our ability to make strategic decisions. Moreover since we are not machines the human condition actually causes us to make bad strategic decisions. Therefore the key to making better strategic decisions is not finding a formula for making strategic decisions but understanding what about us is going to cause us to make a poor decision. In part 2 I will discuss the causes and give the tips you need to make better strategic decisions.

Marketing Dollars and Sense: Spending effectively today to market for the future (Part 2)

As can be seen in part 1, neither type of marketer really instills confidence about the future. On the one hand, the all marketer spends a lot of money on marketing and gets no ROI, but is always at the top of the stack when a customer needs something. Conversely the nothing marketer spends no money so there is no ROI to be concerned with, but must spend core business time on direct marketing to replace any lost customers. In both scenarios the lesson learned is that effective marketing should be a balance of current costs and growth.

For the companies that find themselves in the all category of marketers, effective management of marketing dollars will come from instituting metrics to evaluate the success of a particular marketing method. A lot of times what you will find in an all marketer is free spending and no evaluation of the effectiveness of the spending. Even using ROI, which I don’t recommend because marketing costs are rather abstract and revenues from marketing are theoretically untraceable, would be a good start. However considering the abstract and theoretical complications of ROI, other simple metrics are available to gauge marketing effectiveness. One of the most rudimentary but effective metrics is asking the question “how did you hear about us?” to your customers. For my all company this simple procedure of asking our customers “How did you hear about us?” when they called in to place an order generated a ton of useful information for our company. Our procedure had our one inside sales person mark off how customers heard about us in an excel sheet. This helped our company to lock into which methods of marketing were most effective to reach our customers and generate sales. Promotional fliers that were sent out weekly generated almost no sales interest, while small 20-page glossy catalogues sent out quarterly or left by a salesman at a cold call generated the most sales interest. More than this we found that internet marketing on our website and via e-mail generates some interest, but not as much as I.T. experts would lead us to believe it does. Based on the results we were able to save money by cutting the least effective methods. In this way we are now controlling our costs AND staying in front of our customers.

For the companies that fall into the nothing category of marketers, effective management is more about letting marketing do some of the customer contact work. The nothing marketers will have a hard time seeing the correlation between sales and marketing. Even simple firsthand metrics like the “how did you hear about us” questions don’t provide ample evidence to justify spending the money on marketing. Recently I sat down with the owner of my nothing marketing company and talked about the current customer base. We noticed that year on year there is a large level of attrition among our existing customers for various reasons. Fortunately the owner always finds a new customer to replace the lost ones. Typically however, he is only usually able to line up business to replace what he had lost and does not bring additional business to the company. This obviously isn’t a real recipe for growth. I tossed him a little “did you know” that believe it or not the time and effort he puts in pursuing replacement customers IS marketing. I told him however, that if the company was doing more traditional marketing to potential customers with similar interests as existing customers he wouldn’t have to be in two places at once. He wouldn’t have to invest as much of his time and effort looking for new revenues to replace lost ones. Considering that he is the chief new business generator, and his own HR department, and his own legal department, etc., he was better able to appreciate what marketing could do to make his job much easier. As a result we incorporated some marketing dollars in the operating budget for next year. Obviously, we made sure to install metrics to gauge the effectiveness of the new marketing expenses. This way he will be able to see if our marketing is driving new business to the company or not.

Overall, no matter what type of marketer you are or you work for, marketing should be a priority for 2010. For the all marketers in the group, finding a metric that works for you to help control costs and get more bang for your buck is crucial. If you are a nothing marketer, a cost-benefit analysis of your time spent on personal marketing efforts and compare it to what other things you need to be doing with that time may help you see the light. If 2009 was about cutting costs to stay in the game, then 2010 needs to be about getting greater efficiency from your costs. So spend the money on marketing, but remember that if it doesn't make dollars, it will never make sense!