“The absence of business logic is simply astounding.”

(originally published on EFA® in February 2010 under the same title;  updated and republished in April 2013, as part of our retrospective Above Average: The Best of Escape from Averageness®, 2009-2012;  published again here, as part of the explanation of a new Velocity Accelerators® for the upcoming Pipeline Workshop™ No. 8)

McKinsey and Company

The intrepid, results-based consultant shook her head, partly in amusement, partly in disbelief.  It was another sobering reminder that RB Builders, early in this process, was capable of coming to bewildering conclusions, the latest of which centered around the company’s team-based performance compensation plan.

The Gross Income Participation Pool, or GIPP, was a prerequisite – une condition nécessaire – to her firm agreeing to become involved in a client-consultant partnering arrangement with RB Builders in the first place;  it was, in fact, one of a set of three stipulations, which included a requirement that the company’s internal financial statements reflect a variable costing approach, and a requirement that any existing improvement initiatives be subordinated to the company’s new constraint-focused, rapid-results process of continuous improvement.

The GIPP was new.  It was supposed to replace the company’s longstanding practice of paying individual bonuses based on multiple measures, and consisted of a team-based approach focused on performance related to a single business outcome, specifically, increases generated in Gross Income above a specific baseline.

Under the GIPP, the baseline performance was referred to as the Gross Income Baseline, while the budgeted performance was dubbed the Gross Income Target.  The difference between the GI Baseline and the GI Target was referred to as the Gross Income Reserve.  The GI Reserve was scheduled to be paid out progressively, based on the achievement of a predetermined number of “bonus buckets”, called Gross Income Milestones.  The aggregate teammate share of the GI Reserve represented one-third of the GI Reserve, while the remaining two-thirds was allocated evenly between distributions to owners and retained earnings.

Now, however, the GIPP was getting push-back from one of RB Builders’ recently-hired Regional Vice Presidents.  In fact, he was advocating that the plan be canceled.

“The market has improved, but we still have credit facilities that we have to restructure, repay, and replace, and now we need land and building lots;  bottom-line, we need the cash”, he explained.

In the intrepid, results-based consultant view, the Gross Income Participation Pool was a well-established prerequisite;  it was too late in the planning schedule to consider changing it, let alone cancelling and replacing it.

The intrepid, results-based consultant was having none of it.

“Where did you get this idea?”, she asked.

“It is the best approach to a situation that remains very challenging and uncertain”, he replied.  “We cannot justify bonuses in this economy, in this housing market.  We are fortunate to have our jobs.  We have nothing against bonuses in better times, just not now.”

“So, you just want to cancel the GIPP?  YOU CANNOT BE SERIOUS!”

“McEnroe”, said the CEO.  “Nice impersonation.”

The intrepid, results-based consultant turned towards the CEO, her impassive facial expression nevertheless clearly communicating her thought:  “Where did you find this guy?”

She turned her attention back to the Regional VP.

“Let me get this straight.  You are concerned that your division will be unable to meet its debt service obligations, or find land, if it rewards performance above its baseline?”, she asked, rhetorically.  “Really?  Where is the money supposed to come from?

“The GIPP will not have paid out anything unless there is a reserve created by performance that exceeds the baseline.  You do realize that the GIPP is completely self-funding, that it does not cost the division or RB Builders’ owners one-red-cent?

“You do understand that, right?

“For the most part, all of the land and building lots acquired are kept off-balance sheet.  With in-place limitations on work-in-process and management controls on non-variable expenses”, she continued, “is there any likely scenario under which additional Gross Income will result in less cash flow?  On baseline alone, RB Builders is profitable, operating above breakeven, correct?  So – is there any likely scenario under which every cent of that additional Gross Income will not drop straight to the division bottom-line?  Where it can be utilized for – oh, I don’t know, say – debt restructuring, or distributed to teammates and owners before it became retained earnings?

“I can understand being careful with important decisions in uncertain times.  I can understand increased diligence in determining a baseline that reflects current reality.  I can understand having a more progressive structure to the payouts, so that each successive milestone is worth more.  I can understand adjusting the distribution of the reserve between teammates, owners, and retained earnings, to 25-25-50, or 30-30-40, instead of equal shares, in order to provide more money to meet extraordinary debt service requirements.  I can understand – but not agree with – the fear that would drive your flight to a supposedly-safer outcome, like Net Income.

“But, to deny yourselves – you, your teammates, your owners – the opportunity and motivation to do better?  To preserve your shared livelihoods?  To secure your collective futures?  That, I do not understand.

“The absence of business logic is simply astounding.”

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of the five Velocity Accelerators® highlighted (together with Critical Chain Project Management, Epic Partnering™, Building Information Modeling, and Business Process Improvement) at the next Pipeline workshop™, October 18-19, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Cost is $875.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.  Sponsored by BUILDER and BuilderMT.

Details:  www.buildervelocity.com