“The absence of business logic is simply astounding.”

(originally published on EFA® in February 2010 under the same title;  republished in April 2013, as part of our retrospective Above Average: The Best of Escape from Averageness®, 2009-2012;  updated and republished in advance of each Pipeline workshop™)

McKinsey and Company

It is mid-2012.  The intrepid, results-based consultant smiled and shook her head, in a combination of amusement, incongruence, and disbelief.  It was yet 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 intentions for its team-based performance compensation plan.

The Gross Income Participation Pool – the GIPP – had been a prerequisite to her consulting firm agreeing to become involved in a client-consultant partnering arrangement with RB Builders in the first place, one of three stipulations, along with internal financial statements that reflected a variable costing approach, and the subordination of every existing initiative to the company’s new constraint-focused, rapid-results continuous improvement process.

The GIPP was new.  It was purposely designed to replace RB Builders’ longstanding-but-inconsistent practice of paying individual bonuses based on multiple job-related measures.  It consisted of a team-based approach performance compensation focused on achievement related to a single business outcome, specifically, Gross Income achieved above a specific baseline.

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

Now, however, the GIPP was getting push-back from a recently-hired Regional Vice President, who was saying the plan should be scrapped.

“We have better uses for those funds”, he said.

The intrepid, results-based consultant’s thought to herself, “The Gross Income Participation Pool is an established prerequisite.  This guy’s assertion doesn’t have any merit, but even if it did, it is too late in the planning cycle to consider changing it, let alone canceling and replacing it.”

She was having none of it.

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

“People get paid salaries to do their jobs, and we bonus certain positions”, he replied.  “I need more people, not higher-paid people.”

The intrepid, results-based consultant stared at the CEO, her impassive expression 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, what?  Be unable to meet its debt service obligations, or find land, or hire more people, 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 one thing, all of the land and building lots acquired are kept off-balance sheet, so that is not a concern of yours”, she continued.  “And – given that RB Builders places strict limitations and controls on the level of work-in-process, and on any increase in non-variable expenses – is there any imaginable scenario under which additional Gross Income will result in less cash flow?

She stared down the Regional Vice President.  “I didn’t think so.”

“On baseline alone, RB Builders is profitable, operating above breakeven, correct?”, she asked, without waiting for the answer.  “So – is there any imaginable scenario under which every penny 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, let’s say – distributed to teammates and owners before it became retained earnings?

“I can understand being prudent with important decisions;  at some point, there will be an economic downturn, and we have to be prepared for it.

“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, in order to provide more money for other uses.

“I can understand – but not agree with – the choice of a supposedly-safer outcome, like Net Income.

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

“The absence of business logic is simply astounding.”

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of the three Velocity Accelerators® highlighted (together with Critical Chain Project Management and Business Process Improvement) at the next Pipeline workshop™, March 25-26, 2020, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Cost is $895.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.

Sponsored by Specitup and Simpson Strong-Tie.

Details:  www.buildervelocity.com