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A Case of Conflicting Incentives

Posted August 3, 2011 8:29 AM by Dylan Miyake

So, last weekend, I was restocking wardrobe essentials like t-shirts, socks, etc. As is the case with most guys, shopping is not one of my strong suits. I delay and delay until there is no choice but to retire those trusty but threadbare socks and replace them with a fresh pair.

While I was shopping, the gentleman working the counter struck up a conversation. He said he recently finished college and has been working at the store for almost a year now. I mentioned something about how tough jobs are to find and he said it seems to be getting better- if his sales numbers are any indicator of the overall economy. As a data cruncher, I had to ask how his numbers were tracked and the answer was pretty surprising...

He said that each sale is added to a big database at the company Headquarters which compiles and predicts sales nationwide based on weekly and seasonal trends. Not all that surprising, as most big companies have some form of Business Intelligence (BI) software or Enterprise Performance Management (EPM) software.

He continued by pressing a button on the keyboard and a summary of his sales popped out of the receipt printer. He said his target for the day was $850, he was 4 hours into a 6 hour shift, and had sold about 65% of his target (not including my sale). Again, this was cool, but nothing ground breaking. Most big companies have some sort of production target and employees scramble to meet them.

Incentivized Decisions

It got interesting as he was ringing up my purchases. He said that if I sign up for a company credit card, I would receive 20% off my purchase. I declined and he seemed a little disappointed as signing up new credit card customers was probably another one of his daily targets.

He scanned another item or two and then said he had another offer. This offer was to support a local charity that encourages reading. If I purchased one of their cards for three dollars, I would receive ten dollars off of every $50 purchased. I asked if there was a limit and he said no. So in my mind, if I spent six dollars supporting a local charity, I would receive $20 off my purchase. A quick mental calculation and it was $100+$6-$20 = $86, essentially a 14% discount plus the warm fuzzy feeling for supporting a local charity.

I mentioned that this charity coupon was pretty generous from the store's point of view. They were giving up quite a bit of revenue to support the local community. He agreed, but then said the discounts really hurt his daily sales numbers. So not only was the store losing money, but each coupon was cutting into his daily quota as well. Seems tough, but he did say that each coupon he sold entered him into a drawing for an ipad computer.

A process map might looks something like this:

If I was on his side of the counter, and keeping my job in a tough economy depended on me making the daily sales quota, I would hide both the credit card offer and the charity coupons. But he did not withhold these offers, but did feel the consequences when my final bill dropped by 14% from what it would have otherwise been.

So what is the point of this story?

To me, it was a real life example of how objectives from the corporate strategy map cascade down to the front lines. This gentleman had a number of incentives to act in certain ways – increasing revenue through sales, signing up credit card buyers (which hurt his daily sales number, but probably makes the company more money through interest payments over time), or he could choose to support a local charity and look better in the eyes of the community, but at the expenses of both his and the stores daily profits.

In our own worlds of strategic planning and performance management, it is important to understand the incentives from both the corporate and from the front-line point of view. If the incentives are unbalanced, or completely misaligned, decision made on the front line may not support the larger corporate strategy.

The point here is that the store's leaders understood the incentive structure and added additional compensation so that no matter what decision I made, both the cashier and the company could benefit. Consequently, my cashier presented me with both options, made progress towards his daily sales target, supported the local community, and is hopefully the owner of a shiny new ipad too!

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