The Right Incentives

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The use of incentives is often overlooked as an effective way to increase market share in a shrinking economy. Productivity-based, excess profit incentives can be designed with no upfront cost. Better yet, they are paid only when the desired sales and excess profits are actually produced.

There are three ways companies can develop effective incentives to increase market share. First, provide production employees incentives to produce more, which lowers direct labor costs, allowing the business owner to lower prices to increase market share. Second, give the sales team productivity incentives to sell more. And, third, offer incentives to existing customers. Adding incentive plans for both customers and employees will increase sales and lower costs at the same time.

Incentive Don’ts
Unfortunately, even in today’s economy, many owners still are unaware of the true operating costs of their companies. Or, because they lack the expertise to develop effective incentive programs, they guesstimate their expenditures and offer ineffective or costly incentives. Either is detrimental to the business.

A common and simple incentive program is to drop prices or entice customers with free upgrades (another way of lowering the overall price). Owners are inclined to lower prices when business is down and customers are not spending money. This position is based on the belief that a price reduction will enable companies to woo buyers away from their competitors or to schedule customer work now rather than at a later date. Even though this approach may increase business in the short term, the reality is the company is likely to lose money, weakening its ability to sustain operations until economic conditions improve.

Owners also err in setting up employee incentive programs. In many instances, the program does not offer enough incentives to make it effective or achievable. Some owners set the goal too high because they are unwilling to give up much. Or they make the program too complicated with many levels that must be reached before the incentive is released. Both types of incentives are counterproductive because they deflate the productivity of the employees. Effective incentive programs need to be credible and sustainable.

Effective Production Team Incentives
When employees do their jobs properly and productively, the company achieves and sustains profitability. Employees receive their paychecks and owners receive their profits. However, when employees are more productive than normally expected, companies should achieve greater, or excess, profits from those efforts. This is the right scenario to introduce productivity-based, excess profit incentive programs.

For example, a home remodeling company accepts a job for a flat fixed bid. When preparing the bid, the owner determines the job will take 150 labor hours. The employees are properly motivated and complete the job in 125 hours, generating excess profit for the company (the remaining 25 hours included in the bid). With a productivity-based, excess profit incentive program, a portion of the unused 25 hours of labor wages is allocated to the employees involved in this job. In other words, the owners share some of the excess profits with the employees. Similar incentive programs can be developed to use with other production-related employees, where they earn additional compensation through their increased productivity.

Effective Sales Staff Incentives
Incentives for the sales staff are structured differently from those of the production team. The sales team can be incentivized through a combination of top-line revenue increases, maintaining or exceeding gross margins and cross-selling and up-selling certain product and service mixes. One example of a sales staff incentive is to offer additional commission for achieving sales at a specific level above the previous year’s amount or above a baseline amount. Many companies only use these top-line incentives because they don’t know or understand how to offer other programs. These can be effective when managed correctly.

It is important to remember that increased sales do not always equate to increased profit. Some sales staff are given the freedom to manipulate pricing to get the bid and, in doing so, may give away too much margin to get the increased top-line sales. Instead, structure the incentive program so the sales staff is paid only on the margin or the profit from their jobs.

Additionally, owners can design an incentive program based on a particular product or service. For instance, the company may previously have purchased roofing materials that are just taking up space in the warehouse. The owner may decide to pay a higher percentage on roofing jobs sold by the sales team to make use of the existing materials. In this way, the incentive program benefits the owner by reducing overhead costs, the sales staff by increasing their paychecks and the customer, as the roofing job can begin quickly since the materials are already available.

Effective Customer Incentives
There are several approaches for offering incentives to customers. In any contractor’s business, there are slow off-peak times just as there are certain times when companies cannot keep up with the demand. Owners can take advantage of the slower times by offering to reduce the price of the job for those customers scheduling work during this period. In this way, the owner brings in revenue and keeps staff employed during the sluggish months.

However, it is imperative for owners to pace the work so they are not overextending their own cash flow and line of credit, thus finding themselves cash poor waiting for final payments on all this new work. The successes are from assertive sales, not necessarily aggressive scheduling.

Rather, there needs to be a combination of new business scheduled at a reasonable pace. In this way, the company can afford to do the work based on financial and labor related conditions.

Another method to incentivize customers is to offer a job discount when customers prepay. An additional benefit of this cash flow is it allows owners to save money by not tapping into their lines of credit and accumulating extra interest. Also, in some instances, manufacturers offer special incentives to contractors. The owners can pass along these incentives to customers as enticements for scheduling work at specific times or prepaying a portion of the job. When implemented correctly, customer incentives offer owners added methods to grow their companies.

Incentive Do’s
Returning to the basics is a simple but effective concept. Companies today are fighting the “Joe Pick-Up Truck” phenomenon. This occurs when laid off individuals with trucks and tool boxes are bidding virtually every available job.

In today’s economy, it is now even easier for customers to focus on cost alone and for construction owners to give in to the temptation to compromise. However, if the companies give the work away, they won’t survive. Or, they might even end up tarnishing or destroying their reputations. Intelligent companies follow the age-old advice of “doing what you say and saying what you do.” They stick to the basics rather than compromise quality by submitting the lowest bid to get the job.

In this way, they become known in their market areas for providing quality work and fair prices without taking the shortcuts. However, the others will not be able to sustain their businesses as they acquire jobs at little to no margin and lose money on the jobs that they underbid.

Successful companies also understand the importance of pacing their work so they are not overextending their employees or their cash flow. By adding effective incentive programs for both the customers and the employees, the construction companies can grow their market shares in the shrinking economy.

About Patrick A. Genovese 2 Articles
Patrick A. Genovese is a senior project manager. With an background in marketing and business management, Patrick was a small business owner for 40 years.

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