💰The article about salary

Designing 'smart salaries' Salary is the “gene of the company" which, upon examination, reveals much about the overall "health" of the organisation. The extensive experience (since 1993) of TRIZ-RI specialists in consulting indicates that there is scarcely any consultancy work that does not involve the creation of salary models for employees and/or the establishment of key performance indicators. More details ...

True Story 1

The ambience in two stores of the same company, which trade in construction materials, differs noticeably. In the store selling carpets, there is an atmosphere of goodwill; however, in the store selling wallpapers, salespeople almost hate the Customers. In both cases, the remuneration system is identical: a percentage of the gross turnover (the money received from product sales). Yet, the problem lies in the fact that despite the same level of sales efforts (demonstrating, persuading, recording), the gross revenue in the carpet store is higher.

True Story 2

The store, which sells electrical appliances and household goods, also faced a difficult problem. When the sales assistants were incentivised with commissions on gross revenue of sales, they naturally gravitated towards Customers making significant purchases (such as washing machines, electric ovens, etc.) and showed little interest in smaller items. Conversely, when incentivised by the number of sales, then a larger purchases were neglected due to their more complex selling process (involving extensive explanations, persuasion, and justification), which was unnecessary for smaller items.

True Story 3

Salespeople in a clothing store were rewarded with commission on gross sales. This commission structure was set up in the summer. In autumn and winter, the less expensive summer collection was replaced by a more expensive winter collection (typically a fur coat is more expensive than a dress), yet the percentage of gross sales remained the same. As a result, the director felt that the sales staff were earning disproportionately more. And began to think unkindly of the staff...

Solving complex salary tasks

The aforementioned stories from real practice in consulting share one commonality: in all these situations, salary-related problem was not resolved, and notably, it was not resolved addressed in the same manner. It's important to note that the task is far from trivial and, regrettably, is often "swept under the carpet" by management.

This tendency to avoid a genuinely challenging task is quite typical and, indeed, emotionally understandable. Salary is, metaphorically speaking, 'the DNA of the company.' An in-depth analysis of it can reveal much about the health of the corporate organism as a whole. The experience of the 'TRIZ-RI Group' specialists demonstrates that, irrespective of the initial task's formulation, almost no consultation proceeds without expertise in and/or the development of employee salary models.

So, it was necessary to develop salaries and/or remuneration systems for several dozens of enterprises in various CIS countries and neighbouring foreign countries. This included for:

Directors of supermarket and hypermarket chains;
Managers selling premium alcohol and tobacco;
Cost estimators in project organisations;
Specialists in contractual departments of construction materials;
Back office secretaries of investment companies;
Designers in architectural firms;
Insurance agents on railways;
Specialists in advertising departments of various firms;
Heads of construction sites;
Interviewers of marketing agencies;
Salespeople in supermarkets and boutiques;
Managers of real estate firms;
Music school teachers;
Directors of departments supplying cable products;
Building and household materials;
Financial directors ...
and many others.

And, despite the diversity of professions, and indeed, regardless of this diversity and almost irrespective of an organisation's size, most companies are unhappy not “in their own way” but similarly or almost similarly. Like a drosophila fly is a more convenient object for studying the same mutations than an elephant.

A typical example: a survey conducted amongst our site's target audience revealed that only every tenth visitor can accurately identify a successful salary model for an advertising department head. This generality enabled us to devise a universal technology for developing diverse remuneration systems, which assists the user (for example, a company or department head), regardless of industry, size, and business form, and even in the absence of the author, to develop salary models to:

Encourage employees to work more productively and effectively;
Facilitate a 'natural selection' of more diligent and capable employees (regrettably, in most companies, an 'unnatural selection' of employees is already in place);
Provide feedback to all company departments. At the slightest system failure, some employees (or an entire department) should certainly feel that it will adversely affect their salary and demand remediation of the situation.

At first glance, the development of the corresponding universal technology may seem implausible. Currently, there are about 50,000 specialities. Moreover, even within the same job title, roles often differ significantly. For instance, drivers (they may be chauffeurs for a company director, race participants, truck drivers, etc.), should obviously be incentivised differently. But let's reiterate: after many years of work, it became clear that most problems are chronically recurrent.

Perhaps, readers will feel that over this article hovers the spirit of Taylor F.W. and spirit of Emerson G. Just like sir Isaac Newton, who sought to see further by standing on the shoulders of giants, we too strive to build upon their legacy.

Thus, reward for performance introduced by Taylor F.W. in 1911 is present in every solution. (However, the ways to implement it in the examples below, readers will probably agree, are quite unobvious.) On one hand, 90 years after Taylor, thousands of specialities have emerged, which are difficult to standardise. (Measuring the productivity of a stonecutter or a loader is evidently easier than assessing the output of a self-service store salesperson or an advertising department manager.)

On the other hand, there has been almost no instrumental material in specialised literature over the same 90 years, devoted to developing various salaries without resorting to the emotional yet unproductive schema of 'fair/unfair.' The relevance of such articles is indeed quite significant.

An unprofitable habits revenue backside

Let's try to figure out what's going on in carpet and wallpaper stores (Story 1) and resolve the situation.

A good idea is not the first thing that comes to mind. Unfortunately, the first thought that is mercilessly implemented in such situations is to set different percentages. Salespeople in wallpaper stores began to receive a higher commission percentage of gross sales (turnover) than carpet sellers. Result: now not only wallpaper sellers are offended, but also carpet sellers...

Which stereotype has prevented the respected manager from getting to another solution? The emotionally understandable but unllogical habit of looking for the only true “the final result” and the desire to pay a commission from the profits or turnover even to those employees whose functions are necessary but not enough for their increase.

The wrongly chosen way immediately drags a stream of new questions: how many percentages of this ill-fated final result to pay to each employee? What is this “final result"? Turnover? Profit? Number of sales? Or, maybe the number of Clients? How to share this goddam commission between salespeople, loaders and expeditors? And how to define a modest contribution of the storekeeper?

If we ignore stereotypes about the “final result” and take a detached look at the problem itself, it is easy to see that it is based on the following contradiction: the turnover of stores is objectively different, but the incentive system should be the same. Since the carpet store is the leader in terms of turnover, it turns out that both its revenue and the salary proportional to it are the benchmark for the wallpaper store. And, we note, this benchmark that is unattainable for wallpaper sellers. Similar to the performance of even a super efficient digger-human will never compare with the performance of an average excavator operator. Obviously, the wallpaper store needs a different benchmark than the carpet store.

The proposal suggests setting own benchmarks for each store based on two parameters simultaneously: the target on turnover and the target on the number of sales. The carpet store has a higher turnover, while the wallpaper store has a higher number of sales. Each store should work towards its respective targets. As we can see, the final result can have two heads.

Now when we have two benchmarks, we can compare the results in relation to both factors: how fully each benchmark performed. This ratio (following Emerson) we shall count it as the result.

"Performance" is defined as the actual result compared to the target benchmark multiplied by 100%. Performance = (Actual Output / Benchmark) * 100%

Here is an example calculation:

Table 1. The results of sales of the carpets store (for one month):

Table 2. The result of sales of the wallpaper store (for one month):

Notes:

The numbers in the tables are conditional.
Overall Performance in this case is calculated as the product of performance on turnover and the performance on number of sales (for example for the carpets store 0,88 X 1,03 = 0,91 or 91%).

Now let’s move straight on to the design of salary. It will consist of two parts:

a) the so-called "basic" – permanent part which is fixed for each salesperson (it can vary in relevance to knowledge, skills, experience and other achievements)

and

b) "Reward" - variable.

"But this already common knowledge. Salary + Bonus", - shall say the reader and be mistaken. The resemblance is only superficial. We shall show you the difference. There will be 3 ones.

Difference 1

The Total salary is calculated using the formula:

Total salary = Basic salary + Basic part х Overall Performance

and not according to the formula: ~~standard salary + bonus on turnover (or profit etc.)~~".

Difference 2

The amount of the basic part is set in the following way, in order for the total salary (that is the salary together with the bonus), for a overall performance of ~70%, to correspond to the average market value. In such a way, the employee starts to receive a factual reward (salary which exceeds the average market value) only for a performance of more than 70%. We shall come back to this principle further below.

Difference 3

The reward is calculated using the formula:

Reward = Basic part х Overall Performance

This implies that the base for calculating bonus has the same name (basic) part of the salary of the employee (ad not the profit, turnover, number of sales etc.).

In other words: the sought-for "final result" considers sales and turnover, but the bonus is calculated as a part of the salary. (It’s just that the size of this share is directly tied to performance.)

Such an approach removes the necessity to solve some difficult tasks. For example, it is already not necessary to calculate the contribution of the employee in “general chores" in view of "fairly" sharing bonus (from profit, gross value etc.). Last, but not least, this approach does not provoke the employee to think about “social fairness” diverting him from work.

In our case:

Table 3

Now the stores are friends, like families.

A "forcing circumstance" game

Story 2 was about selling large and small goods. An astute Reader probably noticed a distinct similarity between the situations, which at first sight seem different. The first story was about two stores. The second story is about one store. This is where the differences end. In both the first and second cases, we have "different calibres" of goods and the same "throwing" in search of the truth between turnover and number of sales.

A typical stereotype that prevents you from finding a solution is the "either/or". But, as we saw above, the apparent contradiction is removed by moving to the "both and" model. That is, not by choosing between turnover and number of sales (neither of which is sufficient to solve the problem), but by combining (synthesising) them into a more general principle of effectiveness. The problem described in Story 2 can be solved in the same way as the problem described in Story 1, by setting two benchmarks: by turnover and by number of sales.

However, we'll expand the zone of possible solutions.

Obviously, the store manager has to encourage the sale of both large and small items at the same time. Often, to achieve this goal, sellers are forced to speak certain "scripts", “speech modules”, fined them, are offended by them for their lack of understanding...

Unmotivated salespeople naturally “forget”, “feel shy” to take action, become lazy or openly refuse to show additional activity in a “boring job” in line with these requirements. It is quite difficult to control that. As a result wallpaper is sold without glue, paint without brushes, lamps without bulbs.

In order to keep the salespeople interested in the process of sales, all the goods are transferred from the “storage program” to cards, which remind us of the familiar game from our childhood, cards of “Lotto”.

When any good is sold, the corresponding cell on the card is closed. A bonus is paid for each closed row. The more closed rows, the higher the bonus.

On each row the goods are grouped as follows:

Each row should contain one or two large items and the rest should be a small ones.
The goods in a row should represent a “set”. For example, video camera, power supply unit, cassettes, special bag and tripod. Then the salesperson will propose the customer to buy the video camera with the whole set in order to fill in a row.

What else to do? The circumstances are forcing. This is "do or die".

Table 4. Lotto card

Just as in the first situation, this method combines two rewards into one: a reward for the number of sales and a reward for the turnover. The "Lotto" can be used effectively for a range of goods of no more than 100 to 200 units. For a wider range of goods it can be used as an additional move to sell a specific group of goods you need to get rid of.

Minimun performance

Earlier we said that in order to evaluate the performance of fulfilling any function, it is necessary to set up target benchmarks. But what shall we do if they are repeatedly not fulfilled?

Let’s consider a distant example. Let's say we have hired a typist to type 1000 pages per month (our target benchmark, normative). To simplify, let’s imagine that the basic part of her salary is 400 U.S dollars. If the typist fulfils her normative (that is, type 1000 pages a month), we shall pay her a 100 % reward for performance.

With the formula:

Total salary = Basic part + Basic part х Overall Performance , where

Overall Performance = (Actual Output / Benchmark) * 100%

Hence, if the typist, types out 1000 pages a month:

Performance = 1000 pages/1000 pages = 1 or 100%.

Total salary = $400 + $400 х 1 = $800

But will the Reader believe the following situation? In a month the typist types out only 30 pages and asks for a reward of 3%:

The overall performance = 30 pages/1000 pages = 0,03 or 3%.

The total salary = $400 + $400 х 0,03 = $412

"Absurd!" – will say the Reader and he will be right. However, the absurdity of the situation became obvious only after it had occurred. What if the typists hands out 500 pages and asks for a $600 for the work? It is also absurd. The obvious conclusion: "She has not fulfilled the normative! Why should we pay her extra?"

The formula only is not enough, there should be boundary conditions.

But before setting them, let's look at another, more distant example. A new manager is hired in the sales department. Let's say he is given a target of 10 deals per month. The basic part of his salary is set at 700 US dollars. The manager repeatedly concludes not more than 5-6 deals per month. ===

Then:

The performance = 5 deals/10 deals = 0,5 or 50%.

His total salary = $700 + $700 х 0,5 = $1050.

It is stunning but a reality that in many companies, the manager concludes only 5 deals and receives his $1050.

Of course, if he makes unusually few deals (for example, one, while all the others make 7 to 10), it will be immediately visible. But in a real business, the main problem often starts with employees who work at a performance of 30-60% of the possible one. Yes, and shouldn't a performance of "30-60%" itself be absurd? This is why we introduce boundary conditions.

While solving the task with the two stores, we have already shown that the employee should receive a real reward (the salary above the market average) only if the performance is 100%. Otherwise, the reward must be lower (according to the formula: "Basic part х Overall Performance") or the salary should be limited to the basic part if the performance is less than 70%.

For comparison. For a basic part of $400, the salary of a typist, who works at 69% performance, shall be $280 less than a typist working at an performance rate of 70%, who receives a salary of 400 + 400 х 0,7 = $680.

In the case, if an employee repeatedly fails to achieve the boundary conditions (e.g. 70%), it is recommended to specify: is this target benchmark too high? If not, then the employee should better be unmercifully… fired. Yes, this is not in favour of the employee. But this article itself is about the interests of the company and not about favouring of idlers.

A poor get poorer, a rich get richer

Sometimes they say: "Ok, it is good to set up a minimum performance where the employee has a fixed basic part and a variable part of the salary. But what if there is no basic part at all? For example, when we talk about agents? After all, actually the agent “sits on percentages” and does not ask for a basic part, no matter how he works. Does the boss have any moral rights “to put pressure on him?"

Let's think about it.

The task

Once the director of a company trading in expensive products, decided to attract the best trading agents of the city. In order to achieve this goal, he doubled the percentage of the agents' commission compared to the other competing companies: from 15% to 30% (the profit margin allowed him to do so).

We suggest that readers put this article aside for a moment and try to visualise the possible outcome in their minds. It did not turn out at all rosy. That is, of course, a lot of agents actually gathered. However the director did not consider the fact that a high percentage attracts everyone. Not only the best, but also the worst and the average and so on... And since there is always much less really good employees, than the rest, the choice was “hopelessly bad".

"Nothing strange about that. They do not ask for a salary. If there is a deal, there is a commission %, no deal – no commission %", - thought the director and thus made his second mistake.

The mistake is this. Even if the agents do not ask for a salary, but are satisfied with a small number of deals, nevertheless it is still necessary to keep the office, the telephone, the photocopies, distracting the management team and other employees. And every businessman knows that if a paid but illiquid asset is even kept safe, it is the same as being stolen. It is more profitable not to have it at all.

The right decision (which was actually proposed to the director) was the introduction of a scale of salary for performance, specified by a corresponding target benchmark. In order to avoid the "accumulation" of negligent agents in the company, the agents' commission was differentiated: if the agent was not productive, the percentage he received would decrease and he would no longer be interested in working in this company (since in a competitor's company or one with such low performance, he would receive a higher percentage: 15% instead of 10%).

An example of the calculation of agent's salaries:

Table 5

Table 6

Note. This numbers are conditional.

In our example, the agent worked with an effectiveness of 84%, which falls in the range of a commission of 23% from turnover. The actual turnover on the deals concluded by the agent were $1100. Accordingly, his commission = $1100 х 0,23 = $253.

An average temperature at a hospital

When setting up target benchmarks, it is important not to engage in their "pernicious averaging." We shall explain this with an example.

Example:

A growing retailer supplies building materials to different groups of Customers:

small stores that regularly buy small consignments
and large construction companies who place a single ones, but very large orders.

In theory, in order to separate the two technology services, the wholesale managers, should be divided into two categories:

Those who work with "small but regular” customers
and those who work with "large and rare" ones.

This is understandable. The process of providing services to VIP customers is very different from providing services to the general public, just as the type of service in an expensive Japanese restaurant is different from the type of service in "McDonald's".

With the second group of Customers we can meet often and for a long time, make unique contracts etc., with the first group we need specially developed flow technology and principally quickly service them. The overlap between the different groups threatens us with low productivity.

However, “historically” managers have worked with a different Customers. Or it was considered that Customers should be serviced by “the one who found him”.

What did should be done? Preventing the managers from working with one or the other group of Customers is not possible. It would be good if they could “exchange” Customers, but why would they want to do that?

It was suggested to use the "80:20" principle. When evaluating a manager with Customers of the first group, the emphasis is on increasing the "number of deals" (i.e. the number of Customers and the number of deals with each Customer), and when working with the second group, the emphasis is on "turnover". ===

Note. What is to be considered as a big deal or a small one is quite subjective.

More specifically, it was considered that for managers working with Customers of the first group, the effectiveness depends 80% on the number of deals and 20% on the turnover of the deals:

Overall performance = performance on turnover х 20% + performance on number of deals х 80%

And managers working with Customers of the second group, on the contrary, performance depends 80% on turnover and 20% on the number of deals:

Overall performance = performance on turnover х 80% + performance on number of deals х 20%

We set up a target benchmark for each category of managers:

For example:

for managers working with the Customers of the first group:

Table 7

To calculate the actual output, we have made a table, in which we have listed the companies of the Customers, in the columns we have noted the deal and in the cells we have noted the sum of each deal.

Table 8

We calculate the number of filled cells in the table. For example there are 450 such cells. This is the actual the number of deals concluded by the sales manager. The sum of all these deals ($82 000) is the actual turnover on deals.

Now we calculate the performance:

Performance on the number of deals (on all the clients of the manager for a month) = (the actual number of deals/ the target-benchmark number of deals) х 100% = 450/510 х 100% = 88%.

Performance on turnover = (82 000/100 000) х 100% = 82%.

Overall performance = performance on turnover х 20% + performance on number of deals х 80% = 82% х 20% + 88% х 80% = 87%.

Now let us count the total salary:

Total salary = Basic part + Basic part x Overall performance

For a basic part of $700: Total salary = $700 + $700 х 87% = $1 309.

Just like in the previous examples, it is necessary to set up a minimum performance level.

What effect did we attain with this solution? Now the sales manager can choose himself which system to use to get his salary. If he attains at least the minimum performance level for large or small goods, he can receive two basic parts and two rewards. But this way or another, it is not profitable for him anymore to mix Customers and disperse efforts, it is much better to give away a large order and take many small ones instead; or the contrary. Thus, it is clear that one big Customer will affect the salary of managers of the first group, on average, 4 times less (80:20) than many small ones.

What happens next?

Is leader stands for an equality in poverty?

The experience of implementing various salary systems has shown that one of the external manifestations of the “correctness” of the model implemented is the stratification between “poor” and “rich”.

Some employees begin to show activity when they understand the possibility to earn more, while some others criticise the new system with highly-spiritualism but low-technological speeches about the imperfections of the world in general and the company in particular… . The latter tend to make proposals about the need to redistribute Customers through "fairness", because some employees "are similar to the bourgeoisie" and others have "nothing to feed their families".

No matter how hard is the chief manager should not give in to such a provocation. In this context it is important that the poor to get poorer and the rich to stay rich. Because we all know to what dispossession and collectivisation have led to: everyone became poor.

And it is also wrong, indecent and unproductive for a manager to spend the same amount of energy and time on idlers and successful employees.

Summary

So let's list a few typical mistakes related to ideas and stereotypes that turn wages into waste:

Mistake 1

Using profit or turnover as a basis for commission, although they are the “most understood”, they do not always have the suitable criteria for “final result”.

Mistake 2

Choosing between two false alternatives: pay either from one or from the other parameter (for example either from turnover or from the number of sales). Neither one of these alternatives can give an appropriate solution. As we have seen earlier it can be achieved with “and-and” but not with “either-or”.

Mistake 3

The lack of a target benchmarks that is understandable to the employees (or, as advertisers say, "positioned"). There is often a lack of understanding of what is good and what is bad, what should be encouraged and what should not.

Mistake 4

Viewing the setting of benchmarks as the ultimate truth (which is not actually achievable) rather than as an ongoing contractual process.

Mistake 5

Averaging the salaries of managers with the same function, but different types of Customers. As a result of this mix of the different service techniques, it becomes almost impossible to set a target benchmark.

Mistake 6

The distribution of rewards among employees without a single and understandable system to evaluate the performance of their work, and this leads to many conflicts and “wrongs”.

Mistake 7

Attempt to prevent the “stratification” of employees into “rich” and the “poor”. It should be remembered that it is impossible to establish communism even in a "single, separately taken enterprise".

The epilogue of the consultant

On the one hand, after having completed several dozens of orders for the development of salary systems, it is easy to say what salary system has been used here and how effective it is, just by entering any company and looking at the employees' behaviour...

On the other hand, after analysing the “salary problems” faced by the management of the company, we can diagnose how efficiently the analysed business is working in general.

It is logical that a well-designed remuneration system is an important factor in an intensifying competition.

The author thanks Sergei Sychev, Igor Vikentiev, Olga Deinega, the ”TRIZ-CHANCE” system, for their help in writing this article.

The article was first published in the newsletter "Advertising Dimension" ("Reclamnoe Izmerenie") No. 10 (75), 2000.

Designing 'smart salaries'

PreviousNews NextThe paradox of an agent

Last updated 1 year ago

Was this helpful?