Compensation: Goal-Driven Incentives
John Westrum's home-building company, in Blue Bell, Pa., was growing like mad: from 1991 to 1994, its revenues skyrocketed 700%, to $28 million. But Westrum became alarmed when he realized that the demands of that dramatic growth were overshadowing the four principles that Westrum Development Co. was founded upon: quality construction, customer satisfaction, on-time delivery, and on-budget performance. "Customers were unhappy, contractors were screaming at us, and our management of invoices and payments broke down," recalls Westrum.
So Westrum took his 30 employees on a retreat and enlisted their help in developing measurable goals that would address those four original principles. The result was an 11-point plan that included, for example, guidelines that addressed the length of construction time, the quality of the construction job as measured by a 178-point checklist, customers' willingness to recommend Westrum to their friends, and so on. As an incentive to employees, Westrum set up a companywide bonus pool (equivalent to about $1,000 for each house built) that would be paid out quarterly according to how effectively the goals were met.
"For each point, we set intermediate and ultimate goals," says Westrum. "If you set unrealistic goals in the beginning, people will be discouraged." Employees agreed that when intermediate goals had been achieved, Westrum would pay into the bonus pool and then raise the bar to the next goal. For instance, after the company had rewarded employees for a 19-day reduction in construction time for two consecutive quarters, the ultimate goal (a 26-day reduction) kicked in. "In the beginning it was a little bit demoralizing, because we weren't doing as well as we thought we would," says Westrum. The first year (1994), only 20% of the pool was paid out.
But Westrum persisted, formatting the company's performance on Excel spreadsheets and then graphing the results over the previous four quarters and posting them. "Employees started focusing not so much on the dollars but on the results," says Westrum. "Anytime we weren't meeting an objective, people would rally behind the person who needed help. After about a year and a half, the effect was phenomenal."
In 1995, 60% of the bonus pool was paid out, and this year 80% of the available pool had already been paid out at the end of the first quarter. Bonuses for 1996 should range from $2,000 to $20,000, depending on seniority, level of experience, and other more subjective criteria, says Westrum. Net margins are up 1%, more than 90% of customers said they would recommend Westrum to a friend (as opposed to 50% two years ago), and quality inspections of finished homes routinely yield scores of more than 90% (compared with percentages in the low eighties in 1994).
DONNA FENN | Inc.com Contributing Editor
Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.