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Pearle Vision's Managers Think Like Entrepreneurs

January 1, 1993
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Related Topics: Corporate Culture, Compensation Design and Communication, Featured Article
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Monday morning, 8:00 a.m. You drive into the parking lot of the store that you've been managing for the past five years and notice that your boss is standing at the front door, waiting for you. The discovery makes you worry, but you manage to remain calm as she welcomes you to a new week—and to your new store.

"Funny," you think to yourself, "the store looks exactly the same as it did on Friday evening when I left." But you're afraid to say it—so you don't. You just smile and say, "Thanks," as your boss hands you a key.

"What's this for?" you ask.

"It's the key to your new store," she says, matter-of-factly. "Run it as if you own it."

As a store manager, you probably couldn't get any more empowered than that. As for Pearle Vision, a 31-year-old retail chain providing eye-wear products and services, there probably isn't any other action that would increase your organization's profitability more.

But management at Pearle Vision, a wholly owned subsidiary of Dallas-based Grand Metropolitan, didn't always know that. It found out the hard way that the keys to success would amount to empowering its 500 store managers through a new bonus system, a training program and a new company culture. Already it seems to be worth it—in profits, commitment and future growth.

Managers had less control than franchisees.
Something odd had been happening at Pearle Vision. Senior managers looking at data reports that compared the 557 franchise stores with 500 corporate-owned stores discovered that franchisees consistently outperformed corporate store managers in total profits.

Vice President of human resources, Roy J. Wilson, sat down to discuss the matter with the company's CEO and COO in early 1991. They came to the conclusion that franchised owners had three things that corporate store managers didn't have:

  • A store license—empowerment to make their own choices
  • The ability to manage their own bills and employees
  • The power to develop their own marketing strategy and to control their own local marketing dollars.

These three seemingly simple differences meant large gaps in performance between franchisees and corporate store managers. "When we explored why a franchisee seemed able to do better, we realized that, from the corporate perspective, the system didn't allow managers of company-owned stores to operate in the same environment as franchisees," Wilson explains. "In essence, store managers were unable to run their stores in a way that allowed them to serve the customers' needs best. They simply weren't encouraged to think and manage innovatively," he adds.

The store managers were required to adhere to rigid corporate rules. All the stores were operated exactly the same way, regardless of their location, size, projected growth or previous profitability. These constraints made it impossible for store managers to have more than limited creativity in almost any area, including budget, local marketing and personnel management.

HR identified three tools vital to retail success.
Pearle's HR department took on the challenge of developing a program that would help corporate store managers reach their full potential. This, in turn, would help the business grow.

Senior management gave Wilson a month to come up with a solution. "Obviously, 30 days wasn't nearly enough time to do something as dramatic as we were talking about," says Wilson. Development of the complete plan, Optipreneur, aligned with the idea of the entrepreneurial spirit—took seven months.

Wilson started by putting together a team of eight content experts from different areas of the company, including finance specialists, store managers, franchisees and so on. The group looked at several layers of the organization—senior, mid-level and first-line management. Early on, the group realized that a big issue was the company's compensation and incentive-pay structure. While studying the problem, the group used the successful compensation programs of other multisite retailers, including Domino's Pizza Inc. and Luby's Cafeterias Inc., as benchmarks.

As they studied the problem, they realized that it was more than just a problem of money. "We had to do something about the corporate environment, too," says Deborah Flaherty, the HR manager at the organization's corporate office.

"We had to be able to effect change through the entire system, not just the top 20%."
Roy J. Wilson,
Senior VP of HR

The group identified the three tools necessary for retail success, which centered on the ideas: want to, can do and able to. "These became the core of our program," explains Wilson.

"The want to was essentially an incentive program—a bonus plan," explains Flaherty. "The can do piece trained managers, and gave them the tools to manage and operate their stores better, the way independent businesspeople would. Finally, and probably most important, was the able to. We took a hard look at the corporate culture. Even having a new compensation program and well-trained managers, if the corporate structure didn't embrace this philosophy, we knew we weren't going to be successful."

"The biggest distinguishing factor between franchisees and corporate managers is the fact that franchisees pay employee salaries out of their sales," Wilson points out. They pay close attention to how they're doing, because if they don't, they're out of business. Pearle management wanted corporate employees to feel the same sense of ownership. "What we ended up with was a complete management-philosophy change," he says.

One fundamental change that Pearle management needed to make was to allow each store to operate differently, aside from preserving brand equity from store to store, because each store was different. "Stores have different frame lines because of their markets. They have different types of employees, they market differently, and they might even look different," explains Wilson.

"To take it to the extreme from an HR standpoint, for example, we operate a lot of stores in which the employees are fluent only in Spanish. Other stores may be in very upscale retail areas of the city. Still others may be in middle-class spending environments," says Wilson. These differences needed to be accounted for within the system.

Bonuses no longer are capped.
Previously, the management compensation structure varied from year to year. Bonuses usually were tied to sales increases and management's ability to meet the budgets set by the corporate office.

Under the old management system, a regional manager or mid-level manager was responsible for approximately 20 to 50 units and established the guidelines, under strict corporate rules, by which every store would have to meet its goals.

"Picture this," Wilson explains. "You have 500 corporate stores, and someone sitting in Dallas setting a budget for all those stores." The budget will be disseminated to the store managers, who are told simply to hit the mark, regardless of their stores' capabilities. If they happen to reach the goal, they receive a bonus. That's how it was at Pearle. "It was top-down, and was driven by area management," Wilson explains. "It isn't that way anymore."

Now Pearle pays its store managers a base salary plus a bonus based on the controllable profits (any profit beyond the average yearly profit) and sales growth. Store managers also must measure up in two other important areas—quality and customer service—to ensure brand equity. Managers are evaluated in these areas by a quality team in the corporate customer-service department.

There's no cap on bonuses for store managers under the Optipreneur program, "so the amount of money they make is up to them," says Wilson.

Before the Optipreneur program, a store manager could get a significant increase in salary or responsibility only by being promoted to area manager. "Now we have area managers who earn less than store managers," says Wilson.

Although the new incentive system is just for store managers, the employee associates' (the company's term for sales personnel) bonus system has changed as well. There may be as many as 50 associates in one store, and each receives a bonus or commission based on the specific target goals for that store. "We provide managers with three or four commission schemes, so they can pick the bonus structure that best fits their store's needs. "It might mean increasing the number of patients they see or the types of glasses they sell, or controlling the expenses of the store, depending on what's important at that location," Wilson says.

The problem with the previous employee associates' bonus structure was that it wasn't tied to store management performance. "It used to be regional but unstructured," says Wilson. "It was a disconnect. What we're trying to do is make sure on a local basis that the compensation of store managers is linked to the compensation of their sales associates."

The program was tested for seven months.
All corporate store managers were invited to participate in the test process, comprising three phases: selection, certification and field testing.

Selection began with a questionnaire. Managers who were interested in participating were asked to respond in writing to the following questions:

  1. Examine the store's year-to-date financial performance versus the plan, commenting specifically on areas significantly over and under plan variances and on actions you've taken to address areas of weakness and to reinforce strengths.

  2. Describe your approach to store management, including notable successes and the reasons for them, in the following areas: staff development, incentive programs, public relations and community service or both, employee promotions and product quality assurance.

  3. Given a free hand, what are the three most important changes you would make to improve your store performance? What improvements would you expect and why?

  4. How would you drive sales during an economic downturn?

On the basis of their answers to these questions, a panel of content experts (primarily the individuals who had designed the program) chose the top 30 candidates to interview. Of the candidates interviewed, 14 were chosen as the test group.

"Those top 30 people had a variety of backgrounds. We didn't just pick the store managers from the 30 most popular stores; we took a cross section from throughout the country," says Flaherty.

The managers divided the stores into three categories: very high sales performance, moderate performance and marginal performance. They also selected stores from a variety of locations, but they didn't select store managers who were having extreme difficulties managing their stores at the time.

The test group of managers also was chosen from various performance levels: average, above average and exceptional. "This generated quite a heated debate," remembers Wilson. "My view (and this is what we debated so much) was that, for the rollout to work nationwide, we'd have to be able to effect change throughout the system, not just select the top 20%."

The certification phase consisted of training. The 14 managers came to the company's Pearle Eye Care University (accredited by the American Board of Opticians) in Dallas. There they went through an intensive 21-day training course taught by the HR department's manager of training and development.

The training had four components:

  • Operations
  • Financial
  • Employee management
  • Leadership.

In addition, the classes covered topics like inventory management, marketing and sales, and the technical aspects of making lenses and fitting frames. The managers received pass-or-fail ratings on their performances in each subject. If they were unable to pass, they didn't receive a certificate and didn't go on to the final phase of the test process.

Everyone passed, although two managers nearly failed the finance section, Wilson explains. "One of the most complicated things you learn about when you've just begun to run a store is its finances. That's where most small-business people fail."

"We actually were teaching the store managers how to create a budget or a plan to work from," Flaherty adds.

Darlene Smith was a store manager in Arlington, Texas, at the time she took the test. She had been through manager training before Optipreneur and says that she thinks the new education process now is more thorough. "It was very intense training. We became a team, even though we were spread out throughout the U.S.; there was a bonding process. We wanted this program to be successful, and we worked together to make it that way."

During a seven-month field test, managers didn't move to other store locations. They remained at the stores they already were managing. To help them with any questions they might have along the way, Optipreneur managers received a list of mentors or tutors, called Opticrusaders.

These individuals were corporate experts in such designated areas as finance, marketing, product support and customer service. The test managers could call them for advice when they needed it.

"They were a support system for us," says Smith. "If we had any questions, we could contact them; they were our consultants. They didn't tell us how to do things—they just gave us information and explained the choices we had."

To round out the employees' body of knowledge and give them better tools for success, the Optipreneur field test also included an in-store, cross-training component. This involved training each employee in several functional areas.

Although cross-training is common in U.S. businesses, especially in the optical industry (in which approximately 75% of employees cross-train), it was a new concept for Pearle's corporate stores. "That fact underscored the need for us to revamp our corporate culture," says Wilson.

"We wanted our lab people and our retail people to know and understand each other's jobs," says Wilson. "It brought our store teams closer and made them much more efficient."

Smith agrees. "Cross-training is essential to the operation of the store. I didn't realize it until I got into this program." Smith has managed a store that had eight employees who knew many aspects of the business, including working in the lab and in retail. The eight people could do the work of 14 employees, according to Smith, because they knew all the facets of the business.

Test results surpassed expectations.
The results of the field test surpassed the company's expectations from both an HR standpoint and a corporate standpoint. When they left the three-week training, store managers in the test group were given specific goals to meet within the first 30, 60, 90 and 120 days.

The stores were measured against the performance of the following:

  • Other local stores in the cities in which they operated
  • The company (Pearle Vision)
  • The franchise community.

In the first 30 to 60 days, it was clear that the managers were making some improvements in sales. After a few months, more improvements had been achieved. By the end of the test period, as a group, the 14 stores had increased their sales performance by 185%—outperforming Pearle's other corporate outlets in virtually every case.

Some stores in the test group never had turned a profit. According to Wilson, it can take awhile before a store makes a profit. "Stores that had never been profitable made a profit in two months," says Wilson. He remembers one store in particular in Cupertino, California, for example, that had never realized a profit nor experienced any sales growth. It had been that way for years, mostly because of the company's small presence in the state. That store now makes a profit, and corporate management attributes it to the Optipreneur program.

Another good example of the program's success is Smith. Her store's controllable profits have improved radically as a result of the Optipreneur program. Profits soared from 37% to 51% in 12 months. Her store has achieved the best results of all of the 14 test stores, even after a recent renovation. "It's tough to get sales to bounce right back after that," says Wilson. "She did a lot of things to bring sales into the store, at the same time managing her controllable profit." She accomplished this task in spite of having had lower sales than in any previous year.

Smith says that the best aspect of the Optipreneur program was that she could run the store as if she owned it. She says that she feels it has added a new dimension to her career and that she's a much better manager. "I've always believed I could succeed in business, but I never had the money to invest in a franchise. With this program, I feel personally challenged to make things work better all around, and I'm compensated well for my efforts," says Smith. "If it weren't for this program, I wouldn't have been able to reach 51%. I did an excellent job, and I'm proud of it." So is her company. Pearle has promoted Smith to corporate manager of customer service.

Some stores have earned management bonuses of more than $100,000 during the seven-month test period. The average management bonus was slightly more than $20,000. Pearle's corporate earnings also have improved: 93% of the test stores reported a radical improvement in profitability that amounted to hundreds of thousands of dollars, according to Wilson.

Although there were clear successes, HR learned what wasn't working well with the initial program design. Before the Optipreneur program, training of store managers involved only five days of general information, which, in retrospect, wasn't the information that was fundamental to driving the business, Wilson explains.

After the test, the training was redesigned. The first training phase became eight days instead of 21. Managers come back at another time for other training modules, for a total of at least 21 days. "It's very difficult when you try to train 500 store managers and pull them out of their stores for 21 days. It's a shock to the system. So we're having to redesign this," explains Wilson. "What we did in the beginning was to teach and develop in a vacuum, and then roll it out into the real world. The real world says that you're going to have to do your training in phases."

Managers can choose not to participate.
The Optipreneur program was tested in 14 U.S. Pearle locations for seven months. It was rolled out to the rest of the company at a national meeting at the Dallas headquarters in March 1992.

During the rollout of the Optipreneur program, every store manager learned that the new system would be implemented at every location within three months. All corporate store managers would have the opportunity to go through the Optipreneur training. "We gave them the choice. They could say 'No, I don't want to be empowered to run a store as if I owned it,'" says Wilson. "But then they would have to give up running the store. They could stay at their stores as associates, or they could leave the system."

Wilson adds, "It's one of those difficult decisions that you make when you're trying to change a company or change a culture. I believe that, given the opportunity, most employees will elect to be captains of their own ships."

Unfortunately, some don't want the responsibility. "We don't ask them to leave the company; we just ask them not to run one of our stores. Each store is taking in an average annual volume of from $700,000 to $1.5 million. I want to make sure that whoever is running that store is committed to the program," says Wilson.

To make it easier for store managers to stay in communication, human resources mails each of them a weekly packet of information, called Ops Weekly, written by the operations group. It contains vital information that helps managers run their business.

Selling the program to senior management wasn't easy.
Although senior managers initially asked Wilson to come up with a plan, the resulting design caused quite a stir. Although some senior managers embraced the idea from the start, many, including company directors, were skeptical. Wilson, who also is on the company's board of directors, says that there was a lot of dissension about this program.

"There were a lot of skeptics, because you're talking about a radical departure from the past," he says. "It was tough getting people committed to the program, particularly in the beginning, when the numbers weren't there."

The problem was the perceived loss of security, Wilson explains. "When you're sitting at the top of the company, and you have 500 corporate stores that you manage from a controlled environment—it can seem very secure," he says. "It becomes very insecure when you decide to have all 500 store managers helping you manage it."

Wilson's advice to anyone considering making a radical change to a compensation-and-bonus structure like this is to test it first. "The test actually gave people the opportunity to see that this could succeed," he says.

Changing the corporate culture will take years.
The Optipreneur program has been in place for approximately six months. How long will it take the company to embrace the new way of life? "It's going to take years," says Wilson. "I mean, you're talking about effecting a cultural change of a $700 million company that has 4,200 corporate employees and approximately the same number of franchise employees. It's going to take time. In fact, you want it to take time, because it isn't cast in concrete. You have to work through the problems as they come.

"Company culture is one of those continuous things that are difficult to get your hands on," Wilson continues. "People talk empowerment. They say that they believe in employees. They talk a lot about what they're going to do to give workers more responsibility. Until you set up some processes and give the employees some tools to take ownership of the business, nothing really ever changes."

Are all the store managers currently running their stores as if they owned them? No, says Wilson. Are all corporate managers now being attentive to home-office employees? No. Is the corporate office being attentive to every store manager's needs? No—not at this point, anyway. "Those things take time," Wilson says. "I would guess that it's going to take one or two more years to realize a total cultural change." He's optimistic, however, that the company can move further into the entrepreneurial mind-set on the basis of the changes he's already seen.

"I think every company is faced with trying to give people more responsibility without having to promote them every year or two," says Wilson. "At the upper- management level, there are fewer chairs. I think companies in general—and HR specifically—are challenged to broaden people's responsibility without having to give them more in terms of authority."

As companies look toward re-engineering their corporate compensation and culture structures, "they're going to rely on human resources even more to help effect those changes," says Wilson. "I believe that HR should be the change agent for the company," he says. In this case, at least, he seems to be right.

Personnel Journal, January 1993, Vol. 72, No. 1, pp. 38-46.

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